Canadian construction costs balloon as steel and aluminum tariffs exact a heavy price
April 12, 2019 by David Kennedy
TORONTO—The North American showdown over steel and aluminum tariffs was expected to be brief — little more than a shove from the U.S. to push NAFTA renegotiations over the finish line. But nearly a year later, despite a new trade accord, the American duties and their retaliatory Canadian counterparts remain firmly entrenched.
Along with other industries, the two-way duties have driven up material costs for construction significantly, raising prices for rebar, heavy plate and other metal materials vital to building projects of all types. According to Statistics Canada, costs to construct residential and non-residential buildings rose 5.1 and 4.6 per cent, respectively, over 2018. The agency heaped much of the blame on the metal tariffs introduced last June.
Likewise, a recent report from real estate consultancy Turner & Townsend, which compared building cost estimates, says construction costs increased by between five and eight per cent in 2018, as much as double the historical trend of three to four per cent a year.
“The only major variable over that year has been the impact of tariffs,” Gerard McCabe, the company’s managing director for Canada, said in an interview.
“Unless there’s a significant increase in [steel and aluminum] supply, or there’s a significant reduction in construction volume, I don’t see why the trades would reduce their prices,” he added.
PICKING UP THE BILL
When the tariffs were first put in place, a number of contractors and subcontractors working with fixed-price contracts were left in the lurch. On the line for added costs in the immediate aftermath, industry players have since hiked their prices to build in a buffer or have introduced escalation clauses to protect themselves against future fluctuations.
In other words, these added costs from the 25 per cent tariffs on certain steel products and 10 per cent on aluminum have simply been passed along the chain.
“Whether it’s the owner or the end-user, they’re paying it,” McCabe said. “In terms of condos, it’s just factoring its way into the price. Developers, they’re not going to take the hit. They’re going to continue to make the margins they need to make on the development and they’ll pass the cost of the development… on to the end-user or the purchaser, until such times as the price gets to a point where it affects sales, then they’ll reduce the price.”
From an infrastructure project perspective, it’s generally the public purse that’s picking up the bill.
Since the Trump administration first introduced the tariffs last year, Canada’s Chrystia Freeland has taken a combative stance. The Foreign Affairs minister has repeatedly slammed the duties as “unjustified and illegal.” While the White House imposed the duties under a rarely-used section of U.S. trade rules, arguing they are vital to national security, Freeland has dismissed this justification as absurd.
In recent weeks, Freeland has continued to call for the removal of the tariffs. With Canada, the U.S. and Mexico signing off on a new trade pact last fall, she says they are no longer necessary. While the three countries agreed to a deal in November, none have ratified the new version of NAFTA. Freeland has made it clear that the U.S. lifting the tariffs is a key factor for Canadian ratification.
DECIDING ON SAFEGUARDS
Amid the lack of movement on the U.S. front, the Canadian construction industry has been left largely to its own devices. The federal government introduced targeted relief measures for certain steel and aluminum buyers at the end of last year. Otherwise it has not adjusted its approach since October when it imposed provisional safeguards, in the form of 25 per cent duties, on seven types of steel products entering Canada from countries other than the U.S.
Those provisional duties will soon come to an end.
Last week, the Canadian International Trade Tribunal, which is responsible for determining if the safeguards are justified, said imports of five of the seven steel products were not harming the Canadian industry. Specifically, the CITT determined imports of concrete reinforcing bar, energy tubular products, hot-rolled sheet, pre-painted steel and wire rod were not harmful. The tribunal deemed the safeguards against heavy plate and stainless steel wire imports to be justified, however.
The Canadian Coalition for Construction Steel (CCCS), which represents a range of users and suppliers of steel, welcomed the tribunal’s recommendations, particularly its position on rebar, and said it expects Finance Minister Bill Morneau to give the results of the inquiry “fair and careful consideration” when deciding whether or not to eliminate the safeguards.
On the other hand, the United Steelworkers union (USW) and the Canadian Steel Producers Association called on Morneau to ignore the CITT assessment and finalize the safeguards on all seven products.
“If existing safeguards are not finalized, a surge of foreign imports will devastate Canada’s steel industry and communities across the country,” Ken Neumann, the USW national director, said in a statement.
The ministry must act on the CITT’s recommendations by May 13, but it is not strictly bound to follow the tribunal’s direction.
A RETURN TO NORMAL?
According to the CCCS, Canadian producers manufacture about half the steel used in construction across the country. U.S. sources contribute another 25 per cent and all other foreign suppliers make up the final quarter. The removal of the safeguards would likely relieve some of the cost pressures on builders, but Canada has remained adamant that its retaliatory tariffs against the U.S. will remain in place until the U.S. scraps its own duties.
With lingering bad blood between Ottawa and Washington, the path back to normalcy appears hazy.
Meanwhile, Canadian contractors have built up considerable backlogs as the building market remains buoyant. Cities such as Ottawa, Toronto, Montreal and Vancouver are flooded with projects. In this environment, McCabe said, even if Canada and the U.S. can agree to shelve the metal tariffs, those expecting lower building costs will likely be disappointed.
“It’s the new normal,” he said. “Unless the market changes — unless we’re building less — and volume of construction drops and the market becomes a bit more competitive, I’m not expecting that the prices will drop just because the tariffs get removed.”