New Ventures in Canada

Commodities in Canada

Commodities in Canada

Commodities play an important role in the Canadian economy. Over one quarter of exports in Canada are derived from Base Metals, Forestry Products, or Crude Oil. When researching investment opportunities in Canada it is always good to gain some insight into trends occurring within the commodity dominant sectors of the economy.

Current issues affecting investment in many commodity driven sectors are very similar.

Base & Precious Metals: total world production from mines has been dropping and new deposits have become increasingly more difficult and expensive to find. Further, once new deposits are located, an extensive amount of time is required to bring them into production. At the same time, world demand has been increasing and is expected to continue to increase as China, India and other nations develop. The list of minerals mined in Canada is quite extensive but here are some major examples: Aluminum, Coal, Copper, Diamonds, Gold, Iron Ore, Nickel, and Uranium.

Companies of interest in this sector:

Aber Diamond
Alcan
Barric Gold
Cameco
Platinum Group Metals
Teck Cominco

Crude Oil and Natural Gas: total world production of oil reserves has remained stable for years and no new major refineries are scheduled to open any time soon while world demand has been increasing dramatically. Most analysts believe that this trend of high energy prices is here to stay and I agree. With Canada’s vast oil reserves the future looks very bright for companies investing in the oil sands of Alberta.

Companies of Interest:

Apache Corporation
Canadian Natural Resources
Enbridge
Encana Energy
EOG Resources
Husky Energy
Imperial Oil
Irving Oil
Petro-Canada
Suncor
Talisman Energy

Forestry: Demand for paper and wood products seems to remain strong and Canada is one of the world leaders in this sector. Forces that may negatively affect this sector include a strengthening Canadian dollar, a depreciation of the Euro compared to the U.S. dollar, and slower than expected economic growth.

Companies of Interest:

Canfor
TimberWest
Weyerhaeuser

Canadian Oil

According to the Emergy Information Administration, Canada is one of the worlds largest produces and exporters of energy and has considerable natural resources; the country is a net exporter of oil, natural gas, coal, electricity, etc. Since 1980, Canada's total energy production has increased by 81%, while total energy consumption only increased by 40%. The majority of this excess capacity makes its way to the U.S. as Canada's largest trading partner. Consistently, Canada is the largest source for U.S. oil, natural gas, and electricity imports. This trend of energy export will only continue to rise as world energy demand increase.

Canadian Oil

As of January 2007, according to Oil and Gas Journal (OGJ), Canada reported 179.2 billion barrels of proven oil reserves; Saudi Arabia is the only country reporting more. The bulk of these reserves are oil sands deposits in Alberta where there are outstanding investment opportunities.

The oil sector is privatized in Canada and has undergone consolidation in recent years. There are a number of Key companies invested in this area: Imperial Oil (majority owned by Exxon Mobil), EnCana (Canada’s largest independent upstream operator), Talisman Energy, Suncor, EOG Resources, Husky Energy, and Apache Canada.

Oil Sands producers have also attracted increasing attention from Asian oil companies looking to satisfy growing demand in their countries. This has included major investments from Korean National Oil Corporation, China’s Sinopec and China National Offshore Oil Corporation.

With higher oil prices, it has become increasingly profitable to invest in oil sands projects and as a result these vast reserves are now being developed.


When I first started researching oil companies in Canada I contacted my investment advisor and he helped me focus my search to find companies that would fit my portfolio best. He also helped direct my search to other areas within the oil and gas industry in Canada including Offshore projects, Pipelines, Oil Services, and Refining.

Offshore Oil Projects

These are located off the Atlantic coastline and the major players are Petro-Canada, and Husky Energy. Industry experts also believe there could be sizable oil and natural gas deposits on the Pacific coast; however, there is currently a federal ban on offshore oil activities in the Pacific Ocean region.

Pipelines

There is an extensive pipeline system to transport western Canadian oil to domestic and U.S. markets. Canada has two major pipeline operators: Enbridge, and Kinder Morgan. Enbridge operates a 9000 mile network of pipelines and terminals delivering oil from Alberta to Eastern Canada and the U.S. Great Lakes region, while Kinder Morgan operates the Trans Mountain Pipe Line delivering oil from Alberta to refineries and terminals in Vancouver, British Columbia. These companies also operate extensive pipelines for export to the U.S. and there is demand for growth of these lines.

Anyone interested in investing in this industry should consult an investment professional. Here are some useful links to research on the companies discusses in this posting:



Apache Corporation
Enbridge
Encana Energy
EOG Resources
Husky Energy
Imperial Oil
Kinder Morgan
Petro-Canada
Suncor
Talisman Energy

Interest Rates

There is currently a general trend around the world to raise interest rates to moderate inflationary pressures. In Canada, the most recent hike occured on July 10, 2007 with a 1/4 point raise to 4.5%. The Bank of Canada attributed its policy to raise as a direct result of stronger than expected economic and inflationary growth in the April Monetary Policy Report (MPR). Statements from the Bank of Canada have highlighed Final domestic demand and firm commodity prices as the key drivers of economic growth and their sentiment suggests that this trend will continue. The bank sets a target inflation of 1-3% and both total CPI and core inflation were above this; further, longer-term interest rates have increased resulting in a significant appreciation of the Canadian dollar.

Looking forward, the Canadian economy is projected to grow by 2.5% in 2007, and slightly slower through 2008 and 2009. New projections from the Bank's website predict higher interest rates, and a higher Canadian dollar (93 to 95.5 cents U.S.) as moderators of growth through 2008 and 2009, leading to an estimated growth of 2.5% through each year. The Bank also made statements suggesting inflation would remain stronger until early 2009 where it is expected to decline to 2%.

The result of these projections is that the Bank of Canada is now subject to both upside and downside risks with regard to inflation expectations:

Upside Risk--stronger house hold demand in Canada
Downside Risk--higher Canadian dollar, and ongoing adjustment in U.S. Housing market

The next scheduled interest rate announcement is September 5, 2007.

For more information about the Bank of Canada visit their website:

http://www.bank-banque-canada.ca/en/index.html

Strength of the Canadian Dollar

Canadian Dollar

The Canadian Dollar has appreciated dramatically over the past 6 months compared to the greenback. Economists at TD Bank suggested in a report dated July 12, 2007 that the strength of the Canadian dollar will help to limit Bank of Canada rate hikes through the coming quarters. However, their report also predicted another quarter point raise to come in September as a direct result of stronger economic growth and elevated inflation. TD added that “the strength in the Canadian dollar should not only help reign in inflation by restraining economic growth and import prices, but [they] feel it will also limit the degree to which the Bank needs to hike rates.”

WHAT’S BEHIND THE SORING CANADIAN DOLLAR?

Graph of Canadian $ vs. U.S. $

Struggles of the U.S. Economy: budget and trade deficits have never been higher

Canada’s economic performance: Unemployment at a 32 year low, Strong GDP Growth,

Interest Rate Hikes

Rising Commodity Prices (Commodities account for 35% of Canadian exports)—especially oil (Canada is a net exporter or Oil)

Other notable exports: Nickel, copper, aluminum, and zinc.

WHAT DOES THIS MEAN FOR INVESTING IN CANADA?

Canadian exporters are the major losers when the dollar appreciates because their products become more expensive relative to their competitors in other countries. However, many economists suggest that this may actually benefit exporters in the long run as they must become more efficient to remain competitive internationally. The other benefit of the high dollar for exporters is that any outstanding foreign debts will now be reduced.

Canadian importers are the major winners. They can now import products at reduced rates due to the stronger dollar.

WHAT DOES THE FUTURE HOLD?

Some analysts are calling for the Canadian dollar to reach parity with the U.S. dollar by the end of 2007 and possible surpass the US dollar thereafter.