08 November 2007 19:32 [Source: ICIS news]
By Stefan Baumgarten
TORONTO (ICIS news)--The soaring Canadian dollar keeps squeezing profitability and competitiveness of Canada's export-oriented chemicals, plastics and related downstream sectors, top industry officials said on Thursday.
The Canadian dollar is now trading at historic highs against the US dollar with little relief in sight in the near-term, sources said.
"The chemical industry is a manufacturing industry, and the 25 to 30% rise in the Canadian dollar against the US dollar this year alone hurts our profitability," said David Podruzny, vice president for economics with industry group Canadian Chemical Producers Association (CCPA).
The US market is critical for Canada's chemicals. Two thirds of the country's chemical production is exported and the US accounts for 80% of those exports, Podruzny said.
The Canadian dollar (C$), known as the loonie, on Thursday bought over 1.07 US dollar.
The currency’s surge against the US dollar - from a low of $0.62 in 2002 to $0.90 early this year and parity with the US dollar in October – is largely driven by weakness in the US economy and the global boom in oil and commodities, which benefits western Canada, in particular Alberta.
The US Federal Reserve Bank's decision last week to cut interest rates again, strong Canadian jobs data with unemployment at a 30-year low, oil prices surging close to the $100/bbl level, and reports of ?xml:namespace>
Economists have been warning for some time about the competitive impact of the rising loonie on chemicals and other manufacturing sectors in
The currency thrives on booming commodities economies in
CCPA's Podruzny said with the recent surge in the Canadian dollar many chemical makers were locked into customer contracts they could not quickly adjust upwards.
At the same time, the industry is exposed to the rising feedstock and energy costs, he said.
For the most part, the strong Canadian dollar is a reflection of the weak US economy, said Podruzny, adding that the US dollar also declined against other currencies.
Under normal circumstances the US economy would benefit from the decline, were it not for its housing and subprime credit problems, said Podruzny.
With high energy prices, conditions were not favourable for a robust outlook for economies worldwide, he added and pointed to the high oil prices the early 1980s that brought on a recession at that time.
On the upside, Alberta-based petrochemicals and chemical production, at least, was benefiting to some extent as that province's oil and gas boom was also improving feedstock availability, Podruzny pointed out.
Major Canadian chemicals and fertilizer makers all noted the currency impact in their recent third quarter which ended 30 September, just before the recent additional spike in the currency.
The Calgary, Alberta-based petrochemicals major has a significant part of its operations in
Potash Corporation of
John Cummings, an independent Toronto-based petrochemicals analyst, cited the Canadian dollar as one factor in the closure of chemical plants, in particular in the latest wave hitting
That province alone will lose four chemicals plants in the near future.
The Canadian dollar was of course only one factor, said Cummings.
Others factors included size and age of plant, technology, location and freight costs to markets. Other factors included access to capital for upgrading, expansion, and research and development (R&D), the skill level of management and workers, and the productivity of plants versus their competitors.
But these would all be constant in the short run whereas the change in the exchange value of the dollar was an additional factor, said Cummings.
Feedstock and energy costs were other important factors, he added.
Dow Chemical cited lacking ethylene feedstock availability as a factor in its decision last year to end all of its production at the
Like CCPA's Podruzny,
This year alone, Canadian mills have announced plant closures with some 6,500 jobs losses, coming on top of 32,000 jobs lost in that sector since 2002, said Avrim Lazar, chief executive of industry group Forest Products Association.
The high dollar is particularly hurting the competitiveness of
Canada's auto sector – a big offtaker of chemicals and plastics - is highly geared toward the
It remains unclear what, if anything,
The term describes, with reference to the Netherlands' natural gas boom in the 1960s, the impact of a country’s exploitation of natural resources on its manufacturing sector.
Prime Minister Stephen Harper told media on Wednesday his government was concerned about the impact of the loonie’s unprecedented rise on certain sectors of
Some industry groups, Ontario politicians and media commentators keep urging government intervention, in particular interest rate cuts.
The Bank of Canada, in setting its interest policies, struggles to reconcile the contradicting needs of western
The Bank has acknowledged that the strong dollar and the weak
The Bank forecasts the Canadian economy to grow by 2.6% in 2007, with slightly slower growth of 2.3% expected for 2008, and 2.5% in 2009.
Meanwhile, some investment advisors see the Canadian dollar as grossly overvalued and advise clients looking to take advantage of the situation to move quickly.
($1 = C$0.93)
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