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High-Speed Rail in Canada: Submission to the House of Commons Standing Committee on Transport, Infrastructure and Communities

June 2, 2009 ( Ottawa, ON )

The Canadian Steel Producers Association (CSPA) appreciates the invitation from the House of Commons Standing Committee on Transport, Infrastructure and Communities to offer comments with respect to the Committee’s current study of High Speed Rail (HSR) in Canada. 

By way of background, the CSPA is the national industry association for Canada’s primary steel industry, including steel pipe and tube producers. Collectively, CSPA members employed some 30,000 Canadians and generated approximately $14 billion in turnover in 2008. We are significant suppliers to the North American manufacturing, energy, construction and mining industries, and are closely integrated into their respective supply chains. Steel is a major traded product for Canada, with about half of production (some $7 billion in value) exported in 2008.  

Steel remains critical to Canada’s industrial fabric now, and for the future. Members will undoubtedly realize that the current global economic crisis is having a sharp and extended impact on the steel industry. Steel has been hit harder than the wider economy as a whole. Capacity utilization, a key measure of health in such a capital-intense industry, has been running at or below fifty percent for a number of months, forcing steel producers to respond with difficult decisions including workforce reductions, facility idlings, and aggressive cash management. 

We must, however, look beyond the current crisis to the importance of the steel sector to Canada’s economic future and to the role that steel will play in developing the 21^st century economy and meeting the needs of Canadians in an environmentally progressive way.  

HIGH SPEED RAIL (HSR): THE STEEL OPPORTUNITY 

HSR is one such major opportunity that would certainly offer strong potential to the domestic steel industry on multiple fronts. Rail transportation systems rely on a vast range of steel products for both fixed infrastructure and for rolling stock.  

In addition to the steel rails, an HSR system would require significant volumes of other steel products. Each corridor would need to be built as entirely new infrastructure or adapted from existing rail infrastructure as a stand-alone system. Either would require significant amounts and various types of construction grade steels (especially reinforcing bars and other structural products) to form not only the foundation of the rail track system but also the supporting bridges, tunnels, culverts, fencing and other civil infrastructure directly tied to the corridor. Further, it is our general understanding that HSR systems tend to require more infrastructure of these types per kilometer compared to a typical conventional rail corridor due to the use of dedicated tracks, required frequency of use, and related safety and routing requirements. 

In addition, an HSR corridor would require other steel-intensive infrastructure, including dedicated lighting, security, passenger stations, service depots, power transmission and other steel-using applications. The opportunity would thus be extended to a wider variety of steel products, potentially including flat-rolled products, plate, and possibly various tubular grades. It is also worth noting that steel is also an essential component of the rail rolling stock and many of its components, including wheels and axles.  

Canada’s steel producers offer a high-quality, competitive source of supply for many such steel products. Certainly, the eventual HSR project design and specifications will determine the specific opportunity for Canadian steel producers, individually and collectively, and other supplying industries to participate in the project. Other key project variables with a significant bearing on the ability of any Canadian firm to participate will include the overall economics of the project, construction timing and duration, market conditions at the time, and all other factors affecting industrial competitiveness. But in principle, the requirements for a variety of steel products would be considerable and would offer sizeable opportunities for Canadian steel manufacturers and their employees. 

One obvious question, already raised in earlier testimony, is whether Canada could produce the steel rails – the most obvious steel component in any HSR project. The exact size of the steel rail opportunity in an HSR project would depend on the specifics of the final project or projects proposed. However, using a series of basic assumptions, our initial estimates for steel rail requirements for the total project would translate into approximately one year’s annual output of a typical facility.* We look forward to the specific details of the upcoming KPMG study to provide a better basis for estimating potential demand. 

There is no current Canadian producer of steel rails. Canadian rail production ceased in Nova Scotia in 2000 (Sydney Steel, now bankrupt) and in Ontario in 1993 (when the former Algoma Steel Inc., now Essar Steel Algoma, exited the market). There are only two active producers of rails in the United States, with a third potentially entering the market in the near future. Even if there were domestic rail manufacturing capacity, the requirements for HSR projects require different grades of steel and technologies. Consequently, there are relatively few such suppliers globally. 

A hypothetical new Canadian high-speed rail facility would need to address several factors to merit the investment. The upfront expenditure would be sizeable – our order of magnitude estimate is in the range of $500 million. Beyond initial capital costs, key additional factors would include size of the ongoing market opportunity, competitive pressures, and expected financial return. Critically, given the scale of the required investment, steel manufacturing works to a long-term time horizon for investment return. The ongoing requirements for steel rails in any potential Canadian HSR projects over the long-term would thus need to be sizeable enough to justify an investment, given the required scale of any supporting manufacturing operation. For these reasons, the prospects of a new investment in a Canadian HSR rail facility are unlikely at this time.  

GETTING THE POLICY FRAMEWORK RIGHT 

Government policies have an enormous bearing on the ability of manufacturers to maintain, grow and reinvest in their operations. As manufacturing becomes increasingly global, greater attention to the effective cost of capital becomes critical. Canada’s economic fundamentals are important to our ability to attract such investments. New investment is also linked to research and development and skills training. Infrastructure of all kinds – physical, technical, and human – must be designed intelligently to create a stable platform for long-term success. 

Governments can also wield influence over the extent of Canadian industrial participation through the structure and guidelines of the procurement process itself. Should a “turn-key” approach be preferred or specified, there may be more certain opportunities for lead project managers to partner with Canadian steel producers and other suppliers as part of an overall project consortium. Encouraging the use of Canadian materials and services at the outset of the project design process would strengthen the business case for steel producers and other suppliers in Canada. 

A further factor that would influence Canadian industrial benefits from an HSR project is the prospect of dumped or subsidized steel and steel-containing manufactured goods from other countries. Subsidies and other distortions continue to plague the international steel market, and Canada must remain vigilant in its support of fair, rules-based trade. The government must continue to enforce Canada’s trade rules effectively to ensure market outcomes in our domestic market. Canadian producers can compete in the domestic market against any steel producer in the world, but cannot compete against foreign governments.  

CONCLUSIONS 

The Standing Committee deserves credit for pursuing its interest in HSR in Canada. While not necessarily an immediate “shovel-ready” project, it is the type of major project that can deliver both industrial benefits to Canadian suppliers and help position Canada as a more competitive, environmentally progressive leader on the global stage. 

For CSPA members, this is of particular interest as a project of this scale would create attractive opportunities for Canadian steel producers. The nature of the potential benefits is clear even if the specific quantities depend on a range of unknowns at this point. CSPA members already manufacture many of the high-quality products that will be required for key elements of any project. Ultimately, participating in an HSR project would help sustain jobs and ongoing investments as well as the indirect benefits throughout the steel supply-chain. 

The degree of participation in such a project depends on a range of factors, including the overall public policy environment, which will determine how Canada would compare with other jurisdictions. This is a complex set of issues to manage. Canada’s steel producers, however, are quite prepared to engage with governments at all levels to help position Canada to win these investments as we believe it is in the long-term economic interest of the country. 

The CSPA looks forward to the outcome of both the Committee’s study and the tri-governmental consultants study on High Speed Rail in Canada, expected in 2010. These reports will improve substantially on our ability to analyze more specifically the volumes and types of steels that are required, and thus the potential jobs and other benefits. Working with governments and other stakeholders, the CSPA looks forward to collaborating to position Canada’s economy for a more competitive future.