May 23, 2012

January 17, 2012

Canada’s November exports provide insight into resource sector investments

Alex Carrick

Chief Economist, CanaData

Canada’s goods exports rose 3.2% in November 2011 versus October, while imports declined 0.8%, according to Statistics Canada.

As a result, the merchandise trade account swung back into surplus (+$12.9 Cdn. billion annualized) for only the second time in the latest 10 months. September was also positive at +$15.0 billion.

The merchandise trade account has been see-sawing up and down around a $0 balance since the onset of the recession in the fall of 2008. Over the past three years, there have been 11 surpluses and 25 deficits.

This is very unusual for Canada, where we are used to running positive balances ranging from $40 billion to $80 billion. That was the pattern before October 2008.

The U.S. recorded deterioration in its goods and services trade position in November, to -$573 US billion annualized. Each step the U.S. takes towards better health is likely to increase its trade deficit.

That’s because the U.S. remains dependent on foreign oil, plus there is the ongoing temptation to buy cheap consumer goods from the likes of China.

However, pre-recession trade patterns in both the U.S. and Canada are undergoing adjustment.

For example, the U.S. no longer needs to import as much natural gas. It’s speeding ahead with development of its own reserves in the relatively new field of shale gas.

In fact, there are regions in the U.S. (e.g., North Dakota) that are presently experiencing outright energy-induced booms in employment and investment.

The proportion of U.S. imports coming from Canada and Japan has been on the wane for at least a decade, while China and Mexico have been supplying larger shares.

The success of China and Mexico has been largely due to lower-priced manufactured goods made for consumption by U.S. bargain-hunting shoppers.

The U.S. does satisfy some of its oil requirements from Mexico. That won’t last. Those oil fields are in decline due to poor management and a lack of investment.

Canada is an export-oriented economy. Goods exports comprise about 30% of this nation’s gross domestic product (GDP). (Approximately one dollar in five of this nation’s output is destined for the U.S. market.)

Hence trade is tremendously important for the construction industry because plant expansions and mega resource projects depend on more than just the outlook for the Canadian economy.

Whether or not they are judged viable depends on wooing and winning foreign customers.

Supplying products to the rest of the world is an important part of Canada’s industrial make-up.

Canada’s trade picture is also undergoing significant shifts.

Over the past ten years, the share of our products going to the U.S. has fallen from 83% to 73%.

The flip side is that the rest of the world now accounts for more than a quarter of all our exports.

Year to date in November, total Canadian exports were +13% in current dollar terms. There were some significant overachievers among the various product categories.

The two standouts were energy products (+23.5%) and industrial goods and materials (+21.7%). Those are two resource sectors replete with large expansion plans, the Oil Sands region of Alberta being the most obvious example.

The industrial goods and materials category encompasses metals and minerals. High commodity prices earlier in the year, spurred by demand from emerging markets, drove sales.

The more recent easing in commodity prices – with Chinese growth expected to be negatively impacted by a weaker Europe - means some of the expected project spending may be postponed.

On the other hand, ongoing civil strife in the Middle East, plus Iran’s nuclear ambitions, have left global oil as one commodity where prices have not pulled back.

Crude petroleum exports dominate the energy products category at 60% of the total. Through November of last year, Canadian oil exports were +35% compared with the same January to November period of 2010.

On the same comparison basis, our natural gas exports (13% of the energy category) were -11%.

Oil and gas exports go almost exclusively to the U.S.

Coal (7% of the total) is a category of energy products that has a wider foreign customer base (e.g., Chinese steel-making). Coal year-to-date exports in November were +41%.

Electricity exports were +6%, but they were only 2% of the total energy category.

The importance of energy product exports is reinforced by the following. Among all major trade sub-categories, by far the largest surplus was recorded in energy products.

At +$53 billion through November, it was almost three times higher than second-place forest products (+$18.4 billion).

Within industrial goods and materials, there were some prodigious percentage increases in such categories as iron, copper, nickel and zinc ores (+37%); chemicals, plastics and fertilizers (+20%); and precious metals and alloys (+44%).

The categories where exports were laggards mainly tied to portions of the U.S. economy where the sleepiness is only slowly being shaken off. For example, forestry product exports (largely for U.S. housing) were only +4.3% on a year-to-date basis.

Machinery and equipment exports were +5.7% and automotive products, +2.6%.

The motor vehicle market on both sides of the border has improved, but it’s been a tougher slog here than in the U.S.

After a sharp but limited pickup from a terrible trough in 2009, the trend in combined car and truck sales in Canada has been slightly upwards since the beginning of 2010. (The “vans trucks and buses” sub-category has done much better than passenger cars.)

According to Statistics Canada’s latest motor vehicle sales report, November’s activity level was -1.0% month to month and only +1.0% year over year.

Not so coincidentally, motor vehicle sales were strongest in regions of the country where oil exports have been most buoyant – Newfoundland and Labrador (+13.4% year over year) and Alberta (+16.7%). Strong export-oriented oil sectors have provided better incomes and prosperity for the citizens of those provinces.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.

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