It’s pretty clear now why the Bank of Canada (BoC), in its December 8 interest-rate policy statement, suggested that a rising loonie “could act as a significant further drag on growth,” a softening of the warning that a stronger currency would “more than offset” progress toward economic recovery: Statistics Canada reported two days later that the country generated a trade surplus in October.
To the surprise of most analysts, and after four consecutive months of net deficits, Canada posted positive net exports of CAD428 million. Rising exports to the US accounted for three-quarters of the increase despite the relative strength of the loonie versus the greenback. StatsCan reported increases in both shipments of and prices for gold and energy.
Exports of precious metals, primarily gold, surged 34 percent to a record CAD1.3 billion in October. Canada also benefited from higher shipments of copper ores and other non-metallic minerals. Energy sales rose 6.5 percent to CAD6.8 billion because of higher prices.
As was the case during the 2002-08 expansion, people are buying Canada’s stuff; not the high-value-added stuff, but the stuff that comes out of the ground, oil and gold, and, critically, at higher prices. And this is the stuff of Canada’s future economic growth. Commodities prices are established according to international--not just North American--markets. Although there’s still a lot of work to do to expand direct trade with Asia, particularly China, that doesn’t mean Canada can’t benefit from the impact on global demand emerging economies continue to exert.
Contrary to conventional wisdom, export growth, strictly speaking is not the key to Canada’s recovery. Rather, as Stephen Gordon, a professor of economics at Laval University in Quebec City and proprietor of Worthwhile Canadian Initiative, has argued, self-sustaining growth, at least according to recent experience, is more a question of the price commodities fetch in the global market than it is about the volume and value of manufactured goods.
The gist of the argument is this. An increase in net exports is sufficient--if all other variables that comprise aggregate demand stay the same--to support growth, but it isn’t necessary. And, as the data covering the 2002-08 period suggest, it’s more efficient for Canada to sell its oil and gold on the international market than it is to prop up a high-value-added and therefore labor-cost-intensive manufacturing industry. Professor Gordon explains:
In the early 1990s, commodity prices fell, and the only way for us to obtain the imports we wanted was to shift workers to the manufacturing sector, and to increase the value-added of exports. But devoting more of our productive capacity to making things that are to be consumed by foreigners isn’t a path to prosperity, and workers’ real buying power stagnated.
In 2002, commodity prices rose, and we were able to get the imports we wanted with fewer productive resources allocated to the export sector. The expansion of 2002-2008 was characterised by a shift out of export-oriented manufacturing, and these workers were able to produce more for domestic consumption. Exports stagnated, but real incomes increased.
In this context, the idea that "Canada will need a thriving export industry to maintain stronger growth rates" seems rather odd. I don't see how paying more for imports is going to make us better off.
In the context of the rhetorical battle between those who observe a change in the composition of the Canadian economy, toward energy-and-resource-led exports and a service-intensive domestic economy, against those who hold fast to the notion that high-value-added “manufacturing” is the key to economic revival, the BoC’s new phrasing is no small shift.
ExxonMobil’s (NYSE: XOM) USD31 billion acquisition of natural gas producer XTO Energy (NYSE: XTO) has sparked a speculative frenzy in the energy space as traders try to zero in on potential targets. Various specific names have been tossed about, including EnCana Corp (TSX: ECA, NYSE: ECA), a competitor of XTO’s and Canada’s largest player in a reviving North American gas market.
Enthusiasm for natural gas is also reflected in the fact that ARC Energy Trust (TSX: AET-U, OTC: AETUF) was able to raise CAD252 million in a bought-deal issuance of 13 million new trust units. ARC had announced plans to raise CAD200 million on 10.3 million units, but “strong investor demand” led to an increase in the size of the offering.
ARC is using the proceeds to fund the acquisition of a general partnership that holds tight oil and gas properties in the Ante Creek area of northern Alberta’s Montney formation. ARC has a significant presence in the area; it’s drilled more than 125 wells and generates more than 5,000 barrels of oil equivalent per day (boe/d) there. According to ARC, the acquisition will boost production by approximately 2,000 boe/d and its undeveloped land holdings by approximately 20 percent. The new assets comprise an estimated 12.6 million boe of proved plus probable reserves.
Meanwhile, Andrew Willis of the Toronto Globe and Mail reports that Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) may have a little competition for ConocoPhillips’ (NYSE: COP) 9 percent stake in the Syncrude venture. Willis writes that “one or more one or more public sector pension funds” is negotiating with ConocoPhillips for a stake in the oil sands that could be worth up to CAD4 billion.
The Exxon/XTO and ARC deals highlight the vast potential unleashed by new discoveries in North America. The idea that natural gas could be the environmentally and economically friendly alternative that spurs reindustrialization in the world’s largest energy market isn’t so far-fetched. At the same time, the rumored battle for 9 percent of Syncrude suggests appetite for long-life assets that produce steady cash flow is still strong--and that there has to be a fossil-fuel bridge to that cleaner-burning future.
Names How They Rate’s Oil and Gas section rallied across the board on the news of Exxon’s offer, which represents a 25 percent premium to XTO’s December 11 closing price.
Exxon, because it’s so big, has to make big acquisitions to generate growth. This naturally limits its potential field of targets. This doesn’t mean, however, that other players won’t look to consolidate.
As our colleague Elliott Gue noted in a Flash Alert to Energy Strategist subscribers yesterday, the Super Oil has enough cash to pay straight-up for XTO, but it offered 0.7098 of its common shares for each share of the target. Though credit is rather cheap these days, and would be particularly so for a company of its ilk, Exxon chose not to finance the USD41 billion purchase. It did assume USD10 billion of XTO debt as part of the USD41 billion transaction cost, which it’ll probably carry for some time.
What this deal is likely about, as Elliott posits, is the direction of natural gas prices, and that bodes well for all North American producers.
Battle of the Bully Pulpits
Of all the critics out there on this issue, none is more important, accurate and credible (present company included) than Volcker. He is The Man on these issues: Make banks smaller, make them accountable, don’t engage in moral hazard, do not reward reckless speculation. If they are too big to fail, then they are too big.
If the President were nearly as smart as advertised. he would jettison the dynamic duo in favor of Volcker’s prescriptions. He is the only politician/banker who is not afraid to prescribe foul tatsing but effective medicine . . .[sic]
Disclosure: No Positions