Canada must strengthen chemicals industry - trade group

11 August 2010 15:52  [Source: ICIS news]

Canada told to support chemsTORONTO (ICIS)--Canada must take steps to improve the competitiveness of its chemicals industry, a trade group said on Wednesday.

In a strategy paper, the Chemistry Industry Association of Canada (CIAC) cited a number of “serious concerns” over regulatory framework, feedstock availability, infrastructure and logistics, electricity prices, and finance issues that had hampered growth of domestic chemical production.

Layers of duplicative and sometimes conflicting federal-provincial environmental regulations discouraged potential investors, at a time when manufacturing in central Canada and large parts of the US was eroding, the Ottawa-based group said.

“North America and central Canada in particular has been experiencing serious erosion of its manufacturing base for some time; this represents the key customer base for the chemical sector and is a competitiveness concern.”

“In some cases, entire co-dependent integrated complexes are at risk as key flagship industries are not retained or upgraded due to loss of feedstock supply and/or key customers,” the group said.

The recession had exacerbated this loss of customer base. Facilities were closing, and to reverse this, Canada needed to attract replacement investments.

At the same time, Canadian chemical producers had been hit by rapid price fluctuations and supply uncertainties for energy. Producers were concerned about adequate supply of competitively-priced raw materials, the group said.

CIAC suggested a number of steps and initiatives for government and industry to meet those challenges.

One important measure to help rebuilding manufacturing would be a two-year accelerated capital cost allowance (ACCA) for machinery and equipment used to upgrade its material resources and add value, the group said.

“Put the ACCA in place for machinery and equipment for five years and extend it as it succeeds in growing new investments,” the group said.

Second, Canada needed to align federal and provincial approaches and strategies in the key area of environmental policy, the group said.

“Federal/provincial coherence on issues such as climate change, air pollution and chemicals management […] is missing. This creates uncertainty and manufacturing is suffering as investors turn elsewhere.”

Third, Canada needed to “actively encourage” value-added resource upgrading within the country, moving along energy and other value chains.

“Make it more profitable to achieve sustainable energy solution here than anywhere else in the world,” the group said with reference to a growing trend to export raw bitumen and tar sands from Alberta's oil sands industry to US refineries, instead of upgrading them for value-added production in Canada. Olefins-rich off-gases from oil sands upgrading are seen as an important feedstock for the chemical industry in Alberta.

CIAC said the supply of petrochemical ethane feedstock extracted from conventional natural gas was already below levels needed for the chemical industry to operate at capacity.

If nothing was being done to boost ethane availabilityCanada was headed for an ethane shortfall equivalent to the feedstock requirements of a major petrochemicals facility by 2020, it added.

While the Alberta provincial government had designed an "Incremental Ethane Extraction Policy" (IEEP) to encourage investments to increase the proportion of ethane extracted from natural gas as well as to use off-gases from oil sands upgraders, that programme was not big enough in its scale, the group said.

“Unfortunately, the size of the [IEEP] fund and its design is not adequate for large projects, and in particular for off-gas extraction and delivery to be economical to pursue.”

Further, the decline in proportion of oil sands upgrading in Alberta was disappointing, the group said.

“It is important to note that upgrader projects in Canada do not qualify for the current temporary ACCA. Meanwhile, US refineries are retrofitting to handle Alberta bitumen as they take advantage of a five-year ACCA that was put in place in 2007 by the US government and recently extended to maintain a five-year planning horizon,” the group said.

Another key concern for the chemical sector was electricity and electricity pricing, especially in Ontario, Canada’s largest province.

Ontario needs a plan that includes less costly options for supply and delivery [of electricity]” the group said.

In logistics, Canada’s rail system, particularly in western Canada, was congested, with chemical firms facing “arbitrary changes in the timing and frequency of delivery and pick-up of railcars that do not match production schedules,” the group said.

The chemical industry was concerned that rail service be maintained for all chemical products and that carriers worked to manage risk more effectively, it said.

“Raising rates, creating ancillary charges and asking shippers to bear risks for activities beyond their control is not an acceptable way of meeting carrier obligations,” the group said.

CIAC also said Canada needed to do more to strengthen, improve and safeguard the two-way flow of goods and people across the Canada-US border. The US is by far the largest export market for Canada’s chemical industry.

Furthermore, the group said it had noted an “unprecedented tightening of access to credit” that had made it harder for key suppliers and customers in the chemical value chain to conduct everyday business transactions and refinance operations.

Canada’s banking system withstood the global economic crisis without the banking failures that occurred in the US and Europe, the group said.

However, Canada's financial market needed to better understand the chemical sector so that it could more accurately assess business risks and develop greater confidence in providing financing to chemical companies, it said.

Major chemical firms with production in Canada include NOVA Chemicals, Dow Chemical, Shell, MEGlobal, DuPont Canada, LANXESS, Invista, and ExxonMobil’s Canadian Imperial Oil affiliate, among others.

For more on Dow Chemical, NOVA Chemicals and other producers visit ICIS company intelligence
Read Paul Hodges’ Chemicals and the Economy blog
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