If beaten-up Canadian investors are looking to assign blame for the bruising suffered by their portfolios of late, they could do worse than point an accusatory finger at China. The resource super-cycle that drove valuations so much higher over the last decade is now hobbling along at a snail’s pace and China is a big part of the reason why.
A slowdown in China’s economic growth is exacting a heavy toll on resource-based economies like Canada’s. Domestic coal mines are being shuttered due to tumbling coal prices. In Ontario, hopes to mine chromite deposits in the so-called Ring of Fire are fading as steel markets continue to weaken. At the same time, British Columbia’s plans to ship liquefied natural gas to Asian markets are being scuttled as LNG prices come off their highs. Similarly, lower oil prices are prompting Big Oil to shelve plans for multibillion-dollar oil sands projects in northern Alberta.
Seeing a simultaneous pullback in spending on big resource projects isn’t a coincidence. Look around the world at what’s happening in the resource space and it’s easy to see that new sources of supply aren’t helping prices. Consider the oil market, for one, where prices are now treading at four-year lows. Part of the reason for the decline is all of that new oil flowing from fracked shale formations in places like North Dakota, Texas, and southeast Saskatchewan. It’s often said that the best cure for high prices is high prices and that’s exactly what’s happened to oil after the big run up to $147 a barrel. Indeed, an extended super-cycle made new sources of supply economically viable in nearly any resource market you care to name.Read the full article