Anti-dumping duty threatens LNG Canada project

The Globe and Mail | Brent Jang | October 30 2017

A hefty anti-dumping duty imposed by Canada against imports of industrial modules threatens to crush plans by Royal Dutch Shell PLC to build a liquefied natural gas terminal in British Columbia.

The anti-dumping tariff of up to 45.8 per cent against fabricated industrial steel components (FISC) made in three foreign countries places the Shell-led LNG Canada megaproject at risk of being cancelled and also hurts other firms that rely on imported modules.

The trade case has come to light as LNG Canada, oil and gas producer Suncor Energy Inc. and engineering firm Fluor Canada Ltd. file documents in the Federal Court of Appeal to argue their respective cases. They have filed separate applications for judicial reviews of the Canadian International Trade Tribunal's decision to deny their requests to be exempted from the new federal tariff.

LNG Canada, which is hoping to import massive modules from China and assemble them in Kitimat, B.C., is also seeking tariff relief through requesting a "remission order" from the federal Finance Department. LNG Canada forecasts that it will cost up to $40-billion to construct the Kitimat terminal and related infrastructure, but that doesn't factor in the import tariff.

Energy-industry observers say the anti-dumping duty could easily add billions of dollars to the price tag because of the heavy reliance on large complex modules from China.

A final fabrication yard hasn't been selected yet. LNG Canada has set a Nov. 30 deadline to receive bids from four competing groups of engineering firms vying to be the prime contractor. Shell and its three partners from China, South Korea and Japan are expected to make a final investment decision by the end of 2018 on whether to forge ahead.

The Canada Border Services Agency ruled this spring that FISC from South Korea and Spain are being dumped in Canada at below market value, while China is both subsidizing and dumping its industrial steel goods. Most of the foreign products being targeted pertain to China and South Korea. Spain accounted for only 3.6 per cent of the total import volumes from Jan. 1, 2014, to June 30, 2016.

"The scope of the government of China's macro-economic policies and measures provide evidence that the government of China is influencing the Chinese steel industry, which encompasses the fabricated structural steel sector, including FISC," the border agency said in its statement of reasons, dated May 10, 2017.

In its reasons in June this year, Canada's trade tribunal said it had to deny LNG Canada's exemption request because there weren't any final engineering designs for the proposal to use imported Chinese modules.

LNG Canada is conducting a review that will lead to the appointment of a prime contractor in charge of engineering, procurement and construction (EPC). "There is no EPC for the LNG Canada project proposed to be constructed at Kitimat," said the trade tribunal, which also denied an exemption request from Lafarge Canada Inc., the cement maker and construction supplier.

The tribunal noted that Canada's steel industry believes "FISC incorporated into such complex modules were subject and like goods, while parties opposing submitted that they should not be so considered." The tribunal described LNG Canada's exemption request as "highly speculative and overly general."

The Shell-led consortium argues that large complex modules should not be covered by the anti-dumping duty, saying the tribunal failed to render a definitive ruling. "The lack of decision poses significant commercial jeopardy to the project since it must consider the full application of the duties as it assesses the overall cost," LNG Canada external affairs director Susannah Pierce said in a statement to The Globe and Mail. "The reason we must consider the full application of duties is because it is expected that large complex modules will need to be imported since fabrication yards in Canada cannot and do not build modules of the scale and complexity required for the project."

The complainants in the Canadian Border Services Agency case are domestic makers of steel components: Supermétal Structures Inc. of Lévis, Que., and two Edmonton-based firms, Supreme Group LP and Waiward Steel LP. The Canadian Institute of Steel Construction, which represents the country's steel construction sector, supports the decisions by the border agency and trade tribunal.

There have been more than 20 LNG ventures pitched in recent years in British Columbia, but amid low prices for the fuel in Asia, no export terminal is under construction in the province.

Woodfibre LNG hopes to start construction in 2018 at its Squamish-area site, located 65 kilometres north of Vancouver, but officials with the small-scale project are also worried about the impact of the anti-dumping duty.

LNG Canada envisages importing modules that are 10 storeys tall and then have workers on the Kitimat site at the head of Douglas Channel handle the meticulous task of connecting the structures – weighing thousands of tonnes.

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"Once these modules are built, they must then be transported to site, which poses another challenge even if a Canadian fabrication yard could build modules of this scale and complexity – highways would have to be widened, bridges raised," Ms. Pierce said.