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Testing our Metal: Tariffs hit Canada’s trailer makers, upfitters hard

Posted: August 17, 2018 by John G. Smith

Much of the steel and aluminum used by Canada’s trailer makers is not available domestically. It’s why Jacques Tremblay, president of Quebec-headquartered Tremcar, still has to turn to the U.S.

TORONTO, Ont. – Falcon Equipment had eight to nine months of orders on the books as a July 1 deadline for steel and aluminum tariffs approached. The B.C.-based manufacturer waited as long as it could. But eventually there was no choice.

“We bought as much steel as we could find,” says company vice-president Blair Norberg, referring to actions taken ahead of Canada’s 25% counter-tariffs on American steel and 10% on aluminum. “We typically buy steel for on-time manufacturing because we don’t necessarily have the storage. To just have steel sit out in the back lot and rust for six months when we wait for production doesn’t make a lot of sense.”

A trade war between Canada and the U.S. doesn’t make sense to him, either, but the extra carrying costs and storage fees couldn’t be avoided. Manufacturers that import large volumes of metals to produce their goods – such as specialty trailers, truck bodies, and truck-mounted equipment – have seen material costs soar.

“While we support the idea of defending Canadian interests, the tariffs imposed by the Canadian government are also having a negative impact on the economy,” says Don Moore, director of government and industry relations at the Canadian Transportation Equipment Association (CTEA), whose members include such manufacturers.

The cost increases have not been limited to Canadian tariffs alone. Steel and aluminum prices have been pushing skyward since U.S. President Donald Trump announced the first round of tariffs on China in March. Combined with the higher demand that comes with a robust economy, the prices of the all-important metals are up 20-40% since January, Moore says.

“We started to see the inflation of the aluminum in April. It was very, very quick,” says Tony Roberts, president and CEO of Platinum Tank Group, which makes products such as aluminum B trains. “The dynamite had already been lit. Adding the [Canadian] tariff just added a little bit of injury that was already a significant pain.”

He’s still waiting for metal suppliers to issue costs for the fourth quarter of this year. That’s left him to estimate 2019 trailer prices rather than offering firm numbers when taking orders. The details now need to be confirmed 120 days before deliveries.

Canadian-based specialty trailer manufacturers like Tremcar have faced significant cost increases because of tariffs.

Limited options

To compound matters, many of the materials used by Canada’s trailer makers are only available in the U.S. It’s why Jacques Tremblay, president of Quebec-headquartered Tremcar Technologies, was relieved when Canada removed stainless steel from the proposed list of counter-tariffs.

“There’s no mill producing the material in Canada,” he said, referring to his last domestic supplier that closed in 2002.

But the business still faces 10% counter-tariffs on the aluminum used to manufacture tankers that haul goods like plastic pellets. Even after absorbing some of the cost, Tremcar still had to add a couple of thousand dollars to the price of a typical unit.

While some industries may be able to source other supplies from Asia or Europe, this isn’t really an option for businesses like these. Those who export trailers to the U.S. need to remain conscious about the share of foreign content allowed under NAFTA. There are differences in metals to consider as well. Aluminum sourced from Greece might technically meet requirements, but it’s not identical, explains Tony Roberts, president and CEO of the Platinum Tank Group. “It doesn’t manipulate in the same manner. It doesn’t bend as well.” Even the coloring is different.

“It’s not as easy as people would like to think. You don’t wake up in the morning and start buying metal from Greece and other sources,” he adds.

As small or mid-sized businesses, manufacturers also source their metal through distributors, who were quick to increase prices and capitalize on the higher demand in the time leading up to counter-tariffs, Moore says.

They weren’t the only suppliers to increase costs.

“Companies are using this as a bit of an excuse to raise their prices if they have a little steel component,” Norberg says, referring to the example of tarping systems that were suddenly 10% more expensive even though only a fraction of the products are made with metal. Roberts has also seen the price of finished aluminum components rise 8%, even though about 40% of such a product’s price might be linked to raw aluminum costs.

While there is talk of a refund or rebate program to offset the tariff-related increases, it has yet to be fully defined, Roberts says. “We’re not 100% certain we’ll get 100% of those duties back.”

Announcements about tariff-related relief have largely focused on the metal suppliers themselves. Finance Minister Bill Morneau, for example, recently referenced the need for “exceptional” safeguards to counter a surge in foreign steel products coming into Canada. Among those is the steel plate used in heavy machinery and transportation manufacturing. Hot-rolled sheet used in the automotive sector is there as well, as is the stainless steel wire used in springs, and wire rods used in making several automotive and industrial components.

“The government will always stand up for Canadian workers and Canadian businesses, and that means taking action to counter unfair trade practices when merited. International trade unquestionably strengthens Canada’s economy, but it must be fair and open, and it must result in growth that works for everyone,” he said.

Double dipping

Moore openly wonders whether some steel and aluminum suppliers are raising prices on top of accepting relief available through the federal government. It’s especially “irksome” when steel makers talk of the positive results, he said. Lakshmi Mittal, chairman of ArcelorMittal, recently credited the tariffs for helping the company to realize record profits in the second quarter of this year.

“Hopefully these manufacturers of steel and aluminum are not going to take all this profit and also say they want of the $1.7 billion,” Moore says.

In the meantime, the specialty trailer makers wonder when the higher prices might begin to cool sales.

Current economic conditions have buffered Tremcar somewhat. “The economy is booming like never before, and the backlog is long,” Tremblay says. “We have a backlog today 12 months ahead. People may not have many choices in the market.” The danger comes if the general economy begins to slow. “If the business slows down, they [U.S. trailer makers] are going to ship stuff into Canada,” he explains. “It’s not only in the states we compete.”

Since trailers tend to be in service for 10-20 years, someone who sees the price of a B-train rise from $200,000 to $220,000 might eventually decide to skip a year to wait for the costs to even out, Roberts adds.

Moore now wonders if some smaller companies have the financial means to survive if the trade dispute drags into 2019.

“A lot of people like to lump trucks into automotive,” he says. “We’re not the big auto industry.”

“The programs that are offered to most of our members are pretty useless,” he adds, referring to such things as duty drawbacks and the recuperation of tariffs.

The trailer makers also scoff at broad discussions about finding new markets for their products. The trailers made for Canada and the U.S. are dramatically different from those sold in Europe, for example. Looking at the brakes alone, North America’s regulators focus on hard stops, while their European counterparts tend to focus on the way individual brakes handle their share of the load, Moore says. “For us to adjust is not that easy.”

Even if answers to the differences can be found, trailers are more conducive to moving freight than being viewed as freight.

“You can’t imagine how much it costs to ship air on a boat,” Roberts says, referring to the realities of moving massive empty containers. Besides that, breaking into a mature market is no small matter. “They’re not going to let you just walk into their marketplace.”

There’s simply no replacing the export opportunities to the U.S.

“We product four to five trailers per day,” Tremplay says. “Without [the] U.S. we would have to fire half of our people.”

Even once tariffs are removed, there are questions about how much the price of steel and aluminum would actually drop. Norberg points to fuel costs as proof. How much did the price of gasoline or diesel drop when the cost of a barrel of oil plunged?

“It’s not easy to be a manufacturer in Canada,” he said. “It’s got more expensive to be a Canadian.”

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