Imperial Oil Imports Help Fuel Record Machinery Imports

An hour north of Fort McMurray, Alberta, Imperial Oil Ltd. (IMO) crews are assembling equipment shipped across the Pacific Ocean from South Korea for one of Canada’s largest construction projects. Government figures show other companies are following Imperial’s lead.

Imports of machinery and equipment, a gauge of business investment, jumped 3.2 percent to a record $11.2 billion in June, Statistics Canada reported yesterday, up from average growth of 0.1 percent the previous seven months.

The import data comes as companies such as Enbridge Inc. (ENB) and Imperial, which is building an C$8.9 billion dollar ($9 billion) oil-sands operation near Fort McMurray, 755 kilometers (470 miles) northeast of Calgary, report higher capital expenditures in the second quarter. The figures indicate Canadian businesses may be regaining their appetite for spending as policy makers try to rein in household borrowing.

The import data are “tentatively suggesting maybe the slowdown we got earlier this year was just that, a temporary slowdown,” Mark Chandler, fixed-income strategist at Royal Bank Capital Markets in Toronto, said by phone. “We’re helped a little bit by the improvement in oil prices and a little bit better equity prices.”

Business investment grew an average 1 percent in the three quarters through March, after rising at an average quarterly pace of 3 percent following the 2009 recession.

Prices Drop

Falling commodity prices and global financial uncertainty stemming from the European debt crisis had kept companies from spending, one of the reasons Mark Carney, governor of the Bank of Canada, cut his growth forecasts for the economy last month.

Average commodity prices have dropped 3.9 percent from the start of the year and 15 percent from a post-recession peak in April 2011, according to Bank of Canada data. Recent gains though, with prices up 11 percent since June 27, may be spurring a revival.

Imperial, which said July 26 its second-quarter profit declined 13 percent as crude prices fell, increased its capital expenditures 41 percent in the second quarter from a year earlier. The company, which is 70 percent owned by Irving, Texas-based Exxon Mobil Corp. (XOM), spent C$2.48 billion in the first half at its Kearl bitumen project. Some of that was spent on pipe, heat-valve and monitoring equipment modules from South Korea that will help the company produce 110,000 barrels a day of oil once the project begins operations later this year.

The company chose Korean suppliers several years ago when surging construction demand in the oil sands limited the capacity of Canadian contractors, said spokesman Pius Rolheiser.

Imperial was little changed at C$44.67 at 10:38 a.m. and has advanced 11.6 percent since touching a 2012-low on June 4.

Biggest Spender

Crescent Point Energy Corp. (CPG), had the fastest one-year capital spending growth among Canadian companies with a market value of at least C$10 billion, excluding financials, according to data compiled by Bloomberg News. The Calgary-based company spends about 85 percent of its total expenditure on drilling and development, said Kellie D’Hondt, a spokeswoman for the company in a phone interview. The company mainly uses external drilling crews and needs to spend about C$600 million a year on drilling to maintain production levels, she said.

Average capital spending measured over 12 months by companies on Canada’s S&P/TSX Composite Index that have reported results in the current earnings season rose 6.8 percent during the second quarter to C$716 million. That’s up from 2.4 percent growth in the first quarter, according to data compiled by Bloomberg.

To be sure, businesses have let up since 2010, when monthly growth in machinery and equipment imports averaged 1.2 percent growth, the fastest pace since 1997.

Consumer Risk

The Bank of Canada estimates business investment will add 0.5 percentage points to growth this year, down from 1.4 percentage points in 2011. The central bank expects an expansion of 2.1 percent in 2012, down from 2.4 percent last year.

“There was more overall machinery and equipment purchases in 2010 and businesses have really been steadily buying the stuff for the past three years,” said Doug Porter, deputy chief economist at BMO Capital Markets in Toronto

Canada has relied on consumers to drive its expansion because, unlike Canada’s three previous recessions, trade has remained a drag on growth. That driver of growth, though, has created new risks for the Canadian economy with household debt rising to the highest on record. Policy makers have been clamping down on the housing market, and encouraging businesses to ramp up investments.

Capital Flows

Carney, in an interview Aug. 8 with CTV television, said that investors have begun to see Canada as a safe haven and the country needs to put more of the capital flowing into the country into productive uses rather than housing.

“Our challenge as a country is how do we use that capital that comes in,” Carney said in the interview. “We can use it to grow our economy, invest it in new productive assets and industries, or we can build houses. Our view is we should do the former.”

Statistics Canada reported yesterday that imports of industrial and agriculture machinery jumped 5.9 percent in June, the fastest pace in a year. Purchases of drilling machinery for mining rose 9.9 percent, while excavating machinery rose 7.4 percent. According to Bloomberg calculations, since the early 1980s, movements in the monthly imports of capital goods have correctly predicted the direction of change in quarterly investment in machinery and equipment over 80 percent of the time.

“At least relative to the last couple of quarters that have been quite weak for business investment, this is moving in the right direction,” said David Tulk, chief Canada strategist for TD Securities in Toronto.

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net; Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net