Steel costs for sixth patrol vessel could be steeper

Andrea Gunn (agunn@herald.ca)

Ongoing steel and aluminum tariffs between the United States and Canada will not drive up costs for the first five Arctic and Offshore Patrol Ships, but could contribute to the final price tag for the sixth, the Department of National Defence says.

There have been tariffs in place on imports of Canadian steel and aluminum to the U.S. of 25 per cent and 10 per cent respectively since the end of May. In response, Canada implemented its own dollar-for-dollar duties on steel and aluminum being imported from the U.S. Both the American tariffs and Canadian countermeasures remain in place, even with a new tentative agreement to replace NAFTA.

On Tuesday, Prime Minister Justin Trudeau confirmed the signing of the new trilateral trade deal was not contingent on the lifting of those tariffs.

In an emailed statement, Department of National Defence spokesperson Ashley Lemire said these tariffs will not have an impact on the cost of the first five Arctic and Offshore Patrol Ships (AOPS) being built by Irving Shipbuilding as part of the National Shipbuilding Strategy. Lemire said most, if not all, of the steel has already been purchased for these vessels and none of it comes from the U.S.

“As part of its contract with the Government of Canada, Irving Shipbuilding Inc. is responsible for the procurement of steel used for the construction of the Arctic and Offshore Patrol Ships,” Lemire said in an email. “Irving procured the majority of steel from a foreign supplier who sourced it from Europe and, to a lesser extent, from China. A small amount of steel was procured in Canada.”

Lemire said for the sixth AOPS, which the government confirmed plans to build last week, the department has planned and budgeted for the risk of increased steel and aluminum prices.

Earlier this week a DND spokesperson said buying a sixth AOPS will increase the cost of the $2.3 billion project by about $810 million. Of that, $250 million is set aside for “adjustments” — things like labour rates, inflation, and exchange rates.

Lemire said any additional steel costs will come from that $250 million fund.

David Perry, senior analyst with the Canadian Global Affairs Institute, said the materials needed to build a navy vessel are so specialized that it's not uncommon for governments to do advanced purchases

“There's a limited supply; you can't just go and call it up at the last minute kind of thing,” he said.

Perry said in the case of the AOPS, having a separate fund set aside for potential cost increases — rather than paying the company a higher contract price to assume all the liability for changes in commodity or labour prices — will likely save taxpayers money if costs do go up.

Ian Lee, associate professor at Carleton University's Sprott School of Business told The Chronicle Herald the federal government is lucky to have avoided any major increases with the AOPS.

But, Lee said, if the tariffs remain in place, they are likely to impact future builds either directly or indirectly.

“It's not going to affect the (AOPS) program but it's still a burden on the economy it's going to be passed on through the cost of doing business,” he said.

This is perhaps concerning given the most expensive build of the National Shipbuilding Strategy — the Canadian Surface Combatant — is on the horizon.

But how much that project would be impacted if tariffs remain in place is anybody's guess, Lee said.

“Historically governments have been very, very involved in the shipbuilding industry with subsidies, and offsets and that sort of thing, so it's hard to predict how it might affect future builds,” he said. “It's not a normal competitive market like the stock market or most commodities.”

That said, Lee said there will likely be a big push on the federal government's part to get the tariffs sorted ahead of the upcoming election.

“Generally speaking when you look at the trade agreements that have been signed in the last 10 or 20 years whether it was the original NAFTA, CETA or the TPP, one of the first things and most important things you do is reduce or eliminate tariffs,” he said,

“I think it's going to make it more difficult for Mr. Trudeau and his government to defend this in the fall 2019 election, that's why I think they're going to be working assiduously to try and remove them.”

https://www.thechronicleherald.ca/news/local/steel-costs-for-sixth-patrol-vessel-could-be-steeper-257534/