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Focus on Canada

Riding the Waves

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MCN Editor Dan Markham Coronavirus, tariffs and energy problems have kept the Canadian industrial economy on edge, though the rest of country’s manufacturing sector has emerged in decent shape.

The signs were promising in Canada. Until they weren’t. 

At the tail end of 2019, the United States, Canada and Mexico put the finishing touches on the USMCA, the trade agreement to replace NAFTA. Optimism was high that the uncertainty that had permeated since the NAFTA renegotiations had begun would yield to better relations, and better outcomes, with the country’s most important trading partner. 

Three months later, Canada became the last country to ratify the deal, just as the world was falling apart. 

Heading into the year, the mood was fairly upbeat, says Venture Steel President Tony Kafato, his opinion driven by hopes of a more stable pricing environment for steel. “When you’re in a year and the prices seem to be riding down almost consistently and fairly significantly, that’s a tough environment to navigate as a distributor and as a service center. We felt those challenges were behind us as we entered 2020, and sure enough new ones emerged with the pandemic.”

His optimism was shared by fellow Ontario service center company Taylor Steel. “This year, we were expecting it to be a relatively strong year with respect to our markets in auto, construction and manufacturing,” says Randy Smith, president and CEO of the Stoney Creek-based company. “Obviously, all hell broke loose when March came.”

Fast forward three more months. As the Canadian economy began to recover from the brutal spring, the USMCA went into effect on the first day of July. Immediately, rumblings started the U.S. was considering reinstating Section 232 tariffs on Canadian aluminum. In August, the Trump administration followed through on the threat, angering nonferrous supply chain members on both sides of the border and again thrusting acrimony into the trade relations between the two allies. 

“The measures are both unjustified and unnecessary and will have a negative impact on the unprecedented efforts being made to restore our respective economies, which are reeling in the wake of COVID-19,” said Dennis Darby, president and CEO of the Canadian Manufacturers & Exporters. 

Yet in still another turn of events, the U.S. agreed to lift the tariffs in mid-September in anticipation that import levels would normalize over the final four months of the year. 

That chain of events accurately summarizes the year it has been in the Canadian industrial economy, and the world at large. Optimism quickly giving way to doom and gloom, though with hopes that recovery was not far off in the future. 

In the short term, the effects were profound. Canadian GDP was down nearly 12 percent in the second quarter, following a modest decline in the first quarter. This loss happened despite the country getting a much better handle on the coronavirus pandemic than their neighbors to the south. 

According to data from Johns Hopkins University, through mid-September Canada had approximately 1/48th of the cases of COVID-19 as its southern neighbors, though the U.S. is only nine times larger in population. 

“We didn’t have it as bad. And any country that didn’t have it as bad is doing better; that’s just a general rule,” says Jim Ritchie, CEO of Cascadia Metals, a Western Canada-based service center company with operations in both Canada and the United States.

How bad depends on the market being served. The Canadian manufacturing sector has bounced back fairly rapidly from the depths of March and April, when the locked doors at North America’s automotive plants was felt by the Canadian steel supply chain. Since then, however, conditions have improved in the eastern provinces in a number of different metrics.

“Obviously, we had our share of volatility in terms of consumption and demand related to the pandemic, but things are definitely back up and running close to full speed ahead,” says Kafato, whose company specializes in flat-rolled steel. “We’re fairly positive at this point, but we still have to worry about a resurgence.” 

Likewise, construction, which Cascadia serves, has held up rather well throughout the pandemic. 

“Sometimes I have difficulty differentiating between us and the economy. I do believe we have a full-on recession in Canada, but our company, Cascadia Metals, has been a COVID winner. Our primary market is construction. Interest rates are low, money is cheap, the government is giving money away to young people, so construction is doing quite well,” says Ritchie, whose company was one of the few in the distribution industry to expand during the pandemic, acquiring the specialty metals business of Varsteel, another Western Canada service center company.

Across the country, the assessment was the same. John Reid, president and CEO of Mississauga, Ontario-based Russel Metals, said nonresidential construction has been the bright spot for the Canadian economy. “If you look across our service center segment, nonresidential construction has held up really well. And those jobs that were put on hold are starting to move forward,” he said during the company’s quarterly conference call. 

In contrast, the provinces of Alberta and Saskatchewan on the western half of the country are heavily dependent on the energy market. And the pre-pandemic price war gave way to the post-pandemic demand crash, leaving that market still begging for air. 

According to Baker Hughes, rig counts in Canada remain at low levels, with the September count dropping two from August to 52 active rigs. That was down 95 rigs from the same period in 2019.

And with oil prices continuing to lag, the prognosis for rapid improvement simply isn’t there. “Right now we just don’t see a lot of pickup for energy for the balance of the year. I think inventories, hopefully, will start to come in line from the distributor side. But we’re not seeing a whole lot other than in Canada benefiting from heavy oil,” said Reid.

Kafato agreed with the assessment. “That’s the one sector we’re not overly exposed to. But if you’re in energy that’s a very tough space to be in.”

Economic activity slowed considerably in late-March into early April in Canada, as it did everywhere around the globe. Since April, recovery has taken place in a number of areas. 
Canadian manufacturing sales increased for the third-straight month in July, up 7 percent. At month’s end, sales were just 5.4 percent below pre-pandemic levels. 

Similarly, according to the CME, the Canadian economy has recovered 1.9 million jobs, representing 63.5 percent of the 3 million jobs lost at the height of the pandemic-related shutdowns. 

Reflecting the nature of the recovery, all but 20 percent of the new jobs created in August took place in the manufacturing hubs of Ontario and Quebec. 

“Canada’s job market continues to heal. However, with the pace of the recovery now slowing, fully recouping the remaining 1.1 million jobs will take much longer,” says Alan Arcand, CME chief economist. 

Over the longer term, there remain some challenges. Manufacturing has been seeping from the country for more than a decade, with companies often seeking lower-cost options in the Southern United States or Mexico. Nowhere is it more evident than the automotive industry, which has invested significantly in both the U.S. and Mexico since the last recession, but very little in the traditional hub in Ontario. 

It was this trend that saw Venture Steel open up facilities not just in the U.S., but also in Mexico. “We opened that facility with the objective of following our customers. Our long-standing customers were urging us to do that, so we went and moved with them to continue our spot in the supply chain,” Kafato says. 

Other companies have responded to the decline in manufacturing differently. Steve Walker of Boss Steel says his company has shifted from distribution to mostly manufacturing and doing retail sales since 2008. “We started out 30 years ago selling steel. That was our main focus. Over the years that focus has changed because of government decisions and supply and demand,” he says, noting that steel sales are down to about 28 percent of his revenue. He sees no change in the future for the Canadian manufacturing sector. 

But in the more immediate future, the outlook is far more promising, executives believe. “We’re certainly on the road to recovery,” says Smith. “We’re looking at a positive finish to the year in Q4.”

“On the short term, things are looking very positive,” Kafato says. “We have extended lead times now. For the first time in a long time, we’re hearing from the mills they have a pretty sold order book, extending out as much as 7-8-9 weeks. That’s a pretty positive signal that demand is very strong, and the question we have is will it be sustained.”

Of course, its sustainability may well be governed by the coronavirus, and whether another wave hits Canada. Additionally, there’s a question of what happens when the Canadian government stops supporting its citizens financially, which has to happen, since, “Canada, unlike the U.S., can’t keep printing money forever. We’re not the default currency of the world,” Ritchie says.

Still, he’s banking on COVID-19 remaining under control, first through continued good decision making followed by his expectation for better therapeutics to manage the effects of the virus. Once that happens, the economy will able to truly and fully open again.
 
“I think we somehow dodged a bullet,” Ritchie says. “We dodged a bullet during the 2008 financial crisis, and it looks like we’re dodging COVID, at least until now.”


Photo caption: Conditions have improved for flat-rolled specialists such as Taylor Steel.
(Photo courtesy Taylor Steel)

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