By Design or Luck, Saskatchewan is Bucking the RecessionBy Joanne Costin
Article Date: 07-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.
Region-specific resources aside, some lessons for survival universally apply.
Move over gloom and doom – a bright spot is shining in the market, and it’s called Saskatchewan. In most years, 1.6 percent growth won’t get you noticed, but in 2009, it makes this Canadian province an economic wonder. In fact, things were so good in 2008, that the provincial government not only cut taxes, but also increased infrastructure investment and balanced the books.
Covering an area of 251,000 square miles, the Saskatchewan province is slightly smaller than the state of Texas, and not densely populated. Just one million people call Saskatchewan home. Saskatchewan is rich in natural resources, obtaining 95 percent of its output from farming, livestock, oil and gas, potash, uranium and wood.
So why is Saskatchewan the rising star of Canada and the only province that the Canadian Conference Board predicted would grow in 2009? And how did Saskatchewan manage to outperform all other provinces in 2008 for exports, retail sales, wholesale trade, building permits and capital investment?
Potash and Uranium in Demand
Part of the answer lies in potash or potassium chloride. Used in the production of fertilizer, the potash market has exploded in the last decade due to a growing population and increased demand for food and feed. Increasing incomes in emerging markets, improving diets and fewer acres of farmable land are also factors.
“We export the world over,” said Michael Fougere, president of the Saskatchewan Construction Association. China and India represent the biggest markets for Canadian potash. Saskatchewan has nearly two-thirds of the world’s recoverable potash reserves.
Uranium is another reason for growth. Saskatchewan produces about 33 percent of the world’s uranium. With a global focus on nongreenhouse gas-producing energy sources, nuclear power plants have emerged as a good alternative to fossil fuels. As of March 9, 2009, the U.S. Nuclear Regulatory Commission had received applications for permission to construct 26 new nuclear power reactors.
Strong Agricultural Markets
Agricultural markets in Saskatchewan are also doing well, according to Timothy Kramer, president and CEO of Kramer Ltd., the Saskatchewan Caterpillar dealer, who also serves the agricultural market. “Our farm market has divested itself of the grains that go through The Wheat Board and have gone to cash crops like canola, fava beans, peas and lentils,“ said Kramer. “A huge portion of the lentils for the Asian market comes out of Saskatchewan.”
Oil and Gas Slumps But Carbon Capture Emerges
Saskatchewan has not been immune to the worldwide recession and falling oil prices. It is the second largest oil producer in Canada, behind Alberta. Yet Saskatchewan has something going for it that Alberta does not: The territory has emerged as a leader in the field of carbon capture and storage, a process that is looked at as one of the key technologies in the effort to reduce CO2 emissions and global warming. In May of 2009, with the backing of both the Canadian and U.S. governments, Saskatchewan Premier Brad Wall and Montana Governor Brian Schweitzer announced they were joining forces on carbon capture and storage. A new, $270 million program will develop new technologies to capture carbon from coal and gas-fired power generation and store it deep underground.
The Role of Government
The Saskatchewan government believes its policies have contributed to the success of the province. According to Fougere, the new regime launched Enterprise Saskatchewan,
an agency designed to remove government from economic development and make it less politicized.
“I think it has been pretty successful,” said Fougere. “We are getting investment in potash and uranium and diamonds – all those areas we have strength in. That is a positive for us.”
Tax cuts are another tool in the Provincial arsenal. In October of 2008, Premier Wall tapped into the government’s estimated $3 billion surplus and delivered a tax reduction of historic proportions – one that saves a family of four more than $1,300 per year.
Ray Korpan, partner in the independent Korpan Tractor and Parts, views the new government’s policies as a positive for business.
“The provincial government recognizes the fact that this geographic area is made up of small business,” said Korpan. “And instead of taxing business they are promoting business.”
The government is also stimulating the economy by spending money to improve infrastructure.
Fougere reports that the province of Saskatchewan invested $1 billion dollars in infrastructure in 2008 and another $1.5 billion in 2009-10. Until just recently, no federal monies were budgeted for highways, so all investment had to come from the province.
“For our province of a million people that is a significant investment,” said Fougere. “Updated highways and infrastructure, roads, new schools, hospitals, and investments in research and development – those are the kinds of things that will stand us in good stead when the economy gets moving again.”
Kramer takes a different view on the role of government in Saskatchewan’s success. “I don’t think it makes any difference who is in office,” said Kramer. I think it’s just timing. I think it is just being in the right place at the right time.”
Dealers Using Slowdown to their Advantage
While recognizing they are far better off than most of their peers, dealers in the area have felt the effects of the global recession.
“This year is reality check time,” said Korpan. “Since fall 2008 there has been sand thrown on the tracks and everything skidded down. People are putting their hands very deeply into their pockets.”
“There is no doubt there has been a slowdown,” agreed Fougere, “but there have been no projects cancelled in Saskatchewan.”
Major projects moving ahead include a $1.9 billion expansion of an oil refinery in Regina and several potash mines. Still, with the world in recession, an export-driven economy like Saskatchewan will definitely feel the pinch. Potash producers have already curtailed production to limit supply and keep prices high.
Lower equipment prices at a recent auction are a sign of abundant supply. But Kramer puts the recent downturn into perspective: “When you look at the overall average of what has been going on for the last 10 or 20 years, we are going to settle down at a high level, well above our historic average.”
Milder Credit Impact
According to a recent report from Bloomberg News, Canadian banks have remained profitable and outperformed their U.S. peers because of tighter government restrictions on lending and capital requirements. Four Canadian banks are now listed in the top 10 for North America.
As a result, contractors and dealers in Saskatchewan haven’t seen the same devastating credit crunch as their U.S. counterparts.
“There is a credit issue, but it hasn’t dried up completely,” said Fougere.
Korpan expects that credit restrictions will continue and that marginal contractors who are underfunded will fail. “We have seen fleet reductions next door in Alberta.”
According to Kramer, a lack of credit hasn’t been hurting equipment sales. “Everything we do is very conservative,” explained Kramer. “Most of our people, if they don’t have cash, they won’t pay for it. They won’t buy it.”
Word of a good market spreads quickly in a down economy and the growth in Saskatchewan has attracted contractors from the U.S. and other provinces.
“Large American contractors as well as contractors from other provinces have come and taken large earth work contracts from resident contractors, which causes excess capacity,” said Korpan. “There are all kinds of pressures on the local contractors, by virtue of the fact that other people are coming in the market and undermining the pricing.”
The Positive Side of a Slowdown
Both Kramer and Korpan will try to use the economic downturn to their advantage. For example, Kramer is looking at expanding his facility.
“I always buy my lawnmower at Christmas time and I buy my snow blower in the middle of the summer,” said Kramer. “That is what I am doing right now. It is the time to do it.”
Korpan says the slowdown provides the perfect opportunity to hire qualified people – something they had difficulty with in 2008.
“We haven’t reduced staff at all. In fact, we are looking for more people as they are displaced. Getting a stable workforce has always been a building situation for us.”
Until the recent drop in oil prices, it has been hard for dealers to compete with oil and gas companies offering higher wages. “Any nut who had a hammer was going to Fort McMurray and making $55 per hour. But they were paying $53 per hour to live,” said Kramer.
“Traditionally one of our largest exports was people,” said Korpan. “But that is changing. The population is increasing, due to market opportunities and active recruiting.
Last year, Kramer Ltd. used a rolling billboard on a semi truck to promote the benefits of living in Saskatchewan. Saskatchewan businesses and government have also taken an active role in recruiting, attending job fairs in Ontario and Toronto. In 2008, the province grew by more than 15,000 people, with more than one-third of this growth coming from interprovincial migration.
Dumb Luck or Smart Design?
So if you can’t produce potash, diamonds or oil and gas, is there anything to learn from the story of Saskatchewan? Three lessons do emerge from the region’s model: First, a diverse economy will always be more recession-resistant than one that is highly dependent on one industry, and the same is true for any equipment distributor’s business. Think about how you might diversify your business to protect yourself from the inevitable cycles of the construction industry.
Second, when it comes to finance, conservative lending – and borrowing – wins out in the long run. Don’t borrow more than you can afford, sources advise, and don’t lend to buyers who can’t afford the payments. In the U.S., foreclosure activity is concentrated in areas where real estate speculation was rampant. California alone accounted for 27 percent of foreclosures in 2008, followed by Florida. Just five states represented 50 percent of foreclosures in 2008.
Third, looking ahead to the future is always a good strategy. In government or business, forward-thinking and planning helps dealers identify new opportunities and threats. Every market has winners and losers, and the winners are usually those who see what’s coming. But of course, a little dumb luck doesn’t hurt either.
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