Manufacturing in Alberta a one trick pony

November 21, 2009

By Todd Hirsch
Chief Economist
ATB Financial

Todd Hirsch

CALGARY, AB, Nov 20, 2009/ — Who knew Alberta was such a manufacturing super star?

The value of manufacturing within the province totaled some $4.5 billion in September of this year and accounted for nearly 11 per cent of Canada’s total manufacturing activity. That’s roughly in line with Alberta’s share of the country’s population.  

Isn’t this a strong argument in favour of the diversification of Alberta’s economy? With all of this manufacturing going on, maybe the province isn’t as dependent on natural resources as people think!

Maybe. But breaking down manufacturing by sector, it’ s glaringly apparent that the energy patch is still the muscle that powers the provincial economy.

The single largest manufacturing sector in Alberta is refined petroleum and coal, which contributed close to $1 billion (22 per cent) this past September. Unfortunately, that refining activity is directly related to the value of crude oil and its derivative products: gasoline, diesel fuel, jet fuel, etc. The value of those products – led on a rollercoaster ride by oil prices – have gyrated wildly over the past couple of years. Only recently has the value of refined petroleum products clawed its way back up. But even with the recent price gains in oil and gasoline, the value of refined petroleum is only back to where it was in 2004 and 2005.

Chemical production, the third largest contributor to industrial manufacturing and is concentrated in only a few very large facilities. And again, on the surface it seems to support to the notion of economic diversity. But the feedstocks used in the production of chemicals in Alberta are drawn primarily from natural gas liquids – which is in turn, are dependent on natural gas extraction. When that activity is disrupted by low natural gas prices, it greatly affects input availability.

Machinery and equipment places fourth in Alberta’s manufacturing ranking. Unfortunately, it lacks the mix of industrial and technical manufacturing which takes place in southern Ontario, Michigan, or China: by and large, machines produced in Alberta are specialized pieces used in either conventional drilling, or increasingly, in oilsands extraction. Think specialized boilers, pumps, drill bits, and heating coils. Without demand from oil and gas drillers, machinery and equipment manufacturing in Alberta is in a funk. From it’s peak in July 2008, total value in the province is down 43 per cent.

Fifth on the list of Alberta manufacturing is fabricated metal products, and the story is the same as with machinery and equipment: most of it feeds into the energy sector. Specialized rolled steel products and steel pipe used for drilling and casing make up a good deal of these metal products. And, like machinery and equipment, they’ve taken a hit. Their overall value is off by more than 40 per cent.

Those four sectors alone – refined petroleum, chemical, machinery & equipment, and fabricated metals – accounted for 55 per cent of Alberta’s total $4.5 billion in manufacturing in September of 2009. And the troubles in the energy patch are without doubt being felt; shipments from each of these four industrial sectors have been pummeled in 2009.

However, it’s not all doom and gloom: Food processing has scrambled to the number two spot among the major manufacturing sectors, and it has been enjoying an upward trend. Most of the action in Alberta’s food processing takes place at a handful of cattle and hog slaughtering factories, and the associated beef and pork packaging. But it also includes poultry and egg production, bakeries, beverage brewing and bottling, and a series of other smaller food processors. All in all, they account for nearly $1 billion in sales, up about 25 per cent in the past five years.

Forest product manufacturers, on the other hand, are not enjoying the same growth. In fact, the total value of lumber, plywood, and pulp and paper has gradually fallen over the past few years, weighed down by low prices, poor demand from the US, and a punishingly high Canadian dollar.

But with over half of the province’s manufacturers being heavily exposed to the energy patch, it’s hard to see much upside without a strong recovery in conventional drilling. That, unfortunately, is not particularly likely given the stubbornly soft prices for natural gas. The irony is that the current downturn in the energy sector will probably result in Alberta’s economy becoming more diversified after all.

Channels: Didsbury Review, November 25, the Calgary Beacon, February 22, 2009