Read about Canada's worst recession since the 1930s and the overcapatilization that exists in the world today. Inflation is not in the cards for some time.
A sea of slack
Idled drilling rigs in Alberta. Half-empty planes. Hundreds of anchored cargo ships. As Canada's economy pulls out of the recession, it is hardly full steam ahead. A troubling gap between supply and demand is keeping the recovery at bay.
Hundreds of out-of-operation container ships and oil tankers are moored in international waters off the coast of Malaysia.
David Ebner and Brent Jang
Vancouver, Toronto — Globe and Mail Update
Forty-five minutes before the takeoff of Flight 475 at Toronto's Pearson International Airport, flight attendant Braunwyn Simpson slips on latex gloves as she prepares to dig out the garbage tucked inside the plane's seat pockets.
Ms. Simpson's job is easier these days.
There are fewer napkins, empty wrappers and plastic cups to clean out because WestJet Airlines Ltd.'s planes aren't as full as they used to be.
For this trip to Winnipeg, 93 passengers board the 136-seat plane – nearly one-third empty.
“If there were more bums in the seats, the company would make more money and that would be good for our profit-sharing cheques,” Ms. Simpson says.
The empty seats on Flight 475 are just one example of a problem plaguing the Canadian economy as it struggles to recover from the most severe recession since the 1930s: overcapacity.
Widespread industrial overcapacity in Canada and abroad – what Bank of Canada Governor Mark Carney calls slack – weighs like an anvil on economic growth in these critical early days of the fragile rebound.
Slack is a typical headache of recession hangovers.
But as companies across the country struggle to dig themselves out of the slump, indicators point to an overcapacity legacy that is much deeper and more widespread than those of past downturns.
Mr. Carney warned last week of “a very large gap” between the economy's supply and demand, and said “it will take sustained private demand growth to return our economy to its productive potential.”
From emptier airplanes and office towers to idled factories, anchored cargo ships and sawmills running at half capacity, the mismatch between supply and demand means the economy faces long-term headwinds as it strains to gain pace.
Slack stands in the way of what really makes an economy move – investment in new economic capacity such as planes and the latest manufacturing equipment. And this crucial spending provides a key ingredient needed to bring the economy back to life: jobs.
As the recovery builds, joblessness remains one of the biggest worries. Laid-off workers are hard-pressed to find new jobs without taking cuts in pay and benefits. Canada's economy created more than 30,000 jobs in September, Statistics Canada reported yesterday. But the gain was due to public sector hiring, while private sector employers shed more than 17,000 jobs. The unemployment rate stands at a troublesome 8.4 per cent.
At WestJet's Toronto Pearson Airport operations, the company will make do with its current staff of 300. Standing outside Gate C24, WestJet's Pearson general manager, Paul Moreira, says his last hire was three months ago. Though he hopes to add 40 people next year if traffic improves, the former baggage handler knows from working through the painful recession in the early 1980s that “you can't take anything for granted.”
The Calgary airline had planned to add 40 new Boeing 737s by 2013. Instead, it has postponed a quarter of those aircraft until 2014 and 2015.
Finance officials are suddenly paying close attention to once-arcane readings on capacity utilization, which measure the amount of available industrial capacity in use. Today's low levels tell a foreboding tale.
Currently at 67.4 per cent, off a harrowing 12 percentage points from 12 months earlier, the current capacity utilization rate is stuck well below the bottom levels of past downturns: 82.6 per cent in 2001, 77.7 per cent in 1991 and 70.6 per cent in 1982. The lower the utilization rate was at the time, the longer the recoveries from those pullbacks tended to take. After the 1982 bottom, business investment in such assets as new machinery and computers didn't bounce back with vigour until the spring and summer of 1985 – almost three years later.
With overcapacity and little hiring, “we're not going to have a booming recovery. It will take time,” said Jock Finlayson, executive vice-president of the Business Council of British Columbia. “It's not suddenly going to be a red-hot economy in the middle of 2010.”
Gas glut idles rigs
The economy's excesses can be found nationwide, from the auto parts shops of Ontario to the natural gas fields of Alberta. Bulging North American inventories of natural gas have sent prices tumbling.
“I'd like to talk to people who are saying the recession is over and get them to explain that to me,” says Duane Mather, president of Nabors Industries Ltd.'s Canadian arm, the country's third-largest driller. “Let them go talk to the 160,000 people who are unemployed in Alberta.”
Nabors, with 86 rigs, has idle equipment scattered around Western Canada, in farmer's fields, trucking yards and at its industrial hub in Nisku, south of Edmonton. Only 18 rigs are working, far less than normal for this time of year.
The industry will be “damn lucky” if half of the 840 rigs are working this winter, the industry's busiest time, Mr. Mather says. In good times, almost every rig is tapping the frozen ground in the foothills of the Rocky Mountains.
Though some old rigs have been put down for good, the metal sold for scrap, and others have been moved to the United States or overseas, as many as 200 more have to disappear to rebalance with demand, Mr. Mather calculates. That will take time.
Other industries are waiting for the economy to pick up the slack. Canada's battered manufacturers have slashed jobs by the tens of thousands while idling plants. Even if the economy improves, it doesn't mean a surge in new jobs.
“Just because the recession is over, it doesn't mean we're going to be anywhere near where we were before,” says Mel Svendsen, co-owner and chief executive officer of Calgary manufacturer Standen's Ltd., which makes agriculture equipment components and truck parts such as springs used in suspensions.
Standen's has avoided layoffs for its 500 workers partly by absorbing the blow in anticipation of better times, and by a job-sharing program that keeps staff working four days a week instead of five.
In 2006, Standen's invested in new precision gear to make more exact and lighter products. It was humming near full capacity when the economy was chugging along, but today, it's “well below” that, Mr. Svendsen says.
Forestry: hard knocks
Even as the recovery takes root, some long-suffering industries, such as forestry, provide a dark harbinger of what the broader economy faces from persistent overcapacity.
The business of chopping down trees and turning the wood into beams and trusses to build houses has been in recession for more than three years. At the U.S. housing bubble's apex, North American sawmills pumped out 75 billion board feet of product.
Industry capacity is at 70 billion board feet, but this year's output is set to barely surpass 40 billion board feet, with many mills idled.
Two hours northwest of Prince George in B.C.'s Central Interior, a sawmill in Fort St. James, home to 1,355, provided a third of the town's jobs before it was shuttered in the fall of 2007.
In March, it reopened under the new ownership of upstart forestry firm Conifex Inc.
But the facility is running at half capacity – 155 million board feet – on one shift with 171 employees, Ken Shields, chief executive officer of Conifex, says from his Vancouver office.
Operating at a loss, like the rest of the industry, Mr. Shields has no plans to add a second shift for at least a year. That second shift would bring another 80 jobs back to Fort St. James.
Shipping traffic sinks
One of the sectors hardest hit by overcapacity is the shipping industry. In the harbours of Vancouver and Prince Rupert on the West Coast, container traffic has fallen precipitously. The new terminal at Prince Rupert is at less than half its capacity and a nearly complete expansion at Delta, south of Vancouver, will leave Port Metro Vancouver about half idle.
“Let's remember the capacity was being built for where we were back in 2007,” says Morley Strachan, a vice-president of sales at TSI Terminal Systems Inc., which is expanding in Delta and is the largest container operator in the region. It was bought by the Ontario Teachers' Pension Plan in early 2007.
The completion of TSI's current project was to be followed by a much-larger $2-billion expansion led by AP Moller-Maersk AS. An original completion date of 2016 is now pencilled in for 2020.
Same thing in Prince Rupert. A $650-million second phase was supposed to come quickly after the opening of the container terminal. The plan is now stuck in limbo.
Other port plans presented as certain are now back in the planning stage. At the height of the potash boom in June, 2008, export consortium Canpotex Ltd. announced a $500-million expansion with fanfare – a new terminal at Prince Rupert and more capacity in Vancouver.
But with the collapse of the potash market amid an excess of supply, the scope of expansion is being pulled back. Instead of Vancouver and Prince Rupert, it's going to be one or the other.
“You're not going to roll out [major] new terminal capacity until there's more of a market balance,” says Jon Somers, vice-president of planning and development at Saskatoon-based Canpotex.
Shippers have the same problem. Oslo-based shipbroker RS Platou warns of “massive overcapacity” looming. For Beijing-based container shipping magnate Cosco Group, the only good news is things aren't getting worse. The company owns and operates 550 ships. It's the world's biggest bulk shipper – hauling products like grains and coal – and is among the top container liners, moving goods among 1,300 ports in 160 countries.
“We anticipate a very slow recovery,” says Dave Bedwell, an executive vice-president at Cosco Canada.
Rates reflect the shipping slack. Costs for Suezmax oil tankers not on longer-term contracts crashed to $24,633 a day in the second quarter, down sharply from $42,188 in the first quarter, and roughly a third of the $72,169 a year ago before the Great Recession, according to Teekay Corp. Some ship operators are barely covering operating costs.
The shipping story extends to the railways that connect with ports and all stops in between. Carload traffic at Canadian National Railway Co. and Canadian Pacific Railway Ltd. has fallen more than 20 per cent in the first nine months of this year, leaving a lot of empty cars in yards across Canada.
Business owners are welcoming every uptick in demand as the economy inches forward, but many say it won't lead to expansion or hiring any time soon.
At Briggs & Little Woolen Mill Ltd., founded in 1857, sales of its traditional knitting wools rose 15 per cent in the past year as recession-hit customers turned to knitting for a low-cost pastime, co-owner John Little says from his facility in the village of Harvey, N.B.
The mill can process about 250,000 pounds of raw wool annually, but Mr. Little says he still has 20 per cent spare capacity. The operation employs 24 people and no hiring or expansion is planned.
“Whether the recession is over or not, in terms of expansion or anything like that, in the yarn business cycle, you can't just increase on an upturn.”
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