Last year was tough for most of western Canada, as most commodity prices fell into a downward spiral with little hope of short-term recovery.
It looks like that trend will continue this year, with an added dose of geopolitical instability. Barring an unforeseen turn of good luck, it is going to be another year of pain for much of western Canada.
What we’re expecting to see across western Canada in 2016
British Columbia could begin moving on the development of its liquefied natural gas (LNG) industry. Shell and Petronas are expected to announce final investment decisions on two LNG projects which, combined, are worth $80 billion. Meanwhile, the energy sector in Alberta will be watching closely when the National Energy Board rules on Kinder Morgan’s $6.8-billion pipeline expansion project in May. Both Alberta and British Columbia will benefit from the construction project in the short term; more importantly, it would increase tidewater access for Alberta’s oil exports.
Alberta surprised the country in 2015 when it elected an NDP government to replace the 44-year-old Progressive Conservative regime. The provincial NDP government is pursuing a fiscally stimulative strategy at a time when government revenues are down as a result of oil prices (WTI) being at their lowest since March 2003. The new government has announced tougher climate change actions and undertaken a review of natural resource royalties. We will be watching closely to see what effect these policies will have on the energy sector.
Saskatchewan is feeling the effects as potash prices continue a downward trend. Two of Saskatchewan’s biggest exports, potash and oil & gas, have both experienced price hits and that – combined with ongoing weakness in agricultural commodities – has put the provincial government’s budget under pressure. Analysts say new potash capacity in the next few years would help boost future prices. Daryna Kovalska at Maquarrie Bank is calling for an average potash price of just US$254 tonne this year. Over 2015, potash spot prices dropped 3.5% from US$306 at the beginning of 2015 to US$295 by the end of the year (down from a peak of US$873 in 2009). The long-term outlook for the fertilizer, however, is good. Saskatchewan is the largest potash producer in the world.
Manitoba is facing a general election in April. The past few years for the incumbent NDP party have been rocky, with challenges to Greg Selinger’s leadership among them. Politics is always uncertain, but some pundits think Brian Pallister’s Progressive Conservatives could form the next government. Regardless of the election’s outcome, our focus will be on potential changes in fiscal policy.
Effects of global trends
It’s all about the price of oil. With world economic growth this year expected to be only slightly better than in 2015, there will be less demand for petroleum products and continuing weakness in oil prices. The price of WTI was US$53 at the beginning of 2015, dropping one-third to US$37 by December. The price of oil is not expected to make major gains in 2016 (barring some cataclysmic world event). We’ll be watching for more belt-tightening in the oil patch.
Non-oil commodity prices continue to sag as China’s demand falls. Low commodity prices
are putting pressure on the economic viability of other natural resource industries in western Canada.
As the world’s largest consumer of commodities, China’s economic health affects the ability of our natural resource industries to grow and prosper. Especially vulnerable is the mining industry, where companies took on high debt loads before the current slowdown. We can expect to see mining and other resource companies further cut costs, reduce capital spending, lay off employees and sell assets. We may see a few casualties as the year plays out if commodities prices remain low. Commodity prices for forest products exported to the United States may be the exception. Economic indicators point to the U.S. economy gaining strength after years of marginal growth. As long as this trend continues, western Canadian forest product exports should receive better returns from higher commodity prices.
China is everything to everybody. Last year, was full of surprises coming out of China. Some market analysts expect growth in China this year to be lower than forecast by the Chinese government (7%). As it transitions from an export-driven economy to consumption and services, every move China makes this year will be felt around the world. According to Eurasia Group’s 2016 risk analysis, China has been responsible for approximately one-third of global growth for the past seven years while Chinese imports and exports account for more than 10% of global goods trade. When China moves, western Canadian commodity producers see the effects on their bottom lines.
Oil prices getting caught up in the Sunni versus Shi’ite conflict. Actions by the Saudi-led OPEC cartel drove down oil prices from US$114 a barrel in June 2014 to less than US$34 barrel now. OPEC increased production, flooding the market and pushing higher-cost oil producers, pointedly the growing U.S. shale producers, out. Growing budget woes in Saudi Arabia have many pundits questioning how long they can sustain this strategy. But Saudi Arabia seems to be upping the ante by antagonizing its regional rival, Iran. The execution of Shi’ite cleric Nimr al-Nimr and 46 others in this month has the region on high alert. Previously, when tensions in the region flared, oil prices would move upwards but the opposite appears to be happening this time around. With China’s influence as a major economic driver, large inventories of oil, and more oil producing countries around the world, there doesn’t appear to be a rush to scarcity and higher prices in this go-around.
– Janice Plumstead is a senior economist
How are you feeling about the economic prospects of the West this year?