Michael Garcia, CEO of Algoma Steel Group Inc., has announced that the Canadian steel company is in advanced negotiations with the Canadian government for a financial aid package exceeding half a billion dollars. This comes in response to the increasing financial strain brought on by the escalating trade conflict with the United States. Specifically, American President Donald Trump, as of March, enforced 25% tariffs on all steel imports into the country. This figure was then amplified, rising to a 50% tariff in just the previous month, artificially barricading the American market from Canadian steel manufacturers.
Algoma Steel, headquartered in Sault Ste. Marie in Ontario, is particularly vulnerable to this recent increase in tariffs. Their single mill in Ontario depends notably on American demand. Prior to the launch of the trade conflict, approximately 60% of Algoma’s total production found its way into the U.S. market. Garcia disclosed in a recent interview that they are now seeking between $400 to $600 million in loans from the federal government to secure their medium-term operations. In addition, an equity component might be included within the support package.
These developments are possible due to recent legislative changes that now allow the government to hold equity in companies under the Canada Enterprise Emergency Funding Corporation’s network. In light of the unfolding trade war which shows no signs of immediate resolution, Algoma is recalibrating its strategies to adjust to a new norm where access to the US market appears to be cut off for an undetermined timeframe. Consequently, Algoma is exploring strategies to increase its market share domestically.
While selling their steel domestically is a strategic shift to compensate for the loss of American market share, Garcia expresses doubts over replacing all of American revenue with local buyers. The main challenge lies in the quick adaptation needed to this new business environment. He stated, ‘The transformation needs to happen promptly, as we don’t hold the advantage of watching developments unfold at a slow pace’. Although, even if the 50% tariffs last beyond the stipulated deadline of August 1st, Garcia has pointed out that Algoma will face significant challenges.
Canada’s Prime Minister Mark Carney has expressed skepticism around the feasibility of a tariff-free trade agreement between Canada and the United States. Although he had initially targeted August 1st as the date to hammer out a deal, its actual realization remains uncertain. Algoma’s negotiations with Ottawa for a fair financing package also have been fraught with difficulties. Garcia mentioned that the initial proposal from the government entailed excessively stringent terms and was presented in a ‘take it or leave it’ manner.
The loans are being structured under the government’s Large Enterprise Tariff Loan (LETL) initiative, a $10-billion financial facility launched in March to assist companies struggling due to the ongoing trade war. Garcia offered his view of the proposed financial package, deeming it ‘unattractive’ due to exorbitant interest rates, high fees and mechanisms that potentially allow the government to acquire company’s shares, determined by a stock price severely impacted by the trade war’s tariffs.
This would be very dilutive for Algoma’s shareholders. Garcia is urging the government to reconsider and propose better terms, given the strategic importance of Algoma to the Canadian economy. It should be noted that Algoma is the last remaining independent primary steel producer in the country. The two other major steel producers in Canada, ArcelorMittal Dofasco, and Stelco, are owned by overseas conglomerates.
Algoma’s unique position in the Canadian market is further solidified as the sole Canadian producer of steel plate used in the defense industry. The company is also navigating a transitional phase towards becoming a low carbon emitter, with an ambitious goal to become the most cost-efficient operator in Canada by the end of 2026. Garcia highlighted that the federal government has historically offered financial support to the company under highly favourable conditions, and is advocating for a repeat of such an arrangement.
To illustrate, the Canadian government has previously granted Algoma a $200-million loan to construct its new electric arc furnace. This loan stands to be forgiven if Algoma successfully achieves certain emissions standards resulting from the use of the Electric Arc Furnace that is intended to gradually shut down its traditional blast furnace. Furthermore, the government also extended a $130-million loan to the company to modernize its plate mill, again on favourable terms.
Garcia addressed the government’s original loan proposal and has stated that despite a 200 basis-point reduction in the interest rate, the terms are still excessively harsh. He emphasized, ‘The interest rate charged is still higher than other financing options’. Presenting a transparent picture of the company’s financial health, Garcia clarified that Algoma is not on the verge of a liquidity crisis, even if the government financing doesn’t come into fruition.
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