Back to the Future Resource Industries and the BC Economy

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Back to the Future? Resource Industries and the
BC Economy
presented to Canada West Foundation May 29,
2008 Vancouver, BC
Jock Finlayson EXECUTIVE VICE PRESIDENT
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Global Situation

• World economy is slowing after several years of
  robust growth
• Global growth averaged 5 over 2004-2007 this
  year and 2009, perhaps 3.5
• US is downshifting, led by the housing sector
  likely in recession now
• Very modest economic growth ahead for EU, Japan
  forecasts for 2009 also downgraded
• China, India, OPEC, and other emerging markets
  continue to support global expansion

3
US Home Construction Tumbles
thousands
Latest April 2008
Source US Census Bureau.
4
Share of World Growth
Industrialized Countries
Emerging Markets
Source TD Economics. Including Newly
Industrialized Asian countries.
5
Asia Now Imports More than North America
per cent
Source World Trade Organization, World Trade
Statistics 2007.
6
The World in 2050 Projected Size of Economies
(US 100)
Source PWC.
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BC Economy Overall Picture

• Strong multi-year expansion giving way to a
  slightly below average performance
• real GDP growth averaged 3.4 over 2003-2007, vs
  2.6 over 1997-2002
• Resilient domestic economy
• Construction, retail sales, finance, other
  domestic services
• public sector is also expanding
• Widespread weakness in export sector
• lumber prices and output down
• exports down in almost all categories
• pulp is providing a lift
• 2008 will mark third consecutive year of lower
  exports

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Job Market Still Holding Up
BC Labour Market
per cent
y/y per cent change
25 yr avg.
Latest Q1 2008
Source Statistics Canada, seasonally adjusted
quarterly averages.
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Exports Structurally Weak and Recently Falling
millions
International exports fell 6.5 in 2007.
Latest March 2008
Source BC Stats.
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A Chronic, Widening Trade Deficit
millions 1997
Source Statistics Canada, Provincial Economic
Accounts includes goods and services.
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BC Economic Forecast (annual change unless
noted)
Source Statistics Canada and Business Council
of British Columbia.
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BCs Resource Sector

• Generally defined as
• Forestry and related processing (logging, wood
  products manufacturing, pulp and paper)
• Mining and related processing
• Natural gas and oil
• Petroleum and coal products manufacturing
• Fishing/seafood products (and processing)
• Agriculture and related processing

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BCs Resource Sector is Relatively Big
per cent
Sources Statistics Canada, Provincial Economic
Accounts and BEA. Note Washington and Oregon are
2005 data.
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Its Direct Share of GDP Has Fallen
per cent
Source BC Stats and Business Council estimates.
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But Resource Industries Remain Critical (resource-
based products as a of BCs)

• Resource-based products still dominate BCs
  exports and manufacturing shipments.

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BC Merchandise Exports by Commodity Groups 2006
Source BC Stats.
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Resource Sector Direct Jobs

• BCs resource sector directly employs 175,000
  people, similar to the number in 1990 and 2000
• The sectors share of employment, however, has
  declined it now accounts for 7.7 of all jobs,
  down from 12 in the early 1990s
• Pay levels comfortably exceed the all-industry
  average
• Many resource activities are high-value/high
  productivity, so the sector directly accounts for
  a bigger share of economic output than of
  employment

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BCs Resource Industries Carry Disproportionate
Economic Weight

• Strong export-orientation
• Relatively high wages (mining is 1 in BC oil
  and gas, forestry, also pay well above average)
• Payments to governments (taxes and other)
• Most business inputs used in resource extraction
  and processing are sourced domestically rather
  than imported (raw materials, energy, labour,
  transportation, business services)
• import content of BC resource products is quite
  low
• machinery/equipment is the main imported input

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Resource Industries Vital to BCs Prosperity
Range of Contributions to the BC Economy (GDP)
Source Gary Horne, Sectoral Review of the
British Columbia Economy An Input-Output
Approach, BC Stats (October 2001) updated by
Business Council.
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Deteriorating Competitive Landscape for BC
Resource/Export Sectors

• US downturn, severe slump in lumber prices,
  softer outlook for some other commodity markets
• Additional run-up in the C against the US
  greenback (up another 20 since Q4 2006, on top
  of previous 37 gain from Q2 2002 to Q1 2007)
• Worsening labour/skill shortages, upward pressure
  on compensation costs in some sectors
• Escalating construction and other project costs
• Domestic policy developments a) BC Energy Plan
  higher electricity costs, b) new carbon costs
  for BC industry, c) onslaught of new green
  regulation, d) policy surprises ban on
  uranium exploration, Bill 43 e) absence of a
  robust competitiveness agenda

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Loonie Marches Higher
US cents/Cdn
hi
average
low
forecast
Latest May 7, 2008
Source Bank of Canada for history, forecasts are
averages of forecasts from BMO Capital Markets,
CIBC, RBC, Scotiabank, TD.
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Exchange Rate Impact BC Resource Industries

• BC forest products industry 150-160 million
  per 1 cent change
• increase in C from US 85 to parity since Q1
  2007 2.5 billion hit
• BC mining industry 50 million per 1 cent
  change
• Increase in C from US85 to parity since Q1 2007
  750 million hit
• Other resource-based sectors (agriculture,
  greenhouse growers, oil/gas, electricity, etc.)
  no estimates available, but exchange rate is a
  significant competitive factor

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BCs Cost Competitiveness Erodes
Source KPMG Competitive Alternatives, assumes
Cdn at par with US.
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Total Greenhouse Gas Emissions in British Columbia
2020 business as usual forecast
Mt CO2 - equivalent
2004
?
2020 BC government target
Source Environment Canada.
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Emissions Track Population Growth
1971100
Source Environment Canada, BC Stats.
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BC Resource Industries Medium Term Prospects

• Mining (metal and coal) favourable global
  demand outlook significant upside potential
  25 BC projects in the review/approval/permitting
  systems but poor track record of converting
  economic ore bodies into mines (no major metal
  mine has opened in BC since 1997)
• Oil/gas positive N. American demand outlook for
  natural gas new development opportunities in NE
  BC and also in other interior basins favourable
  provincial fiscal regime and regulatory
  framework but BCs aggressive GHG reduction
  targets create uncertainty re expansion of
  upstream sector
• Electricity provincial self-sufficiency and
  green Energy Policy goals will require major
  build-up of domestic generation will scope exit
  for BC to become a significant power exporter?
• Bio-energy potential new line of business to
  utilize dead timber and wood residues but
  economics have not yet been demonstrated

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BC Resource Industries Medium Term Prospects

• Forestry - solid wood the industry is grappling
  with unprecedented challenges today (US housing
  implosion, slumping lumber prices, high dollar,
  15 export tax) yet medium-term outlook is
  attractive due to US demographic trends, global
  supply limits, and other positive international
  demand drivers pine beetle will eventually lower
  Interior harvest by one-third revival of coastal
  industry (apart from log exports) depends on
  attracting fresh capital and assuring timber
  supply
• Forestry pulp/paper Canadian industry,
  including in BC, is increasingly uncompetitive on
  a global scale too many aging, relatively small
  production facilities rising energy and
  transportation costs secular decline in
  newsprint demand strong global competitors
  (Europe, L. America, Asia) drop in chip supply
  due to pine beetle

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Commodity Prices (in US dollars unless otherwise
noted)
Source Scotiabank Global Economic Research.
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Resource Industries BC Competitive Advantages

• An exceptionally rich and diverse resource base
• Strong local expertise in related/supporting
  industries (legal, engineering, geological,
  mining finance, transportation, etc.)
• Access to reliable, low-cost power
• Geographic location proximity to growing US
  and Asian markets
• Skilled work force
• BC is a leader in environmental
  management/sustainability
• Government focus on stimulating resource sector
  development

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Resource Industries BC Competitive Challenges

• Complexities/costs arising from unresolved
  aboriginal claims (the New Relationship has
  done very little to address these issues)
• Influential environmental groups that tend to
  oppose resource development
• Overlap/lack of coordination in provincial and
  federal regulatory regimes affecting resource
  industry activities high costs and extended
  delays
• More recent developments 1) BC carbon tax and
  aggressive GHG reduction targets 2) BC Energy
  Plan focus on self-sufficiency 3) high C
• Longer-term issues 1) urbanization 2) growing
  urban/rural split (40 of GVRD population is
  foreign-born!)

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For a copy of this presentation, please
contact Vicki Champ at vicki.champ_at_bcbc.com or 60
4-684-3384