Higher resources prices will help Saskatchewan

Saskatchewan stumbled out of the gate in 2009, tripped up by plunging potash prices and sales, turning what should have been a nation-leading sprint into a mediocre, middle-of-the-pack performance.

But the Prairie province is expected to pick itself up and get back in the race in 2010, as many economists predict that Saskatchewan should lead the provincial pack in economic growth this year.

Take that forecast with a grain of salt, though, because that’s what economists said about Saskatchewan in 2009. Instead of the rosy 3.5% growth predicted by some in late 2008, or the 2.1% growth predicted in the 2009-10 provincial budget, or the zero to 0.6% growth forecast by most economists in early 2009, the province is likely to report a dismal 1.6%-2.5% contraction.

No one predicted — least of all, the province’s Ministry of Finance — that potash production would fall so dramatically. It nosedived to about four million tonnes last year from 10 million tonnes in 2008.

This miscalculation has had catastrophic effects, not only on Saskatchewan’s economy but also on the provincial budget. In the province’s November 2009 mid-term financial report, Finance Minister Rod Gantefoer conceded that the budget projection of $1.9 billion in potash revenue would be off by $1.8 billion. So, instead of almost $2 billion in revenue, the province would receive a paltry $109 million. More recently, Gantefoer has suggested that even the projected $109 million may have been overly optimistic.

As a result, the budget forecast of a $25-million deficit (based on the summary financial statements, which includes the province’s Crown corporations) has now been revised to a deficit of about $1.05 billion — the worst fiscal shortfall since the record $1.5-billion deficit in 1991-92, the final year of the ill-starred Progressive Conservative government of Grant Devine.

The cause of Gantefoer’s discomfort has been the inability of the Saskatchewan potash industry — through its offshore marketing agency, Canpotex — to get a long-term contract with China. The potash industry wants higher prices; China and other developing nations, not surprisingly, want lower prices. So, as the impasse continues, potash prices have stayed stubbornly below US$400 a tonne instead of the US$550 forecasted by the industry. More important, potash production has slowed to a trickle.

But economists say things will be different this year. And the main reason for their optimism is that the things that went wrong in 2009 — namely, lower prices for potash, oil and gas and other commodities — should improve in 2010.

“The good news is that the main sources of weakness are expected to reverse in 2010, thanks in large part to a steady acceleration in global growth,” states Royal Bank of Canada’s most recent forecast.

For example, oil prices, which had plunged by more than US$100 a barrel in late 2008, have rebounded from their lows of around US$40 and climbed steadily into the US$80 range in recent months.

This past autumn, the Petroleum Services Association of Canada had forecast a 10% increase in drilling, to 1,935 wells in Saskatchewan this year, based on an oil price forecast of US$72 a barrel for 2010. Should prices stay in the current range, oilwell drilling may surpass the PSAC’s projections.

Natural gas, which has not seen the same strong recovery as oil, is expected by PSAC to remain in the range of $5 per thousand cubic feet in 2010, providing little cause for optimism regarding an uptick in activity in that sector.

Rebounding activity globally is also likely to support grain prices, says RBC’s report. Moreover, a return to more normal weather conditions — especially during spring seeding — would contribute to a boost in agricultural production.

Saskatchewan narrowly averted disaster last year, as the abnormally cool spring delayed planting by three or four weeks, raising the risk of a major crop failure. Miraculously, several weeks of unseasonably warm weather in September and November helped farmers reap the crop, which was just slightly smaller than 2008’s record harvest.

Potash, however, is the wild card. At least one analyst believes potash prices should strengthen in 2010 — albeit from a lower base — averaging US$375 a tonne (free on board at the Vancouver port), with full price recovery set for 2011.

This suggests the potash industry’s recovery may take another year or so. That’s not good news for Gantefoer, who has ordered government-program spending to be frozen or cut in the upcoming budget. He has called for a 10% reduction in spending by government ministries, with the aim of no overall increase in the 2010-11 budget.

@page_break@Economic stimulus spending — infrastructure, roads and highways — will continue in 2010 but will start to wind down in 2011. And the potash industry is spending billions on expansion projects. A new player, Australian mining giant BHP Billiton Ltd., recently announced it was spending $240 million in “pre-feasibility” work on its Jansen potash project near Saskatoon.

And Saskatchewan, with the country’s lowest unemployment rate (4.7% in 2009 vs 8.4% for Canada), nation-leading job growth (up 1.5% vs 0.9% nationally) and the third-highest wages in Canada ($815 a week, behind Alberta’s $954 and Ontario’s $857) in 2009, is entering 2010 with momentum.

Accordingly, many economists are calling for Saskatchewan to lead the nation in economic growth in 2010, ranging from Bank of Montreal’s moderate forecast of 3.3% real gross domestic product growth to RBC’s very bullish 3.9% growth forecast.

But other economists are less optimistic. Canadian Imperial Bank of Commerce is calling for 2.4% real GDP growth, while National Bank of Canada is forecasting 3.1% growth.

Toronto-Dominion Bank is the most pessimistic, projecting 2.3% real GDP growth, which is below the expected Canadian average growth rate of 2.6%. But TD concedes that Saskatchewan will have the highest growth rate among all the provinces over the low-growth 2008-10 period, posting an impressive 1.4% average over these years.