Managing the impacts of shifting tariffs
Trade tensions ran high during the 13 months of intense North American Free Trade Agreement (NAFTA) renegotiations, and especially since this past spring when the U.S. announced tariffs on imports of certain steel and aluminum products from Canada. In response to the new tariffs, the Canadian government took retaliatory measures by announcing its own set of surtaxes on imports of certain steel, aluminum and other products from the U.S. (to the toll of $16.6 billion in American imports).
While it remains to be seen whether signing the United States-Mexico-Canada Agreement (USMCA) – which will replace NAFTA – will put an end to the steel and aluminum tariffs, one thing is certain: Canadian mining and metals executives need to understand the potential impact of shifting tariffs on their business and prepare mitigation strategies to minimize the impact in the short-term and in the long-term.
While the impact to steel and aluminum companies is more obvious, the tariffs have a broader impact on the industry through increases to input costs, which will result in higher prices and/or reduced production. Executives should be asking themselves how to minimize the effects of tariffs on their bottom line in the near term, and in the long run.
In the short-term, executives must focus on how the tariffs impact their organization’s cost structure. More specifically, what is the exposure? This requires an in-depth review of the organization’s suppliers and supply chain to determine the total exposure. Secondary markets that will be impacted include manufacturing, especially heavy machinery, and electrical products. These suppliers will either raise prices or reduce production, which could lead to supply issues.
Taking a longer term view, executives need to focus on improving overall competitiveness to withstand periods of uncertainty. There are a variety of ways increasing competitiveness can be achieved including:
Companies that actively and dynamically manage their portfolio of assets achieve better long-term returns than companies with a buy-and-hold strategy. Robust portfolio management not only identifies assets that become off strategy – it contributes to the long-term health of an organization.
Those who undertake a disciplined approach will be best positioned for success.
Companies need to consider their capital allocation strategy.
How do you invest in periods of uncertainty? Taking a long term view allows a company to cut out the “white noise” and focus on investing for the future. This could mean shifting resources to a jurisdiction that is seen as safer or one that is not “in the line of fire.” Ultimately, a holistic approach to resource allocation is critical to the overall competitiveness of an organization.
Consolidation and diversification
Players with strong balance sheets should consider reinvestment opportunities in order to optimize their portfolios and boost shareholder value. Increased M&A activity could allow companies to remain globally competitive, versus relying on government subsidies or temporary trade barriers. M&A can also provide avenues for diversification into different metals or minerals as well as different geographic regions. A well-executed M&A strategy will improve an organization’s overall competitiveness and reduce its risk profile making it stand out from its peers.
Investment in digital technologies
Digital disruption is impacting every industry, including the mining and metals sector. Investment in new and emerging technologies, such as automation and artificial intelligence, will help improve safety, accelerate productivity and improve margins. Digital technologies have tremendous potential to assist mining companies to increase competitiveness.
In times of uncertainty it’s easy to get caught up in short term thinking. The companies that will come out ahead are those that take a long-term view. Incorporating portfolio optimization, capital allocation, M&A and digital strategies into regular planning discussions will ensure management is focusing on the issues at hand, allowing the business to stay ahead of the competition.
MICHELLE GRANT is the BC Mining and Metals Transaction Advisory Services Leader at EY Canada. She is based in Vancouver. For more information, visit ey.com/mining.