These are stories Report on Business is following Tuesday, Jan. 29, 2013.
Oil price gap spells trouble
Both Bank of Nova Scotia and Canadian Imperial Bank of Commerce are warning today about the impact of what Alberta Premier Alison Redford calls the “bitumen bubble.”
And it’s not just Alberta.
The banks issued reports related to commodity prices and the fallout where Canada’s resource-rich provinces are concerned, both talking about the price gap between western oil and global benchmarks.
Western Canadian Select, the most commonly traded Canadian heavy oil, is priced significantly below West Texas Intermediate and Brent, and Ms. Redford warned just last week that lower oil and gas royalties would cost the province some $6-billion this year.
The discount, said Patricia Mohr of Scotiabank, is the result of several factors, notably constraints on the pipeline system for movement of blended bitumen from the oil sands and “light, tight” oil from Saskatchewan’s Bakken.
That’s exacerbated by the surge in production from North Dakota, which is “competing” with Canadian oil for pipeline space.
There was also “downtime” at refineries in the U.S. Midwest early last year and a delay in upgrading an Indiana refinery.
All of this has contributed to producers moving to ship by rail.
“The pipeline system from Canada to the United States now has little ‘operating flexibility’ to handle disruptions (caused by reduced pipeline pressure or technical problems on other pipelines, backing up flows onto the system),” said Ms. Mohr, one of Canada’s leading commodity experts.
“Some redundancy in pipeline capacity is required,” she said in a report today.
"The ‘opportunity cost’ of these discounts is enormous for the Alberta and Saskatchewan economies as well as for Canada - reducing government royalties/income tax receipts and ultimately governments’ ability to fund ‘social services’ and ‘public infrastructure.”
This is an issue for Alberta, Saskatchewan and the federal government, as well.
Economists at CIBC, separately, warned that a combination of troubles have “dimmed the lights” for the country’s resource-rich provinces, while other regions are picking up nicely.
Indeed, said the report released by CIBC World Markets, the “provincial economic and fiscal playing field is now more evenly balanced than at any time in the past decade.”
According to CIBC’s Warren Lovely and Emanuella Enenajor, pipeline constraints, along with the troubles in Europe and weakness in emerging economies, are pressuring the resource provinces.
With the exception of Ontario and Newfoundland and Labrador, the economists cut their projections for economic growth in all of the provinces for this year, though some of the weakness in the resource regions are due to temporary factors.
“Expect some of that weakness to be recouped in 2013,” Mr. Lovely and Ms. Enenajor said.
“But Canada’s resource sector - still a very big part of the country’s long-term growth plan - faces a more difficult road ahead. With global real GDP growth decelerating to 3 per cent this year, a sideways profile for some key commodity prices could dampen fortunes in Canada’s West.”
“That has triggered a substantial falloff in provincial royalties and, as some recent announcements highlight, jeopardizes investment and job prospects in the oil patch,” said Mr. Lovely and Ms. Enenajor.
“While a number of long-term solutions have been proposed, there’s simply no quick fix. Of relevance to B.C. and others, prices for natural gas have languished in response to surging U.S. shale gas production, while cheaper levels for some minerals serve as a threat to Canadian mining sector activity more generally.”
- 'Bitumen bubble' means a hard reckoning for Alberta, Redford warns
- From Alberta's 'bitumen bubble' to higher gas prices in East
- ROB Insight (for subscribers): 'Bitumen bubble'? Alberta has bigger problems than that
- What the shale oil craze looks like from space, and why it matters
Moody’s, Fitch warn on debt
Two major rating agencies are sounding alarm bells over the level of consumer debt in Canada, and the outlook for the housing market.
As The Globe and Mail’s Grant Robertson reports, Moody’s Investors Service downgraded the ratings of several of Canada’s banks yesterday, citing the potential for trouble. Among those downgraded were Toronto-Dominion Bank, which lost its triple-A ranking, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada and Caisse Centrale Desjardins.
Both Moody’s and Fitch Ratings, which reaffirmed the levels of the major banks, stressed that the country’s banks are sound, but they’re concerned over some issues, and how they could affect the financial services industry.
“The main domestic threat to the stability of the Canadian banks is the record level of consumer indebtedness and the risk of overvaluation in the housing market,” said Fitch.
“Between 2001 and 2012, Canadian home prices appreciated by approximately 116 per cent and the household debt-to-disposable income ratio increased to 166.7 from 108.3,” it added in its statement.
“These increases are set against a backdrop of unemployment remaining above 7 per cent and GDP growth hovering in the 2 per cent to 3 per cent range.”
Moody’s issued a similar statement, though with a different timeframe, citing a rise of 20 per cent in house prices since November 2007.
The steam has, of course, come out of the Canadian housing market, with sales cooling rapidly, particularly since Finance Minister Jim Flaherty moved in the summer to tame credit growth with new mortgage restrictions.
And according to the Bank of Canada, credit growth has in fact slowed, though was still, at its last measure, outpacing the growth in incomes.
- Moody’s knocks Canadian banks down a notch
- ROB Insight (for subscribers): Relax, Ottawa, consumers have this debt thing under control
- ROB Insight (for subscribers): Bat an eyelid - Canadian banks just got downgraded!
- Tavia Grant’s Economy Lab: The shifting makeup of the 1-per-centers
Ford disappoints on Europe
Ford Motor Co. posted stronger-than-expected fourth-quarter results today, but disappointed markets on a weak outlook for Europe.
Ford earned $1.6-billion (U.S.), or 40 cents a share, compared to $13.6-billion or $3.40 a year earlier, but the 2012 results were inflated by a tax issue.
The problem for the auto maker is that it projects a $2-billion loss in Europe this year, following a loss there of almost $1.8-billion in 2012.
“Ford is being adversely impacted by higher pension costs due to lower discount rates, and a stronger euro,” the auto maker said.
“The business environment remains uncertain, and Ford will continue to monitor the situation in Europe and take further action as necessary,” it added.
Streetwise (for subscribers)
- Why a Rogers-Shaw merger will happen
- Real estate expected to drive M&A in 2013
- Agrium wakes up to its Jana problem
ROB Insight (for subscribers)