Stormy times ahead for Newfoundland and Labrador

As a recessionary whirlwind whips northward through Ontario’s automotive heartland, the economies of Canada’s two petro-provinces are reaping the unwelcome gifts that come with blacked-out manufacturing plants and plunging oil prices.
Prospects for Newfoundland and Labrador closely mirror those of Alberta, as both provinces rely overwhelmingly on the oil industry for jobs, business growth and government revenue.
The ratcheting down of oilsands projects, such as mothballing of Suncor Energy’s $20.6 billion Voyageur expansion, directly impacts hundreds – if not thousands – of Newfoundland and Labrador workers, many of whom commute directly between St. John’s and Fort McMurray. With pink slips replacing pay envelopes for increasing numbers of migrants, the ramifications are only now becoming clear.
Some communities, such as Stephenville, had been cushioned from economic disaster with the closure of their main sources of employment, in this case a paper mill that closed in late 2005. Skilled workers were eagerly snatched up by Alberta recruiting firms, and the government of Newfoundland and Labrador was spared the messy task of finding new jobs for those who had been displaced.
Equally important as the jobs themselves were the remittances sent back east by migrant workers, which propped up the commercial sector of rural communities. Sales of pickup trucks, SUVs and recreational vehicles continued to climb throughout 2008, even as sales throughout central Canada slid during last summer’s period of $150 per barrel oil.
New car sales in 2008 within the province continued to exceed 2007 month-to-month figures until November when sales dropped to 1,662 units, the lowest number for that month since 2004. A measure of the health of the automotive market came in January when the St. John’s Chrysler and Mercedes dealership slid into receivership, with creditors claiming $19 million in unpaid bills from the firm.
A string of bad news stories has dogged the province since last fall, the worst being the pending closure of the Abitibi Bowater paper mill in Grand Falls-Windsor. The century-old plant is the only significant private sector employer in central Newfoundland, providing hundreds of jobs for mill workers and loggers. The port town of Botwood will also lose a significant portion of its economic base, as freighters will no longer load paper from its docking facility. For those who are losing their jobs, Fort McMurray is no longer an option.
Less significant is the slowdown in Labrador’s iron ore mining communities. Wabush Mines has laid off 160 workers, representing one third of its workforce, while in the neighbouring town of Labrador City a one-month-long shutdown of the mine owned by Iron Ore Company is planned for this summer.
Meanwhile, uncertainty swirls over Vale Inco’s planned nickel processing facility, which is planned for Long Harbour on Newfoundland’s east coast. Unexplained delays by the company in filing its development plan with the provincial government have led to concerns about the future of the $2.17 billion plant, which has already passed the environmental assessment stage.
According to the original 2002 timetable, Vale Inco was to have submitted its final development plan by the end of December. The province extended the deadline by three weeks, a date now exceeded by the company.
Questions also persist about the fishery this year, as processing companies grapple with the combined effects of poor prices in the United States and the collapse of Iceland’s banks, which had provided operating credit for several of the province’s largest firms.
The credit situation is so daunting that the Fish Food and Allied Workers Union – which is not known for its sympathetic attitude towards processors – raised the alarm. The union is demanding that governments step in to assist the companies; the alternative being that some fish plants may remain shuttered this year.
Certainly, Canadian banks might be forgiven for looking askance at offering credit, considering forecasts for key sectors of the fishery. Prices for snow crab, the mainstay of Newfoundland and Labrador’s fishing industry, are looking weak, although this could change by the time the season opens this spring.
The industry’s concerns originate with American restaurant market, which has been the mainstay for both lobster and crab; the recession has already negatively affected lobster prices, due to lower demand south of the border, and there are fears this will extend to crab.
So far, this list of economic challenges has not greatly impacted projections for Newfoundland and Labrador’s economy for 2009, which, despite the challenges, is expected to out-perform all other provinces except Saskatchewan. BMO is forecasting 0.7 per cent growth in real GDP, while Scotia Bank sees slightly lower growth, at 0.4 per cent.
The basis of this optimism lies with the strength of the province’s oil industry. Although annual oil production peaked in 2007 – gross output actually declined by 17 per cent in 2008 – and the billionth barrel of crude was drawn from the three existing offshore fields this January, the industry is expected to keep the economy bouyant during the next decade.
Even with $40 per barrel oil the provincial government is expected to record a surplus for 2009-2010, although Finance Minister Jerome Kennedy is warning that oil price fluctuations could push the government into deficit territory in the following fiscal year.
Fortunately, the government has prepared for bad times by consistently using unexpected windfalls in oil royalties to reduce the province’s debt. Its net debt is now expected to come in at $9.2 billion for 2008-2009, compared with the $10 billion forecast in the budget last spring.
Perhaps most timely for the province is construction of the Hebron oil production platform, which is set to begin in 2010, thereby providing fabrication jobs for hundreds of workers at yards and factories throughout the province. Hebron is expected to provide 1,000 direct jobs during its construction stage, and to generate $16 billion in royalties to the province during its 25-year life.
If both Hebron and the Long Harbour nickel processing plant proceed as planned, then the Newfoundland and Labrador is expected to weather the recession better than most other provinces. The housing market has emerged as one of the hottest in Canada, with prices increasing by over 30 per cent in 2008; there is no sign of this growth slowing dramatically this year.
Although these are reasons for optimism, thanks to the oil and mining sectors, the province has so far failed to diversify its economy away from production of commodities. Manufacturing, in particular, remains weak, aside from those companies supplying the oil companies, and is centralized almost exclusively in the St. John’s region.
An indicator of this is the unemployment rate, which is forecast to remain Canada’s highest, at 12 to 13 per cent until at least 2010, despite jobs growth in mining and oil.
The major challenge for the province’s government and business sector is to forge a path away from raw resource extraction, and to reverse the growing gap in economic fortunes between the vast rural areas and the urban communities of eastern Newfoundland and western Labrador.