Diane Francis on Business Issues

Monday, May 22, 2006

Keevil's Great Idea

Diane Francis column for Saturday Post May 20:

Peter Brown thinks he knows who's going to win the takeover battle underway in Canada's mining sector.
"If I was a betting man I'd bet Teck [Cominco Inc.] wins Inco [Ltd.] because its Chairman Norman Keevil won't lose," said Peter Brown, founder, Chairman and CEO of Canaccord Capital Inc. in Vancouver, Canada's biggest independent investment bank.
"In 40 years, Teck's gone from a $20-million market cap, and two mines with two years' reserves left, to this huge base metals conglomerate," he said in a recent telephone interview. "The company was built with the right combination of science, geology, innovation and guts and I don't think it stops here. Norman is a builder. He would like Teck to be an RTZ."

Norman Keevil Jr. is a geologist with a PhD whose late father invented mining technologies that are still in use today. Mr. Keevil and his family control the company with 50% of its restricted, high-vote stock. His well-heeled partners in this stock include Japan's Sumitomo Metals Mining America Inc. and the Caisse de Depot et Placements du Quebec. There is also Middle Eastern money.

Thus far, Teck's strategy has been cunning.

Teck bid for Inco even though Inco had negotiated a friendly takeover of Falconbridge Inc. which Teck said it has no desire to own. In fact, Teck's bid was based on Inco dropping the Falconbridge merger.

This opened the door for Swiss-based Xstrata PLC, which owns 19.9% of Falconbridge, but had blessed the Inco-Falconbridge merger, to bid for the rest of the company it did not already own. That's what happened this week which is not only predictable but might be exactly what Teck wanted.
Now it looks as though Inco and Xstrata may become embroiled in an expensive bidding war for Falconbridge and Teck appears to be in the best position.

-- If Xstrata outbids Inco for Falconbridge, then Teck will capture Inco then make a joint venture deal of some description with Xstrata regarding Falconbridge's Sudbury nickel operations in order to realize sizeable synergies by eliminating duplication.

-- On the other hand, if Inco outbids Xstrata for Falconbridge, its own stock value will be reduced, making Teck's takeover offer more tempting to Inco shareholders. Teck may also join forces with partners to buy Inco/Falconbridge.

-- Alternatively, if Xstrata appears to be willing to overpay for Falconbridge, then Inco may be agreeable to joining forces with Teck to help snatch it away from Xstrata.

This, to many, is the most likely outcome and would result in a three-way mining powerhouse.

(It's interesting to note that Teck made a quick $500 million windfall on a bet of C$100 million from Inco when it bought the Voisey's Bay nickel discovery from Robert Friedland.)

While Teck has become the cat amongst the pigeons, the aggressive mining company isn't the only game around in Canada. One intriguing possibility is gigantic Alcan Inc. of Montreal, says Terry Ortslan, mining consultant in a recent interview.
"I think Alcan is a very real possibility," he said.

That's not as odd as some may think. Alcan is big enough to buy Inco and Falconbridge. Also, buying base-metal mining outfits has been a successful strategy for its rival Alcoa, the world's biggest aluminium company. Likewise, Australian mining giant BHP Billiton of Australia is involved in aluminium along with nickel, copper and other commodities.

"This is going to be a big battle because Inco is the ultimate prize in the mining industry. The others won't let this go away without a fight. Perhaps Teck's owners will form partnerships to get it," said Mr. Ortslan.

There are two other possible foreign bidders such as Brazil's Companhia Vale do Rio Doce or CVRD.

"It has a commitment to diversify and has been making large takeovers," said Mr. Ortslan. "It also looked at Noranda."

The other takeover possibility is America's largest mining company, Phelps Dodge Corp., flush with cash and more worried than most miners are about operating mines in hostile, increasingly anti-American, jurisdictions around the world. Assets in safe, democratic, friendly Canada might even net a premium to such a company.

The consensus is that the Chinese government, embarrassed by Ottawa's rebuff of its planned takeover of Noranda Inc. months ago, will take a pass.

Politics will continue be important in this one. The election of a minority Tory government may make a foreign takeover easier but cannot be considered a green light.

In fact, a foreign predator would create problems for the fledgling government because there would be a big political pushback on the part of the New Democrats and Liberals. There may also be a backlash by the public against any foreigners buying a national treasure such as Sudbury'a and Voisey Bay's rich nickel deposits.

Clearly, the best outcome for Canada in the current mining bidding wars would be if Teck Cominco Ltd. or another Canadian succeeds in buying Inco Ltd. as well as Falconbridge Ltd.

But Teck's restricted share ownership structure may become a problem unless Teck's board agrees to tender their high-votes for regular shares at a reasonable ratio. There have been indications the board will do this.

Whatever the outcome, Canada deserves an aggressive base-metal player that's a world-beater. A three-way merger would create a C$50-billion mega-miner and rank as the fourth largest mining corporation in the world.

Friday, May 19, 2006

Mexicans, Courts and Russians

Diane Francis column Friday Post May 19:

NEW YORK CITY - The President's speech to the nation this week about the Mexican border was purposely ambivalent because it was really about oil and election votes.

Sending National Guards to the border appeases certain elements in U.S. society who are concerned about the flood of cheap labor.

But his proposals to grant amnesty to 11 million illegals already here (on top of 32 million legally here) and to pave the way for more immigration appeases Hispanic-American voters and the Mexican government.

It also sends a signal to Mexicans and others to get into the country illegally because citizenship is eventual. I would speculate a flood in coming months.

Nearly 25% of all Mexicans now live in the U.S. and immigration has been a safety valve for a country that finds it impossible to create enough new jobs every year for its growing population. Besides that, Mexicans in the U.S. send home billions of dollars every year in "remittances" to loved ones, helping bolster its economy.

But Bush's speech, highlighted as an important national address, was also about oil.

Mexico is America's second biggest supplier of oil, after Canada, and any draconian action by Washington to truly seal the border and keep out Mexicans would guarantee that the next President of Mexico to be elected this summer will adopt a very populist, anti-gringo attitude.

He may even be tempted, with an intransigent America, to pull a Hugo Chavez and divert oil production to others such as China.

Too little too late
This week, eBay Inc. won its case at the U.S. Supreme Court which decided to reduce the imposition of injunctions in patent infringement cases.

Unfortunately, the unanimous decision was ten weeks late for Canada's Research in Motion Ltd. That company, faced with a ruinous injunction in a patent infringement dispute, was forced to settle for US$612.5 million.

RIM's lawyers tried but failed to convince the judge to wait for the outcome of this Supreme Court decision but the judge ordered the two sides to strike a deal or have one imposed on them.

RIM paid the huge sum as settlement and also had to sign away any opportunity to benefit from the eBay decision.
Until this unanimous decision, injunctions, such as RIM faced, have been automatic and forced many companies to settle prematurely rather than be driven out of business.

It was legalized extortion in some cases.

This decision directly benefits eBay Inc. which was sued by a competitor in 2001 claiming infringement of a "business method" patent.

The Supreme Court not only changed the rules for patent disputes in this week's long-awaited decision but also restricted the use of injunctions involving rights-holding companies (a non-operating entity which sued RIM) or involving "business method" patents. The court called them at times "vague" patents.


Russia Inc.
This summer the world's biggest IPO, for as much as US$20 billion is expected take place involving OAO Rosneft, Russia's third largest oil giant.

To date, there have been 30 IPOs, raising US$22 billion, in lockstep with the bull market in Russia, thanks to soaring commodity prices. GDP growth in Russia has averaged 7% per year since 1999.

But there is general skepticism about recent Russian IPOs and specific skepticism about Rosneft which this week announced that its proven reserves of oil and natural gas rose by 18% higher in 2005.

(Rosneft is third biggest behind OAO Gazprom and OAO Lukoil. Its new reserves are higher than any oil company outside Russia except Exxon Mobil Corp.)

Rosneft's lead underwriter is Morgan Stanley and there is speculation that this IPO will be postponed until the fall and may only raise US$10 billion. In part, that may be due to higher oil and gas prices and a reduced need to raise money on capital markets on the part of the company.

But that may be an excuse.

Russian IPOs don't have a good reputation these days. For starters, there's OAO Yukos, bankrupted by edict through trumped up charges leveled against its politically ambitious officers for tax evasion.

The concern with a Rosneft IPO is that the company acquired Yukos assets which had been confiscated by the government and are subject to legal challenge.

Another case in point occurred in April when Morgan Stanley suddenly pulled out of an IPO for a Russian meat production company.

Then there is the fact that many newly floated companies have posted disappointing earnings and poor results due to news which had not been disclosed to prospective shareholders.

Russia presents grave political risks for investors. Among them are the levying of unpredictable taxes, government interference, lack of minority shareholder rights, corruption and a strategy by wealthy Russians to liquidate before the 2008 President election. Current President Vladimir Putin is not allowed to run for a third term unless the constitution is ignored.

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Wednesday, May 17, 2006

Revenge of the Atomic Ayatollahs

Diane Francis column Friday May 12:

There's a new oil "cartel" more powerful than OPEC and led by the Atomic Ayatollahs of Iran.

The other "cartel" members are Russia and Venezuela - a troika responsible for scaring everyone, thus creating an "anxiety" premium for oil and gold prices.

In the past year, gold and oil have both leaped by more than 50% in price or nearly US$700 per ounce of gold and US$70 a barrel for oil.

And there's little doubt, given the leadership in these three countries, combined with the geopolitics involved, that these three, by luck or guile, will help hike the price of oil to at least US$100 a barrel in pretty short order.

(Caveat is that they aren't really disciplined and run the risk of breaking the cardinal rule of cartels: don't be too greedy. If price hikes are too much too soon, they can bring about substitution (such as mandated hybrid cars) or recessions, either of which would result in price declines.)

But in the medium term, going long on oil and gold seem unassailable strategies, just based on the situation at hand.
By far, the biggest contributor to the "anxiety premium" is the controversy concerning Iran's nuclear program and its failure to fully cooperate with nuclear inspection authorities.

Messages are somewhat mixed, and often frightening, and Iran's true motives are unknown. Perhaps the country merely wants to exploit nuclear power so it can export more oil to others for cash. Perhaps the country wants to join the neighborhood's nuclear club (India, Pakistan, Israel) for its own protection. Perhaps its Persian leaders are frightened of the 300 million volatile Arabs who have attacked in the past and surround them.

Perhaps the Ayatollahs are playing the oil futures markets. Perhaps the Iranians intend to create weapons of mass destruction and hold the world hostage through its network of terrorists. Or perhaps all of the above.

What is known is that every time Iran's slightly unhinged, designated spokesman, President Mahmoud Ahmadinejad, opens his mouth the prices of oil and gold jump. And so does the value of Iran's treasury.

The country is the world's fourth largest producer, exporting nearly four million barrels a day. At current prices, that's US$102 billion a year. This is so significant that any possibility that its production would be curtailed sends prices upward.
Iran's production could be reduced by any number of events from United Nations sanctions to military intervention. It could also be cut back on purpose by Iran in protest or to make prices rise higher.

For these reasons, the Iranian issue will continue to add to global anxieties for some time to come.

Another worry is that the American president has been sabre rattling, worrisome given his track record of launching a trillion-dollar war in Iraq without proper due diligence.

The American position concerning Iran is counter-productive. Asking the UN Security Council to threaten sanctions then military intervention is impossible because the Russians will veto any such strategy as will China which signed a US$100-billion deal to buy 125,000 barrels of oil a day from Iran for ten years.

Worse, forcing the matter onto the UN debating society will actually insure that the issue remains above the fold in the world's newspapers, thus contributing even greater anxiety for markets.

Another question is why the urgency?

Most experts agree that the Iranians are years away from such bomb technology, if in fact that's their goal. And while nobody wants every tinpot dictatorship and theocracy to have a bomb, Iran is hardly the biggest culprit.

North Korea has a bomb already, and an even crazier leader and yet a solution there has been left to the neighbors to fix.
It's also interesting to note that Iran is getting hassled even though American allies such as India, Pakistan and Israel already have bombs and have refused to sign the non-proliferation treaty. Iran is a signator.

While India and Israel are benign democracies, Pakistan is not. It's currently run by a military dictator who a friend on the wrist who was exposed for exporting nuclear bomb technology to North Korea, Iran and others around the world.

While Iran remains the focus of most oil anxiety, there are two others playing the game: Russian President Vladimir Putin (wouldn't you love to see his investment portfolio) and Venezuela's populist President Hugo Chavez.

Russia has been scaring everybody by pushing around oil companies inside the country and pushing around neighbors and Western Europe over gas supplies.

Russia is hooked on high oil prices as the world's second largest exporter, some eight million barrels daily, and has been able to mask poor governance with surging oil cash flows.

Tnen there is Venezuela where anti-Americanism reigns, political turmoil continues and whose leader has frightened markets with nationalization plans that are guaranteed to reduce production in the long run.

Wednesday, May 10, 2006

Fight the Sarbanes Oxley Blues

Diane Francis column May 11

For years, Felicia Salomon dreaded the countless compliance forms and documents she had to wade through constantly as in-house counsel for a decentralized insurance conglomerate operating in many jurisdictions.

Three years ago, she decided to harness technology to overcome such legal drudgery and started a soft-ware based legal consulting firm called Corporate Responsibility System Technologies Ltd, in Toronto and New York City.

"We try and cut the red tape," she said in a recent interview in Toronto.
Her company simplifies the process tedious form-filling and other compliance requirements which cost companies and financial institutions billions of dollars collectively.

And the paper burden has become worse than ever. Globalization, the complexity of regulations, the number of laws and new regulatory agencies to deal with specialties such as money laundering or terrorism are making business life more complicated.

And new laws have made compliance more legally hazardous as well as expensive. High profile scandals have led to increased liability for officers and directors. For instance, CEOs must sign off on financial statements in the U.S. and the Ontario Securities Commission's Bill 198 requires CFOs to do the same. In Ontario, officers must also sign off that they have monitored their compliance and financial processes and they must create and monitor codes of ethics.

Penalties for non-compliance have also been hoisted. Fines in Canada can be as high as 5% of a public corporation’s market capitalization or C$1 million, whichever is greater.

Besides that, bad publicity arising from non-compliance can ruin reputations and destroy a corporation’s goodwill or investor support.

Corporate Responsibility System Technology’s software and data bases are updated continuously in the U.S. and Canada. They are also audited and approved by top law firms in their various sectors or jurisdictions to assure clients that they are meeting all compliance requirements.

Her company is an idea whose time has come. ?Her system has boiled down all the overlapping regulatory and legal frameworks into simple templates, or modules, based on the separate compliance requirements, be they a stock exchange, securities commission or financial institutional watchdog.

Her modules translate complex legalese into simple English, and allows corporate users to easily follow instructions and fill in the blanks. Client companies pays fees and get logins to access the modules off a browser. Training takes only hours.

“For instance, it took us four to six hours to train 50 users at the Royal and SunAlliance [Insurance] in groups of three or four,” she said.

Complete modules are available for publicly listed companies in the U.S. so they can comply with the Securities & Exchange Commission and Sarbanes-Oxley filings as well as the requirements imposed by the New York Stock Exchange, NASDAQ and American Stock Exchange. In Canada, her programs help public companies in Canada with securities and exchange requirements and also help insurance companies, banks and other financial institutions across North America file with their appropriate regulators.

The result is huge cost savings because her system means that compliance functionaries don't have to reinvent the wheel, hire outside consultants or find their own shortcuts.

"Our charges for a TSX company could be C$20,000 to C$35,000 a year, depending on the company. This would compare to C$100,000 to do it themselves or through counsel," she said.

Companies still require legal advice for complicated matters, she said, but her process reduces the cost of what's known in the profession as "commodity practice" -- or those compliance functions that common to everyone.

"Companies still need counsel to answer difficult questions," she said. ?
The company started three years ago and took two years to develop its legal modules. Now it's rolling out marketing efforts and seeking venture capital backing to offer services across North America. So far, she has landed a dozen clients and recently opened an office in New York City. Besides, Royal and SunAlliance, she has as clients Assurant and recently Metropolitan Life, among others.

Doing business with such large entities is beginning to lead to more opportunities because compliance requirements vary around the world.

"Assurant is a client and our process is being adapted for use in its Florida, Brazilian and British operations,” she said. “This potential could be enormous.”

Public companies and financial institutions are in greatest need of “automated” compliance help. The insurance world, south of the border, is heavily regulated and national companies must comply with various legislation in each of the 50 states.

Her firm also does custom work and consulting. It’s been approached to devise compliance systems for the Patriot Act, Food and Drug Act and various environmental laws.

"Compliance was the thing I hated to do the most and always procrastinated doing when I was a corporate lawyer," she said. "We've taken some of the chore away."

Monday, May 08, 2006

Pfizer -- Electoral Dysfunction

Diane Francis column Friday May 5:

The battle to defend free enterprise has been joined in Corporate America. Moods are turning ugly south of the border during this year's proxy and annual meeting season.

American investors have begun to lose patience with greedy executives and pliant boards getting rich while delivering mediocre results. The biggest issues to pension fund managers and other shareholder activists are excessive executive pay, entrenched directors and dual class shares.

More activists are stepping up the plate in the absence of tougher regulations and best practices. For instance, Denis Nappier, Connecticut's State Treasurer said his government's US$23-billion Retirement Plans and Trust Funds will oppose re-election of compensation committee members this year at AT&T, Wal-mart, Home Depot, Merck, TimeWarner, Verizon Communications, Safeway, Bell-South and Pfizer Corp.

But unseating corrupt or incompetent managers and directors is not easy.

The root of the problem is the election process for directors which is neither democratic nor just. Corporate democracy has been an oxymoron. Uncast votes are automatically cast in favor of incumbents and the only way to overcome this is to mount expensive proxy battles. This is like saying that anyone who didn't vote for a candidate in 2004 automatically voted for incumbent President Bush.

Unable to change laws just yet, activists have been devoted to getting corporations to agree to majority-rule votes, in order to get rid of directors and mediocre managements more easily.

These rules allow shareholders to curb executive gouging and put companies into play if they are under-performing. They do this by requiring that directors be approved by a majority vote in annual board elections.

An estimated 120 public companies have these rules and another 120 are being targeted by activists such as labor unions, pension and mutual funds, hedge funds and gadflies.

But this is only a small percentage of the total. Virtually all public companies rig the rules by limiting shareholders to voting for slates only and by counting all withheld votes as votes of approval.

Some two dozen big companies have adopted versions of majority-vote rules and the SEC has also proposed balloting reforms.

But the SEC's reforms are stalled and dirty tricks are underway.

One of the worst examples of shareholder abuse involves giant that Viagra helped build - Pfizer Corp. whose CEO Hank McKinnell has frustrated the exercise of his shareholders' rights.

Mr. McKinnell has made US$65 million in compensation since he became CEO in January 2001. He has been under fire recently, before last week's annual meeting, because he negotiated a US$83 million severance package for his retirement in a couple of years.

In the meantime, he has been a mediocre CEO and Pfizer's stock has declined by 46% since he took over in 2001.

Instead of facing a pink slip, Mr. McKinnell has been busy securing his unjustifiable remuneration through a series of cunning maneuvers, including co-opting some of his own shareholders to secure his privileged position.

What's important to note is that Pfizer, on paper anyway, has an enlightened set of governance principles - enhanced disclosure requirements as well as a majority-vote rule of sorts.

The company guidelines stipulate that if more votes for any director are withheld than cast in his favor, the director must resign. The cute part is that the board doesn't have to accept the resignation but has to disclose why it won't accept it.
Unfortunately for Pfizer shareholders, two directors on the compensation committee survived the vote.

And the reasons this occurred are unseemly.

For starters, the company used shareholder money to fight shareholders who wanted to mount a case to withhold votes from these directors.

Some shareholders may have been confused because Mr. McKinnell has also wrapped himself in the corporate governance flag. He formed, with Texas buddies such as Boone Pickens, an organization calling itself Investors for Director Accountability Foundation.

But shareholders upset with his pay were unable to muster the necessary votes mostly because various institutional shareholders must have backed him.

The New York Times reported that some of Pfizer's biggest single shareholders are institutions who are also suppliers making millions from Pfizer. These include institutions which make millions managing Pfizer employee investments, mutual funds designated for employee investments, pension funds managing money, institutions earning management banking or underwriting fees as well as those earning insurance premiums.

So Mr. McKinnell prevailed.

Frankly, laws should forbid such shareholders from voting because they have conflicts of interest. They should also forbid boards from authorizing funds to fight shareholders unless the cause is approved by a special committee of truly independent directors.

Lastly, all public corporations should be forced to adopt majority-vote rules to rid the system of scoundrels.

Counterfeit Canada

Diane Francis column Saturday Post May 6:

Counterfeit goods can legally enter Canada if they are declared due to a loophole in the country's laws.

This has upset trading partners because Canada has the most lax laws in the developed world when it comes to protecting consumers and markets from bogus goods.

"Customs officials in Canada have no power to pro-actively inspect goods to see if they're counterfeit," said Toronto lawyer Jim Holloway in a telephone interview this week. He's with Baker & Mackenzie LLP.

"There are only two situations where Customs will act: If the brand owner gets a prior court order; or if the police authorize the action," he said.

Laws in Europe and the United States are different and are better at protecting companies from counterfeiters and consumers from the effects of often-dangerous fake goods.

In the European Union and United States, trademark owners are allowed to register their trademarks with border officials. Then their laws authorize customs officers to inspect goods with those trademarks to see if they are counterfeit.

"Brand owners train customs officials as to what to look for," said Mr. Holloway.

Here Customs officials are only empowered to pro-actively look for hidden or undeclared goods. Declared counterfeits cannot be seized if declared for customs purposes.

The issue is important and more than just a case of spending money to catch fake Gucci or Ralph Lauren fashions. It's also about more than placating angry U.S. authorities, also upset with Canada's "broken borders" when it comes to the smuggling of illegal aliens, narcotics or potential terrorists.

This is an important issue for Canadian businesses. Those selling legitimate goods face unfair competition from those selling marked-down fakes. There's also the issue of public health and safety.

Recent seizures in Canada include expired baby food with counterfeit best-before dates attached, counterfeited brand=name batteries containing elevated levels of dangerous chemicals, children's stuffed toys fill with hair and fiberglass and safety boots with inadequate protection and fake safety logos.

RCMP officials have also waded into the issue amid evidence that non-existent controls on counterfeit smugglers have attracted organized crime groups, who are reaping windfalls. One estimate of this black market in Canada is as much as C$30 billion a year.

This weekend, RCMP, other law enforcement, customs, business and trade experts are to gather in Toronto to launch the Canadian Anti-Counterfeiting Network to bring attention to this issue.

"We hope the new government has a real good look at this because of growing international pressure to get its laws and enforcement regime in line," said Mr. Holloway.

The issue has gotten the attention of global watchdog, the International Anti-Counterfeiting Coalition which is comprised of the world's largest brand name companies. The Coalition has recommended that Washington's Trade Representative put Canada on its list of "priority foreign countries" such as China, Argentina and Mexico.

"This is not a victimless crime," said Mr. Holloway. "There are concerns about certain Internet drugs as a way of distributing by criminals counterfeit products into the U.S. market. This means people may be paying for placebos they think are helping them. This can cost lives."

The Washington-based International Coalition is comprised of pharmaceutical companies, computer and software organizations and luxury goods manufacturers who have substantial global counterfeit problems.

Another group that's waded into the issue is the International Chamber of Commerce which estimates that 7% of global trade involves counterfeit goods, or US$250 billion a year.

"It's unique that these groups want to shine the light on Canada," he added. "It's not because we are a hotbed of counterfeit manufacturing like Eastern Europe or China. There is some manufacturing here such as DVDs or fake drugs. But the problem in Canada is that, relatively speaking, we have some of the weakest anti-counterfeiting laws in the developed world. Frankly, our borders are porous."

Senior RCMP officials joined the private sector coalition in calling upon the government in Ottawa to legislatively give authority to Canada Border Service Agency officials to search and seize counterfeit products. They also want laws that hand out tougher sentences and stiffer fines for guilty parties. The companies want to be able to register their trademarks with customs officers as is the case in other countries.

"The reality is we tend not to see jail time. It is the exception rather than the rule," RCMP Superintendent Ken Hansen told the Post this week.

Thursday, May 04, 2006

The Dutch Disease and Canada

Diane Francis column for Wednesday May 3



Now that Canada's Petro-dollar heads toward parity with the U.S. dollar, every level of government must come up with strategies to provide Canada's manufacturers with tax parity.

If governments don't adjust taxation wise, Canadians may fall victim to the "Dutch Disease" -- or energy exports pushing the currency so high that manufacturers cannot compete.

Some foreign exchange experts think the C$ and US$ may be of equal value by the end of 2006. Others believe it will rise more slowly.

Of course, the situation is not only about the Canadian dollar's strength, thanks to energy exports and prices. It's also about the slide occurring in U.S. dollar values.

Currency parity with the U.S. is a disaster for Canadian manufacturers and exporters which is why Canadian governments must bear the brunt of adjustments that will avert problems that are already being felt.

Make no mistake the U.S. dollar is in trouble which makes the C$ worries worse.
The latest concern to hit investor/exporter radar screens is that the world's oil exporters have begun to have second thoughts about keeping their reserves in the U.S. currency. Their reserves are growing more rapidly than Asia's and in a year or two could even rival Japan's and China's.

The Asians -- China, India, Japan and others -- are slightly diversifying their savings into other currencies, but in general must be committed to holding U.S. dollars in order to keep their currencies down in value for export purposes.

But the energy exporters are a different story and are earning twice as much money from the U.S. economy as are Asia's manufacturers.

According to recent figures from the International Monetary Fund, the Middle Eastern nations have more reserves than China's US$800 billion; Russia has US$200B in reserves and Africa's oil exporters, US$162 billion. Recent reports are that the United Arab Emirates - upset at the Dubai Ports protectionist controversy - have started to place most of their savings in Euros, thus adding to the downward pressure on the U.S. dollar.

In total, developing countries alone now have US$2.9 trillion in U.S. reserves, as of the end of 2005. And this, says the IMF, has pushed down the yields on U.S. bonds, a favorite haven. This means that diversification out of the US$ is more compelling.

As the C$ and US$ move toward parity, Canadian exporters find themselves squeezed: Their costs are borne in higher, Canadian dollars and their earnings are now in less valuable U.S. dollars. And domestic manufacturers here are losing their cost advantage to Americans.

Results are showing. Canadian manufacturing is slowing while U.S. manufacturing is increasing -- a divergence which hasn't occurred for two decades. This week, Canada's Business Conditions Survey covering 4,000 firms said 14% of Canadian companies plan production increases in the next quarter; 27% expect reductions in production and 58% expect the status quo. American manufacturers are mostly predicting growth in output.

The last time Canadian manufacturers lagged their American counterparts was in 1983 during a recession and prime rates of 22%.

As Manufacturers and Exporters Canada has recommended, the federal and provincial governments must quicken write-offs in new machinery and equipment to match U.S. depreciation rates. This will not only help their bottom lines but help them enhance automation and upgrade their technology to overcome the currency-price differential.

Such rules will also help the energy sector.
Canada's oil industry is transforming itself from exploration to "manufacturing" or the upgrading of tar sands and heavy oil deposits. These processes require huge capital expenditures for equipment, technology and infrastructure. They need faster write-offs too.

In addition to faster write-offs, governments must lower corporate income taxes and business taxes of all kinds. Toronto is particularly greedy in levying excessive business taxes.

And the Bank of Canada should also realize that adjustments are needed. It must back off its tendency to be overzealous in raising interest rates. The Canadian dollar doesn't need protection and is able to attract investors because of energy. If anything, the Bank should embark on a strategy of dampening the dollar's value in order to keep the economy - both east and west -- humming.

The "Dutch Disease" awaits ignorant governments unwilling to adjust to new economic realities.