CANADA TO ROLL OUT NEW STEEL TARIFFS, HOME BUILDING COSTS TO RISE
Canadian home building costs surged as rates were cut, and stimulus fueled record demand. Policymakers assured households that it was just supply shortages and the inflation was transitory. Supply chains will scale up and prices will come down, eventually. That day is finally here for steel. It turns out that was never the goal.
Earlier today, the Government of Canada (GoC) announced it will impose import tariffs for steel imported from China, the world’s largest producer. The politics of the move is debatable, especially given that the tariffs follow the US, which imposed tariffs on “friendly” countries to bolster prices. However, what’s not debatable is the impact on home building costs. Steel is a key input cost for residential and commercial development, and it’s about to become more expensive.
Canada Is Worried About Steel “Overcapacity” Pushing Prices Lower
In just a few months, Canada will begin hitting importers of Chinese steel with a new tariff. This morning the GoC announced a 25% tariff on steel and aluminum products, effective October 15th, 2024. It’s part of a wider series of automobile tariffs, including new import tariffs on finished EVs and solar equipment from China.
Canada is following the US on this move, which imposed its own tariffs back in May. On the announcement day, the Canadian Steel Producers Association (CSPA) also called for Canada to implement protectionist policies to prevent an “overcapacity” of steel. It might be worth emphasizing that while the US framed this as a policy targeting China, it also imposed steel tariffs on “friendly” countries like Germany and… well, Canada.
Considering China is Canada’s third largest source of steel, this will be a broadly felt issue. Not just in the auto industry, as the issue is framed, but an even more critical industry that’s struggling with high input costs—housing. It turns out those towers of glass and steel contain *drumroll* steel.
Canadian Real Estate Price Surge Partially Due To Steel Prices
Canada has seen the cost of building materials surge, and steel is no exception. Last year, an RBC analysis warned the cost of home building is surging, and killing new housing. The bank specifically called out structural steel, noting prices surged 53% from Q1 2020 to Q2 2023. Prices are always easy to inflate, but much stickier to bring down.
The steel woes are also more intense in Western Canada, where the reliance on imports is even higher. There’s only one, lone steel mill in Alberta, east of Ontario. As of last year, one expert estimates that Canada’s protectionist policies have already inflated the cost of steel in Western Canada by $175 to $200 per tonne. That lone mill also only handles 25% of demand in the region, with imports playing a huge role in supplying the rest.
Canada has few data points on domestic steel prices, but we can still gain valuable insight into what’s to come. Most commodities trade in US dollars, free trade regions have similar prices due to agreements, and Canada matches US tariffs. Considering how steel prices are gapping in the US, the premium about to hit Canadian real estate development won’t be pretty.
US Steel Prices Plummeted From Peak But Still 40% More Than China
The rise and fall of steel prices over the past few years was similar to virtually all commodities. The SteelBenchmarker, an industry benchmark of steel prices, shows the price of HRB steel climbed over 275% from January 2020, to a record US$2,100 per metric tonne in 2022. Since then, the index producer says prices have been in a “freefall,” dropping 66% to $720 per tonne as of August 12, 2024. That averages to a compound annual growth rate (CAGR) of 6.9% per year, a healthy increase even after prices corrected.
Source: SteelBenchmarker.
China, the world’s largest steel producer, also saw a surge and plummet but not to the same extent. HRB steel from China peaked at just over US$800 per tonne towards the end of 2021. Since then, the price has been slashed in half, trading at US$401/tonne as of August 12th. Even with the declining prices of US and Chinese steel, Chinese steel is 44.3% cheaper than US domestic steel. In theory, Canada should be trading at a similar price, plus a premium on currency and transport.
Chinese steel seems to be much cheaper than the market. Until one zooms out and realizes that North American steel prices are much higher than imports from any other steel-producing region. That includes other advanced economies in the West.
North American Steel Prices Are Much Higher Than Western Imports
Cold rolled (CR) steel prices are a good example. This is the type used for structural steel, like beams and columns. It’s also used for sheds and industrial buildings, and is measured in short tons (st). A st is an American measure for 2,000 pounds, because anything but the metric system, right?
US steel is trading at a significant premium compared to importing from virtually all markets, according to Steel Market Update. They compared US domestic CR to imports from Germany, Italy, Korea, and Japan. The firm also adds a US$90 premium to foreign prices to cover import costs.
Source: Steel Market Update.
US domestic CR was trading at US$915/st on August 20th, which the firm notes is US$125/st more than offshore products. US CR is more expensive than all but Japan, whose price includes a 71% tariff on the country. The firm’s analysis concludes US CR is 18.2% more than the same product from other advanced economies, even when including hefty import tariffs. It’s even climbed from the 15.3% premium a week before, and is likely to worsen.
It might not be Canadian price data, but it’s easy to see where this is going.
Now this isn’t a total loss—it’s a win for the steel industry, where workers have seen their wages lag inflation. Producers will be able to better handle the shift in costs, though the premium in price already far outpaces wage growth for the industry. In other words, this isn’t about covering the rising cost of wages.
It’s also a win for tax revenues. Higher home prices were originally believed to be due to higher input costs, with policymakers claiming supply chains just needed to scale up. Now that supply chains have scaled up, taxes are increasingly taking a bigger cut of any possible discounts that should have been transferred. Development fees are an example, which climbed to six figures in some regions as prices fell, placing a floor on the cost of building. Now tariffs are being imposed to inflate steel prices artificially.
Most importantly, this is a sign for people who still think the government can intentionally create affordable housing. It may not have been clear when they flat-out stated that home prices can’t fall since older homeowners “need” to use it for retirement. Obviously, homebuyers 25-years ago knew that a global pandemic would materialize, the central bank would slash rates to a record low, and keep them there for an excessive period, resulting in record home price growth.
The CMHC also internally acknowledged that higher prices are needed to create more supply. Demand for building also places demand on materials, resulting in higher input costs. As a result, more building generally means prices need to rise to continue building. However, now that building is slowing and input costs are falling, the state will impose a tax to keep prices elevated (and raise revenues).
Policymakers always claim there’s a lack of supply. Until there’s a surplus, at which point there’s no surplus—just an undertaxed product.
Story by: Better Dwelling
