This report does not constitute a rating action.

(Editor's note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings.)

Key Takeaways

• Recently implemented tariffs between Canada and the U.S. spell trouble for many Canadian corporate issuers, particularly companies in the manufacturing and automotive sectors, lumber producers, and those that rely on discretionary spending in Canada.
• S&P Global Ratings assumes Canadian companies will generally face higher operating costs, supply chain disruptions, reduced competitiveness in the U.S. export market, and weaker domestic demand, which would only be partially offset by the weakening of the Loonie.
• Trade tensions will likely remain high over the coming weeks, especially with threats of additional tariffs by the U.S. administration creating further uncertainty and potentially turning business investment away from Canada.

On March 4, 2025, the U.S. administration implemented its previously announced, sweeping 25% tariffs on most goods imported from Canada and Mexico, except for Canadian energy and certain critical mineral imports, which will be tariffed at 10%. These critical minerals include aluminum, copper, uranium, potash, nickel, zinc, and others. The administration cited concerns over illegal immigration and drug trafficking, particularly the flow of fentanyl into the U.S., as the reasoning behind the tariffs. Canada followed the implementation of these tariffs with an announcement of its plans to impose retaliatory 25% tariffs on C$155 billion worth of U.S. exports, which will take effect in two phases (C$30 billion took effect immediately and C$125 billion is set for 21-days later). This is notwithstanding the potential implementation of additional tariffs on U.S. imports of Canadian steel and aluminum later this month (25% tariff scheduled to start March 12, 2025), which would raise the combined tariffs on U.S. imports of Canadian aluminum to 35% (10%+25%) and on steel to 50% (25%+25%). This is reminiscent of President Trump’s first term in 2018, when his administration imposed tariffs on steel and aluminum (25% and 10%, respectively), which it later lifted as part of the negotiations that led to signing of the United States-Mexico-Canada Agreement (USMCA). While a 30-day tariff exemption was granted today for the auto sector by President Trump, our report assesses the potential impact on Canadian firms should those tariffs be reinstated. Canadian lumber was excluded from the USMCA and Canadian producers exporting to the U.S. have had to pay antidumping and countervailing duties (ADD/CVD) since 2018 (a couple years after the 2006 softwood lumber agreement expired). Last year, the combined ADD/CVD on Canadian softwood lumber were about 14.5%, though this figure could rise further this year, even though U.S. lumber imports from Canada are now subject to a 25% tariff. There were also reports last week that President Trump had instructed the Commerce Secretary to investigate the use of Section 232 to add further tariffs to U.S. lumber imports. Section 232 of the Trade Expansion Act of 1962 grants the president the authority to impose tariffs on imports that threaten national security, which he intends use this month to impose the additional steel and aluminum tariffs mentioned earlier.

Trump’s trade policy is off to a more-aggressive start than during his first term in office. Canada’s economy is deeply integrated with that of the U.S., which renders it vulnerable to sustained cross-border tariffs. Given that the U.S. currently accounts for about 75% of Canadian exports, it is likely the imposition of these tariffs will place many Canadian businesses at a competitive disadvantage in the U.S. market, particularly those in the manufacturing and resource sectors with assets in Canada that sell to the U.S. We expect this will likely weaken Canada's economic output and lead to cost inflation and higher unemployment, which could further reduce affordability for Canadians and negatively affect consumer discretionary spending. Sectors with more integrated supply chains, including auto and aerospace manufacturers, will likely also face higher operating costs and inefficiencies. Furthermore, the demand for the products they sell could decline due to slowing economic growth, higher prices, or a shift among their U.S. customers toward domestic suppliers, which would exacerbate the potential earnings decline. Competitive dynamics and geographic diversity will also play an important role in determining the earnings impact from these tariffs on specific companies. For instance, firms that operate a global production footprint and sell to customers outside of the U.S. could be better positioned to adjust their commercial and production strategies to minimize the effect of the tariffs on their business. Likewise, companies with strong market positions and limited U.S. domestic competitors could more easily pass through the additional costs to their customers, including those in the U.S. that would be responsible for shouldering the extra costs. The uncertainty around Trump’s trade policies may also discourage investment in Canada because companies that derive a large proportion of their sales south of the border may look to shift some of their manufacturing capacity to the U.S.

Weakness in the Canadian dollar, which would make Canadian exports more competitive (all else remaining equal), could partially offset the expected tariff-induced demand loss for many Canadian exporters to the U.S. That said, a relatively stronger U.S. dollar would also weaken the free operating cash flow (FOCF) generation and credit measures of companies that have a high level of U.S. dollar-denominated capital expenditure or debt and report in Canadian dollars. We also recognize that companies entering this year with strong FOCF generation may have the flexibility to manage their shareholder distributions to cushion the potential earnings impact from these tariffs. Another consideration is that the tariffs could lead to higher-than-anticipated interest rates in the U.S. These higher rates would lead to increased interest costs for Canadian companies with a large portion of variable-rate, U.S. dollar-denominated debt or those with significant refinancing needs over the next couple of years, contributing to weaker cash flow metrics and interest coverage ratios.

Aerospace And Defense

The Canadian aerospace industry involves the manufacturing of highly technical products that rely on an intricate supply chain. These companies often source components from the U.S. and may have a limited ability to shift to non-U.S. suppliers because of a lack of alternatives that meet their design and quality requirements or ensuing supply chain disruptions. Therefore, we expect the reciprocal tariffs on U.S. imports to Canada, along with the tariffs on steel and aluminum, will increase production costs for Canadian aerospace companies. Key mitigating factors could include companies choosing to pass through the higher costs to their customers, given our belief that most have the ability to pass through these costs under their existing order contracts, and the net benefit to their operating income stemming from the depreciation of the Canadian dollar against the U.S. dollar. The U.S. is by far the largest market for these companies and a key source of demand for aerospace products manufactured in Canada. With Canadian exporters now facing 25% tariffs in their core U.S. market, we believe their demand and delivery volumes could decline, particularly if there are U.S.-based competitors that offer similar products, which would also negatively affect their ability to pass through higher costs to their end users.

Bombardier Inc. is the largest aerospace company in Canada. We believe the Montreal-based company, which primarily designs and manufactures business jets, is one of the most exposed firms in the sector to the recently implemented tariffs. The company has a large production footprint in Canada (about 90% of assets in 2024), where it completes the manufacturing of its jets, and sources many high-value components from the U.S., including its wings and engines. In 2024, Bombardier generated about 64% of its revenue from the U.S., which is the largest market for business jets (representing about two-thirds of global demand). While Bombardier’s Global and Challenger series jets are very popular, its main competition stems from the G-series jets manufactured in the U.S. by Gulfstream Aerospace (a subsidiary of General Dynamics). We expect this competitive dynamic will limit the firm's ability to pass on higher costs through increased pricing and could lead to a reduction in its orders and pricing pressure if the tariffs are sustained. We anticipate Bombardier’s sales could also decline while its investments in working capital increase this year if it attempts to push out some of its deliveries to a future date when the tariffs might be lower no longer apply. Therefore, Bombardier’s credit measures, including its EBITDA and FOCF, will likely be weaker than we previously estimated. Still, our average forecast for the company's S&P Global Ratings-adjusted debt to EBITDA over the next couple of years remains below our 5x downside threshold and we continue to view Bombardier as having solid long-term growth prospects.

Montreal-based CAE Inc. is a leading provider of aviation training solutions, including full flight simulators. In our view, CAE's earnings have a limited exposure to these tariffs. The company derives about two-thirds of its revenue from the services it offers through its network of more than 240 training sites in over 40 countries and the remaining one-third from its full flight simulators, a portion of which it assembles in Montreal. However, CAE also has manufacturing facilities in Arlington, Va. and Tampa in the U.S., as well as in Germany, which provides it with some flexibility around where it sources its products. While tariffs could increase the company's operating costs and lead to supply chain disruptions, we view its risks as manageable and believe its leading market position will likely support it ability to pass through higher potential costs to its customers. During its 2024 fiscal year (ended March 31, 2024), CAE generated about half of its revenue in the U.S., where a similar proportion of its non-current assets were located.

HDI Aerospace Intermediate Holding II Corp. (dba Héroux-Devtek) is also based in Quebec and specializes in designing and manufacturing aircraft landing gear for civil and defense original equipment manufacturers (OEMs). The key programs in the company’s order backlog include the Boeing 777, F-35, F-15, and CH-47. We estimate the company generates about 60% of its revenue from the U.S., with much of its manufacturing capacity outside the U.S. (Canada, the U.K., and Spain), which exposes a portion of its products to these tariffs. Furthermore, higher component costs, including for steel and aluminum, could pressure the company’s profitability if it is unable to pass on higher costs to its customers. That said, we think HDI will have some success in passing through these costs due to its solid position in the highly technical market and the critical importance of landing gear systems, which comprise a relatively small portion of an OEMs' operating costs.

Autos

The North American auto industry depends on highly integrated supply chains with many parts crossing national borders, often more than once. We estimate a 25% tariff on imports from Mexico and Canada, combined with the tariffs on steel and aluminum, could drive up costs for U.S. carmakers and ultimately lead to higher vehicle prices and reduced demand. We think the Detroit-3, including General Motors (GM), Ford, and Stellantis, will be the most affected by potential tariffs due to their production footprints. Ontario-based Magna International Inc., which offers a wide array of components, is one of the largest automotive suppliers in the world. However, we believe the company's sizable exposure to North America (about 48% of 2024 revenue) and the Detroit-3 (about 38% of 2024 revenue) places it at greater risk for a reduction in its demand if the OEMs curtail their production amid sustained tariff headwinds. In our view, Magna will likely pass on the increased costs to its auto OEM customers. Therefore, the greater risk to the company's operating income stems from the tariff's longer-term secondary effects, such as a reduction in its volumes as higher prices weaken demand, supply shortages, and increased production volatility. In November 2024, we revised our outlook on Magna to negative to reflect the elevated competition among suppliers amid a lower-production environment, the competitive pressures facing its key customers, persistent labor inflation, geopolitical risks, and management's decision to start buying back shares. In our view, the potential earnings impact on Magna from these tariffs could pressure the current rating because it could take the firm longer to deleverage below 1.5x. However, the company may be able to reduce its leverage in the face of weaker earnings by cutting back on its share buybacks or repaying debt using the proceeds from the potential sale of non-core business units.

We expect higher vehicle prices and weaker discretionary spending in Canada, particularly on big-ticket items, will lead to lower vehicle sales volumes in the country. This could cause AutoCanada Inc.'s, the largest public automotive dealership group in Canada, EBITDA generation to underperform our previous expectations. We believe that the increased profits from the company's parts and services segment, due to Canadians keeping their cars on the road longer, would only partially offset the reduction in the gross profit from its vehicle sales and related finance and insurance products. Our outlook on AutoCanada has been negative since July 2024 and, given that its S&P Global Ratings-adjusted debt to EBITDA currently exceeds our 5x downside threshold, we anticipate the rating will come under additional pressure over the coming months.

Tariffs will likely have a limited impact on Global Auto Holdings Ltd. (GAHL) due to its small exposure to North American markets. After the company's recent acquisitions of Lookers in the U.K. and K.W. Bruun in Denmark and Sweden, it now generates most of its revenue in the U.K. and Europe. We estimate that GAHL will only derive about 10% of its vehicle sales in 2025 from North America. In addition, the company’s brand portfolio is weighted more toward luxury European brands, with very limited exposure to the Detroit-3. In November 2024, we revised our outlook on the company to negative to reflect its reduced capacity for an underperformance at the current rating. Although the tariffs may have a more-limited direct impact on GAHL, the broader economic and supply chain challenges could further reduce rating headroom.

Building Materials

Canadian lumber producers, already struggling with challenging market conditions and ADD/CVD since 2018, could face more headwinds this year. In 2024, the combined ADD/CVD paid by Canadian softwood lumber exporters to the U.S. stood at about 14.5%, which will likely increase further this year even though U.S. lumber imports from the Canada are now subject to a 25% tariff. There were also reports last week that President Trump instructed the Commerce Secretary to investigate the use of Section 232 to add even more tariffs on U.S. lumber imports. The U.S. accounts for about 85% of North American softwood lumber consumption, of which it imports about 30% (mostly from Canada). We expect these tariffs will raise the cost of lumber in the U.S. and reduce realized prices for Canadian lumber because it will become less competitive in the U.S. market where some substitution Southern Yellow Pine (SYP) is likely. We estimate that average prices (in U.S. dollars) realized by producers of Canadian lumber, including spruce pine fur (SPF) will decline 5%-10% in 2025 and follows challenging market conditions since 2023. This would translate into an increase of 15%-20% from the perspective of the U.S. customer paying the tariff. We assume average realized prices for tariff-free U.S. lumber, such as SYP, will increase by at least 15%-20%. If the administration adds more barriers to U.S. lumber imports from Canada, potentially including higher ADD/CVD and additional tariffs under Section 232, prices for U.S.-sourced lumber could increase even further. We don't expect prices will rise by the same 25% level as the imposed tariffs because we assume U.S. production will increase in response, although not sufficiently in the near term to displace the materially volume of imports required to meet demand. We anticipate a similar price trend for oriented strand board (OSB) and other engineered wood panels preeminently used in new home construction. With different pricing trends expected for U.S. and Canadian lumber products, the production diversity of building materials issuers across North America is an important consideration when assessing their future earnings and credit risk. The Canada-based forest products issuers we rate include West Fraser Timber and Domtar. Both these companies are well diversified with a sizable operating footprint in the U.S., which could help to offset the effects of the tariffs.

West Fraser produces and sells lumber, panels (mainly OSB), and pulp and paper in Western Canada, the southern U.S., the U.K., and Europe. The company is the largest softwood lumber producer in North America (and the largest OSB producer globally). In our view, West Fraser has a moderate exposure to the tariffs, given that it manufactures most of its OSB (about 60%) in the U.S. and its lumber capacity is roughly evenly split between the U.S. and Canada. On a consolidated basis, we estimate about 30%-35% of the company’s lumber and OSB production crosses the Canada-U.S. border. This rate will likely decline gradually over the next few years as West Fraser continues to shift more of its capacity to the U.S., including possibly through the restart of its idled capacity. The company currently faces no debt maturities and maintains a substantial amount of liquidity, which will likely enable it to manage through an extended period of weaker-than-anticipated earnings and cash flow generation.

Domtar is much less exposed to lumber, which we had previously expected would account for 10%-15% of its S&P Global Ratings-adjusted EBIDTA this year. This exposure stems from the company's acquisition of Resolute Forest Products in March 2023. Domtar generates most of its income from paper, packaging, pulp, and tissue products and has a sizable footprint in the U.S. Based on our belief that most of its lumber capacity is in Canada, we assume the income from Domtar’s wood products segment will likely be lower than we previously anticipated due to the recently implement tariffs. This could lead to reductions in its earnings and cash flow, if not offset by a weaker Canadian dollar, thereby increasing the probability its leverage will exceed our 5x downgrade threshold through 2025.

Groupe Solmax produces geomembranes for industrial and environmental applications. We assume the company could be indirectly exposed to tariffs through its customer-driven projects, which use products it produces in Canada and the U.S. Solmax's key end markets include transportation infrastructure, waste, natural resource operations, and construction. Our current assumptions include a rebound in construction activity in the U.S., where Solmax generates the majority of its revenue, in 2025 due to lower interest rates and ongoing infrastructure spending. However, if there is significant ongoing uncertainty around tariffs and general trade flows, the demand from construction companies and other users of geomembranes may decline until there is greater visibility into U.S. trade policies. This could reduce the company's already limited headroom at the current rating. However, we believe the tariffs will have a limited direct impact on Solmax’s operations because it operates a significant manufacturing footprint in the U.S. and will likely be able to meet the majority of its U.S. demand locally.

Capital Goods

Husky Technologies Ltd. is one of the largest suppliers of injection molding equipment to the plastics industry globally. We believe the risk to the company's operating income from U.S. tariffs over the next couple of years will likely be relatively low. Husky has a global manufacturing footprint that provides it with flexibility to shift its production in the face of tariffs. The company's injection-molding system sales are likely to be the most affected, given that it mostly produces them in Canada and provides them to customers around the world, including in the U.S. Husky sells its injection molding systems to plastics producers, primarily in the food and beverage industry, and uses steel as a key input for building these systems. We assume the company has contracts in place with key suppliers to pass through increased costs related to tariffs and higher steel prices, which will likely help it limit any effects on its profit margins from higher operating costs. Furthermore, Husky’s dominant position as the largest injection molding tooling provider in the world, leading share in polyethylene terephthalate (PET) beverage packaging molds, and limited competition from U.S.-based companies provide some protection to its volumes and pricing. From a capital structure perspective, about two-thirds of the company's debt outstanding is based on the Secured Overnight Financing Rate (SOFR) and its S&P Global Ratings-adjusted funds from operations cash interest coverage ratio is in the mid-1x area. If average short-term interest rates in the U.S. increase, potentially due to tariff-induced inflation, Husky’s cash flow generation and interest coverage ratios could weaken.

ATS Corp. is involved in the planning, design, and building of automated manufacturing systems for diverse end markets, including life sciences, transportation, and consumer products. In our view, the company has a substantial manufacturing footprint in the U.S., given that one-third of its global manufacturing capacity is in the country. ATS also has a relatively low exposure to Canada to U.S. cross border sales (about 15% of sales), which will reduce the effect of these tariffs on its performance. Furthermore, the company recently downsized its transportation division amid lower demand from its automotive customers over last year, which is a sector that could experience further demand declines if these tariffs are sustained. We anticipate ATS will continue to focus on reducing its debt leverage and believe the demand in its key end markets, including life sciences and food and beverage, will remain robust.

Mattr Corp. is an industrial product manufacturer specializing in composite (including composite pipes and tanks) and connection technologies (including engineered wire and cable and heat shrink tubes). The company primarily produces its products in Canada and, to a rising extent, in the U.S. Mattr is exposed to cross-border trade and end markets that we expect will be negatively affected by tariffs, including automotive. In its composite technologies segment (about 50% of revenue), the company primarily sells its pipes and tanks to fuel station operators, oil and gas producers, and wastewater management companies, all of which may reduce their capital spending and replacement plans in the face of high tariffs and an uncertain economic environment. That said, Mattr has made an effort in recent years to expand its footprint in the U.S., including through the addition of a Flexpipe facility in Texas, which could potentially reduce its exposure. In the connection technologies segment (about 50% of revenue), the company sells its engineered wires and cables to telecommunication operators, auto suppliers, and transit operators. We believe the automotive end markets could be face the greatest headwinds from these tariffs and believe Mattr’s in-flight transition of its automotive DSG-Canusa facility to the U.S. from Canada will only partially offset its exposure. Higher anticipated input costs for the company, along with increased substitution risk in the U.S. market, may lead it to generate lower-than-anticipated earnings and reduce its headroom at the current rating.

Chemicals

The North American chemicals sector is fairly closely linked to the global chemicals markets and could quickly feel the effects of trade disruptions. Beyond the immediate direct impact, escalating trade tensions, barriers, and retaliatory measures could have widespread indirect repercussions. These include deepening economic uncertainty, weakening demand for chemicals from key customer industries (such as automotive), and disruptions to complex global supply chains. Companies that try to pass on the higher costs to their customers could experience mixed results, with those with favorable competitive positions likely to be more successful while those with less-favorable positions risk reducing the demand for their products.

Methanex Corp. is a global supplier of methanol produced from natural gas. We expect the tariffs will have a minor direct effect on the company because it handles very limited trade between Canada and the U.S. (it supplies a small amount of product to the northwest U.S. from its Medicine Hat production site) and no exports to China from the U.S. Given Methanex's global footprint, the tariffs could have an indirect impact on its performance through increased economic uncertainty and reduced demand, which could lead to lower methanol pricing that negatively affects its earnings.

Nutrien Ltd. is the world's largest crop nutrient company. Potash and nitrogen fertilizers each account for over one-third of the company's earnings. We believe U.S. farmers are reliant on Canadian potash production (roughly 80% of the potash purchased by U.S. farmers comes from Canada), though less so on Canadian nitrogen (about 8%), and anticipates it will be able to pass on the impact of the tariffs to its customers. Economic uncertainty stemming from the implementation of the tariffs could lead to some volume disruption initially, though the midpoint of the company’s guidance for its production volumes is 14 million metric tons and assumes “relatively limited impact from potential tariffs.” Strong corn prices in North America and good demand in Brazil and Asia will likely also somewhat mitigate the effects of the tariffs and support Nutrien's pricing.

Consumer Products/Retail

The tariffs imposed on Canadian goods will likely have a limited effect on the entities in the Canadian retail and consumer products industries that we rate. In our view, most of the rated companies either have sufficient capital structure flexibility to adjust to the tariffs or have a limited exposure to the U.S. market. Nonetheless, in the consumer segment, we believe Canada Goose Holdings Inc. is significantly exposed because it manufactures most of its products (nearly 70%) in Canada, including nearly all of its down-filled outwear, and generates almost a quarter of its revenue in the U.S. market. Combined with the weakness in the Canadian and Chinese markets (management has already lowered its 2025 guidance for direct-to-consumer sales), we think the 25% tariffs will likely pressure the company’s leverage.

On the other hand, branded seafood manufacturer High Liner Foods Inc. will likely be less affected by the U.S. tariffs. The company has manufacturing facilities in the U.S and will likely shift its production volumes to the U.S. in reaction to the tariffs. Similarly, we expect the tariffs effect on Journey Personal Care Corp. (a manufacturer of adult personal care products) and Knowlton Development Corp. (KDC; a value-added custom formulator) will likely be modest, given the diversity of their manufacturing facilities. Both fuel retailers Alimentation Couche-Tard Inc. (ACT) and Parkland Corp. have operations in the U.S, though we don’t believe the tariffs will affect them directly. However, the second-level effects from higher fuel prices and general inflation could limit spending by lower-income consumers at these retailers.

Canada's retaliatory tariffs and the weakening of the Loonie could magnify the effects of the U.S. tariffs by pressuring the already weak Canadian consumer. Grocery stores that face tariffs on food imported from the U.S. will have to decide how to balance absorbing costs with passing through price increases to increasingly value-focused consumers. At the same time, they will likely shift their procurement focus on local products or those not subject to tariffs. Clearly these trends will accelerate the grocers' focus on cost efficiency, though their exposures to private-label products will provide them with an advantage over the short term.

Discretionary retail companies will likely be pressured by the tariffs. We think Canadian Tire Corp. Ltd. will face elevated headwinds as cautious consumers curtail their discretionary spending, though we expect this will have less of an effect on Dollarama Inc., which is more value focused. If retailers in Ontario, Quebec, and British Columbia pull U.S. alcohol from their shelves, as proposed, we believe this could somewhat benefit Canadian wine producer and blender Arterra Wines Canada Inc., though the effect of the tariffs on its business will depend on whether it can quickly pivot its U.S. bulk wine exposure to global substitutes. On the other hand, the tariffs could be beneficial for the company because the majority of its branded wines originate from Canada and, as such, will likely support its revenue.

The 25% tariffs from the U.S. government could exacerbate profitability pressures for Bombardier Recreational Products (BRP). Currently, the company operates a material manufacturing footprint in Mexico (more than 65% of production) following its move away from Asia. At the same time, the U.S. accounts for about 60% of BRP's total revenue. Therefore, although there is some uncertainty around the outcome of the tariffs, the higher tariffs on products imported into the U.S. from Mexico could act as a headwind for the company's earnings and leverage. We note that BRP could also incur material costs (albeit with some temporary mitigants), which--against the backdrop of a cautious consumer, could lead it to struggle to pass on incremental costs through pricing actions. Such a situation could further soften the company's EBITDA and margins and rise its leverage beyond our downside threshold.

Containers And Packaging

Transcontinental Inc. is Canada's largest printer and a flexible packaging converter in North America. The company operates 14 printing facilities in Canada, 25 flexible packaging plants (mainly in the U.S., Canada, and Latin America), and provides pre-media services. We believe Transcontinental is less exposed to tariffs because its printing products are largely produced and consumed locally in Canada and only about 15% of its packaging business is exposed to cross-border U.S. sales. In addition, the company’s currently low leverage (below 2x) provides it with downside protection against weakening macroeconomic conditions stemming from the imposition of tariffs.

CCL Industries Inc. is a world leader in specialty label and packaging solutions for global corporations, government institutions, small businesses, and consumers. The company has a global footprint featuring more than 200 production facilities in more than 40 countries that are generally near its customers. We believe CCL could shift its production capacity and shipments to its global facilities to limit the impact of the tariff on its customers. Therefore, we anticipate that tariffs will have a modest effect on the company's business. In addition, we believe CCL has ample headroom at the current rating to withstand a substantial decline in its earnings (however unlikely) stemming from the impact of the tariffs while substantially increasing its discretionary spending.

Balcan Innovations Inc. manufactures flexible plastic packaging, reflective insulation, and technical film solutions and operates eight manufacturing facilities in North America (six in Canada and two in the U.S.). The company provides flexible packaging solutions for a variety of end markets, including building and construction, food and beverage, security packaging, resin and chemicals, consumer goods, and industrials. We believe the tariffs will have a moderate to high impact on the company's business, given its substantial cross-border sales. We estimate that Balcan derives about 60% of its sales from the U.S., though less than 30% of its production capacity is in the country. That said, we anticipate the company could optimize its production footprint by exercising its existing options to increase the operating rates at its U.S. facilities (and ramp up production at its new facility in Wisconsin). We anticipate the implementation of the tariffs will place modest downward pressure on the rating and slow Balcan's deleveraging pace, which could challenge our assumption it will reduce its debt to EBITDA below 5x by 2026.

Metals And Mining

Canada is a resource rich country home to a large mining sector that produces a wide variety of minerals and metals, including uranium, gold, copper, nickel, metallurgical coal, iron ore, and many others. Many of these commodities are sold to global customers, which have the flexibility to shift their trade flow, with demand generally more dependent on China than the U.S. Of the minerals and metals we mention above, we assume all but gold and iron ore will be classified as an energy resource or critical mineral and thus be tariffed at 10% when imported to the U.S. from Canada. Canadian mining operators could experience higher-than-anticipated unit costs stemming from tariff-induced cost inflation on the equipment, fuel, chemicals, and other materials they source from the U.S. That said, a weaker Canadian dollar could lead to lower costs (in U.S. dollar terms) for domestically sourced inputs, such as labor, which typically comprises 30%-50% of a mine’s direct operating costs. Overall, we assume the tariffs will have a modest effect, if any, on the earnings and ratings of Canadian mine operators. We could also see commodity prices increase (particularly for gold) in response to the uncertainty around the U.S.' trade policies, which could contribute to stronger credit measures in some cases.

Saskatchewan-based Cameco Corp. is among the world’s largest providers of uranium, with its mining operations primarily in Saskatchewan’s Athabasca basis. The U.S. produces very little uranium despite being one of the largest consumers. Therefore, U.S. utilities rely on uranium imports from Canada, which is the second-largest producer in the world and a more reliable source of uranium than Kazakhstan and other alternatives. Therefore, we expect the tariffs will have very little, if any, impact on Cameco’s ability to place uranium contracts with U.S. utilities. We also note that the company has uranium assets in the U.S. that are on care and maintenance, which provides it with some optionality in the event the tariffs are sustained or increased.

Steel and aluminum account for more than half of the value of the metal that flows from Canada to the U.S., while gold and copper combined accounted for 21% (US$58 billion or C$83.8 billion) in 2023. Canada and Mexico are the second- and third-largest copper suppliers to the U.S. after Chile. However, China is by far the world’s largest copper refiner, thus much of the metal consumed in the U.S. passes through Chinese refineries, which will potentially provide the companies offering these materials with cover to slightly raise their prices. A tariff on Canadian gold exports to the U.S. appears to be just a pure tax on physical transactions into the U.S. because a producer can realize the world price for an ounce anywhere.

Canada dominates aluminum production in North America because of its low-cost electricity. Aluminum production is one of the most electricity-intensive processes in the world, and the U.S. has been closing smelters for decades to direct its scarce marginal power into higher-value manufacturing, residential use, and technology applications. The U.S. has only four primary aluminum smelters operating today, thus higher prices will boost the profitability of these operators. We estimate that restarting mothballed aluminum smelters in the U.S. and increasing total industry capacity utilization to 100% would displace only about half of the imports from Canada, and at a much higher cost. In addition, ramping up that production would require new sources of power, which is what caused the operators to shutter these assets in the first place. Alcoa is the largest aluminum producer domiciled in the U.S., though most of its primary metal output comes from Canada. Most of Century Aluminum's aluminum capacity is in the U.S., thus it will likely benefit from a significant boost stemming the from U.S. tariffs. U.K.-based Rio Tinto is the largest aluminum producer in Canada.

We expect tariffs could have a negative impact on Canada-based steel producer Algoma Steel Inc., which derives about 60% of its revenue from the U.S. While the tariffs could benefit the company through higher steel prices and a weaker Canadian dollar, they could also potentially lead to lower volumes, challenges in passing through increased costs to its customers, and difficulties in securing local scrap supply for its upcoming transition to electric arc furnace operations, which could materially affect its earnings. We believe Algoma can withstand short-term disruptions due to its existing liquidity position, we anticipate it would likely face increased rating pressure over the coming months in the event of a prolonged trade war.

Canada-based metals distributor Russel Metals Inc. largely caters to local customers from its facilities in Canada and the U.S., thus we expect the tariffs will have limited--if any--effect on its operating and financial results. The company may be exposed to short-term supply chain disruptions over the near term due to the implementation of the tariffs, though we anticipate the increase in steel prices will likely benefit its absolute dollar margins because it is a cost pass-through business.

Novelis Inc. is an U.S.-based producer of rolled aluminum products with global operations. The company generates just over 40% of its revenue from North America and incorporates about 63% recycled content (mostly domestically sourced) in its production process. Novelis imports products from its one Canadian plant and other regions to meet domestic U.S. demand. The company will face potential tariff impacts on these import volumes unless it obtains exemptions--as it did in 2018--and may face short-term supply chain disruptions. However, the company is generally a cost pass-through business, thus the effects of the tariffs would be reflected in higher aluminum and Midwest premium prices.

Oil And Gas Exploration And Production

We do not expect the 10% tariff on Canadian oil and gas imports into the U.S. will affect our credit ratings on Canadian oil producers. As we discussed in a previous article (see "Canadian Oil Producers Likely Resilient To Potential Tariffs," published Feb. 18, 2025), we believe the impact of the tariffs will be shared by Canadian producers and U.S. refiners because many U.S. refiners rely on Canadian crude oil imports for their refining feedstock. In addition, Canadian oil and gas producers have limited alternative sale markets and lack sufficient domestic refining capacity.

We expect the tariff on Canadian oil and gas imports will be felt by producers primarily through wider Canadian crude price differentials. We believe the discount will be most notable for Canadian light oil because these imports can be more-easily replaced with domestic U.S. production. For Canadian heavy oil, which account for roughly three quarters of Canada’s oil exports to the U.S., we expect a less-dramatic widening because alternative sources of heavy crude are not plentiful (the U.S. does not produce heavy crude oil) and non-tariffed suppliers will have price leverage. Furthermore, many U.S. refiners have physically integrated, hardwired pipeline supply from Canada with no true alternative feedstock supply sources. This limits their ability to demand price concessions from Canadian producers to compensate for the entire tariff cost. Therefore, we anticipate U.S. refiners will assume some of the additional cost, which they will likely pass on to consumers to preserve their margins.

Canadian heavy oil producer MEG Energy Inc. has committed transportation to the U.S. Gulf Coast for about 70% of its production and to the Canadian West Coast for about 15% of its production. We expect the company will prioritize its sales to non-U.S. buyers to limit its tariff exposure. Given that President Trump’s executive order states the duty will apply only to goods imported for consumption, we believe Canadian producers like MEG will look to avoid the tariffs by redirecting barrels currently sold to U.S. buyers to U.S. export hubs for re-export to non-U.S. purchasers. MEG anticipates it will be able to shield more than half of its oil sales from the tariffs.

Integrated producer Cenovus Energy Inc. has indicated a similar sentiment, with management publicly expressing its intention to rebalance its sales away from the U.S. in response to the tariffs. For example, the company’s sales through the Trans-Mountain pipeline are currently split equally between Asia and California. With the newly enacted tariffs, we anticipate Cenovus will direct as much of its volumes as possible to global buyers to shield its sales.

We anticipate condensate-rich natural gas producers, such as NuVista Energy Ltd., will be the least affected by the tariffs, given that Canada’s domestic demand for condensate as a blending agent for heavy oil production materially exceeds its domestic condensate production.

We expect the weakening of the Canadian dollar, following the imposition of the tariffs, will significantly offset the wider expected price differentials for Canadian oil producers. Because crude oil barrels are priced in U.S. dollars, Canadian producers’ revenue is largely U.S.-dollar denominated. That said, they will continue to pay for their cost of goods and services in devalued Canadian dollars. Therefore, we anticipate this arbitrage will offset a material portion of the potential widening in the discounts on Canadian crude. Furthermore, most producers' balance sheets and leverage metrics are strong because the industry remains focused on maintaining low leverage and spending within internal free cash flow generation. Accordingly, we do not anticipate any change to our ratings on Canadian oil producers due to the imposition of tariffs.

Technology

Tech exports from Canada to the U.S. are very low, thus the potential revenue pressure on Canadian tech companies (mostly software companies) will likely be limited. However, Celestica, a Toronto-based design, manufacturing, and supply chain solutions provider, has manufacturing operations in China. Nonetheless, the company has been expanding its facilities outside of China (Malaysia completed in 2024 and Indonesia to be completed in 2025) and currently has significant capacity at its U.S. facilities that it could use if it decides to shift its manufacturing onshore. Given Celestica’s flexibility, we expect the pressure on its performance will be limited.

Telecommunications

Overall, the Canadian telecom sector has a minimal exposure to the U.S. because it derives most of its revenue and cash flow from Canadian consumers and businesses. However, as the full impact of the U.S. tariffs on Canadian goods, and the retaliatory Canadian tariffs on U.S. imports, are felt, we expect consumer confidence will deteriorate, leading to tightened wallets and more focus on promotions that will ultimately pressure both telecom companies' wireless churn and average revenue per user (ARPU). In the wireline segment, we anticipate accelerating cord cutting while new internet net adds slow because of a reduction in new household formation. Nonetheless, we view telecom services as quasi-utility like in nature and anticipate customers will likely focus on promotions and flanker brands, thus limiting any material effect on the telecom firms' top-line revenue.

Transportation

We believe the pace of North American GDP expansion will slow and U.S. imports from Canada and Mexico will likely also decline, thus we assume modestly lower volume growth for Canada’s two largest railroads, Canadian National Railway Ltd. (CN) and Canadian Pacific Kansas City Ltd. (CPKC). These companies are well diversified by customer, geographic region, and end market, therefore we expect the tariffs' effect on their operating income will be modest. That said, the demand in certain product categories will likely face greater pressure this year, include those with more cyclical demand, or move cross-border if domestic alternatives exist. These include goods in the automotive, intermodal, and metals and minerals industries. We also note that we expect both companies will generate considerable FOCF over the next few years, which will provide them with the flexibility to adjust their distributions to maintain leverage near their targets (2.5x for CN and 2.75x for CPKC). About 30% of CN’s volumes cross the U.S.-Canada border, with about 20% travelling from Canada to the U.S. (mostly petroleum and chemicals, forest products, and grains and fertilizers) and about 10% travelling from the U.S. to Canada. CPKC is more exposed to tariffs because it derives about 40% of its revenue from goods crossing the Canada-U.S. or Mexico-U.S. borders and we expected it would realize a greater proportion of the increase in its volumes from the automotive and intermodal segments over the next few years than CN. Still, before the tariffs were announced, we had expected CPKC would increase its revenue by the mid- to high-single digit percent range this year and a mid-single digit percent improvement at CN. We view CPKC as being at the stronger end of the range for the 'BBB+' issuer credit rating category, which is one notch lower than our issuer credit rating on CN.

Tariffs between Canada and the U.S. could weaken the demand for travel, and thus the credit measures of Air Canada and WestJet, by more than we previously assumed. The demand for air travel in Canada is likely to soften as Canadian consumers reduce their discretionary spending in the face of higher costs and unemployment. The depreciation of the Canadian dollar against the U.S. dollar could further reduce the demand for trans-border flights because traveling south of the border will become more expensive for Canadians. Tariffs on U.S. imports to Canada and a weaker Canadian dollar could also lead to higher prices for jet fuel and aircraft at a time when other costs (particularly for labor) are rising and price increases are becoming harder to pass on to passengers. That said, some mitigants, including the currency hedges these airlines already have in place and their ability to source jet fuel from outside the U.S., could offset these effects. In our view, WestJet has less headroom at the current rating than Air Canada because it generates a larger proportion of its revenue from domestic routes, where capacity is on the rise, and trans-border leisure routes (including to the Caribbean) where demand could weaken more extensively. Air Canada also serves these markets, though it benefits from greater route diversity, including transatlantic and pacific routes, that provide it with more flexibility to optimize its network in response to market conditions. Furthermore, we expect all of WestJet's aircraft deliveries over the next few years will come from U.S.-based Boeing Co., which increases the potential for delays or higher costs from tariffs relative to Air Canada, which has a mix of Boeing and Airbus SE aircraft in its order book.

Related Research

• S&P Global Ratings Metal Price Assumptions: Holding Firm Through First Waves Of Tariffs, March 5, 2025
• What Looming Tariffs Could Mean For U.S. Corporates, Feb. 27, 2025
• Uncertain Tariff Policies Could Create Ratings Risks For North American Automakers And Suppliers, Feb. 18, 2025
• How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates?, Feb. 6, 2025
• U.S. Capital Goods Brief: Tariffs Would Test Pricing Power, Feb. 6, 2025
• Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
• Which Sectors Would Be Most Vulnerable To U.S. Tariffs On Canada And Mexico, Jan. 30, 2025
• Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024

Primary Contacts:	Alessio Di Francesco, CFA, Toronto 1-416-507-2573; alessio.di.francesco@spglobal.com
	Aniki Saha-Yannopoulos, CFA, PhD, Toronto 1-416-507-2579; aniki.saha-yannopoulos@spglobal.com
Secondary Contacts:	Devan Moura, Toronto 1-4165073261; devan.moura@spglobal.com
	Ola Olatunji, Toronto 1-4165072509; ola.olatunji@spglobal.com
	Abidali Maredia, Toronto 1-416-507-2544; abidali.maredia@spglobal.com
	Archana S Rao, Toronto 1-416-507-2568; archana.rao@spglobal.com
	Zahra Alavi, Toronto 1-4165072546; zahra.alavi@spglobal.com
	Laura Collins, Toronto 1-4165072575; laura.collins1@spglobal.com
	Donald Marleau, CFA, Toronto 1-416-507-2526; donald.marleau@spglobal.com
	Edward J Hudson, New York 1-212-438-2764; edward.hudson@spglobal.com
	James T Siahaan, CFA, New York 1-347-2131346; james.siahaan@spglobal.com