Bracing For The Boom

Written by Godfrey Budd Tuesday, 20 December 2011 00:00

As Alberta’s fabricators continue to recover from the last recession, and as orders come in and activity steadily ramps up amid prospects of an oilsands construction boom in the second and third quarters of 2012, optimism has swept across much of the sector, says Bob Saari of the Alberta Pressure Vessel Manufacturers’ Association (APVMA).

But, in recent months, some fabricators have worried about a possible worsening skilled trades shortage as the sector becomes busier. Several are already scrambling to hire the experienced journeymen they need.

The last boom was not without a few adverse effects besides skilled trades shortages. Equipment and materials were often severely under-resourced. Indeed, in the fourth quarter of 2005, some contractors could not buy all the cement they needed. It was not for lack of money. There was simply not enough cement to meet demand. Costs spiralled dramatically in the province’s construction, oil and gas industries, rising between 10 and 25 per cent annually, depending on the sector. By 2008, energy analysts in some of Calgary’s investment banks were saying that, out of about 25 main natural gas basins in North America, Alberta’s natural gas basin (part of what is known as the Western Canadian Sedimentary Basin) had become the most expensive in which to drill, partly as a result of this boom-driven cost spiral.

Also, the provincial government, alone among Canadian provinces, has no sales tax to support a steady revenue stream. Instead, it depends heavily on oil and gas revenues, which typically fluctuate according to commodity prices, which in turn are almost invariably reflected in levels of oil and/or gas activity. Predictably, provincial coffers ballooned during some boom years, especially as a result of natural gas revenues, and the government spent heavily on capital projects, further fuelling demand for human and material resources.

While it benefits from oilsands construction, development, and maintenance work and repairs, the province’s fabrication sector, however, is vulnerable to boom-bust cycles, says Mike Percy, a business professor at the University of Alberta, and dean of the business school there for 14 years until last summer.

HIGHER THAN AVERAGE

The province’s economy, he says, has a unique feature: “In Alberta, capital investment accounts for a large share of the economy, about 35 per cent. The average across the continent is around 22 per cent.”

Oilsands operations require $6 billion to $8 billion per year, not for new construction, but for shutdowns, maintenance and other work, “just for sustaining capital investment. Then, you overlay this with about $8 billion in new construction, you have pressure on the economy,” Percy says. “The bottom line is, when you have that cluster of investments, it puts pressure on wages, squeezing an industry like fabricators hard. What fabricators do is tradeable internationally. Companies can source outside of Canada.”

This is exactly what happened during the last boom, when the first 218 modules for the Kearl project were sourced from Korea. By the time the modules started shipping in late 2010, much of the province’s fabrication sector had been operating at barely 50 per cent capacity for about 18 months. But when the modules were first sourced around 2007, the boom was in full swing.

“The good news is there’s lots of demand for product,” Percy says. Looking ahead to next year’s expected boom, he adds: “The bad news is there’s lots of demand for labour.”

Being cost-conscious and innovative, and using new technologies to offset demand for labour can all help offset the challenges that Percy says affect the fabrication sector more acutely than others. Also, “It’s not just the costs, but actually getting the labour when you need to,” he says.

The situation, however, is often regarded as different this time around on several counts, and fabricators may avoid some of the more negative effects of the last boom. The slow economies in Ontario and the United States could take “some of the pressure off,” Percy says. Also, he says, Chinese demand is lower today. Its growth rate is now at nine per cent, compared to 12 per cent three or four years ago.

U.S. companies, he notes, are aggressively bidding on projects in Alberta. Although this might not be entirely welcomed by all the province’s fabricators, it could help prevent a steep cost spiral and discourage oilsands companies from sourcing overseas.

Strategic partnerships between builders, contractors and fabricators operating in Alberta and outside companies are also an option. Clark Builders recently announced a partnership with U.S.-based Turner Construction Company, which will give Clark access to Turner’s resources.

As for staving off the negative effects of a boom in Alberta by managing growth in the oilsands, as has been advocated in the past, Percy says it is not realistic for 2012. Doing this, which he says would involve gate-keeping projects, would have to be done three or four years ahead of time, and preferably by an arms-length regulatory authority that is perceived as outside spheres of political influence.

NOT THE SAME

The Alberta government says business and economic conditions today are not the same as they were in the period 2005-08.

“First, the price of oil is lower and has been trading in a lower range for a number of months now. Second, the price and availability of steel globally is not the same—prices are lower and more stable and availability is still good,” says John Tuckwell, director of communications at Alberta Treasury Board and Enterprise, in an emailed response.

The email, which said that “labour availability issues were once again becoming a concern,” pointed to several ongoing government programs dealing with workforce development, and business and industrial competitiveness.

The once-again looming skills shortage, however, might make some wonder how well some of those programs are working. Despite this, Gil McGowan, president of the Alberta Federation of Labour, says the province has done more than most to address the issue.

What more might help? McGowan points to several challenges in attracting young people to the trades, but says, “I’m not convinced that all employers have done everything they can to encourage the next generation of construction and manufacturing workers on the skilled trades side. In order for the apprenticeship system to work, we need a number of employers to take their share of first- and second-year apprentices.” Perhaps, he says, the government might consider additional methods to encourage employers to hire more apprentices.

Saari, of the APVMA, says that, for firms in the two main sectors within the fabrication industry—pressure vessels and structural steel—apprentices typically account for eight to 12 per cent of the workforce. Both Saari and McGowan say that poaching of skilled workers can be an issue for such companies when a construction boom hits.