Seven to watch

Where will the action be in 2005? Here are the sectors to follow for big moves--or big troubles.


What was it with Canada's transportation sector this year? The planes, trains and boats that move this nation's frozen turkeys and hot-rolled steel provided a wonderful array of news last year.

Air Canada emerged from bankruptcy with a new name, ACE, a moniker that sounds kind of like a chain of discount hardware stores. Let's hope the nation's airline can embrace that spirit and make a go of it in 2005 by supplying what the market demands: cheap, good air travel. An American Express survey suggests traffic will rebound further in 2005, and that could give the new company some lift.

Any uptick in travel will also be welcome at Bombardier, where Paul Tellier, who was hired to turn around the troubled company, was ousted amid speculation that he clashed with the founding family over strategy. Fears that the Bombardier clan stepped in to preserve its own interests caused the company's shares to tank near the end of the year and left its future slightly more cloudy. Any new business that would help keep financially challenged customers like Delta flying would be welcome. But most critical in 2005 will be progress on a new 100-seat jet, Bombardier's assumed saving grace. Considering that its biggest competitor, Embraer, is about to deliver a 100-seat jet well ahead of the Montreal company, Bombardier has an interesting year ahead.

Turbulence in the transport sector wasn't confined to the air. Chinese imports have caused massive backlogs at the Port of Vancouver, where container business ramped up about 7% in 2004. The bottleneck was so tight it became a new excuse for executives who didn't make their numbers this year, including La Senza, which blamed a money-losing third quarter on lineups at the dock. And it's only expected to get worse in 2005. Drewry Shipping Consultants predicts another 14% rise in shipments between North America and Asia. Luckily, new transportation infrastructure is on the way. CP Rail has announced it is prepared to spend up to $500 million in new track construction to keep it competitive, while the Port of Vancouver is embarking on a $1.4-billion plan to triple the size of its container facility. If the trucking industry manages to find people to replace all the retiring drivers, maybe–just maybe–we'll be able to deal seriously as a nation with the lingerie shortage. J.S.


Nope, we're not there this year, either. The North American rebound in tech spending that has been in the pipe for a couple of years now will remain in the pipe. Since a brief upsurge in the first half of the year fizzled, consulting firms are predicting “anemic” sales in the sector for 2005. Consulting firm IDC says IT spending will expand 6% globally, while Forrester suggests spending in Canada will be even lower, coming in at just 4% in 2005. Canadian firms can be expected to boost productivity by acquiring top-of-the-line U.S. tech (on sale because of the rise in the dollar), but that will not a boom make.

There are, however, some interesting trends beneath the numbers. In early December, IBM announced plans to sell its personal computer division to Chinese PC maker Lenovo Group. Expect similar stories soon: research firm Gartner has predicted two more of the top 10 PC makers will exit the industry over the next couple of years. As well, the low-level, undeclared feud between U.S. and Chinese companies over global tech standards (who gets to set them) will continue, the end of Moore's Law will draw nearer, and more stuff will be crammed into your cellphone. (Let's make a movie with our phone!) Also on the horizon: IT itself will become more automated, leading to less hiring in the sector and compounding the employment woes attached to outsourcing.

Perhaps most important for Canadian big business is voice-over-Internet protocol, or VoIP, which will become more common and cause many a sleepless night for BCE execs who are rushing their own VoIP to market. That and Wi-Fi are big growth areas. One negative trend for 2005 will be that annoying voice-recognition software used in phone systems will become ubiquitous.

Finally, this just in from the longer-term trend file: Google has announced plans to publish some of the collections from the libraries of such well-respected establishments as Harvard, Oxford and Stanford universities, lending credence to that old hacker motto, “Information wants to be free.” Ken Thomson might want to take note.

On the biotech front, the sector faces a big challenge. David Emerson, the new federal industry minister and former CEO of Canfor, has made it a goal that Canada's biotech industry should be one of the Top 5 globally in terms of R&D. The government has shovelled money into the sector, but it continues to offer more promise than return. The king of Canadian biotech, Biovail, has lost nearly two-thirds of its value since mid-September 2003, while drug developer ConjuChem, which came in at No. 1 in our 2004 survey of the Top 300 small-cap stocks, sold off in the second half of 2004.

Nevertheless, hope springs eternal in this industry, and there have been some victories. ID Biomedical got a boost from the flu vaccine shortage in the United States that led to a 10-year contract–a lifetime in biotech terms. Biomira, along with German development partner Merck KGaA, has just received promising results on a lung cancer drug, and Cangene has a deal with the U.S. Centers for Disease Control and Prevention (supported by the U.S. military) to develop a treatment for anthrax.

The biotech revolution continues, it seems, though haltingly. One intriguing bit of news: an industry study estimates that half of China's crops will be genetically modified by 2014, further establishing its standing as one of the world's most pro-GM countries. Anti-GM advocates, meet your nemesis. J.S.


Retailers can expect a 2005 that will look much like the year they've just weathered. And that's not necessarily a bad thing. David Brodie, a Toronto-based analyst at Research Capital, predicts retail sales to grow by just over 4%, much like in 2004 and slightly higher than the year before, but not as robust as the 6%-plus growth of 2002. “As boring as 'More of the same for 2005' sounds, I find it a relief to be saying that,” says Brodie. Higher energy prices, a rising dollar, the potential for interest rate hikes and a softening job market can all hurt merchandisers, but consumers seem still willing to spend–and take on debt–to fill up the homes they bought in the recent red-hot housing market.

Some retail watchers, however, expect a slowdown in big-ticket spending on furniture, appliances and home renos. “These are areas that have seen sales growth in the low teens in recent years, and that can't go on forever,” says Jamie Spreng, retail analyst at Fraser Mackenzie in Toronto. The rising cost of debt is also expected to have an impact; while the Bank of Canada stood pat on interest rates in early December, the long-term trend is for rates to go up. If the increases are gradual, they shouldn't have much impact on buying, says Spreng, but quick hikes? “That's a different story.”

While retail experts don't see big improvements in auto sales in 2005–pretty much anyone who has wanted a new car could get one with very low or 0% financing–one area where they are looking for improvements is clothing. Consumer appetite for more clothes might be masked by the recent trend of falling prices, however–something that should continue, as tariffs on imported clothing and textiles drop in January. We could also see a return to cross-border shopping, thanks to better exchange on the Canadian dollar. Still, with more U.S. and international retailers in the Canadian market than there were when our dollar was this high more than a decade ago, there's probably less reason for consumers to head over the border for a shopping excursion.

The high dollar might also translate into lost jobs in the manufacturing sector, but Doug Porter, senior economist at BMO Nesbitt Burns, says other sectors will probably pick up the slack, so overall job growth should continue. That should help keep consumer spending at decent levels. “We're in an environment of low interest rates and relatively solid employment growth,” adds Porter, “and these are two of the most important things when it comes to consumer spending. Most of the other things–taxes, savings rates, consumer confidence figures–are just noise.” Z.O.


Projections for steel demand are never written in stone. That said, North American contract prices are expected to increase at least 15% in January. Spot prices for a ton of hot-rolled sheet have fallen from their summer high of US$780, but if China stays hungry and U.S. consumers don't stop buying cars, they're expected to float between US$500 and US$650 in 2005. As a result, consolidation and restructuring will probably remain this booming sector's buzz words. In Canada, Dofasco's non-union Hamilton operation should continue to post healthy (if not record) profits. Its dysfunctional hometown rival, however, could still go up in flames. But there is still outside interest in helping Stelco, a money-making insolvent company, emerge from court protection, even with its labour and pension problems. And believe it or not, Algoma Steel, which has restructured twice to date, could be put in play thanks to a growing pile of cash. The Sault Ste. Marie, Ont., steelmaker insists it isn't aware of any potential takeovers, but it recently adopted a shareholder rights plan to defend itself nonetheless. T.W.


What a year for the oilpatch. World demand kept surging, oil-producing regions like Saudi Arabia, Nigeria and Iraq fell further into chaos, and the price of oil went through the roof. So while the International Energy Agency recently cut its growth forecast for total global demand, it will remain steady, and that suggests the big price drop everyone expects may not happen. Nope, it seems we're going to continue to muddle along and watch as OPEC–which can only boost production by two million barrels per day before it reaches its limit–becomes increasingly irrelevant.

Economists tell us commodity prices are set on the margin–that is, where primary production runs out and coveted “extra” amounts of a commodity begin. Which is great for Russian sheiks like Mikhail Khodorkovsky, who will become the new market makers as OPEC reaches peak production. Oh, wait a minute–they were becoming the new market makers. Vladimir Putin can also read the writing on the wall, and decided last year to cut the Kremlin back into the Russian oil revenue stream by arresting Khodorkovsky. After all, while current Russian oil reserves are expected to peak in 2010, the country has just under one-third of the world's natural gas (most of that under the control of Gazprom, a company in which the Russian government is a major shareholder), increasingly providing a larger share of world energy consumption. That fact is expected to reshape Russian society in dramatic ways over the next decade, as massive amounts of money flow north. It's also going to be useful in a world where China, Russia's southern neighbour and historical enemy, is starved for those resources. And Canada? As a net exporter of oil, we'll ride merrily along on markets increasingly set by the interplay between the Communist government in Beijing and a newly resurgent, autocratic (dare we say Stalinist?) Kremlin.

Perhaps that all explains the renewed interest in nuclear energy. It's insanely expensive, but the United States is set to begin building its first new reactors in 20 years. Throw in plans for dozens of reactors in China, and the industry is abuzz with talk of a renaissance. Westinghouse and GE are already busy pushing their reactors around the world, while Canada sits on the sidelines. Many highly trained nuclear industry workers are set to retire, and few are going into school to replace them, since it's not clear whether the Canadian industry is going to take part in this next build-out. “We're at a point of do or die if we want to be part of this industry,” says Murray Elston, president and CEO of the Canadian Nuclear Association. “The Canadian nuclear industry is about to fade if we don't dedicate new resources to it. We're at a crucial point.”

Food for green thoughts in 2005. J.S.


The prospect of an uncertain economy, continued violence in the Middle East and no relief from high oil prices are enough to send a chill through most investors–but not gold bugs. For them, the more precarious the outlook, the better. “Low interest rates, currency devaluations, the massive U.S. fiscal and trade deficits [and] geopolitical instability…are some of the factors that point to a higher gold price in the future,” said BMO Nesbitt Burns analyst Geoff Stanley in a recent report.

Gold has been on a tear for the past three years and continues to edge toward $450. Analysts and gold companies alike are predicting it will go even higher. Just because the price of gold is going up, however, doesn't mean every gold-mining company will be able to cash in. While gold firms have been cutting back on their hedging to increase exposure to rising prices, the weaker U.S. dollar and higher production costs have eaten into potential profits.

Those higher costs are spurring companies to look for partners–a trend that will no doubt intensify in 2005. In the past several months, a flurry of companies have joined the mating dance, with the proposed friendly merger between Goldcorp and Wheaton River Minerals, and a hostile bid to take over Iamgold.

With production costs on the rise and no cap in sight, equity investors may still find it hard to successfully tap into the rising price of the shiny metal. Maybe they should buy gold bullion–or pray for more chaos and bad economic news in 2005. J.G.


The future of the Canadian auto sector, which employs about 14% of our national workforce, looks bright. Growth at Honda and Toyota assembly operations in Ontario, not to mention the Canadian auto parts sector (which saw content per North American-produced vehicle exceed $2,000 for the first time in 2004), have more than made up for lost jobs at General Motors, Ford and DaimlerChrysler in recent years.

“Ontario, or should we call ourselves Motario, will easily out-produce Michigan [in 2004],” says Dennis DesRosiers, an analyst who thinks the province could beat its American cousin by as much as 100,000 vehicles. And with tax dollars now flowing to attract assembly plant investments, he adds, the industry looks poised for a very good decade.

When asked about 2005, however, DesRosiers offers just one word: “Lousy.” The analyst points out markets are “very soft and were juiced [in 2004] in the U.S. with election economics.” DesRosiers also notes that gas, insurance and regulatory costs (such things as licence fees, air-care programs, etc.) are high while resale values are low. The big problem, of course, is that Canada's vehicle assembly sector ships most of the cars, minivans and SUVs it builds to the all-important market to the south, which has seen demand pulled forward over the past few years by record-level incentives. As Burnham Securities analyst David Healy notes, American “consumers took on unprecedented levels of long-maturity auto debt in 2001-03, and a record-high proportion of them now owe more than their vehicles are worth.”

Bottom line: the Canadian assembly sector stalls whenever what used to be called the Big Three hits a road bump. And the Detroit automakers have let their combined U.S. market drop by more than 10% since 1998. As a result, Ford Canada actually lost its B3 membership card in 2004, when it fell behind Honda's Canadian production. The company–which has traded in Canadian chief executive Alain Batty for a new model named Joe Hinrichs–could regain its former local Big Three status over the next few years, when a new billion-dollar plant in Oakville starts churning out Ford vehicles. But in 2005, Canada will probably feel a little pain, since at least two of the Detroit trio are widely expected to trim production to address inventory build-up of slow-moving product. T.W.