International Trade Committee on Nov. 3rd, 2016

[The Chair, Liberal, Mark Eyking]

We're going to start our study. It's officially called the “study of the Canadian steel industry’s ability to compete internationally”.

When did this motion come forward? Last month.

How many meetings do we have allocated? We have today, and then, after CETA, are we going to do a couple more days?

[The Clerk of the Committee, Mr. Rémi Bourgault]

After CETA, we will have three more meetings.

[The Chair, Liberal, Mark Eyking]

Okay, and we're going to start pulling witnesses in from where?

[The Clerk]

We'll see exactly when we complete CETA. We're floating the names.

[The Chair, Liberal, Mark Eyking]

However, we're going to ask committee members to bring you a list, right?

[The Clerk]

Yes, they're to bring a list to me today at noon.

[The Chair, Liberal, Mark Eyking]

Does everybody have that? Good.

Without further ado, we have some officials here to kick off our study. Thank you for coming.

You know what we're doing for the next few days, and we're also dealing with CETA if it pops through, but we're going to try to get the study done before the Christmas break and put some sort of paper forward to the House.

Without further ado, thank you for coming. The floor is yours for however long you want to have it. I understand that one person will be speaking on this right now.

Go ahead, Paul.

[Paul Halucha, Assistant Deputy Minister, Industry Sector, Department of Industry]

Good morning and thank you for the opportunity to appear as you kick off your study of the steel industry.

I have some short prepared remarks that I'll go through that reflect the input of everybody at the table, the three departments.

On behalf of my colleagues from the Department of Finance and Global Affairs Canada, let me express our gratitude for the opportunity to appear before this committee to discuss the Canadian steel industry. I have been asked to deliver opening remarks on behalf of all three departments.

Let me begin by speaking to the responsibilities of the three departments appearing as witnesses.

Innovation, Science and Economic Development Canada is the lead department responsible for analysis and policy development regarding Canada's steel sector. This includes focusing on innovation and productivity issues.

The Department of Finance is responsible for import policy, including trade remedies, which are used to address dumping and subsidizing.

Global Affairs Canada is the lead on Canada's international relations and World Trade Organization issues.

Together, our departments work collaboratively on issues important to Canada's steel sector.

Let me speak for a minute to the steel sector significance and a bit of background.

The steel industry constitutes a major pillar of the Canadian economy, supporting nearly 17,000 jobs directly and contributing about $2.6 billion directly to Canada's GDP. Besides the direct jobs, the industry plays an important secondary role as a key supplier to North American manufacturers, the energy sector, and the construction industry in particular, all of which derive billions of dollars in benefit from Canada's steel industry. However, difficult conditions are posing substantial challenges to the Canadian industry, which has suffered from weak demand, low prices, and intense competition. In this context, two of Canada's major steel producers, Essar Steel Algoma and U.S. Steel Canada, are now under creditor protection.

I'll turn now to some of the key issues.

One of the most pressing issues facing Canada's steel sector, and a key factor impacting the financial health of Canadian steel producers, is global excess capacity and the resulting increase of steel imports, particularly in terms of unfairly dumped and subsidized steel.

To put things in context, global steel-making capacity is approximately 2.4 billion tonnes. Canada has 20.5 million tonnes of steel-making capacity, which counts for approximately 1% of the global total. The capacity is small when compared to the approximately one billion plus tonnes of capacity in China, followed by second-place Japan with approximately 131 million tonnes. According to studies by the Organisation for Economic Co-operation and Development, in 2015 the world excess capacity stood at approximately 850 million tonnes.

This excess capacity has grown due to government intervention and control in countries providing subsidies that create or maintain excess capacity or allocate resources to the steel industry and implement border measures that encourage production and exports. The addition of new capacity, particularly in developing countries, has occurred despite data that continues to demonstrate an excess of supply and low global demand.

While not all of this excess capacity is being used, significant quantities of excess steel are still flooding the global market. This excess supply creates downward pressure on global steel prices, unfairly undermining competition in open markets like Canada.

In facing this challenge, countries are taking various measures to address imports and retain domestic markets for domestic producers. These measures, however, can have significant knock-on effects as countries look for alternative markets to which they can export their steel. Further excess steel depresses prices in manufacturing supply chains. For example, Canadian fabricators working with their partner steel companies can lose contracts for infrastructure projects to competitors using inferior dumped steel hidden in a manufactured product that's imported.

The Government of Canada is working on many fronts to respond to these challenges. This includes increased procurement opportunities for domestic firms and financial support for advanced technology development and adoption to increase the efficiency and sustainability of Canadian production. With respect to trade remedies, the government has made changes to strengthen the trade remedy system, and is considering further action in this area.

Our departments work closely on steel issues with our NAFTA partners through the North American steel trade committee. Recently, this extended to collaborative work with our NAFTA partners on the enforcement of steel-trade remedy measures with Canada's participation led by the Canada Border Services Agency.

We also work with other steel-producing countries on the issue of overcapacity at the OECD and the World Trade Organization. Concurrently, through our efforts with the G20, we are working to establish a global forum on steel excess capacity, and this was announced as part of a communiqué from the most recent G20.

Before I end my opening remarks, let me say a few words about technology, innovation and skills within the steel sector.

While the situation of global excess is a significant challenge, Canada has a very advanced steel industry, producing extremely high quality steel, be it high strength steel for the energy sector, or super-lightweight steel for the automotive industry.

This capital-intensive industry has the highest productivity rates among Canadian manufacturing sectors. Recent capital investments by industry have resulted in Canadian mills being among the most energy efficient and automated in the world.

Canada also produces steel that is significantly less carbon-intensive due in large part to the fact that significant inputs, particularly electricity for steel-making, come from non-emitting sources.

The industry across the country maintains linkages to universities, colleges, and research institutions, which ensure that the sector has the highly trained, highly skilled workforce it needs.

Despite these positives, the global challenges facing the steel industry are considerable. Departments we represent will continue to work with other federal partners and fellow stakeholders to ensure the steel industry can remain competitive.

Thank you again for this opportunity. My colleagues and I look forward to your questions. Merci.

[The Chair, Liberal, Mark Eyking]

Thank you.

We're going to have questions from the MPs, starting off with the Conservatives for five minutes.

Mr. Van Kesteren, you have the floor.

[Dave Van Kesteren, Conservative, Chatham-Kent—Leamington, ON]

Thank you all for being here.

I suppose at least some of you have been to China. I remember on my second trip to China, we visited a number of steel mills, and I read at that time that there's never been a major global power that hasn't been a leading steel producer. I forget what the statistics are, but what are they producing—about 80%? What is China producing at this point?

[Patrick Hum, Senior Director, Manufacturing Industries Directorate, Manufacturing and Life Sciences Branch, Industry Sector, Department of Industry]

China produces just over half of the world's steel right now.

[Dave Van Kesteren, Conservative, Chatham-Kent—Leamington, ON]

Okay. I thought it was 60%.

There's an interesting part of your presentation, which is that Canada also produces steel that is less carbon intensive. One of the things I noted when I was in China and we visited the steel manufacturer was that it was spotlessly clean. I've never seen a steel plant as clean as that. This was the fourth-largest steel manufacturer in the world and the third-largest in China. I think those were the statistics. It was staggering.

The other thing I noticed was that it had its own power plant. That power plant, of course, was powered by coal. The elephant in the room is precisely that. How do we become competitive in an industry that demands a huge amount of energy? We're switching over to electricity, but when they use coal—dirty coal, for the most part—and are able to do so without any limitations, how do we play a part in an industry like that?

[Patrick Hum]

That's a very good question. As Paul mentioned in his remarks, I think Canada's steel producers can be very competitive. In one sense, the steel markets are global, and steel is a very heavy commodity product to move around, so transporting it over large distances can become uneconomical. Within the North American market, certainly, Canadian producers can be quite competitive given their current structure.

[Paul Halucha]

Let me add to that. It is, as you pointed out, a really significant competitive advantage. Just look at some of the statistics here. According to the Canadian Steel Producers Association, Canadian mills produce an average of 42 kilograms of CO2 per tonne, compared to 152 kilograms for the U.S., 598 kilograms for China, and 916 kilograms for India. We know there's a significant differential.

Globally, the effort that has been made and the attention that has been given to issues such as climate change are going to bring attention to dirty inputs, and I think there's going to be a shift in the market. We've seen this happen. For example, look at the challenges that our oil and gas sector has faced over the years in terms of the social contract and the way the product is perceived.

I think this is going to happen more and more around steel, and this will be to the benefit of Canada and Canadian steel producers. Where it has to happen first is in Canada, and I'm thinking in the context of the government's procurement strategies and infrastructure programs, to the extent that we have more than just the objective of economic growth. That's obviously critical, but the government has been very clear that it has additional social and environmental objectives it wants to see from innovation and from global growth. This positions Canadian steel very well to participate in that and to benefit from procurements that put some kind of weight on the CO2 emissions of the inputs to those projects.

[Dave Van Kesteren, Conservative, Chatham-Kent—Leamington, ON]

I'm running out of time, but I must say that I'm somewhat puzzled. We live in a free market system, and in order to compete, we have to compete with countries such as China that don't have the ecological boundaries that we've adopted in this country. It's fine to say that we're setting an example and that we're going to be the ones lead the way, but meanwhile, people are buying and selling steel, and price determines who's going to be in the marketplace.

[Paul Halucha]

The issue you've put your finger on is the fundamental one, which is the degree of dumping that's happening on the market.

I take your point around the free market. My argument would be—and I think the trade officials can speak to this as well—that what we're seeing from the types of dumping taking place globally is not free market participation. That's not a fair market. It's not a market where the outcomes are being determined based on the competitiveness of the product. It's being based on price, and if jurisdictions are able to sell below their cost of production, I don't know of any free market model where that is a sustainable form of business. That's what we're seeing, and that's the challenge that's being faced globally. It's not just Canada that's suffering from that—

[The Vice-Chair, Conservative, Randy Hoback]

I'll have to stop you there. You're well over your time. Hopefully you'll get a chance to finish your answer.

We'll move over to Mr. Dhaliwal.

You have five minutes, sir.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

Good morning. I'm trying to understand what percentage of Canada's domestic needs is met by Canadian producers.

[Michèle Govier, Chief, Trade Rules, International Trade Policy Division, International Trade and Finance Branch, Department of Finance]

I can respond to that.

Based on the information we have—and part of this is based on the apparent demand in the Canadian market—60% is being supplied by imports and approximately 40% by the domestic producers.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

So it's 60 and 40.

Do we do any exports?

[Michèle Govier]

Yes, absolutely.

I don't know if you have the statistics on the exports.

[Patrick Hum]

I believe that about 75% of our exports go to the United States.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

No, but I'm saying—

[Paul Halucha]

Fifty per cent of Canada's sovereign steel production is exported, and 84% of that is to the United States.

[Sukh Dhaliwal, Liberal, Surrey—Newton, BC]

Basically we are using 40% here, and 50% we're exporting. Is that correct?