August 2011

MAC Economic Commentary

Where our wealth comes from

By Paul Stothart

There are many definitions of the term “wealth.” From an economics perspective, wealth can be seen as the accumulation of all goods and services with monetary, exchangeable or productive value. Adam Smith, author of The Wealth of Nations, described wealth as "the annual produce of the land and labour of a society." In a similar vein, wealth refers to some accumulation of resources, whether abundant or not, while richness refers to an abundance of such resources. A wealthy or rich individual, community or nation thus has more resources than a poor or destitute one.

An important source of wealth throughout Canadian history, arguably the most important source, has been our abundance of natural resources. In this sense, the level of wealth reflects our technological ability to discover, assess, extract, concentrate and process these resources into a useable form and to move them to users in an efficient manner. In the mining sphere, wealth is generated through highly sophisticated processes, including the conversion of rock into 99.99 per cent pure metal like copper or nickel. Such products are then valued and traded each day through global exchanges.

The ability to create wealth has positioned the mining industry among the most strategic of Canadian industry sectors. Other factors contribute to the industry’s importance, for example, being the backbone of our stock exchanges, being a leading employer of Aboriginal Canadians and providing the core ingredients to clean energy technologies. Overall, though, it is the industry’s ability to create wealth for Canadians that is the most fundamental variable and from which all other benefits flow.

In the past decade, the level of wealth created by the Canadian mining industry has become increasingly linked to the emergence of the Chinese economy. China has had virtually uninterrupted double-digit annual growth for a period covering three decades, predicated around building its infrastructure and becoming the “world’s manufacturer.” This growth, particularly in the past decade, has transformed China into the world’s leading driver of global mineral prices. Where the country consumed only five per cent of the world’s metals in the 1980s, it now consumes over 30 per cent.

The appended table depicts the evolution of key world mineral prices over the past decade. As can be seen, the price of copper, for example, has risen from 82 cents per pound in 2000 to $4.15 at present – an increase of 406 per cent; nickel rose by 168 per cent and uranium by 594 per cent. Accumulated inflation in Canada or the United States during this period totalled around 25 per cent. In this sense, these mineral price increases are in the range of four to 25 times larger than inflation, depending on the commodity. Not shown on this table, although also a critically important mineral for Canada, is the world crude oil price, which has increased from the $30 per barrel range in 2000 to $100 at present – an increase that is 10 times that of inflation.

While the United States remains the largest market for Canadian minerals, the transactions are occurring at increasing global prices largely driven by China. The effect of these price increases is seen in many ways, including:

  • The growth in relevant company stock prices and in the values of pension funds holding these stocks. 
  • An increase in corporate tax revenues and royalty payments flowing from the minerals industry to Canadian governments. 
  • The relatively high wage levels paid to employees within the Canadian minerals industry (almost 50 per cent higher than average wages within the manufacturing sector, for example). 
  • The benefits flowing from the sector through to the many thousand companies that supply goods and services, including important and visible companies such as CN and CP Rail. 
  • The regional economic development seen in areas such as Fort McMurray and, more recently, the iron ore regions of Quebec and Newfoundland and Labrador, and the metallurgical coal region in northeastern British Columbia. Indications are that many multi-
    billion dollar scale mining investments will be seen in various Canadian regions in the decades to come.

As I detailed in an earlier column, the federal department of Natural Resources Canada has recently been examining value-chain and competitiveness aspects of the Canadian minerals and metals industry. One of their interesting findings has been that in copper value-chain analysis, Canadian operations show a strong comparative advantage in the earliest stages such as concentrate, refined copper, pipe and wire, and progressively less comparative advantage in the downstream stages of machine shops, semiconductors and generators.

In terms of value-added per dollar revenue (or per employee), the greatest wealth is generated at the extraction to concentrate stage, with progressively lower levels of wealth generated from the smelting, semi-fabrication and fabrication stages. Thus, while Canadian policy-makers and businesses can certainly aim to undertake the greatest possible levels of value-added within Canada, we should not overlook the fact that the greatest wealth is actually created at some of the earliest stages. And, as Adam Smith would note, our abundance of natural resources, together with the “skill and dexterity” with which we apply our labour, makes us all wealthier.

Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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