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.
Decline in GDP will also be brutal. Most people have no clue what’s happening, so they just need to see data like the GDP moving in the right direction.
That’s why GDP PPP is so much more important. If the gov decides people have to pay an extra 30% for the base input costs, it shouldn’t inflate the value of output.
This is a salient point. Just because inflation doesn’t properly measure the decay in capital doesn’t mean that paying a lot more for things is the same as growth.
We used to have politicians concerned with the general state of the economy. Now they’re onto worried whether you think the economy is doing well.
I hear price controls worked out well for the Soviet Union. I wonder where they’re at now.
For a country that pretends to hate Communism, it sure is adopting a lot of the practices that led to its collapse.
For soviet union did not work having traitors in Kremlin. Otherwise we all had places to live and paid 3-5% from our monthly salaries for our housing. Not do bad for socialism. Get out a bit more and you shall see enough homeless on toronto streets… never in the soviet union.
Sergey, have you any clue how many people Stalin eliminated single-handedly? Not to mention how many he sent to siberia? You had no choice BUT to live your life without standing out from the crowd in any way. It’s the only way you had a chance of surviving.
The shortage of housing in Soviet Union was enormous, 10 families for 1 kitchen, 1 bathroom.
You are talking about 50s -60s communal housing after germans destroyed 50% of the soviet housing . I was born in one and yet in 70s all of us, our friends and relatives lived in separate apartments and paid 0 to get those. Under Brezhnev 164 million of the soviet citizens got their apartments from the state.you see. Ussr solved the problem of which Canada has no experience. Local governments are completely incapable of solving any issues they create. BTW, considering situation I have no doubt that canada got communal problem of her own. You know, rooming housing or you never heard of it? 🙂 considering prices many will be renting beds for the rest of their lives and many will end homeless.
I have a serious question. When is dumping actually considered dumping? China helped pay for the expansion of its steel industry, which is a key point made in the attached notice.
But Canada also subsidizes a lot of production (as does the U.S.) in a similar way, boasting of development of its export market. Are we going to be hit with the same kind of allegations and restrictive policies?
Thank you for the time.
Dumping notionally occurs when a producer exports goods at a price lower than the price it sells the same goods in its home market or when it is selling at a loss. If domestic prices in the country of export are artificially low due to government interventions, you can ignore those domestic prices and use pricing/cost data from a third country. In steel dumping cases involving China, Chinese prices are routinely ignored due to GOC industrial policies. Sometimes the alternative data is based on US steel prices/costs. So the amount of the dumping is really the difference between Chinese prices and US (or some other country) pricing.
If dumped prices injure (or even threaten to injure) domestic producers of like goods, anti-dumping duties can be imposed.
To your point – dumping duties are imposed after investigations by Canadian authorities based on facts as required under WTO rules. The Liberals are bypassing that process by simply imposing surtaxes. The americans are big enough to flout WTO trade rules. Canada not so much. I expect some level of retaliation from China for this move. See the Ozzie experience with for e.g.
Look, I am soviet man born in 1967. I lived in the soviet union until it was destroyed from within. My grandparents were born in 1924 and father 1936.
They lived and fought under Stalin and with his name. It was not easy times considering where russia was coming from in 1917 and how things were going. Lenin and then Stalin took the country that was on Africa level of economic development and modernized it into world second economic power by 1939. Repulsed two aggressions by the west in 1918 and 1941. Those were difficult times. My grandfather spent 3 years in so called Gulag which was simply put jails management. By his own admission he was guilty as charged. After Stalin death Khrushev sent commission to find out how many jailed wee innocent or mistakenly jailed. They worked there and found around 4-5% of the total number which was not larger than usa current jail population. You see. Khrushev report at 20th CPSU meeting was 100% lies. It has been proven beyond any doubt.
Yes, there were political struggle and attempts of coups in 30s. Yes,there wee innocent that suffered. But those were times that required decisive measures otherwise ussr would have died in 1941. All those lies about Stalin and communism in general are to make sure that people know and see no alternative to dead end capitalism which had passed its prime long time ago.
Capitalism in front of your eyes only creates problems and solve none. It outlived it’s usefulness.
Every time she liberal/democratic party keeps power they spend money everywhere uncontrolled that leads to inflation, higher taxes, higher prices and poorer people.
How people cannot understand that mentality never changed. If you vote for those who never cares economics, you’ll face at the end bad living style as all of us will pay for that everywhere.
This is excellent news!
My myself thinks government should make a list of all the housing materials and double triple the price with taxes (or tariffs or whichever instrument they can find or invent) so that no new homes can be built at lower costs than what is the median price of a home today. This way, homeowners will be supported with a price floor for any new housing that comes into the market.
As for those not in the market and the homeless, government can use federal lands to build rental low-cost social housing with its new lease program. Renting is not so bad, most people in Germany do it. We need to teach young people homeownership is not all it is cracked out to be and we need to embrace a new kind of society.
Last time I wired a house there was barely any steel in the construction, other than rebar for the foundation.
I’m not sure why higher steel would impact residential construction.
Seems like a poor excuse to raise prices. Very little steel used in residential construction.
It’s a pre emptive price control measure without doubt.. it is motivated by nationalist desire to have a buffer effect in favor of future CDN production prices over costs.. ( we do output a bit of steel south of that 49th parallel border) It’s selective ( for real GDP output) and I suppose there will be more movements like this going fwd, as China is, for the most part -the world’s manufacturing plant and keeping their costs relatively cheap in comparison 2 the rest of world manufacturing.
This is what happens over time when you value stock market returns over national investment/GDP – loss of productivity by way of offshore labor and product opportunity along with volatility and headwinds in markets from outside market forces that you can’t control.