Bank of Canada sees volatile Canadian oil prices hindering investment

OTTAWA (Reuters) - Uncertainty about prices for Canadian oil and bottlenecks in transporting it to market have been a key factor slowing down much-needed business investment in Canada, the Bank of Canada said on Tuesday.

The central bank's Monetary Policy Report noted a 32 percent increase in prices for Western Canada Select (WCS) since its January report, following a similarly sharp decline in late 2012.

"WCS prices are expected to remain volatile until sufficient transportation capacity is in place. This volatility adds to the uncertainty facing Canada's energy sector, which is expected to remain a factor restraining Canadian business investment," it said.

The Bank of Canada said that despite the recovery in WCS prices in recent months, some firms were reevaluating their projects.

Likewise, it said that many mining firms had shifted to lower-cost projects that pose less risk in an environment of sluggish world demand and growing world supply.

(Reporting by Randall Palmer; Editing by Louise Egan)

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Cloudy outlook makes Canadian companies shy of investment

By Louise Egan

OTTAWA (Reuters) - Canadian businesses see a challenging year ahead after surviving the weakest two quarters of growth since the 2008-09 recession, and they expect only modest sales growth, cautious investment, and tame inflation, a Bank of Canada poll showed on Monday.

The results of the survey of senior managers, taken from mid-February to mid-March, support market expectations that the central bank is under no pressure to raise interest rates.

Business investment intentions, which the Bank of Canada says are key to economic expansion, weakened at the start of this year. Companies still plan to increase investments, but economic uncertainty is making those plans less ambitious.

The balance of opinion on investment - the difference between the percentage expecting higher investment and the percentage expecting lower investment - remained positive at 12, but it was down from 20 in the fourth quarter and lower than in most other quarters since the recession ended.

"Many firms indicated that uncertainty is having some influence on their investment plans, leading them to postpone some projects; favor investment with a shorter payoff period, smaller capital outlays or less risk; or shift their investment spending toward new or different segments of demand," the bank said in a release.

A Statistics Canada survey earlier this year showed Canadian businesses hardly expect to boost their capital spending at all this year, anticipating investment in construction and machinery and equipment would rise 0.8 percent, the lowest rate since 2009.

Companies said their sales performance over the past year was the worst in three years. But the outlook for sales growth was brighter than in the fourth quarter of 2012, mainly due to new strategies to boost sales. The balance of opinion on future sales rose to 24 from 16.

Businesses almost unanimously saw inflation remaining within the central bank's target range of 1-3 percent over the next two years. But only a third saw the rate rising to the upper end of the range of 2 to 3 percent, down from 42 percent who forecast that level in the fourth quarter. Sixty-one percent expected inflation of 1 to 2 percent versus 54 percent previously.

The percentage of companies reporting labor shortages declined for the second survey in a row, although there was no change in the overall perception of pressures on production capacity or in hiring intentions.

The survey portrays an economy that is slogging along but not really gaining traction.

"Overall, not a dire result, but not particularly robust, given that in the sales question, we are comparing future growth to a tepid prior 12-month pace," said Avery Shenfeld, chief economist at CIBC World Markets.

The results change little for the Bank of Canada, which has kept its benchmark lending rate at an ultra-low 1.0 percent since September 2010.

Central bank chief Mark Carney has been signaling for the past year that he intends to hike rates.

But the weakening economy has forced him to gradually soften his hawkish tone and in March the bank said rates would stay on hold for "a period of time" before any tightening. There is no expectation of a move at the bank's next announcement date, April 17.

Forecasters in a Reuters poll predicted a rate increase in the first quarter of 2014, although traders are still pricing in a slight chance of a cut later this year, according to yields on overnight index swaps.

(Editing by Peter Galloway)

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Canada minister lauds factory investment writedowns

By Louise Egan

OTTAWA (Reuters) - Canadian manufacturers have benefited from a measure allowing them to accelerate writedowns of their investments, Industry Minister Christian Paradis said on Monday, but he could offer no guarantees the upcoming federal budget would extend the program.

Finance Minister Jim Flaherty will present the 2013-14 budget on Thursday and has signaled that he will restrain spending to offset weak revenue rather than increase expenditures to boost the sputtering economy.

Ottawa introduced the accelerated capital cost allowance in 2007 to help manufacturers hit by the strong Canadian dollar.

The measure is due to expire at the end of this year, and industry groups have asked for a five-year extension.

"Of course, as industry minister I think this is a measure that is very, very interesting," Paradis told Reuters in an interview when asked if the extension would be granted.

"It added a lot of leverage in the past and I heard a lot of good comments in the multiple roundtables in the last months, for sure," he said in an hour-long conversation in his office.

The measure allows businesses to write off investments in manufacturing and processing machinery and equipment over a shorter time than in the past, enabling them to generate more cash flow.

Paradis was careful to avoid making any promises, acknowledging that Flaherty is under pressure to restrain spending in the budget.

"This is a measure that has a cost. It has benefits for sure. How the finance minister will juggle with this, I don't know ... We have to deal with the fiscal constraints that we have," he said.

Current costs could climb even higher if Ottawa agrees to a request by the oil industry to extend the benefit to liquefied natural gas plants.

The Canadian Association of Petroleum Producers asked the government last year to recognize LNG facilities as manufacturing and processing assets, which would make them eligible for the benefit.

Jay Myers, president of the Canadian Manufacturers and Exporters, said he was hopeful the budget would include the accelerated writedown measure after his organization lobbied government officials over the past year.

The CME says the accelerated capital-cost allowance allows businesses to depreciate their investments completely over a three-year period compared with about 14 years under the traditional model, and will save manufacturers about C$2.5 billion over the next five years.

Unlike the broader economy, manufacturers and exporters have not yet recovered from the 2008-09 recession.

LESS WORRY ABOUT STRONG CURRENCY

Paradis said he was pleased to see the manufacturing sector growing and noted that he was hearing fewer complaints about the strength of the Canadian dollar, which hurts exporters.

"We used to hear that more in the past than now, to be blunt," he said.

"Wherever I go, we all agree that it's unlikely that the Canadian dollar will go down as it used to be so if people are relying on this to increase their competitiveness, it's not the way to do it," he said. "We should not rely on this."

(With additional reporting by Randall Palmer and David Ljunggren; Editing by Jeffrey Hodgson and Steve Orlofsky)

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Canada cautious on liberalizing foreign investment

By Randall Palmer, David Ljunggren and Louise Egan

OTTAWA (Reuters) - Canada will be cautious about liberalizing foreign investment rules for sensitive economic sectors because it's very hard to reverse a decision once it's been made, Industry Minister Christian Paradis said in an interview on Monday, meanwhile insisting that Canada remains open to foreign investment.

"When you decide to go with these kinds of reforms, you cannot ratchet down after that. You can ratchet up but not down," said Paradis, who is the government minister responsible for foreign investment rules.

Canada has strict rules governing foreign stakes in industries such as banks, telecommunications and airlines, as well as more general tests to determine if foreign takeovers are beneficial to Canada.

But the issue remains controversial. Paradis' predecessor unexpectedly blocked a 2010 foreign takeover offer for fertilizer giant Potash Corp, and the government last year spent several months mulling its response to an offer for oil company Nexen Inc from state-owned Chinese oil company CNOOC Ltd.

Ottawa eventually allowed the Nexen takeover, but imposed strict new restrictions on future bids by state-owned companies, particularly for companies in the Alberta oil sands.

One Canadian company widely viewed as a potential takeover target is BlackBerry, which is struggling to compete against Apple's iPhone and devices using Google Inc's Android operating system.

Paradis said he hopes BlackBerry will remain a national champion. But he said he did not know what would happen to the mobile device maker, given the unforgiving competition in the global telecommunications industry.

"We never know what can happen but I've said - and I truly believe this - I hope BlackBerry will continue to be a Canadian champion in the world, that it grows organically," Paradis said in his office in the Industry Canada building in Ottawa.

"This is my opinion here. But that being said, we don't know what might happen. The market is very aggressive. When you talk about the telecoms sector ... this is a very, very aggressive sector."

The head of China's Lenovo Group Ltd told a French newspaper last week that the firm might consider an acquisition of BlackBerry at some point in the future.

Paradis said the Canadian government would examine any Lenovo bid using its national security guidelines, which are designed to block foreign governments from gaining control over strategically important firms.

"As the industry minister I don't want to send a signal and I don't want it to look like I prejudged a deal or not," he added.

Some of the government's foreign investment policy has been guided by a 2008 official report that urged Ottawa to liberalize, or consider liberalizing, foreign investment rules in telecommunications and broadcasting, the airline industry and in uranium mining, and to allow mergers in the financial industry.

Paradis has lifted restrictions on foreign investment in telecommunication providers with less than 10 percent of the market. But he noted that the 2008 report advocated a broad review before opening the sector up further or allowing more foreign investment in broadcasting.

"We are not there at this point," he said.

However, Paradis hinted at the possibility of a bigger opening to foreign investment if current measures to boost telecom competition fail to bring lower prices and more choice for consumers: "We cannot guarantee we will achieve what we want to achieve in terms of goals, when you talk about competition."

Paradis said he was "very happy" to see growth in the hard-hit manufacturing sector and noted that he was hearing fewer complaints recently about the strength of the Canadian dollar, which hurts exporters.

"We used to hear that more in the past than now, to be blunt," he said.

"Wherever I go, we all agree that it's unlikely that the Canadian dollar will go down as it used to be, so if people are relying on this to increase their competitiveness, it's not the way to do it," he said. "We should not rely on this."

The Canadian dollar rose by nearly 45 percent between a trough in early 2002 and a peak in late 2007, but has held steady at close to parity with the U.S. dollar in the last few years.

Paradis noted that manufacturers have benefited from a measure allowing them to accelerate writedowns on capital investments, but he could offer no guarantees the upcoming federal budget would extend the program.

"It added a lot of leverage in the past and I heard a lot of good comments in the multiple roundtables in the last months, for sure," he said.

Asked about the government's likely response to a possible foreign bid for a company such as natural gas producer Encana Corp, Paradis pointed out that bids by state-owned firms would still be evaluated for the degree of influence a company has over the industry and the sector it is involved in, and the degree of influence the foreign government has over the company.

Encana said last month it did not believe that revised government rules on foreign takeovers would prohibit it from being acquired.

(Editing by Janet Guttsman and Peter Galloway)

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First Quantum bid for Inmet wins Investment Canada approval

TORONTO (Reuters) - First Quantum Minerals said on Friday its C$5.1 billion ($4.97 billion) hostile takeover bid for rival Canadian base metal miner Inmet Mining Corp has won approval under the Investment Canada Act.

The act, which requires a buyer to prove to the government that its takeover of a Canadian company will be of net benefit to Canada, typically only applies to large foreign acquisitions of companies or assets. Vancouver, British Columbia-based First Quantum had to win approval under the law, however, as the majority of its directors are based overseas.

The cash-and-stock bid is set to expire at 11:59 p.m. (EDT) on Monday, March 11. The bid was worth about C$5.1 billion, or C$72 a share, when it was announced in mid-December, topping First Quantum's two previous offers for Inmet.

On Friday, Inmet once again called on shareholders to reject the First Quantum offer, saying it was inadequate.

"While the long-term fundamental value of Inmet has not changed, the value of the First Quantum offer has declined to C$67.70 (a share) as of yesterday's closing price," said Inmet in an open letter to investors.

"The special committee and the board would be prepared to meet with First Quantum to discuss a supported transaction if First Quantum is prepared to make a fair offer to Inmet," the company said.

(Reporting by Euan Rocha; Editing by Peter Galloway)

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Mexico reverses foreign investment flows

MEXICO CITY (AP) — After decades of depending on inflows of foreign capital to develop its economy, Mexico has turned a corner and become a net exporter of direct investment capital in 2012.

Mexico's central bank announced Monday that Mexican corporations invested about $25.6 billion last year in buying up foreign plants and companies, more than twice the $12.7 foreigners invested directly in Mexican firms.

For a country that still has one foot planted firmly in the developing world, that news worried some analysts and delighted others.

An official confirmed that was the first time in recent memory that outflows exceeded inflows.

Last year was marked by big purchases of European telecom assets by Mexican magnate Carlos Slim, considered the world's richest man.

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