·  by Gabriel Friedman   ·  Financial Post

Canada's Steel Industry Has A Secret Weapon That Could Soon Beat China's Cheaper Bid

Last August, Stephen Hunt, director of the United Steelworkers in Western Canada, asked for an urgent meeting with British Columbia Premier John Horgan.

With construction starting on the $1.4-billion project to replace the Pattullo Bridge — which spans the Fraser River just southeast of Vancouver, and stands out as one of the larger infrastructure projects in the country — Hunt, along with other leaders from the USW, urged Horgan to buy the steel for the bridge from a Canadian producer.

“It would be unconscionable for the government of B.C., or any Canadian government, to use its power of procurement to award contracts to bidders that would source their steel from offshore,” Hunt wrote in a letter to Horgan, signed along with two other union leaders.

His entreaties made no difference: the contractor building the bridge sourced the structural steel from China, according to a spokeswoman for the B.C. Ministry of Transportation and Infrastructure, who stopped responding to questions seeking more details.

Hunt wasn’t surprised. He readily admits Canada can’t compete “penny for penny” with many other countries’ steel industries, especially jurisdictions with less stringent labour and environmental regulations, and in some cases, government subsidies. 

But lately, he’s been asking a different question: what if price wasn’t the main consideration driving large purchases for steel and other building materials?

In a shift that’s under consideration in Ottawa, and indeed already happening in other countries, the federal government is considering a new set of criteria for its roughly $18 billion in procurement spending per year, that would create an incentive to purchase lower carbon-footprint building materials.

Under the “Greening Government” directive released by the Treasury Board of Canada earlier this year, the federal government aims to reduce the “embodied carbon” of building materials in major construction projects by 30 per cent, starting in 2025 through the use of recycled and lower carbon materials.

“For a long time protecting our environment was seen as a liability, but now it’s becoming an asset,” Jean-Yves Duclos, president of the Treasury Board of Canada, told the Financial Post, adding, “The supply chain in Canada often ends up being more green than supply chains in other countries and that’s because a significant share of our electricity is already green, or clean.” 

Indeed, Canadian steel had the lowest or second lowest carbon intensity, depending on the steelmaking method, of 15 countries, according to a study supported in part by the U.S.-based Blue Green Alliance Foundation, an organization that unites labour unions such as the United Steelworkers and the Service Employees International Union with environmental non-profits such as the Sierra Club and the Natural Resources Defense Council.

Whether rising demand for low-carbon intensity building materials can rejuvenate Canada’s industrial economy remains subject to intense debate and is far from resolved.

But labour unions and environmentalists are hoping that as countries and corporations commit to reducing their carbon emissions over the coming decades, Canada’s industrial sector will be a prime beneficiary.

As it currently stands, the steel, aluminum and various other building materials used in the largest Canadian infrastructure projects are routinely sourced from the lowest bidder, which often benefits foreign industrial companies.

But Germany, Spain, California and other jurisdictions already have created procurement policies that use environmental frameworks, according to a 2020 study co-authored by Genevieve Dufour, a professor of law at Sherbrooke University in Quebec.

“These environmental requirements must, however, respond to a need to achieve environmental protection objectives,” according to the paper. “In other words, they should not be pretexts to favour a domestic industry.”

In Canada, Prime Minister Justin Trudeau has set a goal for the country to reach net zero greenhouse gas emissions by 2050, and there is legislation moving through Parliament that would set rolling five-year emission reduction targets beginning in 2030. 

Speaking at the Prospectors and Developers Association of Canada conference in Toronto, in both 2019 and 2020, Trudeau hammered on the idea that protecting the environment is also good for the economy.

“Canada is uniquely positioned to be the world’s cleanest supplier of metals and minerals,” he said.

He noted Rio Tinto Group and Alcoa Corp. built an aluminum smelter in Saguenay, Quebec that produces aluminum with zero greenhouse gas emissions. 

Investors are demanding companies use low-carbon metals, and Trudeau even predicted, in 2019, that low-carbon aluminum would fetch a premium on the global market.

So far, that hasn’t happened.

Amit Kumar, a professor of energy and environmental systems engineering at the University of Alberta, said China and India, the two largest steel producers in the world, respectively, use a lot of coal and therefore in general produce industrial materials with a higher carbon footprint.

But Kumar said even in Canada, the carbon intensity of grid varies depending on the province; and there’s still no international standard or benchmark price for low-carbon building materials, whether steel, aluminum or some other metal.

“It’s still early days,” said Kumar. “What do you qualify as low-carbon steel? It’s a global trade and unless or until there is some kind of standard or benchmarking, the industry needs to evolve further.”

The industry may be evolving towards benchmarks.

Last August, around the time Hunt and other union leaders wrote their letter to Horgan, Canada Economic Development for Quebec Regions, a branch of the federal government, granted $5 million to the Aluminum Association of Canada to create a program that allowed the industry to trace metal back to its foundry.

In February, Rio Tinto announced START, a proprietary blockchain system that provides customers with information about its aluminum.

“Just imagine if you go out one day and you buy a can of beer,” Alf Barrios, Rio’s chief commercial officer told the Financial Post earlier this year, “and you have a QR code you can scan, and it tells you where the aluminum came from.”

“It can tell you what the CO2 emissions were (to produce it), about the water usage; it can tell you how much recycled content it has … it can tell you a lot of information across the environmental, social and governance dimensions.”

Such forays into traceability may be the precursors to a market where lower-carbon intensity materials can fetch a premium.

But there are plenty of skeptics that consumers will ever pay more for low-carbon materials, and that leaves Canadian industry, which is rarely the cheapest option, in an uncertain position.

James Campbell, a steel industry analyst with the commodity research firm CRU Group, said that on average, using Canadian steel would add US$50 per metric tonne in costs. Of course, some Chinese mills are more expensive and shipping also can equalize costs, he said.

Various factors come into play when predicting the economic impacts of the transition to a low-carbon economy.

Stephen Poloz, the former Bank of Canada governor and now a special advisor at the law firm Osler, Hoskin & Harcourt LLP in Ottawa, said adding ‘green’ considerations to federal procurement builds on the carbon tax and the movement toward low carbon materials by many companies. 

It shouldn’t be “overly disruptive” to the economy, but its impact is difficult to predict, according to Poloz.

“The details of implementation are often more challenging than the philosophy,” Poloz said via email. “How does one choose between three different supplier proposals with three different carbon footprints and three different cost structures?”

Procurement also requires a judgment about whether the supplier has a track record and the credibility to deliver the necessary materials, he noted.

Duclos, president of the Treasury Board, said a shift toward ‘green procurement’ would open up opportunities for Canadian industry. He recently met with the Chair of the White House Council on Environmental Quality, Brenda Mallory, about both countries “greening government” initiatives and opportunities for Canada to capture a piece of what he estimated as US$600 billion in procurement by the U.S. government every year. 

For now, however, a green procurement policy in Canada remain nascent, and hazy on details; it hasn’t filtered down into big projects such as the Pattullo Bridge near Vancouver.

Catherine Cobden, president and chief executive of the Canadian Steel Producers Association, said her organization has lobbied for “green procurement” policies in government and that the industry has set a target to reduce its emissions to net zero by 2050, and called the decision to use Chinese structural steel in the Pattullo Bridge “a blow.”  

“The decision also runs counter to Canada’s goal to minimize its carbon footprint,” she said. “Canadian steel producers make some of the greenest steel in the world.”

Meanwhile, Hunt, the USW director for western Canada, said he never learned why the structural steel for the Pattullo Bridge wasn’t sourced domestically — given that there was a supplier in Ontario capable of delivering the material.

He expressed optimism about the impact of green procurement, but was skeptical at the same time. 

“It needs to happen faster,” said Hunt.

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