Scotiabank Commodity Price Index Inches Down in August

TORONTO, Sept. 30, 2013 /CNW/ - Scotiabank's Commodity Price Index inched down by -0.1% month over month (m/m) in August.  However the All Items Index has edged up so far this year (+1.2% over the previous eight months of 2012), largely reflecting a rebound in the Oil & Gas Index from last December's low as well as a strong cyclical recovery in building material prices. The Oil & Gas Index continued to gain ground in August, +0.4% m/m, + 24% year over year (yr/yr).

"Slight gains in Alberta light and heavy crude oil and a big increase in propane prices at both Edmonton and Sarnia offset softer natural gas export prices," said Patricia Mohr, Scotiabank's Vice President of Economics and Commodity Market Specialist. "Western Canadian Select heavy oil (WCS) at Hardisty, Alberta climbed to US$90.90 per barrel - the highest level since mid-2008, when WTI oil prices were at a record (US$147.90) - just prior to the 2008-09 Great Recession. 

"This price level is closer to the true, inherent value of heavy crude oil in international markets compared with the heavily discounted prices of only US$62.37 in 2013:Q1."

Highlights in the report include:

• Agricultural prices lose ground, as record U.S. corn crop and record world wheat  crop push down prices;
  
  
• However, base metal prices rally and spot iron ore and coking coal prices move higher, as Chinese steel mills restock ahead of the Fall construction season.  China's steel production now represents 50% of the world total; and
  
  
• Stepped-up rail shipments of heavy crude will offset further delays to Keystone XL.  

Read the full Scotiabank Commodity Price Index below, or at http://www.scotiabank.com/ca/en/0,,3112,00.html.

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Scotiabank's Commodity Price Index inched down by -0.1% m/m in August. However, the All Items Index has edged up so far this year (+1.2% over the previous eight months of 2012), largely reflecting a rebound in the Oil & Gas Index from last December's low as well as a strong cyclical recovery in building material prices. While agricultural prices will move lower in September and potash prices will continue to be hurt by the fallout from the Uralkali exit from BPC, we would not be surprised to see commodity prices bottom later this year.

The Oil & Gas Index continued to gain ground in August (+0.4% m/m, + 24% yr/yr). Slight gains in Alberta light and heavy crude oil and a big increase in propane prices at both Edmonton and Sarnia offset softer natural gas export prices. Western Canadian Select heavy oil (WCS) at Hardisty, Alberta climbed to US$90.90 per barrel — the highest level since mid-2008, when WTI oil prices were at a record (US$147.90) — just prior to the 2008-09 'Great Recession'. This price level is closer to the true, inherent value of heavy crude oil in international markets compared with the heavily discounted prices of only US$62.37 in 2013:Q1. This reflects both a temporary narrowing of the price discount on WCS heavy oil relative to WTI in July and August, but also an increase in WTI prices closer to Brent (the international benchmark). WTI oil is currently trading at US$102.87 — only US$5.76 less than Brent at US$108.63. New pipeline developments in northern Texas as well as Seaway expansion, have connected U.S. Mid-Continent supplies to the Houston refining centre, draining oil away from Cushing (the NYMEX pricing point).

The Metal & Mineral Index also rallied by 1.0% m/m in August, after losing ground for six consecutive months (-13.6% yr/yr). Base metal prices strengthened across a broad front alongside stronger economic indicators from China (better-than-expected export & import data in July, a stronger Official Purchasing Manager Index for Manufacturing and robust gains in industrial production of 9.7% yr/yr in July and 10.4% in August). The net result, LME copper prices climbed from US$3.13 per pound in July (the lowest monthly average of 2013) to US$3.26 in August and are US$3.29 in late September — still yielding a lucrative 35% profit margin over average world breakeven costs (including depreciation). Contrary to market expectations, China's demand for refined copper has been strong this year, with cathode imports up 14.7% yr/yr in July and concentrate imports reaching a record (+37% ytd).

The Forest Products Index also rose by 1.0% m/m in August to a level 2.7% above a year earlier. After a correction in 2013:Q2, Western Spruce-Pine-Fir 2x4 lumber prices have posted a strong rally, rising from a monthly low of US$297 per mfbm in June to US$326 in August and currently stand at US$359, yielding strong profits for mills in Western Canada.  A surge in buying by price-sensitive Chinese buyers in July, taking advantage of significantly lower prices, as well as a slow uptick in the United States, appears to have led the recovery. Block sales to Chinese customers from Western Canada reduced availability to the United States, lifting lumber prices across the U.S. and Canada.  Canadian exports to China jumped by 43% m/m in July and were 29% above July 2012 volumes.  In recent years, China has emerged as Canada's second-largest export destination, accounting for 19.2% of Canadian softwood lumber exports in 2013 YTD (approaching 1/3 of exports by Western Canada); Japan is third at 7.6%.  Recent developments highlight the benefits of export diversification.

The rejuvenation of lumber & other building material prices since late 2011 has triggered an average 124% jump in equity values for three of Western Canada's best-known forest products companies (West Fraser, Canfor and Interfor).

A 4.4% m/m decline in the Agricultural Index in August just offset the gains in the Industrial sub-components noted above.  Barley prices at Lethbridge, Alberta (a feed grain) led the decline, dropping 18.5% m/m to US$212 per tonne (an 18-month low). This reflects softer CBOT near-by futures for corn, which fell from US$5.93 per bushel in July to US$4.81 in August and  is currently US$4.57 (still above the 2000-13 average of US$3.73).  After the U.S. Midwest drought of last year, the U.S. Department of Agriculture expects a record U.S. corn crop this Fall (13.8 bn bushels, +29% yr/yr) and has revised up its national yield estimate to 155.3 bushels per acre.

Canola prices (No.1 grade at Vancouver) also fell in August (-6% m/m, -20.6% yr/yr) alongside lower — though still high — CBOT soybean prices. While the U.S. soybean crop has been revised down (farmers shifted some spring plantings to corn), the world soybean crop is expected to reach new heights, as a record crop in Brazil and upward estimates for Paraguay offset reductions for the United States, Canada, China and Russia. Soybean oil prices have also been pressured by large global vegetable oil supplies. Despite lower prices (including for wheat), farm income on the Canadian Prairies will be supported by a large harvest (possibly monster-sized). 

World Oil Prices & 'Fed Tapering' 

Brent oil prices climbed from US$104.70 per barrel in July to a high of US$116.61 in late August — buoyed by 'geopolitical tensions' surrounding Syria and the near total shutdown of Libyan production — before receding to US$108.63 in late September, on a Russian proposal for Syria to surrender chemical weapons.  Global supply & demand conditions in 2013:Q3 are balanced, with the 'call' on OPEC crude at 30.3 mb/d and world inventories on the low side.  Saudi Arabia stepped up output to 10.2 mb/d in August (a 32-year high), offering increased shipments to Asia to offset a temporary reduction in FSU supplies.  However, Libyan production was cut in half and plunged to a mere 150,000 b/d in early September amid civil unrest (down from 1.4 mb/d in 2012).  New refining capacity in Saudi Arabia and China also boosted demand.

In 2014, global consumption should pick up modestly (+l.2%) with somewhat better economic conditions.  However, prospects for 'Fed tapering' of its 'asset purchase program' (the monthly purchase of US$85 bn of Treasury bonds & mortgage-backed securities) recently pushed up U.S. bond yields, prompting hot money outflows & currency depreciation in some 'emerging markets' such as India and Indonesia. While domestic subsidies on gasoline & diesel often offset higher local currency import prices, actual Fed tapering could contribute to marginally lower oil demand in some non-OECD countries. In addition, the rapid development of new 'light, tight' oil in the United States continues, with output up 1.1 mb/d over a year earlier to 7.5 mb/d in July.  A possible easing in tensions over Iran's nuclear program also poses a 'risk' of more supply, likely capping oil prices. Sanctions have curbed Iranian exports to a mere 985,000 b/d. 

Increased Heavy Oil Rail Capacity Will Offset Delays To Keystone XL   

Lengthy delays in U.S. Presidential approval of the Keystone XL Pipeline are encouraging the development of new rail loading terminals in Western Canada for unit train shipments of heavy crude oil. While the discount on Western Canadian Select heavy oil off WTI narrowed in August to US$15.64, the differential widened again to US$22.75 in September and will be US$26.24 in October, reducing WCS heavy prices to about US$83 this month. Narrowing these large price discounts and 'growing' the oil industry requires building more transportation infrastructure to connect Western Canada's 'oil patch' to overseas and North American refining markets, where world prices prevail. 

Scotiabank GBM estimates suggest that the new rail loading capacity currently being developed in Western Canada (mostly for heavy oil shipments bound for the United States) could surpass the capacity of the proposed Keystone XL Pipeline by 2015.  These terminals could handle at least 683,000 b/d of heavy crude oil — though offloading facilities at destination have not yet kept pace — compared with Keystone XL capacity of 830,000 b/d, of which about 580,000 b/d would be available for Canadian oil headed to US Gulf Coast refineries. The new rail loading facilities will connect into the CNR and CPR networks across the U.S. and Canada, with CNR having the broadest reach into the USGC. While market access will be enhanced and the discounts on WCS heavy oil should drop, rail costs via unit train to the USGC are estimated at US$15-18 per barrel (double pipeline costs).  However, the development of diluent recovery units and diluent backhaul systems could significantly lower rail costs over time.         

Metals & Minerals  

Spot iron ore prices, 62% Fe, in northern China — representative of spot prices paid for Labrador Trough ore — have increased from a seasonal low of US$115 per tonne in June to US$136.70 in August and are currently US$133.80.  Spot prices for premium-grade hard coking coal (FOB Australia) have also rallied from US$130.80 per tonne in July to US$140 in August (+7.1% m/m).  Stronger prices reflect re-stocking by Chinese steel mills ahead of the Fall 'construction season'. The mini-stimulus plan, unveiled by China's State Council in late July, is boosting steel-intensive private-sector railway investment.  Despite the recent improvement, market conditions for iron ore are likely to turn very competitive in 2014, as major producers commission large, low-cost developments in Western Australia.

Gold Prices (London PM Fix) also strengthened in August, climbing to US$1,347 per ounce alongside strong physical demand in traditional buying countries such as China and Hong Kong, a slowdown in ETF redemptions by investors and short-covering by funds.  While gold prices remain vulnerable to Fed tapering (expected in late 2013 or early 2014), we are optimistic that the bottom in gold prices occurred in late June at US$1,180 (just above 'all-in sustaining cash costs' for high- cost producers).

Spot potash prices (FOB Vancouver) eased from US$417.50 per tonne in July to US$389 in August and are currently estimated at about US$335.  Market conditions have turned quiet, following the exit of Uralkali from the BPC marketing arrangement in late July.   Brazil is buying potash now for near-term application, given its record soybean and good corn harvests.  While prices may drift somewhat lower over the balance of 2013,  prices below US$300 are not expected.

SOURCE: Scotiabank

Patricia Mohr, Scotiabank Economics, [phone], [email protected]; or

Devinder Lamsar, Scotiabank Media Communications, [phone], [email protected].