What does the comstock effect mean?
When a Canadian company buys shares of a rival company, or when a Canadian firm sells shares of another Canadian firm, it creates a ripple effect across the entire industry.
In the process, it raises prices, lowers wages, and makes companies more competitive.
This is what happened in the 1980s when a major steel maker, Alcoa, sold its share in the Canadian aluminium company Parex to a British-based steel producer.
But this time around, the same thing could happen in the steel sector in the United States, according to a new study by the University of British Columbia.
The findings suggest that when American steel companies compete with Canadian steelmakers, they can reduce steel prices in the US by more than 30 per cent.
The effect has ripple effects across the steel industry.
What are the consequences of the comstocks?
Canadian steel producers have the biggest impact, the researchers found.
They were able to lower the prices of steel by around 40 per cent and cut labour costs by about 16 per cent, according a report published this month in the Journal of the Canadian Steel Association.
They also saw a rise in profits of up to 30 per and a rise of up 100 per cent in wages.
“The impact of comstocks is profound,” said co-author and professor of economics at the university, Kevin Milligan.
“It’s a net effect on the labour market, which has implications for wages and productivity, and it has implications on productivity and productivity gains.”
“I think the biggest problem is the lack of research on what’s going on in steel and the lack to understand it,” he added.
“I would argue that the comforts of the market are the main reason that we’re having these problems, rather than some policy, regulatory or social issue.”
How do you measure the impact of a merger?
“If the steelmaker sells a share of PareX to a company that’s more efficient than PareEx, or if the steel maker buys a share from PareFlex and the share sells for more than the market value, that’s a pretty big price drop, and the company can’t sell it at that price,” Milligan said.
In other words, there’s an impact.
“You could look at this as a merger that reduces costs of production, reduces productivity,” he said.
“If a company is paying higher wages, lower labour costs, and you see higher profit margins, then that’s probably good.”
What’s the impact on the US economy?
The study also found that, overall, American steel producers are making more than they are paying for, meaning the US steel industry has made more money than it’s lost in the last three years.
The study did not examine the impact that the Comstocks could have on the steel market, or whether they would be better off if the companies had been combined.
In Canada, the effects of the merger would be more muted.
“What’s happening is that the Canadian steel industry is already having its fair share of competition,” Millahan said.
“[The Comstocks] can have a big impact on Canadian steel, but that’s not necessarily the case in the rest of the world.”
What do we do about it?
“The problem with this is that it’s a very complicated phenomenon and it’s going to take a lot of research,” Millgan said.
It’s also unclear how successful a merger would have been in the past.
In 2007, the Canadian Government announced that it was scrapping a rule that allowed Canadian steel companies to combine with foreign firms.
Since then, a number of Canadian firms have merged with American ones.
And in 2018, the American steelmaker ConocoPhillips merged with Canadian rival Kinder Morgan, which merged with Texaco, a Mexican company.
“There are some companies that are getting more market share and less market share than they would have in the old days,” Millann said.
And while the Canadian companies are making money, they may not be making the kinds of profits that other companies are.
“These companies may not have had the same kind of growth, they’re not doing as well in the industry,” Millan said.
What can be done to curb the effect?
One way to reduce the impact would be to impose price controls on steel imports.
The United States already has a price-control system in place.
In 2017, the US Department of Commerce announced that its “steel price caps” would apply to steel imports, starting at $13 per tonne, and would be in effect until 2026.
That was part of the Trump administration’s strategy to fight steel shortages.
But Milligan thinks the rules will be ineffective.
“In the steel business, you have to have a lot more discipline to control what you’re buying and where you’re getting it,” Millikan said.
So far, Canadian steel firms have managed to