August 2010

MAC Economic Commentary

The competitiveness of mineral processing in Canada

By P. Stothart

Throughout our history, there has been a call for greater value-added in Canadian resource production. The image of Canada as a “hewer of wood and drawer of water” has long irritated many Canadians — including politicians and industrial strategists who have felt that Canada should be more sophisticated and more active in manufacturing value-added products. Rather than exporting lumber, we should export furniture or even prefab houses. In the mining sphere, rather than sending raw concentrate or bitumen abroad, we should be producing refined petroleum products, chemicals, finished jewelry, specialized metal alloys and the like. Or to move another few steps along the continuum, we should have inherent raw material advantages in producing computers, iPods, medical equipment and machinery.

Historically there has been some appeal to this argument, including at the political level. Why send something abroad in an unfinished form when additional jobs and wealth could be associated with adding production value at home? This has manifested itself on some occasions in past decades, when inland mineral processing facilities in Ontario, Manitoba and New Brunswick were established largely for political reasons.

Curently, several of these facilities are under competitive pressure — more so because of poor location rather than a failed economic model. In hindsight, some of these processing facilities would be more competitively positioned today if they were located on waterways with modern port and marine facilities, rather than inland where rail and truck costs and delays must be built into the equation. The nickel processing facility presently being constructed in Newfoundland and Labrador, while driven in part through political pressure, at least has the advantage of being located on the coast.

The Department of Natural Resources Canada has recently been examining value-chain and competitiveness aspects of the Canadian minerals and metals industry. This preliminary work has produced some very interesting findings.

There is a fair amount of mineral value-added work that occurs in Canada. In base metals, 30,000 jobs in extraction correlate with a similar number in smelting/refining and with 280,000 in semi-fabrication and fabrication plants.

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 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.

In terms of the competitiveness of Canadian base metals processing operations, while there is some variability among the ten aluminum facilities, overall, Canada’s aluminum smelters are very competitive internationally, drawing upon energy cost advantages. In nickel processing, Canada has a significant competitive advantage — in part due to the sale of by-products such as sulphur.

In zinc, Canadian smelters are generally positioned in the middle globally in terms of cash costs, although the global cost curve is relatively flat such that incurring new costs could render a smelter uncompetitive. Finally, in copper processing, Canadian facilities are high cost, in the top quartile, as evidenced partly through the recent and pending closure of some facilities.

Beyond wage costs and age of facility, there are of course many other factors that affect, or potentially could affect, the competitive balance of Canadian value-added operations. Imposing unilateral climate change charges in the form of energy fees, for example, could affect competitiveness. Volatile energy costs or unpredictable electricity supply can dramatically affect competitiveness, a factor that Ontario best consider as it makes important energy infrastructure decisions. Transportation costs and efficiency can play a pivotal role, highlighting the importance of items such as competitive rail service.

Scale of operation can be another important variable — the average capacity of the world’s top ten copper smelters has grown from 270,000 to 480,000 tonnes in a decade, an 80 per cent increase that is leaving Canadian facilities in its wake. Erecting raw material export barriers, a policy seen in China and some other countries, provides advantage to their manufacturers by effectively subsidizing input costs, thereby negatively affecting competing Canadian value-added operations. Finally, as raw material supply becomes scarcer in the longer term, it is conceivable that the availability and cost of recycled material could become a highly important driver.

In some countries, public policy decisions have been taken to ensure a major presence in mineral processing, regardless of the intrinsic strengths or weaknesses of the industry. Canadian policy-makers have generally avoided this path, largely exposing the industry to the vagaries of open markets and free-flowing investment. This is a fine strategy, provided our transportation, tax, trade and investment, environmental, and energy policies are similarly enlightened, aligned and supportive. In line with this strategy though, Canadians should not be surprised if the bulk of investment occurs in the extraction and concentrate stages where the most value is added and where Canadians are most competitive.

www.mining.ca


Paul Stothart
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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