Scotiabank's Commodity Price Index Climbs Further in October

• China's 12^th Five-Year Plan will double the role of nuclear energy, with positive implications for uranium.  

TORONTO, Nov. 30 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, advanced by 3.6 per cent month over month (m/m) in October, posting its fourth consecutive monthly gain. The All Items Index has climbed 31.6 per cent above the April 2009 low, following the global credit crisis of second-half 2008. Commodity prices will likely rise further in November.

"A second round of Fed quantitative easing, announced on November 3, injected fresh liquidity to bolster the U.S. economy and significantly weakened the U.S. dollar, triggering a powerful rally in commodity prices through November 11," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "This surge will likely offset the recent pull back, linked to concern over further monetary policy tightening in China to stem a pick-up in inflation - 4.4 per cent year over year for the CPI and 5.0 per cent for producer prices - difficulties in the Irish banking sector and another bout of investor risk aversion triggered by Euro-zone debt."

The Oil & Gas Index led the advance in October, rising 4.9 per cent m/m. While U.S. dollar fluctuations continue to dominate day-to-day movements in oil prices, the world supply/demand balance has also tightened noticeably in 2010. World oil consumption has fully recovered this year - up a solid and much stronger-than-expected 2.8 per cent - surpassing the previous peak in 2007 - with growth concentrated in emerging economies.

China's 12^th Five-Year Plan - Implications for Resource Industries

"China's 12th Five-Year Plan, to be finalized around March 2011, will set the overall framework for economic growth in China from 2011-15, with important implications for the resource sectors," stated Ms. Mohr.

The plan is likely to emphasize: more balanced economic growth, with less focus on export expansion and greater focus on increasing domestic consumer spending and development of the service industries; economic restructuring focusing on the closure of smaller, less efficient plant and rationalization into larger, lower-cost entities; reducing industrial energy intensity (power use per unit of GDP); China's recent commitment to cut energy intensity by a further 17.3 per cent from 2011-15; a greater focus on developing the Central and Western parts of China, away from the heavily industrialized Eastern and Southern Coastal areas; as well as raising household incomes and living standards.

"The implications for Canada include the following: nuclear power - emitting virtually no greenhouse gases - is likely to be favoured, with positive investment implications for uranium," commented Ms. Mohr. "As well, potash and fertilizers will be in strong demand in the next five years, as rising consumer incomes allow households to consume more meat, requiring fertilizer-intensive feed grains such as corn. Less focus on further industrialization and more on consumer spending implies slower, but still high, base metals consumption growth than in the past ten years, with China's copper consumption as a per cent of world demand growing further.  Interest by Chinese investors in Canada's mining and oil & gas sectors will surge, with a marked pick-up in equity investments, joint ventures and M&A activity, especially junior mining companies, already very noticeable since 2009."

Metals & Minerals

The Metal & Mineral Index surged in October (up 4.7 per cent m/m) - climbing well above the previous near-term high in April 2010 - and up 41.5 per cent from the April 2009 cyclical low (the best performance of any sub-component since the 2008 global credit crisis).

LME copper prices soared to US$4.05 per pound on November 11, approaching the all-time record high of US$4.08 on July 3, 2008. Uranium prices have also been boosted by positive news from China - indicating that the renaissance in nuclear energy is genuinely underway.

"After bottoming last March at US$40.50 per pound, spot uranium prices have been firming up since last July, rising to US$52 in late October and US$61 in late November, triggering a US$3 increase in the average long-term base contract price to US$65," added Ms. Mohr. "Prices jumped around November 8, following comments by China's National Development and Reform Commission's Energy Research Institute that China is considering a new target for nuclear power of 80 GWe by 2020, initially reported by the media as 112 GWe, double the current 40 GWe target, and much larger-than-expected even by optimistic observers. "

Spot uranium prices were also spurred in early November by news of large, long-term supply agreements with the two major buyers in China - China National Nuclear Association (CNNC) and China Guangdong Nuclear Power Corp. (CGNPC). Cameco (the world's largest publicly-traded uranium producer) has just announced that it will supply CGNPC with 25 million pounds of uranium concentrates through 2025, following an agreement to sell 23 million pounds to CNNC through 2010 (announced at the time of the G20 Summit in Toronto).  

The contract price for premium-grade hard coking coal from Western Canada to Japan and other Asian markets declined from US$225 per tonne (FOB Vancouver) in JFY2010:Q2 to US$209 in JFY2010:Q3 (October to December) in line with lower spot prices last summer. Prices, nevertheless, remain 63.3 per cent above a year ago. Lower prices reflect last summer's seasonal slowdown in global steel production, recent electricity cutbacks to heavy industry in China and the mandated closure of many small, inefficient steel mills in China. Coking coal prices will remain firm in 2011, with first-quarter prices possibly up 5-10 per cent to US$220-225.

Oil & Gas

The recent rally in WTI oil prices reflects a solid 2.8 per cent recovery in world demand in 2010 (2011 forecast: 1.5 per cent). China's implied petroleum consumption jumped 11.3 per cent year over year in October to a record high, with stepped-up diesel demand to run back-up power generators, in view of mandated electricity cutbacks and closure of small coal mines this Fall. China - which has much lower strategic reserves than the United States or other International Energy Agency (IEA) members - is expected to build a second round of inventories (a development likely to underpin oil prices in 2011-12).  U.S. consumption has edged up by 1.6 per cent this year, but remains below 2004-05-peak levels.

The Agricultural Index also advanced by 2.0 per cent m/m in October, as grain and oilseed prices moved higher (especially canola - the highest value crop in Western Canada). Meanwhile, the Forest Products Index posted its fourth consecutive monthly gain (up1.3 per cent m/m). Western Spruce-Pine-Fir 2x4 lumber prices continued to rally contra-seasonally, rising to a profitable US$276 per thousand board feet in mid-November, despite still weak U.S. housing markets (519,000 units annualized in October). This reflects the emergence of China as a major importer of Canadian lumber.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

For further information:

Patricia Mohr, Scotia Economics, [phone], [email protected]; or
Patty Stathokostas, Scotiabank Media Communications, [phone] or [email protected].