Bank of Canada to explain its pandemic actions as political tides shift

Erik Hertzberg, Bloomberg News   Jun 24, 2024

The Bank of Canada is doing a formal review of its pandemic-era policies, when it bought hundreds of billions in government bonds to suppress interest rates. It may represent a last chance for Governor Tiff Macklem to explain himself before one of his fiercest critics comes to power.

Early next year, the central bank plans to release a report on the “exceptional” measures it took during the Covid shock. That’s likely to be shortly before Canada’s next election, which is due to take place by October 2025.

Conservative Party Leader Pierre Poilievre — who’s leading Prime Minister Justin Trudeau by a hefty margin in polls — slammed the central bank during its first-ever foray into quantitative easing, saying it contributed to inflation. During his campaign for the party leadership in 2022, he even threatened to fire Macklem if elected.

Should Poilievre win next year, that would put him in the country’s highest office ahead of a scheduled review of the bank’s mandate in 2026 and the end of Macklem’s term in 2027. As the bank renews its framework, a Conservative government would likely want to scrutinize tools such as quantitative easing.

But first, the bank will conduct its own review — which will include an external assessment by central banking experts — to deliver a verdict on what role the bond-buying and other actions played in the run-up in inflation, which peaked at 8.1 per cent in June 2022.

In a speech on June 13, Deputy Governor Sharon Kozicki cited bank research that showed quantitative easing added as much as three per cent to the country’s gross domestic product at its peak. She didn’t mention another finding of the report — the emergency bond purchases added 1.8 percentage points to inflation. 

The bank’s position is that supply disruptions and higher commodity prices were the primary contributors to inflation, and Kozicki said policymakers see “very little correlation” between the increase in the country’s money supply and the inflation surge.

The bank said quantitative easing was initially deployed to restore market functioning during the economic shock of the pandemic. It complemented then-Governor Stephen Poloz’s decision to cut interest rates from 1.75 per cent to 0.25 per cent, injected liquidity throughout financial markets and helped to keep longer term borrowing costs lower. 

Still, monetary policymakers under Macklem continued large asset purchases well into the recovery. In total, the bank bought $340 billion in bonds, and at peak in 2021 the central bank held as much as 43 per cent of Canadian government bonds on its balance sheet. 

That allowed Trudeau’s government to issue record amounts of debt at lower costs than it otherwise would have faced, helping pay for wage subsidies and other programs to keep the economy afloat in 2020. 

“How much of that fiscal was aided by the bank being ready to buy those bonds during QE? That, I think, is a legitimate question,” said Jeremy Kronick, associate vice president of the C.D. Howe Institute.

While the Bank of Canada wasn’t buying most of its bonds directly from the primary government auctions, its purchases in secondary markets may have given other market players the confidence to buy from the government at higher prices than they would have otherwise paid, Kronick said. 

In 2020, when Poilievre was the Conservative finance critic, he accused the Bank of Canada of acting as “an ATM for Trudeau’s insatiable spending appetites.” During his successful bid to win his party’s leadership in 2022, Poilievre told supporters he planned to sack Macklem — a pledge that drew considerable criticism from economists and which he hasn’t repeated lately.

The bank’s review of its pandemic response has the potential to “calm down” its relationship with Conservatives, said Yaroslav Baran, a former communications strategist for Prime Minister Stephen Harper’s Tory government who now works at consulting firm Pendulum Group.

“It sets the Bank of Canada up for a reputational rehabilitation in quarters where they were criticized,” Baran said. An acknowledgment that the size, intensity and duration of quantitative easing led to at least some additional inflationary pressures would be “well-received,” he said. 

With yearly inflation headed toward the central bank’s two per cent target, it will probably be easier by next year for the central bank to make the case that its emergency measures were ultimately successful.

Bank of Canada spokesman Paul Badertscher said officials will unveil details in coming weeks, including a list of central banking and academic experts who will evaluate the bank’s findings. 

Asked to comment on the bank’s upcoming review, Poilievre’s media relations team pointed to a short documentary called “Housing Hell” released last year. In it, the Conservative leader repeats statements that government spending, quantitative easing and the expansion of the money supply were major contributors to housing inflation.

“There’s really not a good way to directly pinpoint what the effect of QE on inflation would be, in isolation,” Citigroup economist Veronica Clark said in an interview. “While it was probably both loose fiscal and monetary, a lot of the inflation is easier to pinpoint directly more to the fiscal side of things.”

Yukon mine halts operations after system failure, says infrastructure damaged

Ashley Joannou, The Canadian Press

Work has been temporarily stopped at a mine in central Yukon after what the company says was a failure of its system that uses chemicals to help extract gold.

Victoria Gold said in a statement Monday that its heap leach pad at the Eagle Gold Mine near Mayo experienced a failure, causing some damage to infrastructure and that "a portion of the failure has left containment."

Heap leaching uses chemicals to percolate through crushed ore, allowing it to extract gold.

A technical report on the company's website says gold at the Eagle Gold Mine is being leached with a cyanide solution.

A statement from the First Nation of Nacho Nyak Dun, whose traditional territory includes the mine site, said it is concerned about the "potentially significant and far-reaching environmental impacts, particularly to surrounding waters, fish and wildlife."

The First Nation said early reports appear to indicate that the "significant" heap leach failure caused a landslide near the facility and gold recovery plant.

"This is a deeply serious incident and we are monitoring it closely, with our staff on the ground and with our partners in public government," Chief Dawna Hope said in the statement.

"Our first priority is to minimize the impacts on our lands, waters and wildlife, as well as on (the First Nation) and any other affected First Nations. We will then seek to understand how and why this occurred."    

Victoria Gold said no one was injured, and staff and management continue to assess the situation and gather information.

The First Nation said it is in contact with both the mining company and the Yukon government.

John Thompson, a spokesman for the Yukon Department of Energy, Mines and Resources, said in a statement that territorial natural resource officers will be investigating.

The Eagle Gold Mine poured its first gold in 2019 and the company says it's expected to produce 2.4 million ounces over an 11-year lifespan.

The mine employs approximately 500 people as well as numerous contractors and consultants, according to the company website.

This report by The Canadian Press was first published June 24, 2024.

 

Alberta lithium company E3 pegs capital cost of proposed project at $2.47B

The Canadian Press

A company that aims to develop the lithium that occurs naturally within Alberta's oilfield brines has pegged the estimated capital cost of its proposed Clearwater project at $2.47 billion. E3 Lithium employees walk through the company's lithium pilot plant near Olds, Alta., Thursday, Sept. 7, 2023. , THE CANADIAN PRESS/Jeff McIntosh

A company that aims to develop the lithium that occurs naturally within Alberta's oilfield brines has pegged the estimated capital cost of its proposed Clearwater project at $2.47 billion.

Publicly traded junior resource firm E3 Lithium opened the province's first lithium extraction pilot project near Olds, Alta. last fall.

The company aims to construct a full-scale commercial facility in the same area that would process battery-grade lithium product ready to be sold directly to battery producers and electric vehicle companies.

The company — which has financial backing from Imperial Oil Ltd. — announced Wednesday it has completed a pre-feasibility study that establishes a "clear and viable pathway" to commercialization.

E3 says its project would have an initial capacity of 32,250 tonnes of lithium hydroxide per year.

The company is proposing to use carbon capture and storage technology to reduce emissions from its lithium processing facility, though the cost of that equipment is not included in the project's estimated price tag.

This report by The Canadian Press was first published June 26, 2024.

 

Canada is a force in AI research. So why can't we commercialize it?

Anja Karadeglija, The Canadian Press

It has impressive research bench strength. It has billions of federal dollars for the taking. It's kind of a nice place to live. 

But when it comes to turning knowledge of artificial intelligence into companies, products and investment, Canada is lagging behind — and, some experts argue, actively shooting itself in the foot.

Why give up all that brain power to Silicon Valley? 

That was a major line of questioning as Prime Minister Justin Trudeau spoke recently with tech journalists on a niche New York Times podcast. 

"We're proud of Canada's early role in developing AI," Trudeau said on Hard Fork, noting that many breakthroughs have happened because Canadian scientists are well-funded.

In 2017, Canada became the first country to have a national AI strategy. It launched a second phase five years later, allocating $443 million to connect research capacity with programs aimed at enabling commercialization. 

This year's federal budget included an additional $2.4-billion investment in AI. And the government has boasted that Canada has 10 per cent of "the world's top-tier AI researchers, the second most in the world."

Among them are two so-called godfathers of AI. 

But Ottawa is "fighting to make sure we keep our skin in the game," Trudeau told the podcast hosts. 

He made the pitch, saying Canada has many of the ingredients it needs: among other things, clean energy, a good quality of life for workers and government programs to encourage the sector. 

In spite of that, Canada hasn't always been "great at commercializing," Trudeau conceded.

More than that, Canadians have "fallen far behind," argued Benjamin Bergen, president of the Council of Canadian Innovators, which represents the tech sector. 

The government spent "a tremendous amount on the talent side of the equation," he said recently, but not on converting it "into building companies."

Bergen said the government has "institutionalized the transfer of our AI intellectual property to foreign firms."

The government's 2022 strategy update promised that the country's three AI institutes are "helping to translate research in artificial intelligence into commercial applications and growing the capacity of businesses to adopt these new technologies."

But Bergen argued an AI strategy focused on commercialization must start with Canada owning its own IP. "You cannot commercialize what you don't own."

Intellectual property lawyer Jim Hinton has been trying to quantify that problem.

And the numbers show "a train wreck I've been watching happen in slow motion," he said.

About three-quarters of patents produced by researchers who work for Toronto's Vector Institute and Montreal's Mila leave the country, and most of these are in the hands of Big Tech, Hinton's research has found. 

Another 18 per cent of the 244 patents he tracked — 198 from Vector and 46 from Mila — are now owned by North American academic institutions.

Just seven per cent are held in the Canadian private sector. 

Of the foreign-owned patents, the largest number, 65, went to Uber, while 35 landed with the Walt Disney Company. Nvidia, which recently displaced Microsoft as the world's most valuable company, got 34. 

IBM ended up with 15 and Google with 12. A handful of the patents were co-owned.

Foreign companies benefit from Canada’s public funding, Hinton argued, and there are "no guardrails put on the ability for these foreign companies to basically pillage Canada's really good AI invention." 

Researchers can work at the AI institutes and foreign tech companies at the same time, Hinton said, charging that this is what allows the tech giants to take advantage.

The Canadian Institute for Advanced Research, which co-ordinates the government’s AI strategy, pushed back strongly on that assertion. 

Executive director Elissa Strome said a "small number of our researchers" have part-time employment in the private sector.

"Those private-sector organizations own the rights to the IP that is generated by those researchers," she said, but only when they're on the clock for those companies.

Strome said it's long-standing practice in Canadian research "that there are relationships around contract research with industry," and "a really strong firewall" is in place between IP generated via public funds at the AI institutes and that which is generated through private funds. 

She said Hinton's statistic on patents was inaccurate, but did not provide data to refute his findings.

She also argued that patents are not a good measure of commercialization, and "it’s the people that we're training in the AI ecosystem that actually hold the greatest value in AI, not patents."

When it comes to sponsorship agreements at Toronto's Vector, any IP created at the institute "belongs to Vector," a spokesperson said, adding it is not the primary employer for most of its researchers.

If academics don't have an opportunity to work for companies, they're more likely to leave altogether, Montreal's Mila said in a statement. It said the three institutes have turned around a "massive brain drain in AI in Canada" that existed prior to 2017.

The multi-billion-dollar investment in this year's budget seeks to further protect against that brain drain by beefing up Canadian infrastructure and computing power. 

The envelope includes a "relatively small" amount of money to help Canadian companies scale up, noted Paul Samson, president of the Centre for International Governance Innovation. 

Overall, the government is "doing the right thing" by ensuring that's part of the equation, he said. 

But people in the tech sector are skeptical. Bergen said companies were given little time to provide input.

"The government already had a top-down strategy that it wanted to implement … and didn't really care what CEOs and leaders of domestic firms were actually needing in order to be successful," he said. 

Nicole Janssen, co-CEO of AI company AltaML, raised the concern that the Canadian government might end up simply throwing money at American firms to move north. 

"What I'm trying to figure out is how the government thinks they're going to spend $2 billion on building computers without just handing that $2 billion to Microsoft," Janssen said.

The budget said the money would go towards both access to computational power and developing AI infrastructure that is Canadian-owned and located in Canada. 

A spokesperson for Industry Minister François-Philippe Champagne said more details would be provided in the coming weeks. 

Companies like Microsoft and Nvidia are already looking to Canada as a place to build computing infrastructure, Janssen said, due to factors like climate and relative political stability.

"We don't need to do anything to attract them."

A better approach, Janssen said, would see the government helping Canadian firms adopt AI more quickly — a gap her company has been trying to help fill. 

It takes AltaML an average of 18 months to start building an AI product in Canada, she said, compared to four months in the United States.

"We definitely do not have the ecosystem of companies that you would expect for the amount of talent that we have," she said.

There's real clout at Canada's AI institutes, with veterans Yoshua Bengio and Geoffrey Hinton heading up Mila and Vector, respectively. 

They and other elite researchers have "attracted students from all over the world to come study under them," said Janssen, and that's a big advantage for Canada, especially if it wants, as Trudeau said on the podcast, to lead in developing a more democratic AI. 

The prime minister said one of his biggest preoccupations is maximizing "the chance that it actually leads to better outcomes and better lives for everyone" instead of only benefiting those "with the deepest pockets."

Canada could be a leader in responsible AI, Janssen said.

"That is a title that is up for grabs," she said. "And no one has grabbed it yet."

This report by The Canadian Press was first published June 26, 2024.

 

Long-awaited Arctic port and road project restarts with regulatory filings

Bob Weber, The Canadian Press

A long-awaited project that would see an Arctic deepwater port and road connecting rich mineral resources to international shipping routes as well as offering the Navy another northern beachhead has been revived.

The proposed Grays Bay Port and Road, which has been a northern dream for more than a decade, has refiled an environmental assessment with regulatory authorities in Nunavut, restarting a process that has been stalled for years. 

The massive project on Canada's central Arctic coast in the middle of the Northwest Passage could open up crucial mineral resources, said Brendan Bell of the West Kitikmeot Resources Corp., which is leading the effort and is majority owned by the Kitikmeot Inuit Association, a birthright corporation created by the Nunavut Land Claim. 

"Every country is intent on securing a supply of critical minerals," Bell said. 

The project would include a deepwater port with two wharfs designed to load large vessels of the post-Panamax class and an adjacent small craft harbour for community use. It would also have an airstrip, tank farm, transloading facilities, utilities, maintenance shops, warehousing, accommodation, administrative offices and areas for ore concentrate storage and handling.

In its first phase, it would include a 230-kilometre all-weather road into the heart of the mineral-rich Slave Geological Province. That road would connect to ice roads to Yellowknife, making it the first road link from the central Arctic coast to Southern Canada.

There are at least three large deposits of copper, zinc, gold and silver that would be made economic by access to tidewater, said Bell. Many other deposits have been found in the vast region, which encompasses a large area of the central Arctic. 

"We've had a typical chicken-and-egg problem," Bell said. "World-class discoveries of high grade are made, but they haven't been expanded to understand the scale because there's no infrastructure.

"We believe with the new momentum behind the infrastructure you'll see a lot of expansion of those resources." 

Northern premiers have been calling for investment in such a project for years. They renewed that call at the recent meeting of Western premiers.

Bell said the need for commodities, such as copper, in an increasingly electrified world, along with Inuit buy-in for a project that could impact crucial caribou migration routes and the growing viability of shipping through Arctic waters are factors behind the project's revival. 

The Canadian Infrastructure Bank has contributed $3 million.

"It's never been truer that all levels of government, all the public and private sector and Inuit leadership all see critical need to invest in our northern infrastructure," said Ehren Cory, the bank's chief executive. 

Bell said there is no recent estimate on the project's cost, but he suggested it would be around $1 billion.

Even under a best-case scenario, the project is years away. Its environmental assessment is now before the Nunavut Planning Commission, with a review likely to be conducted by the Nunavut Impact Review Board. 

Bell said permits are likely to take until 2027, with construction beginning in 2030.

This report by The Canadian Press was first published June 26, 2024. 

 

Shell going ahead with Canadian carbon capture and storage projects

Amanda Stephenson, The Canadian Press

Shell Canada is going ahead with its Polaris carbon capture project in Alberta.

The company — the Canadian subsidiary of British multinational Shell PLC — announced Wednesday it has made a positive final investment decision on the project, which is designed to capture up to 650,000 tonnes of carbon dioxide annually from the Shell-owned Scotford refinery and chemicals complex near Edmonton.

That works out to approximately 40 per cent of Scotford's direct CO2 emissions from the refinery and 22 per cent of its emissions from the chemicals complex.

Shell did not disclose the dollar value of the Polaris project, but said it is expected to begin operations toward the end of 2028.

"It's a very good day, it's an exciting day for us," said Shell Canada president Susannah Pierce in an interview.

"Certainly for me as country chair of Canada, it's great to see this capital investment from Shell in Canada. Because as you know, I compete for capital in my portfolio, and I'm pleased that Shell has decided to put it here."

Shell also said Wednesday it will proceed with the related Atlas Carbon Storage Hub in partnership with ATCO EnPower. The first phase of Atlas, which will be connected to the Polaris project by a 22-kilometre pipeline, will provide permanent underground storage for CO2 captured by Polaris.

Polaris is Shell's second carbon capture and storage project in Canada. Its first, named Quest, was completed in late 2015 and is also located at the Scotford complex.

That project — which cost $1.3 billion to build — has captured and stored about nine million tonnes of CO2 from the Scotford upgrader since 2015, Shell said.

Shell's decision to greenlight the Polaris project comes just days after a new federal investment tax credit for carbon capture and storage received royal assent. 

That tax credit was first announced in 2022, but its finalization means that companies can now apply for and claim the credit to offset the capital costs of building carbon capture facilities.

"That was a critical component of the (Polaris) decision," Pierce said.

There has been a flurry of carbon capture proposals in Canada in recent years, though few have received a final investment decision. 

Carbon capture and storage, which involves capturing and compressing harmful CO2 emissions from industrial processes and then storing them safely underground, is viewed by many as the best way of decarbonizing heavy-polluting industries such as oil and gas and cement production.

But the technology is very expensive and corporations have proved reticent to invest in it without significant support from governments.

The largest proposed carbon capture project in Canada, a $16.5-billion proposal by a group of oilsands companies called the Pathways Alliance, has yet to receive a final investment decision.

Earlier this spring, Edmonton-based Capital Power Corp. cancelled plans for its proposed $2.4-billion carbon capture and storage project at its Genesee natural gas-fired power plant. Capital Power said while the project was technically feasible, the economics didn't work.

Pierce said every project is different, but in Shell's case, Polaris is a "key piece" of the company's overall decarbonization strategy.

"We have a commitment to decarbonize our Scotford facility, we have experience in CCS (carbon capture and storage) with our years of operating the Quest facility," she said.

"With the right combination of a fiscal framework as well as regulation, we were able to take a look at CCS compared to any of the other alternatives to meet our compliance obligations, and this one worked."

In addition to the federal investment tax credit, Pierce said the Polaris project can take advantage of a range of existing and proposed federal and provincial programs, regulations, and incentives. 

These include Alberta's carbon capture incentive program, the federal clean fuel regulations and the Alberta Technology Innovation and Emissions Reduction regulation which allows companies that have reduced emissions to generate credits that can be saved or sold to other emitters.

In a report Wednesday, global consultancy Wood Mackenzie said it projects carbon capture and storage will represent a US$196-billion investment opportunity worldwide over the next decade. 

About 70 per cent of that investment will take place in North America and Europe, Wood Mackenzie said. 

"The expected pace of CCUS deployment will be driven by the level of regulation and support in different countries," the report said, adding the U.S. and Canada have "robust" regulatory and funding mechanisms in place to drive implementation.

"Announced government funding specifically for CCUS across key countries – including the U.S., Canada, the U.K., Denmark and Australia — amounts to around US$80 billion," Wood Mackenzie said in its report.

"The U.S. leads funding with a 50 per cent share of the total, followed by the U.K. at 33 per cent and Canada at 10 per cent."

Federal Environment Minister Steven Guilbeault told reporters in Ottawa on Wednesday he expects carbon capture and storage to account for seven to eight per cent of Canada's overall emissions reduction efforts by 2030 — making it part of a "portfolio" of technologies that this country will need to deploy to achieve its international climate commitments.

“I’ve always said that carbon capture is one of many solutions to fight climate change," Guilbeault said.

"If you look at our emissions reduction plan, carbon capture will play a role, but it’s not a silver bullet.”

- With files from Alessia Passafiume in Ottawa

This report by The Canadian Press was first published June 26, 2024.

WORKERS CAPITAL

B.C. Investment Management earned 7.5% annual combined pension plan return

The Canadian Press

British Columbia Investment Management Corp. says it earned an annual combined pension plan return of 7.5 per cent for its latest year.

However, the result fell short of BCI's benchmark which was boosted by the strength of the largest tech stocks and posted an annual return of 11.6 per cent.

BCI chief executive Gordon Fyfe said the fund delivered "solid absolute results even through challenged markets this year.”

The fund said all of its asset classes generated positive returns except its real estate equity investments which faced sustained market headwinds.

The combined pension plan return represents the performance of BCI’s six largest pension clients by assets under management.

BCI had $250.4 billion in gross assets under management as of March 31.

This report by The Canadian Press was first published June 27, 2024.

Canada's largest pension fund is souring on emerging markets

Swetha Gopinath and Dinesh Nair, Bloomberg News

Canada Pension Plan Investment Board, one of the largest investment firms globally, is seeing fewer opportunities to put money to work in emerging markets.

“Our emerging markets investments have evolved over time,” CPPIB Chief Executive Officer John Graham said Wednesday in a Bloomberg interview in London, adding that the firm has reduced its exposure to the region. “The opportunity set is not as big as it once was.”

The investment firm’s target strategic portfolio weighting for emerging markets is 16 per cent for the year, according to its latest annual report, down from 22 per cent last year. 

“When it comes to emerging markets, we want to be in the larger markets that have scale,” he said, pointing to India.

The fund, like some of Canada’s largest institutional investors has been adjusting its strategy to neighboring China, amid rising economic and policy risks and its deteriorating relationship with the U.S. and other countries. 

“Geopolitics is obviously a consideration when you look at investments in any market, but we are invested in China,” he said. It is the second largest economy in the world and you need to have the experience of being in such a large market if you are a global investor.”

Graham also spoke to Bloomberg Television on Wednesday, saying he doesn’t see an asset class worldwide that’s totally free of risk for investors like his organization.

“One theme as we look around the world and look across asset classes is there’s probably no safe harbour,” he said in the Bloomberg Television interview. “I think you can get a little worried about almost every asset class and geography and worry about it, but, as a long-term investor, part of our thesis is to develop a long-term portfolio-construction approach.”

The pension plan ended its last fiscal year with $632.3 billion of assets with an eight per cent return. The fund recorded a five per cent loss on its real estate holdings, blaming high interest rates and work-from-home trends that have damaged the value of office properties globally. 

“Our real estate’s been flat let’s say over five years, but you’ve got to unpick it,” Graham said. “And we’ve certainly have taken some hits in office, specifically in North America, but that has been offset partially by our Asia-Pacific portfolio, partially offset by logistics, by data centres, which have done reasonably well.”

The fund has been optimizing its portfolio across strategies, Graham said, with a view to redeploying money into investments that can generate higher returns. 

Americans' pandemic savings are gone - and the economy is bracing for impact

Amara Omeokwe and Laura Curtis, Bloomberg News   

Jun 27, 2024

The pandemic savings cushions that helped Americans weather high prices in recent years have worn through, contributing to a loss of consumer firepower that’s rippling through the U.S. economy. 

Delinquencies are rising. Executives are flagging caution among shoppers in recent earnings calls, and retail sales barely increased in May after falling the month prior. Economists forecast solid inflation-adjusted consumer spending in data out Friday, helped by lower gasoline prices, but that would follow an outright decline in April.

The resilience of American consumers — and their willingness to spend despite rising prices and high borrowing costs — has been a pillar of the unwavering strength of the U.S. economy in recent years. A healthy labour market has played a key role, but so has the roughly US$2 trillion in excess savings Americans accumulated during the Covid-19 pandemic. 

Those excess savings have been fully depleted as of March, according to the U.S. Federal Reserve Bank of San Francisco, heightening concerns about the durability of consumer spending. 

“That excess cushion that households were able to fall back on in the immediate aftermath of the pandemic is no longer available for the most part,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets LLC. “And so their fortunes are basically tied to their current income, which is inevitably a function of the labour market.” 

Employers added 272,000 jobs in May, surpassing all economists’ forecasts, and layoffs are low. But the pace of hiring has cooled, and the unemployment rate has begun to edge higher. 

For now, that resilient labour market is keeping consumers afloat and giving the Fed the space to keep interest rates high to tame inflation, and economists say household balance sheets overall are healthy. But policymakers, including Fed Governor Lisa Cook earlier this week, acknowledge the growing financial strain in some pockets of the economy. 

“The pullback in consumption is all a part of the Fed’s plan,” said Dana Peterson, chief economist at the Conference Board. “But it’s difficult to calibrate that and there are concerns that maybe consumer spending shrinks by too much.”

U.S. household debt has reached a record and more Americans are falling behind on their credit card payments, according to data from the New York Fed. A third of households in a recent U.S. Census Bureau survey reported it was somewhat or very difficult to pay for usual household expenses in the week prior, and the savings rate has fallen.  

Some retailers are also warning about changes in consumer behavior. Target Corp.’s chief growth officer Christina Hennington said consumer debt levels are among the reasons the company has a cautious near-term growth outlook. Meanwhile, the chief financial officer at Walmart Inc., John David Rainey, flagged shoppers are spending more of their paychecks on necessities and less on general merchandise. 

Depleted pandemic savings

Joseph Lewis, of Brockton, Massachusetts, banked about $15,000 in new savings by late 2021 due to the pandemic’s effects. Not only was he able to save on gas and parking but also benefited from the government’s pause on student loan payments.

That money helped pay for repairs on the home Lewis, 33, bought with his girlfriend in 2022 and finance growing everyday expenses like groceries. But now, with those savings largely spent, he finds himself pulling back where he can and looking for ways to save money — including trailing behind his 6-year-old twins at home, reminding them to turn off the lights behind them. 

“We’re in a space where we have to be financially creative in terms of really figuring out what it is you can do without and even what it is that you can perhaps do on your own,” said Lewis, who works as the associate director of an academic program for high schoolers.

It doesn’t help that borrowing money isn’t likely to get cheaper anytime soon. Fed officials have signaled they plan to keep interest rates at current levels, a more than two-decade high, until they gain more confidence inflation is continuing to cool.

“Consumers might be continuing to spend, but it’s taking a toll,” said Tim Quinlan, a senior economist at Wells Fargo & Co. Americans’ non-mortgage interest payments — such as for credit cards and auto loans — as a share of their disposable income was 2.4 per cent in April, near the highest levels since 2008, according to Quinlan’s analysis of Commerce Department data. 

“The cost of carrying that debt is taking a bite out of people’s incomes in a way that it has not since the financial crisis,” Quinlan said. He expects consumer spending growth to slow in the second half of 2024. 

Still, as the San Francisco Fed researchers acknowledge in their research, estimates of how much pandemic-era savings remain in Americans’ pockets — and the potential impact on spending — carry uncertainty because economists use varying methods of calculation. 

In fact, some Americans have seen their wealth grow substantially thanks to a surge in home values in recent years and record-high stock prices. Continued spending by these individuals could bolster consumer outlays in the aggregate, even if others are forced to dial back spending.

"We just about doubled our retirement from before the pandemic," said Geoff Olson, a 64-year-old robotics engineer who lives in California’s Bay Area. "That was a combination of us putting in more money, and we just did really well in the stock market."

 

Canada finds it's cheaper to ship oil via stop in California

Robert Tuttle, Bloomberg News  

Jun 27, 2024

Canada’s newest oil pipeline has turbo-charged exports of the country’s heavy crude to Asia and a diversion through California is making for a longer but potentially cheaper journey.

Close to 3 million barrels have been shipped off Vancouver for China or India since the expanded Trans Mountain pipeline began operating in May, almost tripling the capacity of the sole system linking Alberta to a Canadian port. More than 55 per cent of those volumes have first journeyed south to Southern California where the crude was transferred onto very large crude carriers, or VLCCs, according to Vortexa ship tracking data. 

The transfers have offset one of the key disadvantages of exporting Canadian crude off the West Coast versus the U.S. Gulf: the port of Vancouver can only accommodate Aframax-size tankers or smaller, which hold less than half of what VLCCs hold. As such, shipping directly from Western Canada to distant markets would typically cost close to twice as much per barrel per day than on VLCCs, according to a ship broker familiar with rates who asked for anonymity because he is not authorized to discuss the information.

However, the diversion to California has lengthened the time of the journey to Asia, reducing a key advantage of exporting Canadian crude off the West Coast versus the US Gulf.

The practice is expected to become more common as Aframax tankers are redeployed for making shorter voyages, the broker said. 

Another advantage of transferring the oil onto VLCCs is that shippers can simultaneously send other grades of crude from other regions of Americas. For example, the Eagle Varona, which left for China earlier this month, is carrying two Canadian crude grades, Cold Lake and Access Western Blend, plus Castilla crude from Colombia, according to Vortexa. 

A record 7 million barrels-plus of oil, mostly Cold Lake, have been shipped off Vancouver this month, the first full month of operations for the 890,000 barrel-a-day Trans Mountain system. The U.S. West Coast, particularly Los Angeles, has been the biggest recipient so far in June with 3.9 million barrels, followed by China, India and Ecuador, according to Vortexa data.

Lundin weighs sale of zinc mines in Sweden and Portugal

Jacob Lorinc, Archie Hunter and Vinicy Chan, Bloomberg News Jun 27, 2024

Lundin Mining Corp. is considering a potential sale of two European zinc mines as the Canadian metals producer turns its focus to copper in Latin America, according to people familiar with the matter.

Vancouver-based Lundin is gauging interest in its Zinkgruvan mine in Sweden and Neves-Corvo mine in Portugal, the people said, asking not to be identified discussing private information. Any divestment would help raise funds for further investments in a suite of copper assets in Chile and Argentina.

Deliberations are at an early stage and there’s no certainty Lundin will proceed with a sale, the people said.

The European mines, which are Lundin’s oldest assets, generated about 19 per cent of its revenue last year. Zinkgruvan, an underground mine southwest of Stockholm that has operated continuously since 1857, churned out 76,349 tons of zinc last year, according to the company. Neves-Corvo produced 108,812 tons of zinc as well as 33,823 tons of copper. 

The firm is meanwhile pressing ahead on projects in South America. Its Josemaria project in Argentina, a vast copper and gold deposit in the Andes, will cost about US$5 billion to build into a mine, according to Royal Bank of Canada. On Tuesday, it increased its stake in one of its Chilean copper mines, Caserones, from 51 per cent to 70 per cent in a $350 million deal.  

The company has undergone a series of changes since the death of Swedish-Canadian founder Lukas Henrik Lundin in 2022. The firm relocated its headquarters from Toronto to Vancouver last year, prompting a wave of leadership changes, and Lundin’s son Jack Lundin took over as chief executive officer in December. 

The company owns three already-operating copper mines in South America — two in Chile and one in Brazil. 

“We have a strong balance sheet today, and we are not in a position where we need to divest out of any of our assets in our portfolio,” said Jack Lundin, who declined to comment directly on potential European asset sales in a Tuesday interview. 

“We’re not required to make a sale to make our ambitions in South America a reality.”

The world’s biggest mining companies are all seeking to expand in copper, in anticipation of rising prices as demand for clean power and data centers is forecast to outstrip supply in future years. 

Zinc prices have similarly rallied this year on the back of constraints on mine supply, though the long-term outlook is clouded by the metal’s heavy exposure to the downtrodden construction sector. 

Lundin has received unsolicited offers for Neves-Corvo before, including one that valued the operation at around $1 billion, according to a person familiar with the matter.