Canadian steel tariffs: how the TRQ system works

Hello friends,

This report will be focusing on Canadian steel tariffs. I will be clearly and concisely explaining the current TRQ system in place. Then I will be outlining two scenarios for Canada into the future: one with a deal with the US and one without a deal with the US. I'll touch on tactics to avoid tariffs, and of course give what I think is going to happen in the short- and medium-term future.

What is a TRQ system and how does it work?

• The current TRQ system is designed to protect Canadian steel manufacturers by making import steel more expensive through the implementation of tariffs.
• If you are importing the below steel products and your goods land in a quarter where the quota is reached, then your goods will be subject to a tariff of 50% of the FOB value.

The current TRQ quarters are:

• Q1 (Fall): June 27, 2025 to September 25, 2025
• Q2 (Winter): September 26, 2025 to December 25, 2025
• Q3 (Spring): December 26, 2025 to March 26, 2026
• Q4 (Summer): March 27, 2026 to June 25, 2026

Other notes on the system:

• The government has recently created specific steel categories, separated by free trade countries (FTA) and non-free trade countries (NON-FTA).
• No one country can exceed a certain percentage of the quota given per category. This rule is important to note, as categories that have been typically imported from many mills from the same source country will be greatly impacted, further shuffling supply chains.
• The MT quota table at first glance might sound like a lot of material but it is not. Within each category there are large groupings of HS codes. As an example, "standard pipe" includes welded pipe and seamless pipe in both carbon and stainless.
• Quick note: most import steel comes from NON-FTA countries. Pivoting to FTA countries as a strategy may prove difficult due to past dumping cases and current duties applied, location of the country, and ability of the nation to export ASTM standards or produce at a globally competitive price.

Two paths, same destination.

FTA nations

Austria, Belgium, Brunei Darussalam, Bulgaria, Canada, Chile, Colombia, Costa Rica, Croatia, Cyprus, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Jordan, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Netherlands, New Zealand, Norway, Portugal, Romania, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Ukraine, United Kingdom, United States, Vietnam, Australia, Honduras, Hungary, Panama, Peru.

Tactical strategies and thoughts

• TRQ-Q1 and TRQ-Q2 timeframes as defined will have the lowest chance of import steel being hit with tariffs.
• TRQ-Q3 will most definitely see anywhere between 50% and 75% of all current imported steel hit with tariffs. I would not be surprised if Ottawa reduces the quotas further and makes more adjustments that would restrict import steel further in the coming months as well.
• Categories that have a low percentage allocated per country will see high impact on pricing.
• Timing vessel shipments and using bonded warehouses sounds nice, but if you have spent more than 2 weeks on an operations desk dealing with containers, ports, warehouses, and customs, you are aware of the challenges. If all importers adopt this en masse, we will see quotas fill within the first few days of each new quarter.
• A 50% tariff from one day to the next will be a shock to the market. The US had 25% tariff for 8 years before they moved to 50% this year. I expect this Canadian move from 0% to 50% to be rough.

Two paths, same destination

Canada doesn't make a deal with the US, plus TRQ

Canadian steel mills continue to lay off workers and close capacity (this is such bad politics that I cannot see this happening, however it might. The liberal party, although better today, has been delusional in the past). Canadian steel mills that are operating will be booked out, lead times will increase, steel prices will increase domestically slowly. Import prices will take a bit longer to increase as our current low demand environments will be serviced in some capacity by our Canadian steel mills.

Certain products that cannot be serviced by domestic mills will see price shocks. Importers will price with 50% tariff in the price once they see how frequently they are getting hit with tariffs. Distribution and wholesalers that rely on master distributors will have no competitive advantage over each other. Now is not the time to sit on hands.

Canada does make a deal with the US, plus TRQ

Canada can only make a deal with the US if they play by US rules, which is to create a tariff fence around the Americas. Implementing 50% tariffs and also selling at the same price as the Americans. Today US HRC is $900/T, Canadian HRC is $650/T. This needs to change if Canada is going to get the chance to sell to the US again without tariff or duty. They will need to walk in step with the eco-system that has been created in the US, meaning they need to increase pricing, fast.

If downstream Canadian steel mills (pipe and tube) can sell to the US again, then we will see further price increases from not only the coil mills but also the pipe and tube mills. This scenario will have the fastest impact on steel pricing in the region.