OUTLOOK ‘12: Canada chems see modest sales growth amid challenges

30 December 2011 15:00 Source:ICIS News

The Canadian flagBy Stefan Baumgarten

TORONTO (ICIS)--Canada’s chemical industry expects sales to rise by only 2% year on year to Canadian dollar (C$) 26.0bn ($25.5bn) in 2012 amid recession fears in Europe and challenges from feedstocks, currencies and other issues.

In 2011, Canadian sales of industrial chemicals rose by 18% year on year.

The relatively modest 2012 growth forecast reflects fears about global economic uncertainty, in particular concerns about a European - or broader - recession, and its impact on overall demand, Ottawa-based trade group Chemistry Industry Association of Canada (CIAC) said.

sees sales to customers in Canada rising by 6% year on year in 2012, while export sales are expected to rise by 1% next year.

In 2011, the industry’s domestic sales rose by 13% year-on-year to C$6.5bn, while chemical export sales rose by 20% to C$19bn. About 75% of Canada’s chemical production goes into exports, with the US accounting for 75% of those exports.

Chemical industry operating profits - before interest, taxes and special write-offs – will likely fall by about 11% to about C$3.43bn next year.  This compares with a 61% year-on-year increase in operating profits, to C$3.86bn, in 2011.

Chemical industry employment will likely remain flat at around 14,000.

However, one area where a large jump is anticipated is in fixed capital expenditures, which are forecast to rise by 39% to C$1.3bn next year, reflecting plans by a number of firms to undertake significant temporary shutdowns for turnarounds during 2012, CIAC said

The group highlights a number of challenges facing the industry, including the continuing economic uncertainty, as well as feedstock, currency and other issues.

The main economic issue is the eurozone debt crisis as it is still unclear whether Europe can implement measures that will avoid recession, CIAC said.

While the Canadian fiscal environment remains healthy by international standards, and Canada may be able to avoid going into recession, a weakening of major global economies always has negative impacts on the country's export-intensive industries like chemicals, the group said.

CIAC also notes negative feedstock impacts on Canadian chemical producers from the US shale gas boom.

Growing supplies of US shale gas have dampened demand for exports of Canadian gas, thus curtailing drilling activity in western Canada. When less gas is produced in Canada, less ethane is recovered, with the result that Alberta’s petrochemical industry is now left short on ethane and ethylene-based derivative units are running at below capacity, the group said.

However, producers such as Canada-based NOVA Chemicals are undertaking strategies to secure ethane supplies, including imports of ethane from North Dakota and increased recovery and extraction of ethane from olefins-rich off-gases generated in the upgrading of Alberta’s oil sands, CIAC said.

The group also said that Canadian-based chemical producers remain worried about the value of the Canadian dollar, vis-à-vis the US dollar.

When the US dollar is relatively weak, US chemical producers become more competitive and gain global market share - at the expense of Canadian and other exporters.

As such, the uncertainty about future exchange rates remains an ongoing concern for the industry as unexpected large upward swings in the Canadian dollar have negative repercussions on the international competitiveness of Canada’s chemical producers.

Another key competitive concern for Canada’s chemical industry is the availability, cost and reliability of electricity supplies, in particular in Alberta and Ontario.

While electricity costs are of concern to all industrial chemical producers, the impact is largest for those firms producing inorganic chemicals, CIAC said.

Chemical firms are also worried about labour costs and the supply of qualified staff.

Labour costs are especially high in Alberta, where a strong pull from that province’s oil sector places upward pressure on chemical company wages.

Other labour issues relate to the availability of skilled workers needed to replace an aging industry work force.

($1 = C$1.02)

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Paul Hodges studies key influences shaping the chemical industry in his Chemicals and the Economy Blog

By Stefan Baumgarten