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Auto industry
doldrums and a less-than-favorable exchange rate can’t curb
overall optimism for Canadian steel in 2006.
By
Dan Markham,
Senior Editor
Sidebars
and Tables:
Though
concerns are plentiful and levels of optimism vary widely, Canadian
steel watchers are generally bullish about prospects for 2006.
Some,
such as Denis Turcotte, president of Algoma Steel Inc. in Sault
Ste. Marie, Ontario, see a robust market for steel in the year ahead
and beyond. Others, like admitted pessimist Bud Siegel, president
of Russel Metals Inc. in Mississauga, Ontario, would be delighted
for steel to simply hold steady for another year.
“We
haven’t had any movement the last four years, excluding tons
we’ve acquired through acquisitions,” says Siegel.
Metals
Service Center Institute data indicate that steel shipments in Canada
declined 4.1 percent through October, compared with the same 10-month
period last year. September and October shipments showed gains of
6.9 and 11.3 percent, respectively, however, suggesting a modest
turnaround late in the year.
“At
one point it was down roughly 6 percent on shipments overall. It’s
improved to where it’s coming back almost to flat again,”
says Siegel, who doubts the recent uptick is a long-term trend.
Given
the strengthening of the Canadian currency, which puts Canadian
exporters at a disadvantage, flat steel consumption in Canada could
be viewed as a positive, he adds. “The Canadian dollar has
appreciated against the U.S. dollar by about 25 percent over that
period of time (the previous four years). The fact is that a good
percentage of the steel consumed is eventually shipped to the U.S.
in finished product. It’s amazing that we’ve stayed flat.”
“The
exchange rate is the only fly in the ointment,” agrees Algoma’s
Turcotte. He notes that in just the past 30 months, the Canadian
vs. U.S. dollar exchange rate has shifted by more than 30 percent,
from about 64 cents U.S. per Canadian dollar to around 84 cents
today. “That has impacted small and mid-scale manufacturers
in Canada. It has caused demand for steel in those sectors to soften
a bit.”
The
stronger Canadian dollar is an inducement for imports from the United
States, which increases the competition faced by Canadian manufacturers.
Canada’s trade laws tend to be more liberal than those of the
United States. Since Canada is less restrictive on goods allowed
to pass its borders, its industry tends to suffer from unfairly
subsidized imports more than American competitors, some observers
claim.
Turcotte
would like to see tougher trade laws to level the playing field
for Canadian companies. “We see a lot of steel come in that
in one way or another is subsidized,” he says, for example
by governments outside of North America that provide producers with
low-cost natural gas and electricity. “The American government
takes the position that they’re not going to allow such indirectly
subsidized products into the United States. I think it’s up
to our government to start looking at things the same way and adjust
accordingly.”
Don
Goodwin, president of Tracon Consultants in Ottawa, says failing
to take corrective action against U.S. producers hurts Canada. In
the hot-roll market, for example, Canadian mills’ market share
has declined from 83 to 69 percent, while U.S. producers’ share
has grown from 13 to 25 percent.
“There
seems to be a reluctance on the part of Canadian steel producers
to file antidumping actions against U.S. steel producers. In the
early 1980s, there were all kinds of steel dumping cases against
U.S. producers, but since the mid ‘90s, none. Canada depends
on the U.S. market to keep its production going,” Goodwin says.
Randy
Lacombe, president of the Canadian Steel Producers Association in
Ottawa, says trade rules should ensure that all North American steelmakers
have an equal footing. “We would like to see governments take
action that would ensure there would be no subsidies for steel.
All three NAFTA countries (Canada, the United States and Mexico),
their governments and industries, are working together to develop
a North American steel policy. The foundation has to be effective
trade laws.”
Siegel,
who views the trade issue from the perspective of a service center
that is active on both sides of the border, says Canada is simply
following the rules of international trade agreements. “The
Canadians feel a greater obligation to support NAFTA and the WTO
because, in their minds, they’re a small country and the rules
are beneficial to them against the so-called big guys.”
For
the CSPA, fair trade is one of a few major issues facing the steel
industry. Another is taxation. Lacombe reports that Canadian companies
have made progress on that front.
“Canada
has a higher marginal effective tax on capital than is the case
in the U.S. and a number of other countries,” he says. “The
Canadian government has announced some tax changes that it intends
to make to ensure that Canada has a competitive tax system.”
Another
key challenge facing the steel industry is the cost of energy. “Natural
gas prices in North America are the highest in the world, and electricity
pricing remains a concern as well,” says Lacombe. “We’ve
been working with other industries and manufacturing associations,
advocating a Canadian energy strategy and beyond that a North American
strategy.”
The
upside of energy’s high costs is an increased market for exploration.
The Alberta oil sands are attracting major investment by oil companies,
and increasing demand for steel.
“Many
projects are on tap in the oil sands,” says Bart Melek, a senior
economist for BMO Nesbitt Burns. “Mining will continue to do
well, and not just in Canada. Oil and gas infrastructure are requiring
an awful lot of steel. We’ve got some major pipeline projects.”
Oil
pipelines aren’t the only kind of infrastructure projects likely
to stimulate demand for steel in Canada. The political winds are
blowing toward new spending on highways and bridges, Melek says,
pointing to the heavy “electioneering” surrounding the
Jan. 23 no-confidence vote faced by Canadian Prime Minister Paul
Martin. “I wouldn’t be surprised at all if infrastructure
spending is on the agenda again,” he adds.
While
energy and infrastructure spending may be on the rise, another destination
for Canadian steel—the automotive sector—will almost certainly
slow down. Experts had forecast declines for North American automakers
even before General Motors’ November announcement that it would
produce one million fewer cars in 2006 and beyond.
“Canada
is a significant producer and exporter of automobiles. The market
for automobiles—for the Big Three anyway—is not so good
and projected to decline even further,” Goodwin says. “Dofasco
and Stelco, and their galvanized business, could suffer because
of that.”
There
are other roadblocks to steel’s success, Turcotte admits. “The
whole North American economy looks like its full of opportunity,
but we (Canadian and U.S. producers) share similar threats as well:
the price of natural gas, the price of iron ore, the price of coal
and the price of employment, labor, health care, etc.”
Turcotte
is optimistic about the long-term potential for steel, however.
“On average, we’re in a boom era of steel. The next 10
to 20 years is going to be much more like the 1960s, ‘70s and
early ‘80s, where supply was always running to catch up to
demand,” he predicts. “Although I still think it will
be volatile, you’re going to see trend-line pricing average
a lot higher moving forward.”
The
Changing Face
of Canadian Competition
In contrast to the diversified and fragmented steel industry in
the United States, Canada’s market is concentrated in the hands
of relatively few producers and distributors.
Russel
Metals and Samuel, Son & Co., both based in Mississauga, Ontario,
are by far the two largest service centers operators. Their main
competitors are large American service center players with locations
in Canada, including Ryerson Tull, Marmon/Keystone Corp., A.M. Castle
& Co. and EMJ.
Likewise, Canadian steel production is dominated by a handful of
mills, including Algoma Steel Inc., Dofasco Inc., Ipsco Inc. and
Stelco Inc., among a few others.
Canada’s
market has been unsettled in the past few years by a series of mill
bankruptcies and mergers. Most notable of late has been Stelco’s
ongoing reorganization effort. Stelco has been in court-supervised
bankruptcy protection for nearly two years, struggling to refinance
and trim down to its core steelmaking operations in Hamilton and
Nanticoke, Ontario.
Last
month, Stelco signed a deal to sell three of its subsidiaries to
the world’s biggest steelmaker. If approved, the transaction
would see Mittal Canada Inc., a subsidiary of Mittal Steel Company
N.V., acquire Stelwire in Ontario; Stelfil in Lachine, Quebec; and
Norambar in Contrecoeur, Quebec.
Stelco shuttered its plate operations in 2004.
In
late November, Canada’s steel landscape promised to change
once again with the announcement that Dofasco’s board had agreed
to a friendly takeover bid from German giant ThyssenKrupp AG.
Service
centers have been relatively unaffected by such bankruptcies and
consolidations, says Bud Siegel, president of Russel Metals, who
notes that not all ownership changes result in a significant change
in the marketplace.
“The
bankruptcies were a good thing in one respect, because it took some
capacity off stream. Unfortunately with consolidation, a lot of
that capacity came back on stream,” he says, putting pressure
on pricing.
Imports
have not been much of a factor of late, he adds. “The only
effect consolidation has had, as far as we’re concerned, is
that some of the consolidators have off-shore interests that historically
have been at the low-end of import pricing. They’ve kind of
cleaned that up.”
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