Canada Plays China Card
Trade friction and energy leverage has led to an unprecedented Canadian policy of ?speak loudly and carry a big piece of lumber? policy towards the United states of america.
The long running dispute more than American tariffs on Canadian lumber escalated to the point final week that Canadian Prime Minister Paul Martin indirectly linked settlement with continued U.S. access to Canadian energy supplies. Meanwhile, Canadian Natural Resources Minister John McCallum was off to China to meet with Chinese oil, mining and forestry officials.
This can be severe enterprise. Part of the 1994 NAFTA Cost-free Trade Agreement assured that Canada would remain the favored supplier towards the U.S. It might surprise you to learn that Canada supplies 17% of U.S. oil imports, 16% of our natural gas and nearly all of our hydroelectric power. The Canadian government owns the vast majority in the country?s energy resources and Canada exports more than 1.5 million barrels each day to America representing 8% of U.S. consumption.
China?s Lengthening Reach
Meanwhile, China?s aggressive moves in Canada?s energy sector are raising eyebrows in Washington. Chinese government has earmarked $100 billion for overseas acquisitions of oil and gas. The Chinese are going on a purchasing spree investing in Canadian power companies and lately plunked down $2 billion to create a thousand mile pipeline from Alberta tar sands to port on the west coast and onward to Beijing and Shanghai. Whilst the oil reserve numbers for Saudi Arabia are under scrutiny, Canada has recoverable reserves of roughly 175 million barrels. Much of it really is in oil sand that is certainly processed profitably at oil rates of $20 or larger and T. Boone Pickens thinks that Canada?s oil sand production could reach 6 million barrels every day
You’ll find now about 1 million ethnic Chinese residing in Canada and China is now Canada?s second largest trading partner. Final month, Chinese President Hu Jintao visited Canada and declared that the two countries had upgraded their relations to a ?strategic partnership?.
The US?s Waning Grasp
This Chinese-Canadian power play puts America in genuine jam. You may write a book in regards to the extended simmering lumber dispute but a Nafta panel not too long ago ordered the U.S. to return $5 billion of collected tariffs to Canadian lumber companies. Relations with Canada were also weakened earlier this year when Canada announced that it would not contribute to the American-led missile defense system despite the fact that 90% of Canadian citizens live inside 100 mile with the border between the two countries and Americans obtain 85% of total Canadian exports.
What?s going on? A part of the answer is the fact that the vast majority of Canadians oppose the policies from the Bush Administration. The situation is sensitive in numerous locations across Canada which can be extremely dependent on the lumber sector and Mr. Martin and his celebration are preparing for national elections expected early subsequent year. It is often a vote getter to poke a stick inside the eye in the elephant to the south.
How to Play
Whilst Canadian-American relations have observed much better days, the energy boom has certainly been advantageous to investors in Canadian markets. The Canada iShare (EWC) tracks the MSCI Canada Index which has 40% exposure to Canada?s power and supplies sector. While the S&P index is up only 3%, the Canada iShare is up 16.6% year to date and 28.8% over the past twelve months.
Speaking of timber, it truly is smart to have some timber exposure in your portfolio and I have had timber REIT Plum Creek Timber (PCL) in our core portfolio for more than two years. Here is why I like it. First, timber is a great inflation hedge and over the past 100 years has risen 3% above the average annual inflation rate. Secondly, timber is not correlated to stocks or bonds and thus is a great ?shock absorber? to cushion your portfolio when shares are declining. During the 1970s bear market, timber rose in value whilst stocks went down. Thirdly, from 1973-2000 timber yielded an average annual return of 15%. Final but not least, timber valuations are attractive after some declines during 2000-2002 especially relative to genuine estate costs. During 2004 Plum Creek was up 23% and this year it has traded among $34 and $39 finishing last week just more than $35 with an attractive dividend yield of 4.3%.
It behooves the U.S. to negotiate a settlement to the lumber dispute as soon as possible and lock up Canadian energy sources before the Chinese get the jump on us. Investors can?t do much about improving Canadian-American relations but they can improve their portfolios by adding exposure to timber as well as to Canada as both an energy and China play.
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