On the first day at his new job, John Mayberry got much more than an executive suite, a big salary and a plum parking spot. Indeed, just one day after he took over as president and chief executive officer of Hamilton-based Dofasco Inc., the company became embroiled in a bitter trade war between Canadian and U.S. steel producers. Acting on complaints from 12 American steel companies of “dumping”— unfair pricing—the U.S. commerce department imposed a series of provisional duties against imports from 19 countries, including Canada. Although Canadian producers were among the least severely penalized by the duties—which ranged as high as 109 per cent—the reaction was sharp. Frederick Telmer, chairman of Stelco Inc., Canada’s largest steel company, denounced the ruling as “absurd and destructive,” an opinion that ech-
CANADIAN STEEL PRODUCERS FIGHT FOR THEIR LIVES AGAINST CHARGES OF DUMPING STEEL IN U.S. MARKETS
oed across the industry. But even as the Canadians voiced their outrage, and Ottawa retaliated with counter-duties, industry leaders left the door ajar. Said Mayberry: “We’ve got to work in co-operation to prevent the dumping of
foreign steel in the North American market. We’re in this together.”
Canadian steel executives have aggressively proposed an integrated, continental steel market, governed by an accord similar to the 1965 Auto Pact, since June. At that time, U.S. producers first accused them of dumping, or charging prices in America that were significantly below production costs and domestic levels. That campaign finally reached a political level last week, when International Trade Minister Michael Wilson advocated the formation of a bi-national private-sector panel to resolve the steel issue. Commerce Secretary Ronald Brown, however, rejected it out of hand, calling instead for a multilateral accord. But Prime Minister Brian Mulroney said that the issue would be a “priority” during a planned visit with President Bill Clinton.
Still, according to Frederick Lazar, an asso-
cíate professor at York University in Toronto, a bilateral easing of the tensions between the two countries would not be an adequate long-term solution. “The basic problem is global steel overcapacity and the need to undertake a painful adjustment of the entire industry,” said Lazar. But he added that the United States is squeezing its competitors to forestall the contraction of its own steel sector and the related social costs, including massive layoffs.
The Ontario government’s financial rescue of Algoma Steel Corp. Inc. of Sault Ste. Marie in March, 1992, clearly illustrates the complex political and social pressures associated with the industry’s pending rationalization. Although steel analysts expressed reservations about Algoma’s long-term prospects for survival, the cost of eliminating 6,000 jobs in an economically underdeveloped region during a severe recession apparently outweighed the cost of a $ 110million provincial bailout. Said Gregory Misztela, steel analyst with Winnipeg-based Richardson Greenshields of Canada Ltd.: “Government intervention and investment is a temporary remedy.” He added, “Steel is no longer the backbone of our economy, but it is still a disproportionately large employer and that distorts the issue.”
Despite the current problems of overcapacity confronting the $ 125-billion global steel industry, it has already contracted significantly. Between 1980 and 1990, steel production by major Western industrialized nations shrank by about 21 per cent to an estimated 410 million tons annually. At the same time, that shrinkage triggered a sharp increase in the competitive pressure within the market and a need to use advanced technology to improve productivity and reduce operating costs. But a weak Canadian currency throughout the 1980s made Canadian steel artificially competitive on the international market. That masked many of the underlying problems, allowing domestic steel producers to avoid the layoffs, plant closures and technology investment that characterized the industry elsewhere.
In 1990, three factors converged to plunge Canadian steel producers into a destructive spiral: a higher Canadian dollar, the declining use of steel in the automotive industry, and the recession, which abruptly curtailed demand for steel in other areas as well. Said Misztela: “Sure Canadians are selling below cost—but so is everyone else, including the United States. It’s a devastated market.” The average world selling price for steel fell to $547 a ton
from $631 between 1991 and 1992 alone.
Meanwhile last week, in an action clearly intended as retaliation, Revenue Canada imposed duties of its own against steel imported from the United States and five other countries. The announcement took the form of upholding complaints from Stelco and Algoma that American and other producers were dumping their products in Canada. The new Canadian duties range from 4.5 per cent to 124.2 per cent.
Canadian steel companies have become increasingly dependent on U.S. markets in recent years and the industry trade between the two countries was valued at about $3.1 billion in 1991. According to Leo Gerard, national director of the United Steelworkers of America, more than 300 Canadian companies that formerly bought domestic steel have relocated to the United States since the end of 1991. Gerard noted that the exodus of Canadian industry to the south, combined with recent bankruptcies in the industrial sector, have resulted in a 600,000-ton annual drop in domestic steel consumption.
Following last week’s U.S. action, Gerard and others who opposed the Free Trade Agreement (FTA) when it came into force in 1989 claimed victory. Edward Philip, minister of industry, trade and technology for Ontario, told Maclean’s: “The FTA was supposed to prevent these incidents and, instead, trade harassment has increased.” Under the disputesettlement mechanism of the FTA, trade issues between the two countries are supposed to be settled by bi-national trade panels. Still, private-sector groups, including the U.S. steel producers, retain the right to launch dumping cases against importers if they can substantiate their claims. But, said William Kempling, Conservative MP for Burlington, Ont., who heads the parliamentary steel caucus in Ottawa: “Anti-dumping laws are separate from the FTA and we need a special steel accord. But it takes two to make an accord and the United States does not want to hold hands.”
To retain access to the U.S. market without such special status, Canadian companies have to make cash deposits or post bonds with the U.S. Customs Service to cover the provisional dumping duties on the disputed products. Those duties will be refunded if Washington dismisses the dumping charges. According to U.S. trade law, dumping occurs when a product is sold for less in the American market or at less than the cost of production. Furthermore, foreign importers must also be able to prove that they are making a profit of eight per cent on U.S. sales to avoid charges of dumping. According to the American steel producers, Canada is among those foreign producers dumping plate, hot-rolled, cold-rolled and galvanized steel in their market.
With the duties now in place, the commerce department has to make a final determination by April and the International Trade Commission has to determine if any damage has been done to the U.S. market by the alleged dumpers. It is expected to take until the end of June, one year from the time the charges were made,
for American authorities to complete their final analysis. Said Philip: “It has taken two years to address the harassment over pork trade—the steel sector can’t be put on hold for that long.”
Even before the announcement last week of the provisional penalties, the threat of a potential disruption of steel supply caused concern among the U.S. customers of Canadian producers and led some of them to seek new sources. Indeed, for those manufacturers that have a continuous production line, including automotive manufacturers, the risk of a steel shortage is unacceptable. A protracted and bitter labor strike against Stelco in 1990 forced many of its customers to find new suppliers and Stelco is still struggling to regain its former market share, according to steel industry analysts. Said Dofasco’s Mayberry:
“Sure our customers are nervous about the stability of supply, but we’re working very hard to get them to relax.”
For Stelco, the challenge of reassuring its customers extends beyond the recent trade penalties to growing concerns about its longer-term prospects for survival. Already in a delicate financial position, the company received the highest U.S. penalty of all Canadian steel producers—68.7 per cent above its current price for steel plate sold in the United States. Plate is used to make endproducts in the pipeline and construction industries. Said Richard Shaw, a corporate credit analyst with Dominion Bond Rating Service Ltd. in Toronto: “Stelco didn’t have much
room to manoeuvre in the first place. They’re already living off bank lines and this really shortens their leash.” In the first six months of last year, Stelco paid out $41 million in interest alone on its $786-million long-term debt load. In the first nine months of 1992, it lost $58 million, compared with a $ 19-million loss in the same period a year earlier.
In response to the imposition of dumping duties against Canadian steel, Ontario’s Philip said that the provincial government is prepar-
ing to introduce a special steel-industry task force to develop a survival strategy for the faltering sector. Philip said that he hopes to include federal government representatives as well as industry and labor in the group. Said the United Steelworkers’ Gerard: “If we rely on a series of individual strategies that focus only on making single firms competitive, we are lost.” He added: “Rather than government bailouts, we’re looking for strategic inducements like public works projects that use domestic steel and spur the economy forward.”
For his part, however, Lazar said that he is convinced that a unilateral approach to a multilateral issue is of limited long-term value. “As a relatively weak player, Canada will bear a disproportionate share of the cost of the global industry’s costly rationalization—unless it bands together with others,” said Lazar. He added that the recent steel ruling provides Canada with an opportunity to join forces with the other 18 countries charged with dumping and to stand up against the United States. Peter Morici, a North American trade specialist at the University of Maine in Orono, said, however, that Canada’s role in the steel dispute is incidental and that Japan is at greater risk in all sectors. But for embattled Canadian steel producers, who must now deal with a greatly complicated regime for exports to their main market, that is cold comfort.
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