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Learning the Quick Step in a Fluid World-Trade Dancehall

0 2825 Market Intelligence

Canada has been struggling on the foreign trade front ever since the recession. Whereas we used to run a substantial surplus each and every month, lately we’ve been sitting near a zero balance.

Canada has been struggling on the foreign trade front ever since the recession. Whereas we used to run a substantial surplus each and every month, lately we’ve been sitting near a zero balance.

And we’re not alone. In the fourth quarter of 2012, U.S. GDP growth was flat due in part to a weak foreign trade sector. Exports declined even faster than imports.

Over the last couple of years, China has been experiencing fewer export sales.

Japan’s manufacturing giants have been scrambling for foreign sales. Until recently, a high-valued yen has presented a formidable obstacle.

The latest Prime Minister of Japan, Shinzo Abe – all denials to the contrary – is now trying to change that nation’s export sales prospects through manipulating the currency.

The potential for an international currency war is one of the primary concerns being addressed at current meetings of both the G-7 and the G-20.

Mr. Abe plans a strong program of fiscal stimulus to combat his country’s record of negative growth. He’s also conducting an executive search for a new Bank of Japan Governor who will adopt a “more muscular” monetary stance.

That means accepting an “official” inflation target of +2.0% and – in a tip of the hat to other central bankers around the world, especially the Federal Reserve in the U.S. – a program of unlimited bond buying to ramp up the money supply.

Since the new policy was announced, the value of the yen has already fallen 15% versus the U.S. dollar.  

Traditional economic theory says that competitive currency devaluations don’t work. Such “beggar thy neighbor” practices are ultimately counter-productive. But one can certainly understand the motivation. Plus it’s hard to stand by and simply watch while everyone else seems to be doing the same thing. Neither the U.S. nor Europe is as innocent as they would like to appear.   

The “glory” in the study of economics lies in the inter-connections. If Japan is successful in stimulating its economy, there will be implications for Canadian resource producers. One obvious sector to be positively affected will be uranium producers in Saskatchewan.

Two years ago, Japanese industrial production was crippled when a tsunami destroyed three nuclear reactors north of Tokyo. The situation was further worsened by contaminated fuel leakage.

Subsequently, nearly all nuclear power production in the country was curtailed. Only two out of 50 reactors have been brought back on-line. (Japan ranks third behind the U.S. and France for number of nuclear stations.)  

Public protests against the use of nuclear power were initially wide-spread and virulent. After all, 160,000 people were evacuated to escape radiation poisoning.

Nevertheless, the mood may be altering. The Liberal Democratic Party (LDP) was elected to office in December with a pro-nuclear platform.

Many of the largest industrial firms in the country, accounting for the greatest electricity usage, are pressing for start-ups of idle plants. This would be in combination with beefed up safety standards and on-site structural reinforcements.

Cameco Corp. of Saskatoon – the world’s third largest uranium producer after a firm based  in Kazakhstan (Kazatomprom) and Areva SA of France – has been quoted in the media (Bloomberg News) as saying Tokyo may soon increase its operating nuclear power plants to between six and eight.

Worldwide, many nuclear expansion plans were put on hold after the Fukushima Dai-ichi disaster. As a result, the price of uranium dropped from over $140 per pound to just above $40.

Germany announced that it would be abandoning nuclear power altogether. Elsewhere, the sentiment appears to be shifting in the other direction. Cameco expects an additional 80 nuclear reactors will be built globally between now and 2020, bringing the grand total to more than 500.

This will provide a boost to investments in new uranium mines and expansions.

Let’s continue with the theme of foreign trade in energy products. While there is little doubt that Canada must seek to sell more of its oil and gas to emerging nations in Asia, the level of that demand may be more fluid than first thought, thus threatening our long-term plans.

Besides the fact that we face selling competition from other resource-rich nations (e.g., Australia in liquefied natural gas), there are other developments underway with significant implications.

For example, it’s believed that China has shale gas reserves that are even greater than in the United States. China would like to match the success that the U.S. is realizing in expanding its domestic reserves.

But there’s a problem. Chinese shale gas is in geological formations that are more difficult to access than in North America. The difficulties aren’t insurmountable and Chinese energy companies such as Sinopec are signing joint venture agreements with the likes of Total SA in order to benefit from foreign technological expertise.

Total SA’s inclusion in such pairings is somewhat ironic in that the company is forbidden from applying its knowledge in its home country. Hydraulic fracturing is forbidden in France due to concerns about the possible impact on the eco-system.

Let me conclude with some further comments on the subject of energy exports and irony. British Columbia’s Premier, Christy Clark, has just announced an idea that she hopes will resonate with voters heading into May’s provincial election.

Based on projected windfall revenues from B.C.’s LNG exports to Pacific Rim customers, there is the potential to set up a special provincial savings account similar to Alberta’s Heritage Fund. Exceptional revenue from natural gas royalties, shipping duties and other charges will be set aside to provide a buffer to the vagaries of the government’s normal financial dealings.

Apparently, Ms. Christy has no objection to the notion of big pipelines, massive storage terminals and supposedly “seaworthy-suspect” shipping fleets when it comes to natural gas in her own province.

Ask the oil companies in Alberta and the legislative assembly in Edmonton if they find this attitude shocking, given that Victoria’s Liberal government has clearly placed roadblocks in the way of Alberta’s very similar aspirations to ship oil to the coast and across the Pacific. 

by Alex Carrick

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