Don Berggren’s family-owned manufacturing company was on a roll until a rising loonie and the global recession clobbered his business.
Sales of its industrial cooling equipment to the automotive and plastics sectors were clipping along until the strengthening Canadian dollar hurt U.S. orders, then plunged as the financial crisis brought the economy to its knees three years ago. Mr. Berggren was forced to slash jobs, taking his work force down to 45 from 110 before the recession.
Today, however, the president of Toronto-based Berg Chilling Systems Inc. has switched gears, finding an opportunity to re-energize his business in Alberta’s vast oil fields.
Mr. Berggren has been working with his industry association over the past few years to win contracts to supply cooling equipment to the booming oil sector in Western Canada. “We were trying to find new markets to make up for the ones that were falling apart,” Mr. Berggren said.
The effort has paid off, with orders from oil sands giant Suncor Energy Inc. and two chemical plants in Alberta. Berg has supplied cooling equipment for Suncor’s oil upgrader and refinery operations to re-use or vent heat. And Mr. Berggren expects to make bigger inroads in the province as the company gains experience.
But as Alberta beckons, Berg is finding it far tougher to compete in the U.S., due to a Canadian dollar that was propelled to parity with the American greenback by the very resource boom he is hoping to capitalize on at home.
The decade-long rise in the Canadian dollar has clearly undermined the competitiveness of manufacturers and other exporters by driving up costs relative to American competitors and reducing Canadian dollar revenues from a sale in the U.S.
Like other Ontario manufacturers, Berg is suffering from a form of the “Dutch disease” in which a booming commodity market undercuts domestic manufacturers by driving up the value of the local currency.
The Canadian version of the disease is particularly debilitating. Fractious provincialism and the regional disparity of the country’s resource riches make it hard to share the wealth. And the ailment threatens to re-ignite smouldering resentments that strain the fabric of the nation.
Those tensions were on display this week when Alberta Premier Alison Redford and Ontario’s Dalton McGuinty quarrelled over Canada’s “petro dollar” and its impact on manufacturers. The discord is a vivid reminder of the stark divergence of interests between the booming oil-rich West, and the battered manufacturing hub in the East.
Simply put, $100 oil prices are a boon to the Prairies and the bane of Central Canada.
The question now for Ontario is whether it can get its fair share of the action out west. If Asia’s boom is the next great opportunity for the West’s vast resources of oil, natural gas, potash and other commodities, will Alberta, British Columbia and Saskatchewan be the next great opportunity for the sputtering manufacturing engine of Ontario?
Business and political leaders say the long-term potential for Ontario is big. But early signs suggest any bonanza for Ontario will take a lot more Don Berggrens to become a reality.
So far, the bounty of the oil sands for Ontario is mostly rosy projections. One claim has frequently been recycled: That for every $1 of money spent in the oil sands, Ontario would see 31 cents in economic benefits. The source for the claim is the website of the Fort McMurray-based Oil Sands Developers’ Group, which represents the producers and their main suppliers. But OSDG operations manager Deborah Farkouh, who initially disavowed knowledge of the figure, said more recent research shows the figure is vastly overstated.
In a report last fall, the Calgary-based Canadian Energy Research Institute (CERI) estimated that the oil sands will generate $3.3-trillion in investment and revenues over 25 years, assuming construction of both the Keystone XL pipeline through the U.S. and the Northern Gateway pipeline through British Columbia.
Though Ontario would be the biggest provincial beneficiary outside Alberta, it would receive less than 3.8 per cent of that additional economic activity, and roughly 10 per cent of the direct and indirect job creation, the report found. U.S. states would capture far more business, receiving four times the economic benefits as the non-Alberta provinces, according to CERI, which receives its funding from the provincial and federal governments and the Canadian Association of Petroleum Producers.
“The bulk of the money stays here [in Alberta] the bulk of the money is spent here, but the associated impacts in Ontario are significant,” said CERI president Peter Howard, noting that the boom will also generate tax revenues for the federal government that can be used to support programs across the country.
To seize resource-sector opportunities, Central Canadian manufacturers will have to ensure they are part of the supply chain. But to do so, they’ll have to compete with established international giants, with the handicap of a highly valued currency. In some cases, the manufacturers will have to completely reorient their business models.
Ontario’s economy has lagged the national average for the past nine years. It’s expected to fall further behind its more resource-endowed provincial cousins for years to come.
In a recent speech in Calgary, former Bank of Canada governor David Dodge warned of rising political conflict as Canadians continue to adjust to the world of high-priced commodities and increased global competition.
Mr. Dodge said Ontario and Quebec will lag the oil-rich provinces in their capacity to provide health and education services. And that slower growth will put strains on provincial budgets, maintain higher unemployment and, ultimately, put severe stresses on the equalization system that has underpinned Confederation since 1867.
“There will be real social tensions as Canadians are forced to reconsider changes in what we mean by ‘reasonably comparable’ levels of services and taxation” under the equalization scheme, said Mr. Dodge, now an adviser with Calgary-based law firm Bennett Jones LLP.
Ontario first began receiving equalization payments in 2009-10, and can expect $3.2-billion in the coming fiscal year, according to Mr. Dodge and his associates at Bennett Jones. By 2020, Ontario’s payments will climb to $5.5-billion, though still dwarfed by Quebec’s $10-billion transfer. At the same time, Ontario faces tough fiscal choices with spending cuts and possible tax increases as it looks to reduce a yawning structural deficit. “I think this is going to be extraordinarily difficult to manage,” Mr. Dodge said in an interview.
Regional conflict is certainly nothing new to Canada. Going back to the 19th-century national policy that imposed high tariffs and drove up prices of manufactured goods, Western Canadians have often felt short-changed by Ontario and Quebec. That enmity was heightened when the Liberal government under Pierre Trudeau imposed the national energy program, which Albertans in particular saw as an effort to rob them of the gains they could expect from sharply higher oil prices.
Alberta’s effort to defend the reputation of the oil sands gave rise to this week’s spectre of duelling premiers. During a speech in Chicago, Ms. Redford called on other premiers – specifically Mr. McGuinty and Quebec’s Jean Charest – to support her lobbying campaign to have the Keystone XL pipeline built from the oil sands to the U.S. Gulf Coast.
Ms. Redford was furious when Mr. McGuinty responded that Canada’s “petro dollar” was hurting his province, and he’d be happier to see less oil and gas production and a lower dollar. Under a barrage of criticism, the Ontario Premier backed down, saying a healthy energy sector is in the interest of all Canadians.
Canada has lost 500,000 manufacturing jobs – most of them in Ontario – over the past decade, Canadian Imperial Bank of Commerce economists noted in one of three reports by major banks this week on the devastation in the manufacturing sector. As a share of the Canadian economy, manufacturing slumped to 12 per cent from 20 per cent, while in the U.S. it held roughly steady at about 12 per cent of gross domestic product. In 2001, Canada had a $20-billion trade surplus in the Ontario-based automotive industry; that has been transformed to a $12-billion deficit. The energy sector, by contrast, has climbed to a $59-billion surplus in 2011 from $38-billion in 2001.
Not all the problems of the manufacturing sector can be laid at the feet of the dollar. Intense competition from offshore competitors, along with relatively high wages in Canada play a significant role. But few expect the disadvantage from the high dollar to abate any time soon.
“By and large, we’re going to be in a world where Canada has a strong currency for the foreseeable future,” said CIBC vice-chair Jim Prentice, noting that fast-growing Asian economies – led by China – are going to drive a growing demand for commodities ranging from oil, to potash, to iron ore, to nickel and other metals – all of which Canada has in abundance.
Mr. Prentice said the country needs a pan-Canadian industrial policy – as well as an energy strategy – to ensure domestic suppliers are prepared to meet the booming demand from the resource sector.
Jayson Myers, president of the Canadian Manufacturers & Exporters association, said the oil industry – and resource projects in general – represent a critical new source of demand for producers across the country.
“There are a number of Ontario companies that have successfully retooled themselves and either added on supply to the oil sands or used that to go after other types of energy industries,” Mr. Myers said.
Among them is Mr. Berggren’s Berg Chilling Systems. Thanks in part to the new Alberta orders, Berg is back to 71 employees and growing as it chases new business.
Several major international companies also supply the Alberta oil patch from Ontario, including 3M Co., Emerson Electric Co. and General Electric Co. GE has several Ontario operations that sell to the oil sands producers, including manufacturing, engineering and design, and fabrication and assembly. The products include large motors manufactured in Peterborough; water trailers assembled in Burlington; water-purification products assembled in Oakville, and a digital energy business in Markham.
Ontario Economic Development Minister Brad Duguid said trade missions with Alberta have helped Ontario firms win initial contracts of $246-million over the past five years, a modest amount averaging $50-million a year.
“Ontario welcomes the opportunity to work with Alberta in generating additional opportunities in our economy,” he said. “We recognize the importance of the oil sands to Alberta and to all of Canada.”