Scotiabank's Commodity Price Index Declines Again in April

• Western Canadian Crude Oil Prices to Climb in May and June; Lumber Prices Surge; Spot Uranium Prices Expected to Bottom in 2012

TORONTO, May 10, 2012 /CNW/ - Scotiabank's Commodity Price Index retreated by 2.3 per cent month over month (m/m) in April, the fifth-consecutive monthly decline. As in March, the Index's decline was led by oil and gas (-4.6 per cent m/m).

"The All Items Index has dropped by 15.3 per cent from the near-term peak in April 2011, partly due to a moderation in China's GDP growth to 8.1 per cent in 2012:Q1, as well as tight monetary policy in China and ongoing concern over economic and political prospects in Europe," said Patricia Mohr, Scotiabank Vice-President, Economics and Commodity Market Specialist. "However the pullback in commodity prices remains mild compared with the 46 per cent plunge from July to December 2008 during the global recession. Signs point to a rebound in commodity prices in May."

Canadian natural gas export prices fell to a decade low of about US$2.19 per thousand cubic feet (mcf) in April, though prices are starting to rally back. International oil prices also edged down, with the price discount on Western Canadian Select (WCS), relative to West Texas Intermediate (WTI) oil, widening from US$31.41 per barrel to US$32.81 in April. WCS normally trades at a price discount of only US$17 to US$18, given quality differentials.

"On a more positive note, the discounts on Western Canada's light-sweet and heavy crude oils will narrow significantly in May and June (for WCS to US$19.70 in May and only about US$13 in June) ," added Ms. Mohr. "This reflects an end to seasonal turnarounds at U.S. Midwest refineries and less export pipeline congestion, with outages at Alberta synthetic crude oil operations - 250,000 barrels per day (b/d) - temporarily freeing up pipeline space and boosting prices for other light crudes at Edmonton.

"The reversal of the Seaway Pipeline scheduled for May 17 is also providing a psychological boost, by linking the Cushing, Oklahoma hub to US Gulf Coast refineries (first phase 150,000 b/d), where international oil prices prevail," she said.

The Metal and Mineral Index also lost ground in April (-3.1 per cent m/m), as moderate declines in base metals and gold more than offset slight gains in iron ore, uranium and cobalt.

In contrast, the Agricultural Index - the strongest sub-component this year - advanced by 2.0 per cent m/m, with soaring prices for canola, strong barley and a pick-up in wheat. No. 1 spot canola in-store Vancouver jumped to a near-record US$673 per tonne in April - up eight per cent from an already high US$622 a year earlier.

The Forest Products Index rose by 1.5 per cent m/m in April - the third consecutive monthly gain.  Northern bleached softwood kraft (NBSK) pulp prices increased by US$30 to US$900 per tonne in the United States alongside stronger Chinese demand in the first quarter of 2012 and lower world inventories in March.  While Western Spruce-Pine-Fir 2x4 lumber prices remained flat in April at US$280 per thousand board feet, prices surged in early May to a lucrative US$301 alongside mill outages in B.C. The recent loss of two B.C. mills to fire will hasten the day when only a modest improvement in U.S. housing starts - in the context of rising shipments to China - will significantly lift lumber prices.

International oil prices will remain high in coming months, boosted by the July 1 EU embargo on all Iranian oil and U.S. pressure on India and other importers to cut purchases from Iran. However, Brent oil has lost some momentum, easing from US$124 in March to US$115 in April and US$113 in early May.

Nevertheless, oil prices in Western Canada will strengthen in May and June alongside significantly lower discounts off WTI. WCS heavy oil is priced at more than US$82 in early May - a substantial bounce back from only US$70.54 in April.  Light-sweet crude at Edmonton will also rally.

LME copper prices eased from US$3.84 per pound in March to US$3.75 in April and are currently US$3.67 (still yielding a 50 per cent profit margin over average world breakeven costs including depreciation).

Spot potash prices (FOB Vancouver) edged down from US$495 per tonne in March to US$480 in April, with some competitive price cutting in Southeast Asia.  However, BPC has sold about 100,000 tonnes of the granular grade in Brazil at US$550 per tonne cost and freight (CFR), up US$30 in May, supported by the strength of the international soybean market and Brazil's leading role in that crop.

Spot iron ore prices delivered to Qingdao, China - representative of prices paid for shipments from Labrador and northern Quebec - have edged up from a low of US$135 in November to almost US$148 in April. However, prices have lost ground again late month, with an incomplete recovery in China's steel production (47 per cent of world output).

Spot uranium prices remain at a low ebb of US$52 per pound - well below the US$66.50 just prior to the tragic earthquake and tsunami in Japan and the Fukushima-Daiichi nuclear power plant accident in March 2011. Base prices (prior to escalation) for term contracts are currently US$60 - down from US$73 prior to Fukushima.

Spot uranium prices may well bottom in 2012, with sentiment and prices starting to recover in 2013 ahead of the expiry of the Russia-U.S. highly enriched uranium (HEU) agreement (removing 24 million pounds from Western markets). Term contracting already appears to be picking up, with the market anticipating prices at the US$70 level late decade.

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.

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