By Keith Halliday We've dodged a bullet, but watch out for ricochets: There’s hope that growth will soon return to the North

There has been a lot of optimistic chatter in Northern business circles in the last few months. Even if we aren’t likely to see a boom any time soon, there’s a sense that the pendulum may have swung too far into gloomy territory, and that the economy is now picking up.

There has been a lot of optimistic chatter in Northern business circles in the last few months. Even if we aren’t likely to see a boom any time soon, there’s a sense that the pendulum may have swung too far into gloomy territory, and that the economy is now picking up.

Surging global commodity prices are a big reason for the buoyant hopes.

As this column went to press, oil prices were up more than 75 per cent since January. Both OPEC, the producers’ cartel, and the International Energy Agency boosted their demand forecasts due to stronger economic growth, especially in Asia.

Klondikers were smiling as gold went over $1,000 (U.S.) per ounce, especially in light of this year’s staking rush around Underworld Resources’ discoveries near Dawson City. Copper, zinc, aluminium and nickel were all up more than 20 per cent since June, as were a wide range of other global commodities. Even tea hit an all-time high of five dollars (U.S.) per kilogram (on the Mombasa market).

Higher metal prices are good news for copper miners in the Yukon, the new Meadowbank mine in Nunavut, and exploration companies across the three territories. And although prices were still well below peaks in 2007 and 2008, copper, zinc, nickel and gold are double or triple their 2003 levels.

The news wasn’t quite so bullish for natural gas and the business case for the Mackenzie Valley pipeline. The Henry Hub spot price languished at less than four dollars (U.S.) per million British thermal units (mmbtu), actually down from June’s levels. And unlike most metals, natural gas prices have stayed well below 2003-2008 levels, which ranged from an average price of $5.51 (U.S.) per mmbtu in 2003 to $8.88 (U.S.) per mmbtu in 2008, according to TD Economics.

But at least the gloomiest forecasts for gas from earlier this year didn’t come true.

The capital markets have also been more active for resource companies, with almost twice as many resource share issues in the third quarter of 2009 as in the last quarter of 2008. Underworld Resources raised $16-million this summer and another Yukon miner told this columnist he was optimistic about raising capital too. This bodes well for exploration and development in the coming year.

There are two big risks to this optimistic outlook. The first is the global economy, which could still have big surprises in store for us. The downside risks are tough to quantify, but can be alarming. They range from debt-laden governments stopping their stimulus packages before the private sector is ready to pick up the slack, to nightmare scenarios involving a Chinese banking sector collapse or a U.S. debt and currency crisis.

The other risk is the Canadian dollar. The surging commodity prices mentioned above are all in the greenback, which has been falling relative to the loonie and other global currencies. Many pundits predict we are headed for parity with the U.S. dollar. The loonie may go even farther.

To show how this trend has already taken some of the euphoria out of the commodity price trends, consider gold. In U.S. dollar terms it has tripled since 2003. But in Canadian dollars, it has merely doubled. Still good news of course, but not as good as the headlines might imply.

For natural gas, however, the rising loonie has only worsened the downward trend in gas prices for Canadian producers and their pipeline projects.

The Governor of the Bank of Canada, Mark Carney, is now in a tough situation. The American dollar is quite likely to keep weakening, given the country’s economic problems, the government’s giant deficit, and the Federal Reserve’s prodigious money-printing program. But despite Mr. Carney’s success in October talking the loonie down, his long-run ability to control the exchange rate is limited since Canadian interest rates are already very low. We can expect to hear Canadian officials continuing to speak publicly about the issues with an excessively strong Canadian dollar, but we probably won’t see any major interventions.

This means Northern resource producers may see an even stronger Canadian dollar in the future, eating into their commodity revenues.

So what does all this mean for the North’s economy? Overall, despite the stronger loonie, higher demand and prices for our commodities will be good for the Northern resource sector. The euphoria of the boom years may not return, but well-run companies with good fundamental economics will be able to attract capital and create jobs.

But we should remember that while we may have dodged the bullet we saw coming in early 2009, the global economic crisis may not be out of ammunition yet.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels. His latest book, Game On Yukon!, was just launched.