Bloomberg News

Canada Suffering Parity’s One-Eyed King in Land of Blind

February 28, 2012

(Updates with retail sales, growth forecasts in second- last paragraph.)

Feb. 21 (Bloomberg) -- Canada’s success in parlaying strong economic fundamentals into a rush of foreign investment has come at a cost: weakened manufacturing competitiveness that’s exacerbating a regional divide between the resource-rich west and the factory-heavy east.

Caterpillar Inc. and Controladora Mabe SA are closing plants in Ontario and Quebec, partly because record foreign-debt purchases are keeping the dollar near parity with the U.S. currency, boosting their costs. Out west, Jim Prokopanko, president of fertilizer maker Mosaic Co., says there’s a “gold- rush” to find workers, and Alberta is trying to win permits for multibillion-dollar oil pipelines.

“In the land of the blind, the one-eyed man is king, and that is Canada right now,” said Eric Lascelles, chief economist at Royal Bank of Canada Global Asset Management, which oversees about C$250 billion ($252 billion). “The two big things driving Canada are credit and commodities,” and “we have avoided some of the real headaches that the heavily indebted countries have encountered.”

Canada’s currency will trade close to parity with the U.S. dollar into next year, based on the median estimate of 24 responses to a Bloomberg News survey. Two-year bond yields will remain below 2 percent, according to a separate Bloomberg survey, as inflation slows and the government reduces its C$31 billion deficit, which officials are projecting will be eliminated by the 2015-2016 fiscal year.

Record Debt Purchases

Foreign purchases of Canadian debt have set records in the past three years, including a tenfold jump in money-market investment last year to C$32 billion and C$96 billion of bonds in 2010, according to Statistics Canada.

Pacific Investment Management Co., the world’s largest bond-fund manager, is betting on the country’s longer-term debt because of Canada’s stability and its “strong resource sector,” which makes it “less sensitive to shocks,” Ed Devlin, who manages Pimco’s $11 billion Canadian portfolio, said in a Feb. 10 interview.

The world’s 10th largest economy, Canada has the third- largest pool of oil reserves, and, according to a 2010 speech by Finance Minister Jim Flaherty, is the biggest producer of potash, second largest supplier of nickel and third largest provider of aluminum.

World’s Soundest Banks

Canada’s banks were named the soundest in the world for the fourth consecutive year in 2011 by the World Economic Forum, and Bank of Canada Governor Mark Carney was chosen in November by leaders of the Group of 20 nations to head the Financial Stability Board. The board is charged with overseeing efforts to write new rules for international finance to help avoid another global credit crunch.

The International Monetary Fund projects Canada will lead the G-7 with a gross debt-to-output ratio of 73 percent at the end of 2016, lower than 75 percent for Germany, 115 percent for the U.S. and 253 percent for Japan.

Canada’s central bank dropped a “conditional commitment” to keep its benchmark overnight lending rate at a record low 0.25 percent in 2010, and Carney, 46, has held it at 1 percent since September of that year, the longest pause since the 1950s. In the same period, eleven of the 20 biggest economies have cut rates, and the U.S., Japan, U.K., Switzerland and European Central Bank adopted or extended emergency stimulus or lending in the last year.

All this has supported Canada’s dollar, which has appreciated 5.7 percent against the U.S. currency since Sept. 1, 2010. Canadian government bonds have returned 8.5 percent in the same period through Feb. 17, compared with 6.6 percent for U.S. Treasuries.

Weighed Down

Canadian equity returns have trailed the U.S. in that time, with the Standard & Poor’s/TSX Composite Index weighed down by Waterloo, Ontario-based BlackBerry-maker Research in Motion Ltd. Canada’s benchmark stock index is up 3.8 percent since September 2010, compared with a 26 percent gain for the S&P 500.

Caterpillar’s shutdown of its London, Ontario, locomotive plant, which employed about 775 people, has come after it failed to reach a new collective agreement with the Canadian Auto Workers union.

“The cost structure of the operation was not sustainable,” a subsidiary of the Peoria, Illinois-based company said in a Feb. 3 statement. Caterpillar began making trains in Indiana last year.

Not ‘Financially Viable’

Mexico’s Mabe is closing its Montreal facility by the end of 2014 because the factory, where about 500 people currently work, “cannot be made financially viable,” the company said in a Jan. 26 statement. The Canadian dollar has risen “almost 60 percent over the past decade, and 90 percent of the dryers produced at the Montreal plant are exported to the U.S.”

“Canada’s fiscal system and debt situation is better than the Americans’ now and that makes Canadian assets a better buy and more stable, but it keeps the Canadian dollar higher than it should be in terms of competitiveness,” Robert Mundell, a Canadian-born Nobel-prize winning economist, said in a Feb. 9 interview at Bloomberg’s New York headquarters.

The Caterpillar closing set off a national debate that includes questions about whether Conservative Prime Minister Stephen Harper, who visited the factory in March 2008, should do more to save such jobs. Manufacturing employment fell by 2.5 percent in the 12 months through January and by 21 percent in the last decade, reducing the share of factory jobs in the workforce to 10 percent.

Labor Costs Double

Canadian labor costs in U.S. dollars have doubled since 2002 on weak employee efficiency and the rise in the currency. Unemployment climbed to a nine-month high of 7.6 percent in January, as job growth slowed, with rates in Ontario and Quebec at 8.1 percent and 8.4 percent.

“The Conservatives are sitting on their hands while foreign investors ship good Canadian jobs abroad,” New Democratic Party leader Nycole Turmel said during a Feb. 9 debate in Parliament.

Industry Minister Christian Paradis responded by saying he was “disappointed” by the closing, and the government “is determined to send the most favorable message possible to investors around the world to promote Canada as a secure and stable country and a great place to do business and invest.”

Foreign funds have been flowing into Alberta, where the jobless rate is 4.9 percent. The province has drawn energy investment from China, Thailand, South Korea, United Arab Emirates, Europe and the U.S. The Export-Import Bank of China and Canaccord Financial Inc., Canada’s largest independent brokerage, said Feb. 9 they will set up a $1 billion fund to support Canadian-resource businesses.

Main Attraction

The main attraction is Alberta’s oil sands, which hold more crude than Iran, Iraq or Kuwait, according to the June 2011 BP Statistical Review of World Energy. The Canadian Energy Research Institute forecasts companies will invest C$137 billion by 2020 to tap into oil-sands reserves that it estimates are 173 billion barrels.

Imperial Oil Ltd. on Feb. 3 approved a C$2 billion expansion of its Cold Lake project in Alberta, which will add production of more than 40,000 barrels a day. Mullen Group Ltd., based in Okotoks, Alberta, said Jan. 12 it will increase capital spending by C$25 million to a total of C$100 million this year, to take advantage of demand from oil-sands companies for oil- field and trucking services.

Needs Pipelines

Alberta needs several pipelines to market its oil, provincial Finance Minister Ron Liepert said in a Feb. 13 interview at Bloomberg’s New York headquarters. One would be TransCanada Corp.’s $7.6 billion Keystone XL project, which U.S. President Barack Obama delayed last month. It would deliver 700,000 barrels a day to refineries on the Gulf of Mexico.

“If we are going to be a global energy superpower, we have to have a global marketplace,” Liepert said.

The boom has made hiring a “real challenge” for Plymouth, Minnesota-based Mosaic, as it competes with energy companies in the region, according to Prokopanko, who is also the fertilizer producer’s chief executive officer. “It’s a gold-rush, boom- town mentality,” he said in a Jan. 27 interview at the World Economic Forum’s annual meeting in Davos, Switzerland.

Energy’s contribution to Canada’s economy was highlighted in November, when gross domestic product fell an unanticipated 0.1 percent to an annualized C$1.27 trillion. Output from oil and gas extraction and mining declined 2.2 percent to C$57.7 billion, which Statistics Canada said accounted for most of the shortfall. A Bloomberg survey predicted 0.2 percent growth.

Growth Still Forecast

The economy still is forecast to expand 2 percent this year after an estimated 2.4 percent in 2011, even as global weakness and the strong dollar remain a challenge to exports, the Bank of Canada said last month.

Canadian retail sales declined 0.2 percent in December, matching economists’ forecasts, following weak holiday spending at department and electronics stores, Statistics Canada reported today. After the data were released, Mark Chandler, head of fixed income for Royal Bank of Canada’s capital markets unit in Toronto, said he’s projecting the country’s economy will post a 1.5 percent annualized fourth quarter growth rate when the figure is published March 2.

“Canada is still a pretty strong performing economy on a relative basis,” said David Denison, who oversees C$152.8 billion as chief executive officer of Canada Pension Plan Investment Board. “Are there signs of caution? Absolutely.”

--With assistance from Cecile Gutscher, Doug Alexander and David Scanlan in Toronto, Jeremy van Loon in Calgary, Crayton Harrison in Mexico City, Melinda Grenier in New York and Theophilos Argitis in Ottawa. Editors: Paul Badertscher, Melinda Grenier

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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