November 8, 2012

2012 Leaders

The outlook for construction in Western Canada

According to an old adage, real estate markets depend on three things, “location, location, location”. A similar statement can be made about the economy of Western Canada. It also depends on three things, “resources, resources, resources.”

British Columbia is currently ground zero for deciding Canada’s long-term energy future. That’s where hearings are either underway or planned to determine if oil and gas will be allowed to move from the interior to customers across the Pacific Ocean.

The potential sources of natural gas are mainly in B.C.’s northeastern gas fields. The crude will come from Alberta’s Oil Sands.

There are proposals for several large liquefied natural gas terminals near Kitimat, B.C. These will also require supply pipelines. Shell, Encana, Apache and Spectra Energy are some of the big firms involved in the planning.

In the case of oil, Enbridge is trying to win approval for its Northern Gateway pipeline project, also to Kitimat. To the south, Kinder Morgan wants to double the capacity of its TransMountain system to Vancouver.

Environmentalists and aboriginals are more sympathetic to the notion of gas pipelines than oil pipelines. The environmental damage from leakage in the former is judged to be less severe than in the latter.

The railroads are also contributing to the excitement with plans to increase tanker car shipments to the coast.

Before proceeding to other specific sources of future construction activity in the West, let’s set the table with some data on the regional economy. It continues to lead the country according to so many key measures.

As of August 2012, the four provinces closest to the Pacific have the four lowest unemployment rates nationally. Alberta and Saskatchewan are the pace-setters with only 4.4% of their work-forces on the sidelines.

Manitoba’s 5.4% jobless rate is in third position, followed by British Columbia at 6.7%.

By comparison, the lowest unemployment rate in eastern Canada is in Quebec, at 7.6%.

The highest rates of job creation are likewise in the West, with Saskatchewan leading the nation (+3.6% year over year). British Columbia (+2.3%) and Alberta (+2.1%) are also recording good gains. Only Manitoba (+0.9%) has a jobs increase that is less than the national average (+1.0%).

The best province in the East is Newfoundland and Labrador, with a year-over-year employment increase of +3.1%. All the other provinces on the Atlantic side of the Manitoba-Ontario divide are recording jobs advances below the national average.

In housing starts so far this year, all four western provinces have been in the Top Five for year-over-year percentage climbs. Alberta (+36%) is number one, followed by Saskatchewan (+31%) and Manitoba (+26%).

Only Ontario (+20%) has broken the stranglehold of the western provinces, coming ahead of British Columbia (+11%).

Alberta continues to benefit from a strong energy sector. The price of oil, currently around $90 U.S. per barrel, permits profitable development, but doesn’t guarantee an outstanding return.

The bigger problem for the provincial economy, however, is the depressed price of natural gas.

It’s sitting below $3.00 U.S. per million cubic feet. That’s far below its historical relationship with oil. When burned, six million cubic feet of natural gas produces the same amount of energy as a barrel of oil. Therefore, on an energy equivalency basis, natural gas should be carrying a price tag near $15 U.S. per million cubic feet.

It’s important to understand that there’s been a dramatic shift in the North American energy scene. Due to the advent of a new technology, hydraulic fracturing (a.k.a. “fracking”), the U.S. is rapidly approaching self-sufficiency in gas. Through the same means, our close friends are also greatly expanding their reserves of oil.

New fields are being opened up in unexpected places such as North Dakota, Ohio and Pennsylvania. There are even proposals on the drawing boards to send American gas north to Ontario, to supplant product currently provided by Alberta.

One major consequence is that a portion of Canadian energy production will need to be re-targeted towards customers in China, South Korea, Taiwan, Vietnam and Indonesia.

We’re not the only ones looking to line up energy sales in the Far East. Australia and Qatar are becoming powerhouses in export-oriented liquefied natural gas projects. The U.S. is also planning to export some of its new reserves.

A watershed moment for western Canada’s energy sector will be the federal government’s decision whether or not to permit the takeover of Nexen Inc. by CNOOC, the China National Offshore Oil Company. State-owned foreign investors from emerging nations have the deep pockets to proceed with projects when private sector firms may be more wary.

There is one other reason this case is so interesting. Will our capacity for signing up customers in the Far East be somewhat contingent on allowing foreign investment in our oil patch?

Before leaving Alberta, let’s consider the contribution its energy sector makes to Canada’s economy. In 2011, Alberta’s share of the nation’s total GDP was 14.9%. That’s an impressive figure given that the province’s proportion of Canada’s total population is 11.1%. Ontario’s population share, by comparison, is 38.7%.

But let’s take this a step further and consider construction specifically. Alberta’s bite out of total construction spending nationally in 2012 is expected to be 27.6%, or more than one-quarter of the total. That will be even bigger than Ontario’s 26.7%. It’s because Alberta is so dominant in engineering construction, accounting for 42.6% of the total.

The current list of upcoming projects in the oil patch remains lengthy and expensive.

Manitoba is a province with a key advantage, an excess of hydroelectric potential. Once again, though, prospects are being affected by external forces. The abundance of new shale gas deposits in the U.S. has lowered the price of that commodity.

This is giving rise to a rapid increase in the number of gas-fired electric power plants on the drawing boards below the border. There are plans to replace less efficient and more costly coal and nuclear-fired stations.

As a result, export sales of Canadian electricity may not be as assured as in the past.

At any given time, demographic factors will play a role in the construction outlook.

On that score, the West is again a winner. In Statistics Canada’s population estimates for July 1, 2012, two of the western provinces and one territory recorded population increases that exceeded the nation as a whole.

Alberta (+2.5% year over year), Saskatchewan (+2.1%) and the Yukon (+2.0%) had outstanding population gains. Manitoba’s performance (+1.2%) was better than the national average (+1.1%) as well.

British Columbia (-1.0%) came up only a little short of the national result.

Saskatchewan topped the charts in another way in 2011. Its two major urban centres recorded the largest year-over-year population increases among Canada’s 33 largest cities. Saskatoon’s rise of +2.64% was the clear frontrunner, followed by Regina’s +1.86%.

Also from the West, Calgary was in third spot with a population increase of 1.82%. Edmonton appeared in fifth position at +1.77%. Moncton from the East snuck in between those two Alberta cities with a +1.81% performance for fourth place.

The West is also where the youngest populations in the country are located. It’s because so many twenty and thirty year-olds have moved to where the most available and highest paying jobs are located — in the West’s resource sector.

Among the provinces, Alberta has the lowest median age — i.e., where half the population is older and half younger. The mid-point age nationally is 40.0 years old. In Alberta, it’s 36.1.

This is important because the population of the entire country is aging. The number of individuals aged 65-plus in Canada in the 2011 census comprised 15% of the total population. By 2030, that proportion is expected to climb to 23%.

The higher share of the aged will place tremendous demands on the public purse in terms of pensions and health care.

In the press release accompanying Statistics Canada’s latest population report, it was noted that Canada’s year-over-year population gain on July 1, 2012, of +1.1% was the highest among the G8 nations. Figures for the other industrialized leaders ranged from a low of -0.3% for Japan to a high of +0.7% for the U.S.

Generally speaking and assuming jobs are relatively plentiful, the more people there are, the better it is for the overall economy. They provide a bigger base for consumer spending.

Don’t ever doubt how important it is for Canada to keep its doors open to foreign workers. Two-thirds of the latest population gain came from net international migration.

My final words on the construction outlook will examine a trend that has become important for institutional work.

To combat the effects of the 2009 recession, Ottawa and the provinces embarked on an ambitious program of infrastructure spending. Many of those projects were in health care and education. As a result, institutional project starts in 2010 were at their highest level since the 1970s.

There was bound to be a letdown and it’s appearing in the current starts statistics. In addition to the “aftermath effect”, the cult of austerity is adding to a weaker projection of institutional construction activity several years out.

Governments everywhere have seen the problems that first arose in Greece then migrated to other countries within the Euro zone. They’re taking action now to reduce spending and circumvent nasty financing shortfalls further out.

The fiscal restraint lowers the investment outlook in some key construction categories. With an aging population, however, the ongoing need for medical services will be enormous. The pressure for new facilities won’t be contained for long.

In CanaData’s list of upcoming major hospital projects, British Columbia stands out for having a solid number in the planning stage.

Alex Carrick, Chief Economist, CanaData

Canada West City Labour Market

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