'Everything in our industry is driven by China' The economic recession means Canadian sectors are increasingly turning to the Middle Kingdom. By Evan Duggan Published July 21, 2010

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Paul Stothart is excited.

Last year, iron ore and coal alone accounted for nearly $1.6 billion in Canadian exports to China. This represented $1 billion more than in 2008, continuing a trend that has become a major boon for Canada's mining sector.

"Everything in our industry is driven by China," said Mr. Stothart, vice-president of economic affairs at the Mining Association of Canada, explaining that world mineral prices for copper, nickel, zinc and uranium are largely set by—increasing—Chinese demand for raw minerals.

The Middle Kingdom looms just as large for Andrew Casey, vice-president of foreign affairs and international trade at the Forestry Producers Association of Canada.

"It's been a brutal couple of years," he said, adding that the ongoing downturn in the US housing industry has had a dramatic impact on Canada's forestry industry. He predicts that long-term economic sustainability for the sector will ultimately arrive only from diversification. A comprehensive approach to selling Canadian forest products, he said, includes Asia.

"Success in Asia is almost critical for the industry's future, and that's why we're very encouraged by what we're seeing," said Mr. Casey.

Mr. Casey and the forestry industry aren't alone. In January, in response to the European Union's controversial ban on seal product imports and slouching sales of seafood to established markets, Fisheries Minister Gail Shea visited China to promote the industry. For seal hunters at least, China is seen as the possible saviour of an entire industry that is facing possible extinction.

For these industries and others across Canada, the global economic crisis represented a wake-up call. Having long benefitted from their close proximity to the world's largest market, the United States, they were hit hard when that market suddenly slowed and Americans stopped buying.

Now, many are scrambling to diversify. With 1.3 billion consumers, many of whom are moving up to the middle-class status and seeing their purchasing power increase, China represents a possible saviour to some. Yet others say the bottomline is that Canada's economic fate remains solidly tied to US fortunes.

Big increases

Industry Canada statistics suggest considerable growth in 15 of Canada's top 25 export industries to China, with the largest increases in oilseed, iron ore, and coal. Those three exports alone rose to nearly $3 billion in 2009 over the previous year's total of $1.3 billion. At the same time, traditional exports like pulp and wood products continued along a healthy path.

When compared with stats for Canadian exports to the US, the numbers show that only one of the top 25 Canadian exports to the US increased in that same time period, and that was in pharmaceuticals.

On the surface, the numbers suggest a concerted shift towards China by Canadian sellers.

Mr. Casey acknowledged the steady stream of Canadian pulp and wood products entering the Chinese market. He said he expects the US housing market to eventually rebound, but not before the Canadian forest industry spreads out its business.

China, he said, is the largest Asian consumer of Canadian forest products, buying about eight per cent of Canada's annual haul. In comparison, other Asian consumers combined, including Japan, India and South Korea, consume 10 per cent of total Canadian forest exports.

Mr. Casey said there is a growing demand in China for Canadian pulp, a product that is processed in Canada and then shipped in sheet form to China where it is converted into various paper materials such as newsprint and shipping cardboard—a necessity for China's consumer-goods manufacturing industry. He added that China's doors are open wide for Canadian pulp, due to its unique quality based on specific types of Canadian trees.

There is also a growing demand for Canadian wood building materials as the growing Chinese middle class becomes more interested in wood-framed homes, and in luxury products like wood finishing and mouldings, he said.

When asked what barriers the industry is facing when it comes to China, Mr. Casey replied, "right now, none...that I'm aware of. [The Chinese] have a voracious appetite for [wood] fibre."

Another big winner over the last couple of years has been Canadian oilseed producers, a product used in China for human consumption as well as for industrial activities and includes Canola and flaxseed oils. Since 2005, oilseed exports to China climbed from $117 million to over $1.5 billion by 2009.

Perrin Beatty, CEO of the Canadian Chamber of Commerce, is pleased with Canada's growing exports to China, but he thinks this country is capable of selling a diverse set of products, to an array of new partners.

"The recession itself sent a message to Canadian businesspeople that it's important not to have all our eggs in one basket," said Mr. Beatty. He said the Canadian government and exporters should look beyond the US market, as well as beyond their traditional economic roles as miners, farmers, and lumberjacks. He said Canada has to reconstruct its national brand.

In order to do that, he said, Canadian business leaders should start recognizing the Chinese desire for high-tech manufactured products. He pointed out Montreal-based Bombardier's continued success in delivering large-scale transport contracts in China and elsewhere around the globe, and suggested that Waterloo's Research In Motion's development of the Blackberry helped pioneer a niche path for other Canadians to follow. China, with its rising consumer class represents a vast market for those types of products, he said.

"We've been ignoring the Chinese market," said Mr. Beatty, explaining that for too long Canadians have been seduced by the comforts and simplicity of the US market. "This isn't an either-or situation."

Unsurprisingly, James Brander, an Asia-Pacific economics expert at UBC's Sauder School of Business in Vancouver, said the main obstacle for Canadian exporters, regardless of the industry, remains the undervalued Chinese yuan. Until China allows its currency to float he said, Canadian exporters would have a difficult time expanding their reach into that country.

Meanwhile, Mr. Brander pointed out the perpetual friction between China and US over issues such as free trade and intellectual property rights, both of which also represent problems for Canada.

The bottomline, he said, is the recent trade numbers need to be put in context.

"We've been talking about diversification for as long as I've been alive," said Mr. Brander.

Despite the combination of less US demand and a larger Chinese appetite, he said the US remains the primary destination for products and resources of Canadian origin. He also noted that Industry Canada sometimes lumps multiple exports into one category or fractions others such as forestry products or mining exports, often skewing the quality of the data.

"The US is vastly...more important," said Mr. Brander. "It's so much more important that even talking about China in the same category, or as something that possibly might make up for what happens in the US, at this stage doesn't really make much sense."

Mr. Brander said approximately three per cent of total Canadian exports end up in China compared to 75 per cent that are consumed in the United States. He said that no matter how much growth there is in Canadian exports to China, reliance on the Chinese market will not alleviate pains caused by further economic struggles south of the border.

The upswing in exports to China, he added, probably represents an economic cycle rather than any concerted diversification on the part of Canadian business.

For his part, Mr. Stothart is excited about the mining industry's prospects in trading with China.

"China is still growing seven or eight per cent a year, and the US is not," he said. "The US is, obviously, our most important market, but not to the same percentage extent as it was five years ago."

eduggan@embassymag.ca