The way the nation lives: Canada bets its buck on commodities – by James Munson (iPolitics – October 2012)

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RepublicOfMining graciously thanks iPolitics deputy editor Ian Shelton and writer James Munson for allowing this very insightful and timely content to be posted on this Blog – Stan Sudol

Commodity Supercycles

Speaking on the phone from Haifa, Israel last month, Natural Resources Minister Joe Oliver didn’t hide his government’s bout of commodities fever.

“As I’ve mentioned before, Canada is undertaking many major mega projects,” said Oliver, who was in Israel to secure energy partnerships with the Jewish state. “Over the next 10 years, we could see 500 projects with half a trillion dollars at stake.”

“No other country in the world is undertaking energy and mining projects at this scale or at this pace, creating a truly once in a generation opportunity for investors,” he said.

He was echoing his boss, Prime Minister Stephen Harper, who used the Summit of the Americas in Cartagena, Columbia in April to expound at resource development’s “vast power to change the way a nation lives.”

“Our natural resource sector is of vital importance in ensuring solid job creation and economic growth in Canada,” he said a month after putting forth a budget that deregulated much of Ottawa’s oversight over resource projects, a move that will heighten energy and mining’s already important stature in the Canadian economic pantheon.

“We cannot allow valid concerns about environmental protection to be used as an excuse to trap worthwhile projects in reviews-without-end,” Harper said.

The enthusiasm went beyond the government’s benches to the Bank of Canada, where Governor Mark Carney, often described as one of the most trusted policymakers in the country, agreed with Harper’s view that resource projects could depend on long-term demand.

“In a world where commodity prices are going to be elevated, it’s better to have commodities,” said Carney at an Ottawa business event in May, according to a Canadian Press article.

“We are in a demand-driven commodity supercycle…(and) in our opinion this is going to go on for some time,” he said.
That confidence in long-term and sustained high prices for rocks, fuels and foods – described by some as a “commodity supercycle” – amounts to a major bet on Canada’s future.

But what if these men are wrong?

After all, the godfather of capitalism, Adam Smith, warned politicians against pegging their economies on resource projects.
Mining projects are those “to which of all others a prudent law-giver, who desired to increase the capital of his nation, would least choose to give any extraordinary encouragement,” wrote Smith in The Wealth of Nations.

And despite a robust rebound after the 2008 financial crisis, commodity prices have been on a rollercoaster over the last year, leading investors to reconsider the notion made popular in the mid-2000s that commodities made an excellent portfolio diversifier.

“Looking ahead, given the weak global activity and heightened downside risks to the near-term outlook, commodity exporters may be in for a downturn,” said the IMF in its April World Economic Outlook.

In January, the World Bank said in its outlook that commodity prices peaked in early 2011 and then declined due to concerns over slowing demand, especially in China, with metals suffering most. Metal prices would go down by 11 per cent in 2012, the outlook said.

Six months later, the bank said metal prices actually rose seven per cent in this year’s first quarter, only to fall below their 2011 levels in the time since.

As their centuries-old reputation suggests, commodities can be a finicky business.

With that in mind, iPolitics asked the Natural Resources Department to provide any “research, study or consultation” on commodity price cycles the department prepared before enacting the policy changes contained in the 2012 budget.

The department stated there is constant analysis of the global economy by the Finance Department and the Bank of Canada, and pointed to several independent studies.

While many of them suggested emerging economies will continue to grow faster than developed ones, none of them dealt specifically with the demand on commodities expected from that trend, one exception being a report by the Canadian International Council that recommends Canada increase its energy co-operation with China.

Our own investigation into the history of so-called commodity supercycles reveals an economic idea filled with uncertainty and assumptions.

The debates over the sustainability of commodity prices range from academia to banking to investing, and finally to policy-makers, and reveal that Canada is just one of many places around the world trying to find its way through the resource boom – and most importantly, trying to determine how it will end.

While each of these sectors have their own distinct dynamic, this series will stick to digging into the elements of the broader debate.

While commodities are typically broken down into three clusters – energy, metals and agriculture – this series will focus on the two former in particular. Each of these sectors have their own distinct dynamics and this series digs into elements of the broader debate.

More than ever before, the macroeconomic behaviour of commodity prices are intertwined with Canada’s economy, and it will likely remain a centrepiece of political debate for a while to come.

This spring’s rancour over Dutch Disease and environmental assessments are just two recent examples of how resource development have become a wedge issue wielded, in particular, by the Conservatives and New Democrats.

In the last year, the government has passed a budget that will deregulate Ottawa’s environmental oversight of resource projects, it’s pushing to sell more oil and uranium to places like China, and it’s building a permanent realignment toward emerging economies like the Northern Gateway oil pipeline.

Understanding the nature of the commodities price cycle is key to predicting, to use the Prime Minister’s words, just how our increasingly commodity-based economy will “change the way a nation lives.”

For the entire e-book, please go to the top of this posting. For more on-line content including a three-part
interview with Mark Carney on the resource economy and commodity super cycles, click here: