Spring 07 Issue
Special Report - Canada
Oh, Canada!
Posted: October 1, 2008
Opportunities abound in the Great White North. Our biggest trade partner is booming, many in our state will profit.
Will You?
Economic Geography 101
Prince Rupert
Today’s lesson in economic geography starts with the northwestern curvature of North America.
In a nutshell, when you head up the Pacific Coast, the farther north you go, the farther west you get. Seattle is a few hundred miles west of Los Angeles, Anchorage is a thousand miles or so west of Seattle, and so it goes until you reach Big Diomede and Little Diomede in the Bering Strait and the narrow channel of seawater that divides North America and Asia.
Along this arc, in the northern mists and mountains of British Columbia, stands Prince Rupert, a town of just 13,000 people. But it is the scene of one of the more audacious development schemes in recent memory, a half-billion-dollar roll of the dice based on a pair of key geographic attributes.
Prince Rupert is blessed with an extraordinary deepwater harbor that is shielded from the full force and furies of the North Pacific by arms of land and a group of sheltering islands. More importantly, the harbor mouth is about 1,000 miles north of Seattle and 458 miles west of it. It is also nearly 700 miles west of the Port of Long Beach in southern California. That puts Prince Rupert one to two days closer to Asia than any other West Coast port in the U.S. or Canada, and the proximity is fueling a $500 million plan to transform the tiny town into the next great container port in North America.
After the first phase of construction is completed next fall, Prince Rupert will possess the capacity to handle 500,000 containers per year. A second phase is planned to increase capacity to 2 million containers per year, equaling the container volumes now handled by either the Ports of Seattle or Tacoma.
Project sponsors contend Prince Rupert will become the gateway for a massive new transportation and trade corridor linking Asia and the huge markets of inland Canada and the U.S. Midwest.
Will it work? There are many reasons to wonder, and if you are engaged in any aspect of the container business in Puget Sound, you might find yourself worrying about the prospects too. Regardless, if all turns out as the sponsors hope, Prince Rupert will become Exhibit A for our three first rules of economic geography. These are (1) location, (2) location, and (3) location.
Edmonton
Our second lesson takes place at Edmonton International Airport in the western Canadian province of Alberta, where a recent flight from Sea-Tac arrived in just one hour and 42 minutes. The short duration of the flight was surprising. What makes it more than just a travel curiosity is the fact that Edmonton is the jumping off point for one of the biggest economic booms in the history of North America.
North of Edmonton, in an area the size of Florida, the ground beneath the trees of the boreal forest is covered by vast stretches of a smelly, black, sandy substance that literally extends farther than the human eye can see. Once referred to as Alberta’s “tar sands,” these deposits are now called Alberta’s “oil sands.” The technical term for the strange dirt is “bitumen.”
Bitumen is found at the surface at many places on the earth and it has been put to good use by human beings ever since we first stood upright. Commercial applications literally predate the Bible, and a little bit of bitumen was probably used to waterproof the basket that bore the baby Moses on his fateful journey down the Nile.
Today, it is also possible to process bitumen into oil and then into gasoline. Alberta is home to one of the two largest bitumen deposits in the world, the other being in Venezuela. Oil companies in Alberta dabbled with bitumen processing for decades, but when the barrel price of oil began its dramatic climb a few years ago, the black-gold rush to Alberta was on.
Estimates vary about how much oil the sands hold – and each estimate is enormous. By one standard, there are 150 billion barrels. By another, 175 billion. With foreseeable technologies, it could be more than 300 billion and some otherwise sober-seeming types say the tally could reach a trillion. Even at the smallest number, the known reserves are second only to those possessed by Saudi Arabia.
There is a popular rule of thumb that the oil sands will remain profitable as long as the barrel price of oil remains in the range of $40. However some grades can be processed for less, and there is a larger practical value to the resource that can be summed up in these three facts:
Christmas is legal in Canada, beheadings aren’t, and when they sing the same carols we do, Canadians usually use the King’s English.
While we often lose sight of it on our side of the border, the Canadians are more like us than any other people in the world. We share a merged cultural, legal, political, and commercial legacy that dates back to King Alfred the Great – if not before him – and in contrast to all the bad news that has inundated the United States since 9/11, there now comes the happy news that the Canadians might possess as much oil as the Arabs.
In part for this very reason, private investment in the oil sands has passed the $100 billion mark and some believe it’ll reach $150 billion soon. This leads us to our next lesson in economic geography: it is seldom a bad idea to be 90 minutes by air from an infusion of $100 billion and being that close to $150 billion is even better.
Next stop on our journey of economic and geographic enlightenment, Vancouver, B.C., home base for the 2010 Winte Olympic Games.
Vancouver
For many in Seattle, Vancouver is our great urbane neighbor to the north, a city that is so big, so beautiful, so cosmopolitan, and so vibrant that the bustle largely obscures a mystery. Economically, what exactly makes Vancouver tick? There is no Boeing in or near Vancouver, no Microsoft, no PACCAR, yet Vancouver bustles at least as much as Seattle does, if not more. For the solution to this puzzle, we will turn once more to geography and the related topic, climate.
Vancouver shares Seattle’s climate. And while most of us would offer condolences to our neighbor for sharing this burden, Canadians see it much, much differently. Vancouver stands on the southern shore of Canada’s Pacific Coast and it lacks the one thing all the other major Canadian cities have: a long, very cold winter.
Canadians joke about “cold” the way Seattleites joke about “rain,” but there are two big differences between the two. They are called “snow” and “ice.” The Canadian federal government offers visitors the following warning on the website for its national weather service.
“We may joke about winter, but winter weather is no joke. Bitter cold and winter storms kill more than 100 people in Canada every year. That is more than the number of Canadians killed by tornadoes, thunderstorms, lighting, floods, hurricanes and heat waves combined.”
In the deep-freeze that envelops most of Canada every winter, Vancouver looms as a balmy la-la land. In the winter gloom, it can hold an allure like the one San Diego holds for some of us – as a nice, warm place you can picture yourself moving to. Moreover, when Canadians make the trek it’s often because they have enough money to do so – and they bring their money with them.
Most of us have heard that Vancouver also functions as a safe haven for wealthy Asian expatriates, and it does. But climate still offers a key to the city’s vitality, a link that can be illustrated by a quick Internet check of regional weather conditions.
On a Saturday afternoon last January, it was unseasonably cold, both in Seattle and Vancouver, with temperature a chilly 28 degrees. At the same time, Calgary was 16 degrees above zero; Edmonton was at zero, and in Fort McMurray, the hub of the oil fields north of Edmonton, the temperature was 20 below zero. To give you an idea how cold Canada can be, on the same afternoon the town of Barrow on the Arctic Coast of Alaska’s North Slope was 14 above zero – 34 degrees warmer than Fort McMurray.
The Winter Games will pump an estimated $10 million to $8 billion into British Columbia, with skiing in the nearby mountains, while at the same time sea-level Vancouver remains nice and toasty. As with the oil sands, the infusion will generate spinoff growth for years to come. And this is all taking place just past our northern doorstep.
Yellowknife
Canada is a great mining nation and the world demand forraw materials makes this a banner period for mineral prices. The value of Canada’s mineral output grew to a record $26.4 billion in 2005, up from $24.3 billion in 2004, and while the final returns aren’t in, it is believed 2006 was another record year. Canadians also play a major role in worldwide mineral production, with Canadian companies operating in more than 100 other nations. As it does with oil, Canada comes with a premium for mining thanks to its political stability. In 2006, 20 percent of all mineral exploration in the world took place in Canada and it leads the world for mining investments. None of that is probably too surprising, but this next factoid might be.
Canada is now the third largest gem diamond producer in the world, trailing only Russia and Botswana, and there is a chance it will soon become number two when another major new mine opens. No diamond mines existed in Canada until 1998, when the Ekati mine went into operation about 180 miles north of Yellowknife in Canada’s Northwest Territories. Today, diamond mining accounts for about $2 billion per year and for about 5,000 extremely well-paid jobs in a region that badly needs them.
The diamond mines have also added to the bottom line of Seattle-based B&G Machine, a company that rebuilds diesel engines. B&G did no business in Canada until 1998, when it set out to build a customer base in Vancouver. Today B&G schedules two truck trips per week to serve Canadian customers and its customer list extends to the diamond mines north of Yellowknife, 1,200 miles north of the company’s home base in Seattle. “Our Canadian business is at capacity,” said B&G’s vice president, Johnny Bianchi. “We couldn’t handle any more business than we’re already doing.”
The Bottom Line
So, hooray for B&G Machine and all the other businesses that may find a niche in one of Canada’s booming marketplaces. What’s in it for the rest of us? Well, this. When Canadians do well, no people in the world do better than Americans because Canada is, by far, our nation’s largest trade partner.
It does not possess the cachet or potential consumer markets of China or Japan, but year in and year out Canada is the largest market for U.S. exports. It accounted for $211 billion in U.S. exports in 2005, far surpassing Japan and China. Combine Canada’s figures with Mexico’s and the total brought in by our North American neighbors added up to $331 billion. That was more than the combined total of $321 billion for the next ten largest markets for U.S. goods (in order, Japan, China, the United Kingdom, Germany, South Korea, the Netherlands, France, Taiwan, Singapore, and Belgium).
Because Washington State exports are so heavily boosted by airplane sales, Canada usually ranks as our state’s second largest export market after Japan. But take airplanes out of the mix and Canada is invariably the number one for everything made in Washington that doesn’t have wings, and the present Canada bonanza shows up dramatically in key manufacturing sectors for our state.
State exports to Canada grew overall by 22 percent between September of 2005 and 2006. That’s double the rate of growth for state exports to other world markets, and the Canadian growth was strongest in key industrial sectors such as manufactured machines, up 32 percent, primary metals, up 26 percent, and fabricated metal products, up 26 percent.
Thomas Friedman makes a great case that today’s economic world is flat, but the real world isn’t. As Columbus discovered in 1492, the world is round, and unless you can conduct your business solely over the Internet proximity still matters, along with oceans, mountains, climate, and all the other geographic features of the real world.
Like charity, trade is best when it begins near home. It is our great luck to share border crossings with one of the world’s fastest- growing regional economies. And it’s not a bad time to start brushing up on Canadian.
Consider the case of Partners, a food processing company founded in Seattle to make high-end, low-fat crackers. In 2000, Partners rented a booth at a local food show sponsored by the National Association for the Specialty Food Trades. A Canadian food broker stopped by, liked the crackers, and suggested Partners should try to crack Canada. Partners did, and the rest is now company history. Fueled in part by its soon booming Canadian trade, Partners grew from 15 workers to 100 and it has doubled its sales in each of the last two years, necessitating a move to a larger production plant in Kent.
“Canada was a great first export market experience for us,” says Cara Figgins, Partner’s vice president for sales. “They speak the same language, they attend the same trade shows, and it’s easy to ship across the border.”
It may sound a bit like “coals to Newcastle,” given Canada’s own role as a food-processing powerhouse. But Washington exports of food products to Canada grew by 50 percent in the last five years, growing from sales of $200 million to $300 million.
Not bad, eh?
