There is something really crappy and dumb going on with Canadian industrial policy. Maybe you’ve figured it out. I sure haven’t. In the spirit of “the more minds working on it the better”, here are some low-lights to get everyone’s brains working on it before we all head to the voting booth next time (while this is from a Canadian perspective it also applies to the US and other countries as well – the only difference in viewpoints relates to the financial/military/cultural strength of the bunker one is in).
The issue in a nutshell, irrespective of Canada’s path for a moment, is a guiding principle that should logically be adhered to: A country should be run in a way that optimizes strengths, and, to the extent possible, seeks to buttress weaknesses.
What does a country have, and what does it need?
That sort of idea will usually earn snorts of derision from reflexive people, as in, “No sh*t, what else would they do.”
But you’d think the notion had never ever entered our ruling elite’s heads. Our leaders have been sidetracked by visions of UN glory, while simultaneously exhibiting dangerous complacency that the industrial pieces we’ve worked so hard to build will either just keep chugging away no matter the barriers, or will be easily replaced in the ‘energy transition.’
Either way, we are being massively outplayed.
Here are a few examples using China and Canada as the lead characters – the two are playing out macro programs that are so diametrically opposed that they could be cartoon caricatures.
China has a specific set of problems to deal with, or things it wants to achieve. First and foremost is to keep 1.3 billion mouths perpetually full, because if that fails to happen for more than a few days communist leaders will find their heads on sticks. So to speak. It’s the same in any heavily populated country, but authoritarian ones keep individual temperaments under a certain contained pressure, like a can of Coke, and we all know what happens to one of those if you get too crazy with it. The Chinese populations went along with lockdowns for a surprisingly long time, but once they’d had enough, watch out for flying barricades.
China also wants to be a global superpower, and therefore uses its centralized planning to move global industrial flows the way it wants.
While short of natural resources, China has played its cards well to minimize that fact. Consider that China controls processing capability of many critical minerals/metals/rare earths required for modern technology and various components of the energy transition. It doesn’t necessarily own all the minerals in the ground, but it doesn’t need to.
Furthermore, China is making moves into the future to head off potential competition for a number of key industrial items. First and foremost is LNG. China is signing multi-decade off-take contracts from new LNG export facilities under process or consideration. The importance of this cannot be overstated: the long term contracts allow the facilities to be built, and simultaneously the contracts give China control of decades worth of LNG in a world that is and will be short of it (capital is still being chased away from hydrocarbons; for grim proof, Google the grinning skull that is Mark Carney + GFANZ).
One step further, and in a move that should be of interest to Canada (more on that in a second), a Chinese battery company called Contemporary Amperex Technology Co (CATL) is offering steep discounts to automakers in exchange for contracts whereby manufacturers promise to buy the vast majority of their battery requirements from the company. The move is to cement control of the industry and ward off competition from new rivals.
This latter strategy is of no small significance to Canada, because Canada’s government is throwing billions into the battery production game, despite the fact that Canada controls few of the key processed components. The Prime Minister’s office issued a press release about this strategy, touting how Canadian businesses are, from mining to manufacturing, “…attracting historic investments in the electric vehicle (EV) supply chain.”
The news release then goes on to illustrate exactly what is wrong with our industrial strategy. The PMO brags that the Prime Minister “met with workers at the Saskatoon facility of Vital Metals, Canada’s first rare earths producer, to highlight Canadian leadership” in rare earths. Leadership? Huh?
Check out the rest of the news release, where “leadership” is spelled with “$” in front: the federal government invested $529 million into a Stellantis EV manufacturing plant, welcomed a $5 billion investment in a new EV battery venture, and announced $1.7 billion in subsidies for zero-emission-vehicle purchases. And, he ‘visited’ Canada’s first rare earth’s producer. The priorities are so clearly bent towards the symbolic world of getting all Canadians into EVs and somehow outcompeting China in the battery business.
It is necessary to point out that Canada has unveiled a critical minerals strategy late last year, a move that can be expected to bear fruit when Justin Trudeau is 104 years old. Furthermore, it is largely an extension of green energy dreams, and not geared toward serious utilization of what Canada has most of, and is best at.
The strategy pays lip service to certain key variables like the need to speed up projects, but then drowns everything in the junk that prevents acceleration of same. For example, the strategy “emphasizes the conservation and protection of Canada’s natural environment, as well as the promotion of climate action by supporting the transition to a greener economy at home and around the world.”
That statement may sound beneficial to the environment, but it is a recipe for getting cross-threaded with the sort of politically correct baggage that will prevent significant progress.
The strategy’s soul is revealed as well in the funding schemes outlined (always follow the money!): it pledges $21.5 million for a Critical Minerals Centre of Excellence; $79 million for “public geosicence and exploration to better identify and assess mineral deposits”; and…$1.5 billion for advanced manufacturing, processing, and recycling applications. The latter might sound like a good component – we certainly need the processing capability of minerals/metals, for example – but that’s not what the government is talking about. Processing minerals and metals is dirty work that won’t fit under the green umbrella of the plan, so will be left to China, and our $1.5 billion will go to, number one on the list…” supporting the development of Canada’s critical minerals sector by investing in sustainable energy and transportation infrastructure to support industrial development.”
We are not serious as a nation. We are going take what should be a vital concept like a critical minerals strategy, spend token amounts out in the field, and hobble most projects because they won’t be green enough (“sure, build your mine, but no diesel” – mark my words, you’ll hear that), and focus on building shiny uncompetitive battery facilities in southern Ontario and Quebec where half the country’s voters are. We won’t compete with China at all, and the US will build plenty of new battery facilities to meet their home market as the US IRA dictates it should.
Here is a wiser view of how the world works; see how it stacks up against our dogmatic UN-approved-document.
A pair of Michaels, Kao and St-Pierre, wrote a phenomenal paper called “US dollar Primacy in an Age of Economic Warfare” in which they analyze the key players, their motivations, and their means to win economic warfare. They postulate that modern warfare, Russia’s antics aside, includes acquiring/controlling resources, positioning to capture markets, and positioning to steer clear of structural choke points.
Choke points can relate to physical movement, as in oil moving through dangerous and narrow straits, or can relate to shortages of critical components, such as the bonkers repercussions of a semiconductor chip shortage (for example, parking lots full of fully finished vehicles unable to be sold until some critical chip is sourced and inserted).
Some items are absolutely critical to national security, and are not easily replaced. The two Michaels point to oil and semiconductors; I would add natural gas to the equation as well.
Here, we can see China in action. It buys oil from Russia because it wants/needs to, and, a peculiarly-but-not-really short time before Russia invaded Ukraine, announced over $100 billion in new trade deals with Russia. Secure oil and minerals from Russia: Check.
For items like rare earths, China may not own all the reserves but has been playing the long game here to – the country controls about 90 percent of rare earth processing. Check.
Chinese companies produce about two-thirds of global lithium supplies and are responsible for supplying about 85 percent of cobalt to industrial users. Check.
Now, China is also moving to control the global LNG fuel chain, as that is beyond critical as well. It is a cleverly designed option – if China needs LNG, they have it. If the market values it more than they do, they resell it on the open market, and presumably fire up coal plants for their own needs. (China is one of the worlds largest installers of wind and solar, yet in 2022 permitted on average two new coal plants per week, all year.)
Reasonably priced fuel, semi-conductors, raw materials processing…those are all key choke points in the world today. Canada is chasing none of these, and in fact is actively trying to make our fuel more expensive. If there is one thing that should form the bedrock of Canadian industrial policy, it is our cheap hydrocarbons, which remain cheap because of limited access to global markets.
The rest of the world would kill for $5/GJ natural gas – and ours is currently trading for sub-$3. Our oil trades at discounts because it cannot efficiently get to where it needs to go in the world. Our future ability to maintain and/or increase hydrocarbon supplies faces endless uphill battles of our own making.
Canada has been dealt one of the most magnificent hands ever, and we’re using it for toilet paper.
Vote for whomever you want, but pressure your chosen one to up their game a bit, to at least try to be competitive in the global economic arena. We don’t have to win all the international battles, but we at least have to understand what the game’s objective is.
Energy dialogue should be exciting and positive! Get started by deconstructing the current mess. Pick up “The End of Fossil Fuel Insanity” at Amazon.ca, Indigo.ca, or Amazon.com. Thanks!
Read more insightful analysis from Terry Etam here, or email Terry here.