International Economic Forum of the Americas

By Angus Gillespie

A veritable who’s-who of business and financial executives were on hand for the International Economic Forum when it made its way through Toronto last month. Palm Beach, Fla. and Montreal are also hosts for the event each year. The primary reason for the forum’s establishment is to promote the role of the Americas in major decisions and reforms. Among those on hand delivering keynote speeches were: Natural Resources Minister Joe Oliver and Arizona Governor Jan Brewer.

When the forum was held in Montreal, there was enough concern about the possibility of unruly protesters getting out of hand that Quebec riot police monitored entrances to the downtown convention centre but the threat of violence never materialized and in fact there were no more than a handful of disenchanted folks who made the trek downtown.

Economics is something on the minds of all business people these days, whether it has to do with the very personal aspect of jobs, healthcare, retirement or pension security. There’s a lot of confusing data to muddle through. The speed of change is rapid.

In September two very different economic reports were released. One had Canada’s international competitive rating dropping to 14th from 12th the year before and a slip of five places from where we were in 2009. Another praised us for our efficient markets and excellent infrastructure it also pointed to a lack of government support for technology. On the other hand, also at the end of September, the Fraser Institute put out its annual report on economic freedom and indicated that Canada was ranked in the top five nations in such things as the size of government, legal system property rights, the ability to trade internationally and regulation credit which is critical in business.

Natural Gas

Greg Ebel is president and CEO of Spectra Energy Corp., which is one of North America’s premier natural gas infrastructure companies serving three key links in the natural gas value chain: gathering and processing, transmission and storage, and distribution. It boasts a workforce of about 5,500.

For nearly a century, Spectra Energy and its predecessor companies have developed critically important pipelines and related infrastructure connecting natural gas supply sources to premium markets. In fact, Ebel’s company moves about 15 per cent of the gas in North America every day.

“More than half of our assets and people are here in Canada,” says Ebel. “We’ve got three key businesses: Union gas, which is a 100-year old utility serving about 1.5 million folks in Ontario; a western Canadian processing business (West Coast Energy) and then the Maritimes & North East Pipeline which takes gas down to the United States.”

The oil and gas industry is the largest in the country and natural gas is a vital resource for both the federal and provincial governments, providing about $29 billion in exports. B.C., Alberta, Saskatchewan are already reaping the rewards and its expected Quebec and New Brunswick will see the same returns.

“Since 2007, we’ve invested about $4 billion in the country and we’ve paid $270 million a year in federal income tax,” Ebel continues. “I would expect we will stay here because natural gas is an economic driver.

According to the Canadian Energy Research Institute, over the next 25 years, the natural gas sector given the development of shale has likely produced 10 million person years across the country; $1.5 trillion in overall economic activity worldwide.

“We’re seeing those gains play out on the U.S. side of the border,” Ebel notes. “The shale gas there is expected to reduce manufacturers’ costs by $12 billion a year. By 2017, natural gas will facilitate about a 2.9 per cent increase in U.S industrial production and by 2035 that number will be 4.7 per cent.” 

The major advancements stem from the technology side, especially within the past five to 10 years, which should have a profound positive impact on the economy.

“Because of that technology we now have a century worth of gas even including increased use generation, backup supply or renewables,” Ebel states.

The average pipeline job pays about $65,000 per year, compared with $40,000 for the average worker, so compensation is excellent.

The 2011 GDP in the United States was up by about 2.5 per cent. The contributions from the oil and gas industry related to the new supplies of shale accounted for 2.2 per cent.

“Without that industry at this point in time you’d see very flat U.S. GDP growth,” Ebel states. “The math isn’t hard to figure out. We’ve got to find a way to keep using this.”

Mining – PDAC

When Glenn Nolan officially took over as president of the Prospectors and Developers Association of Canada this past March he became the first Aboriginal to ever hold the high-profile position during its 80-year existence. Strengthening community engagement and increasing the participation of Aboriginal communities within the mining industry are primary objectives of Nolan, who is also Vice President of Aboriginal Affairs with Noront Resources.

Nolan was asked to specifically comment on three areas, the first being whether it’s his opinion that the mining boom is sustainable.

“We see the need for access to minerals to continue to grow,” Nolan responds. “Is it going to be done in a boom cycle or will it be done elsewhere? We think there’s an opportunity here to ensure that continued access occurs because there’s always going to be a need. If we start to slow down our production, we’re going to be faced with a shortage. “

If shortages occur, Nolan says there would be a need to go out and explore more lands and search for resources. He also says there are ways to take the edges off boom and bust cycles in the mining industry.

“Part of that is having a strong central government that has strong policies and strong procedures in developing access to land,” he notes. “Access to capital and a strong, trained workforce is also essential.”

“Here in Canada we have a very stable government,” Nolan continues. “They have clear policies on environmental protection and through decisions made by the Supreme Court. We have policies that clearly state we have to work with local communities.”

The government has also set forth a path that allows the mining industry to have surety when raising capital for projects here in Canada through the mineral exploration tax credit. It’s a credit that allows Canadian investors to invest in Canadian companies on our soil. In the business it’s commonly known as flow-through shares and is something originally championed by a former PDAC President, John Hansuld. It provides for local investment incentives and opportunities.

There remains the need for the industry to be engaged with local communities and it’s now known as corporate social responsibility.

“It’s important that we work with these communities through the entire mining cycle,” Nolan states. “What we’ve done through the PDAC is work very closely with academia, governments, non-government organizations, Aboriginal community leaderships and members to develop a format in which we can bring back to our members so we can give them a template in which they can use when they go into the communities and that program is called E3-Plus.”

E3-Plus was originated in 2003 and is a framework for responsible exploration designed to assist exploration companies continuously improve their social, environmental and health and safety performance and to comprehensively integrate these three aspects in to all their exploration programs.

“The membership voluntarily used that method to the extent they see necessary to advance their project,” Nolan says.

One of the questions most often asked of Nolan is how will the northern communities in Canada be providing additional opportunities for business development and how will it change from previous work that has been done in the past. This relates to smaller centres outside more developed urban areas or known mining hubs such as Sudbury.

“We’re actually seeing communities forming partnerships to supply services and the exploration sector and eventually the mining sector,” Nolan remarks.

“We’re seeing examples of organizations owned 100 per cent by First Nations in Saskatchewan that have in excess of $150 million per year in contracts. In the oil sands and in the Northwest Territories and Nunavut we have other examples of Aboriginal majority owned companies attracting and securing large contracts worth hundreds of millions of dollars.”

Despite those major breakthroughs, infrastructure in the far north is still sorely lacking and will need financial resources, technical and human people power to develop what largely stands as a vast untapped region with unlimited potential. It means recruiting people from the south. The PDAC is working closely with governments to ensure there will be a better trained workforce from the north in the coming years.

“There is a tremendous change that we’ve seen from the way business was done – the exclusion of Aboriginal communities, or the isolation of them from the actual project, to know ensuring that these projects don’t leave behind a negative legacy,” Nolan says. “This will provide them with opportunities that go far beyond the project that comes to their doorstep. It provides them with mobility to take their new skills and businesses and apply those everywhere outside their territory, including globally.”

Fertilizer Production

PotashCorp of Saskatchewan is the largest fertilizer producer by capacity in the world, with the capability of producing 22 million tons of the three primary fertilizer nutrients: potash, phosphate and nitrogen. As the world’s leading potash producer, the company is responsible for about 20 per cent of global capacity. There are five low-costs mines in Saskatchewan and New Brunswick. The company also has operations in the U.S. and Trinidad. Additionally, there are offshore potash investments in Jordan, Israel, Chile and China making PotashCorp an international enterprise and a key player in meeting the growing challenge of feeding the world.

Roots of the Saskatchewan potash industry began in the 1950s. The provincial government saw it as a promising new field and granted large subsidies to new projects, mainly for American contracts. However, overzealousness led to overproduction and when a global potash glut began in the late 1960s the industry almost collapsed.

In August 2010, PotashCorp became the subject of a hostile takeover bid by Australian mining giant BHP Billiton but the federal government announced it was blocking the BHP bid, feeling the sale would not yield at net benefit for Canada.

The failed attempts to sell along with slowed potential deals with China and India on large exports are factors in PotashCorp posting a third-quarter profit decline of 22 per cent from a year ago. Chief executive Bill Doyle has stated that PotashCorp is prepared to wait for China and India, believing they need substantially more fertilizer to grow food production.

“In 2011 we generated 64 per cent of our gross margin from our products segment,” says Wayne Brownlee, executive vice president and CFO of PotashCorp.

Two-thirds of that business is outside North America with virtually no activity in the European marketplace. That said, Potash Corp. does have an executive plan for expansion.

“Our growth prospects are very much tied to developing countries: China, India, Brazil and Southeast Asia,” Brownlee states.

At the core of success for PotashCorp is the direct link to sustainability of increased food production with key drivers including, but not limited to, population growth and the desire for higher quality foods in developing nations. As income rise, there’s a shift to more fruits, vegetables and meats around the world.

The economic uncertainty over the past four years has done very little to slow growth in food demand. In fact, as Brownlee notes, grain consumption over the past four years has grown at a faster pace – 2.4 per cent per year – than the average of the 10 years prior to the economic slowdown, which was about 1.5 per cent per annum. Countries such as China continue to realize robust demands for food. Soy beans are a prime example, with China expected to import a record quantity this year with the total value of their soy bean imports being estimated at $35 billion. In the first seven months, China imported just under 35 million tons of soybeans, up 20 percent year on year. Analysts’ expectations project a decline in the coming months following a rebound in global food prices.

Brownlee says continued pressure on agriculture commodity supplies due to strong demand and adverse growing conditions has been evident in the prices for commodities such as corn and soy beans during the middle months of 2012. In other words, the potash industry was hit by the global economy, just like most other industries.

“Despite the unwavering demand for agriculture commodities we were not immune,” Brownlee admits.

In 2009, with the widespread financial collapse and general lack of confidence for bullish sentiment, global potash consumption declined by 40 per cent in one year.

“The industry went into a state of paralysis,” Brownlee offers. “Fertilizer distributors were forced to take large inventory write-downs mostly in nitrogen and phosphate supplies.”

Farmers around the world cut back application rates given their perception of the risks involved and the need to contain costs according to Brownlee, resulting in a far more risk-adverse customer.

“The cost of inventory has been shifted towards the producers to deal with this risk,” he says. “We’re seeing a bit of a repeat of that right now with concerns about the European debt crisis, so the market is still a bit tepid.”

Despite record farming incomes over the past five years in most agricultural regions in the world, farmers are cautious about their spending. Compounding the problem is a large percentage of subsistence farmers in developing countries, such as China and India.

“With a large percentage of sales destined for offshore developing markets, we are very much subject to changes in government policy from time to time,” Brownlee reveals. “India is a perfectly good example of this. Because it has subsistence farm characteristics for a large portion of the agriculture economy in India, the government there has historically heavily subsidized their domestic fertilizer business including fertilizer purchases by farmers.”

The Indian subsidy is about $22 billion. However, due to budgetary concerns, the Indian government made a decision to reduce subsidies for phosphate and potash, but that wasn’t the case for nitrogen.

“For political reasons, they chose to protect their nitrogen business and continue to subsidize it,” Brownlee reveals. “The consequence is potash and phosphate prices have risen enormously and nitrogen prices have stayed very low.”

The downside of that curious political choice has been the nutrient balance application ratio in India has moved so much in favour of nitrogen that yield responses in India are now threatened leaving the country having to make a longer-term sustainable agricultural policy decision in lieu of short-term political decisions.

Brownlee squarely pegs a large responsibility on the flatness of potash growth over the past four years to economic and political issues in many of these developing countries. He says it’s a pattern he’s become quite used to seeing.

“From 1997 to 2000 potash consumption was virtually flat,” he says. “But from 2001 to 2007 we grew at a rate of 5 per cent a year, which was worth 15 million tons of growth during that time.”

In that timeframe, consumption within China and India grew at an annual rate of 8 per cent and Brazil grew by 7 per cent. But Brownlee notes there is enormous geo-political intervention within the sector where there are periods of drift and periods of intense growth. For companies such as Potash, the essential factor to success is the response to such factors.

“We are currently in the midst of an $8.2 billion expansion in Canada,” Brownlee relates. “There’s $6 billion in Saskatchewan and $2.2 billion in New Brunswick. Once these projects are ramped up by the end of 2015, we’ll be in a position to double our potash sales.”

The expansion is expected to create 36,000 new jobs in Saskatchewan and 11,000 in New Brunswick.