CANADIAN MINERALS DEVELOPMENTS: TRENDS AND IMPLICATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030078-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 21, 2016
• Document Release Date: August 23, 2002
• Sequence Number: 78
• Publication Date: May 5, 1998
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Canadian Minerals Developments: Trends and Implications
Confidential
ER IM 72-78
May 1972
Copy No.
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
eeoLip i
C.d~rt I ,om ooimm~ik
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1972
CANADIAN MINERALS DEVELOPMENTS:
TRENDS AND IMPLICATIONS
1. Canada and the United States are interdependent in minerals. The
Canadians need US markets and capital, and the United States looks to
Canada for rising supplies of essential minerals, particularly petroleum and
natural gas. In addition to growing nationalistic tendencies, Ottawa perceives
potential conflicts between Canada's continuing mineral development and
its higher priority industrial program. This memorandum surveys the
Canadian minerals industry, discusses its 'significance for both Canada and
the United States, and assesses Ottawa's policy options toward future
mineral development.
Minerals in the Canadian Economy
2. Canada's early history was entwined with mineral exploration and
development. Indeed, much of the impetus to settle its west came from
the lure of mineral riches thought to be found there. The most famous
Canadian mining event was the Klondike gold rush of 1896, but the
discoveries in the 20th century of cobalt, silver, uranium, asbestos, potash,
and petroleum, as well as more copper, nickel, and iron ore, have been
far more significant. These discoveries have revealed substantial reserves of
most raw materials, and ongoing exploration - parts of Canada are relatively
unexplored - is likely to result in the discovery of new deposits.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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3. Canada, the world's third largest minerals producer (behind the
United States and the Soviet Union) produces some 60 minerals in
quantities that both satisfy domestic demand and provide an exportable
surplus. Mineral production was valued at $5.5 billion in 1970; by
comparison, US mineral production was about $25 billion. Minerals sales
account for about one-third of total exports, and primary minerals
production accounts for about 7% of gross national product (GNP). Roughly
$1 billion is invested in the industry annually, and the minerals industry
directly provides jobs for more than 100,000 Canadians.
4. During the 1960s, Canada's mineral output grew 9% annually --
about twice as fast as GNP. Production expanded steadily throughout the
decade with the exception of 1969, when prolonged strikes adversely
affected output (see Figure 1). Production surged ahead in 1970 - up 27%
over 1969 - but weak metal markets slowed the growth of output in 1971.
CANADA: Growth of Mineral Production* Figure 1
Million US $
6000 r-
*Including values for minerals it various stages of processing. For example,
the value of crude oil and Iron ore are Included, but refined petroleum
products and Iron and steel are excluded; the values for refined copper
and nickel, however, are Included In the statistics.
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In addition, appreciation of Canada's floating dollar squeezed the industry's
profitability. In a number of cases, mining company profits fell more than
50% from 1970 levels.
5: Crude petroleum is Canada's leading mineral, accounting for
almost 200/'t, by value of the minerals industry's total output. Petroleum
output increased 10% annually in the 1960s and thus was a major factor
in the industry's rapid growth. Canada is tenth in the world, producing
1.4 million barrels per day (bpd). Other major products include nickel,
copper, iron ore, zinc, and natural gas. These products, along with
petroleum, account for 70% of Canada's rrliiieral production (see Figure 2).
Ontario is the leading mineral-producing province, accounting for 28% of
production, led by nickel and copper from the Sudbury region. Oil anc;
gas are responsible for Alberta's second-place ranking at 24% of total output,
and asbestos, copper, and iron ore constitute the bulk of Quebec's 1 7o
of production. The remaining provinces and territories account for only
one-third of output (see Figure 2).
Mineral Trade
6. Canada is the world's leading mineral exporter. Because of a
relatively small population of about 22 million people, domestic demand
is insufficient to utilize the mineral industry's entire output: the bulk is
exported to some 90 countries. Canada's rapid mineral export growth --
up 13% annually - was largely responsible for the industry's development
during the 1960s, as domestic consumption of Canadian minerals grew only
about one-half as fast as exports.
.7. By 1970, mineral exports reached $4.8 billion, compared with
mineral imports of $1.3 billion. Canada imports tin, manganese, and
chromite for its steel industry; bauxite and alumina for its aluminum
industry; industrial diamonds; and some coal and petroleum. Net mineral
exports in 1970 were valued at $3.5 billion, the largest favorable net balance
for any commodity group. Indeed, Canada normally runs a non-mineral
trade deficit - $0.5 billion in 1970.
8. The United States is Canada's most important trading partner in
minerals. In 1970 the United States took 50% of Canada's mineral experts
and supplied more than one-half of Canada's mineral imports. The net
mineral trade balance was $1.6 billion in Canada's favor. As shown in the
table, Canada had a trade surplus with the United States in every category
of mineral trade except solid fuels. Approximately 50% of total US mineral
imports in 1970 of $4.8 billion came from Canada. Canada supplied nearly
one-half the petroleum and three-fourths of the non-ferrous metals shortfall.
Petroleum imports from Canada - the United States takes about 60% of
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CANADA: Percentage Distribution
of Mineral Production,197,11i...
... by Province
Manitoba
Newfound) nd
Saskatchewan
British Columbia
Quebec
Alberta
Ontario
Natural Gas
By-Products
Cement
Asbestos
Natural Gas
Zinc
Iron Ore
Copper
Nickel
Other
Crude Petroleum
by Commodity
2.C
.1
2.8
12 2
2.8
3.7
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Figure 2
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Canada's oil and gas production -- met 5% of US demand, while imports
of Canadian nickel, silver, zinc, and copper accounted for 75%, 30%, 23%,
and 6%, respectively, of US consumption of these metals.
9. The US-Canada mineral trade has a distinct geographic pattern
(see the map, Figure 3). Western Canada, because of a limited industrial
base, is particularly dependent on exports. All of its oil and gas exports
are to the United States, and the United States and Japan take the bulk
of other minerals. Eastern Canada, however, utilizes much of its mineral
production in its manufacturing industries, exporting most of the remainder
to the United States. In contrast to the west, the eastern portion of the
country is not self-sufficient in minerals, and must import coal, oil, and
some industrial raw materials. High transport costs often make western
minerals less attractive in the east than imports.
10. Although the United States is the largest market for Canadian
minerals, Japan is the most dynamic. Japan is the world's largest importer
of minerals, and Canada, because of its growing mineral production and
new port facilities capable of handling large bulk carriers, is in an excellent
position to supply some of these needs. In 1970, Japan imported
$361 million of Canadian minerals and was its largest customer for copper
and lead concentrates and coal; it also was a major buyer of Canadian
aluminum, asbestos, molybdenum concentrates, and pig iron. That year
Canada provided 24% of Japan's imports of zinc concentrates, 56% of lead
concentrates, 15% of copper concentrates, 5% of coking coal, and 2% of
iron -ore. Since 1960, mineral exports to Japan have grown 22% annually.
In 1960, minerals accounted for 26% of Canada's total exports to Japan;
by 1970 they had jumped to 48%. The European Community and the
United Kin-:'am each account for a larger proportion of Canada's mineral
exports than does, Japan, but increased purchases will likely push Japan
into second place by the mid-1970s. Major markets for Canada's mineral
exports ,ire as follows:
Percent
United States
50
United Kingdom
15
European Community
10
Japan
8
Other
17
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CANADA
Major Mineral Resources
:b... SUOaun
p Our
GREENLAND
(Der -mark)
Motel mine
? Industrial mineral mint
or quarry
* Coal mina
? Oil field
* Gas field
* Oil and pas field
Athabaska oil sands
Potential hydrocarbon
producing area
`mil rrrkru, ? ? ?,' Y.~ if
-is
I'_.. aul In? P. 5 J1t SIt $ OSS N`N/
IIIII . j
5,0
II 14 I,1~ r r, ;Nm*},tir6ulul" .' i.~1.
T E D S T A"I T E S cnl~.a~? cI?.o. a a I,J~
NG1oN
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Foreign Investment in the Minerals Industry
H. Canada has been unable to generate domestically the vast amounts
of capital required to finance the growth of its minerals industry. Canada
has turned, therefore, to foreign capital sources, particularly the United
States. Data for 1967 - released this year - show that the United States
controlled $5.8 billion, or 60%, of the capital employed in the petroleum
and natural gas industry, and $2.9 billion, or 56%, in the mining and
smelting industry. Third countries accounted for the control of 14% and
9%, respectively, of the capital in these industries. The United Kingdom
controlled about one-half of the third-country total in each case.
12. Japan is just beginning to become an important capital supplier.
In the last few years the Japanese have entered into a number of agreements
with Canadian mining companies, and their equity plus long-term credits
now total nearly $200 million. The long-term credits are usually tied to
contracts for the supply of needed minerals and are mainly used to develop
or enlarge mines, whose output is then shipped to Japan for refining.
13. by 1970, one-third of Japan's financial interests were in Canadian
copper ventures. In no case, however, did a Japanese firm have a majority
equity share, and in most cases, the interest was in the form of a loan
for a combination of loan and small equity share. Rather than seek control
over the Canadian enterprises in which it invests, Japan's goal is to secure
stable, long-run supplies of resources.
Mineral Development Policy Issues
. Minerals vs. Manufacturing
14. A decade ago conventional wisdom held that Canada's future lay
in the exploitation of its rich mineral resources. Large reserves and rising
world demand for minerals combined to create a favorable future for the
growth of the minerals industry. This policy is now being reconsidered,
however, because of the emergence of persistant unemployment and the
specu;r of more to come. With its labor force expected to continue to
be the fastest growing of any industrial nation, Canada's main economic
problem will be the creation of new jobs. Prime Minister Trudeau's
government has looked to more secondary manufacturing, which is relatively
labor intensive, for employment expansion rather than to growth of the
extractive industries, which are relatively capital intensive. Secondary
manufacturing, however, must be export oriented, as economies of scale
often require larger production runs than the domestic Canadian market
can absorb.
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15. Most Canadian leaders undoubtedly would like to see both
manufacturing and mining output grow rapidly, but this situation would
create a conflict between the two industries. A continued expansion of
the minerals industry would require increased exports as well as further
foreign investment in the industry. The large inflow of foreign exchange
would tend to cause the floating Canadian dollar to appreciate, making
Canadian manufactures less competitive in foreign markets and foreign
manufactures more attractive at home.
16. Although export taxes or investment curbs might be used to
moderate growth in the minerals sector, it would be difficult to adopt
measures that would decelerate the growth. Besides the 100,000 people
directly employed, probably close to an additional one-half million
indirectly owe their jobs to the minerals sector. Many provincial leaders
also recognize the role that minerals play in their economies; political
resistance would be strong against any policies that would retard continuing
development. Canada needs the dynamic contribution of a healthy minerals
sector, and would find it difficult to sacrifice the exports, growth, and
employment generated by it.
17. An indication of Trudeau's thinking on minerals policy was
furnished by the 1971 tax reform law, and further clarification will probably
be contained in the government's energy message due at year-end. Tax
reform did not place discriminatory burdens on the industry; rather, it
reduced the degree of favorable treatment. The new rules abolished an
automatic depletion allowance that was equal to 33% of profits. In its stead,
a less generous system of "earned" depletion was introduced. This allows
mines to claim as a depletion allowance one-third of expenditures on
exploration, processing plants, and certain otbu:r items. Nevertheless, these
lost benefits are not likely to have much more than a marginal adverse
impact on mineral development.
Continental Energy Poles
18. The United States, bE -oming increasingly dependent on imported
oil, is looking to Canada to sup Ay some of its future needs. Production
in the "lower 48" states is expected to peak this year or next, and Alaskan
crude oil will not make a substantial contribution before 1976. Industry
forecasts indicate that the United States will import at least 6 millior. bpd
of oil in 1975 and 10 million bpd in 1980. Also, US demand for imports
of natural gas will rise sharply in coming years.
19. The growing US supply shortages and the Alaskan North Slope
oil discoveries in 1968 have given renewed impetus to the concept of a
"continental" or "common" energy policy between the United States and
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Canada, which was originally proposed more than 20 years ago. The United
States has been the major proponent of a bilateral understanding on energy
policy. The concept, however, has run up against political problems in
Canada.
20. The general Canadian view is that energy trade between the two
countries should be governed primarily by economic factors and that, apart
from the activities of regulatory agencies, government involvement should
be minimal. Canada, currently gripped by rising nationalism, is unwilling
to enter into a formal agreement, feeling that this would further subject
it to US domination. Also, the Canadians feel that long-run Canadian needs
should be provided for before resources are committed to export markets.
The United States seeks a comprehensive bilateral understanding that would
assure supplies of oil and gas. This understanding goes beyond mere relian:e
on the expectation that Canadian exports of energy commodities to the
United States will automatically grow as required.
21. Canada's ability to increase its exports of oil to the United States
M. the 1970s depends in large part on the success of exploration in the
north and Atlantic offshore areas. Although Canada's proved oil reserves
more than doubled in the 1960s, there has not been a major new find
since 1965. i=ir;wever, c':,rent drilling in the north - the Mackenzie delta
and Arctic islands - lor,,:s promising. Estimates of oil reserves in the delta
range as high as 3 billion to 5 billion barrels, and potentially large gas
fields lie in n the Arctic islands. In addition, oil has been found off Canada's
eastern coast at Sable Island.
Ownership
22. Many Canadians find the high degree of US ownership of the
minerals industry distateful. Although only the most ardent nationalists
would advocate "buy back Canada" policies or a complete prohibition on
foreign investment, the feeling is general that foreign ownership should at
least be monitored. Canadians fear that they are selling their birthright to
US industry. US firms own, and US capital has developed, the Canadian
minerals industry. More than 40% of the output of this industry is in turn
exported to the United States. Depletion of non-renewable resources for
non-domestic use undermines n?tional security in the long run. In the near
term, Canadians recognize that the minerals sector's contribution to the
economy would be drastically curbed if the bulk of output could not be
exported.
Export Diversification
23. Ottawa also would like to diversify its markets for its minerals
exports, believing excessive dependence on the United States is hazardous.
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For example, US policy on uranium imports has caused the val ae of
Canada's uranium ouL'put to fall 85% from the peak reached around 1960.
Canada's ;cranium mining flourished then under the impetus of US contracts
and in?restraent. The US Atomic Energy Commission then placed restrictions
on uranium imports. The results were damaging for Canada: an industry
originally encouraged by the United States is now operating at only
one-third of capacity.
24. Despite the growth of other markets for Canada's minerals, the
dominant position of the t?,iited States will not easily be eroded. Trading
links are firmly established, and many firms in the industry are controlled
in the United States. In addition, growing US demand for minerals, along
with the size of the market, will cause it to increase its imports greatly
in the yea^s ahead.
Prospects
25. Canada's minerals industry will grow rapidly during the 1970s.
The country possesses large reserves of many vita' minerals, and continued
worldwide industrialization will draw on this mineral wealth. Indeed, with
mineral demand in major developed countries expected to far outpace their
resources, Canada is in an excellent position to increase its position as the
world's leading mineral exporter.
26. Despite the desire to alter its policies toward mineral development,
Ottawa has few alternatives. It would be difficult to use the potential
conflicts between industrial policy and the further growth of the minerals
industry to stop the industry's growth. Certain policies - depreciation
allowance changes, the possible imposition of some form of export taxes,
or greater regulation of foreign investment in the industry - could be
employed to moderate growth, but not to curtail it sharply. Attempts to
slow drastically the industry's expansion would arouse a domestic furor
that no government would willingly invite. Secondary manufacturing will
stressed, but minerals growth will not be sacrificed.
27. Nor will Canada be able to reduce greatly its dependence on US
markets or long-term capital. The deficit in net US minerals consumption
could reach $5 billion by 1975, and much of this deficit will be met by
imports from Canada. Although the US share of Canada's total mineral
exports may decline somewhat in t:ie face of increasing sales to Japan and
Western Europe, in absolute terms the United States will remain the largest
customer. Despite a likely increase in domestic and Japanese investment,
the vast amounts of capital required will necessitate the use of US financing.
Although foreign investment will face increasing regulation and scrutiny,
Canada will be unwilling to cripple its minerals industry by shutting off
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inflows of needed funds. Thus Ottawa is unlikely to adopt policies that
will significantly reduce Canada's minerals growth, diversify its export
markets, or curtail the use' of foreign capital.
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