Scotiabank's Commodity Price Index Edges Down In February

Potash Prices Should Steady, as a Strong Rally in U.S. Soybean Prices - Spilling Over into Canola and Palm Oil - Points to Solid Fertilizer Application this Spring   

TORONTO, March 27, 2012 /CNW/ - Scotiabank's Commodity Price Index eased for the third consecutive month in February, down 0.7 per cent month over month (January 2007=100, 2010 net export weights).  A decline in the Oil and Gas sub-component (-3.4 per cent month over month) just offset stronger Metals and Minerals (up 1.5 per cent), firmer Agricultural prices (up 1.1 per cent) and a slight gain in Forest Products (up 0.8 per cent).  Despite the decline, the All Items Index remained 2.9 per cent above a year earlier - largely reflecting historically strong oil prices.

"While international benchmarks - Brent and West Texas Intermediate (WTI) oil prices - continued to climb in February, both Edmonton light sweet and Western Canadian Select heavy oil prices fell in Western Canada," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank, "Western Canadian Select (WCS) normally trades at a price discount to WTI oil (averaging US$17.79 per barrel from 2005-2011), given quality differentials. However, the discount increased in February to US$19.33 and is unusually wide in March at US$31.44."

While heavy oil development - particularly from Steam-Assisted Gravity Drainage (SAGD) bitumen projects - has been growing with development of the Alberta oil sands as well as conventional fields, the expansion of export pipeline capacity has not kept pace.

"There is an urgent need to tap faster growing Asian markets, where world prices prevail, and to diversify away from over-supplied U.S. Midwest refining centres," added Ms. Mohr. "Crude oil and refined petroleum products account for a huge 28.5 per cent of Canada's net exports of commodities and resource-based manufactured goods (2010 data), highlighting the importance of addressing this issue."

A strong rally in base metal prices and firmer gold led the Metal and Mineral Index higher in February.  London Metal Exchange (LME) copper prices spiked to US$3.93 per pound late month - leading other base metals higher - as some of the late-2011 gloom on the global economic outlook lifted.

"Base metal premiums over LME cash in the U.S. Midwest are also firm, with the Platts U.S. aluminum premium hitting a fresh 10-month high of 8.75 US cents per pound in mid-March," said Ms. Mohr. "Aside from lengthy delays in getting metal out of the LME warehouse in Detroit and lucrative warehousing deals, this strength likely reflects a significant recovery in U.S. auto assemblies, scheduled to reach 10.5 million units in 2012:Q2 - a level not seen since mid-2007. Consumers and businesses are replacing an aging fleet, with the average age of vehicles on U.S. roads now at a record of nearly eleven years, up from a normal nine."

The Agricultural Index also advanced in February.  Further strength in cattle and hog prices and gains in barley and Atlantic Coast lobster more than offset flat wheat and a slight decline in canola prices.  Chicago Board Of Trade (CBOT) soybean futures - a key oilseed price - have rallied sharply to US$13.80 per bushel in late March, retracing the weakness which emerged last Fall in the wake of heightened concern over eurozone prospects.

The strength in soybean prices has spilled over into canola (Canada's second-highest valued crop).  No. 1 canola at Vancouver climbed to C$628 per tonne the week of March 12-16 - 12 per cent above a year earlier.  Canola exports to China should ramp up in the second half of 2012, with nine crushers in China's rapeseed growing provinces permitted to import Canadian canola.

Spot potash prices (in store Vancouver) eased back from US$500 per tonne in January to US$495 in February, but remained well above US$393 a year ago. Granular potash prices in Brazil have also retreated by about US$30 to US$520 including cost and freight (CFR) for large buyers, while market conditions have been softer in Southeast Asia.  Buyers have been deferring orders, expecting prices to decline. 

However signs point to steadier potash markets ahead. Canpotex and the Belarusian Potash Company (BPC) have just agreed on new contracts with Chinese buyers for 2012:Q2 (at US$470 per tonne, cost and freight - unchanged from 2011:H2).

The recent rebound in soybean, canola and palm oil prices in Malaysia/Indonesia and ongoing strength in corn prices - all requiring large amounts of potash per hectare planted - has improved farm economics and bodes well for solid fertilizer application in North America, Southeast Asia and Brazil, as 2012 unfolds.

The Forest Products Index edged up in February, as firmer lumber prices just offset a slight decline in OSB and unchanged Northern Bleached Softwood Kraft (NBSK) pulp, newsprint, SC-A paper and linerboard prices.  Western Spruce-Pine-Fir 2x4 lumber prices rose to a profitable US$264 per Thousand Board Feet (mfbm) from US$254 in January and only US$238 in 2011:Q4.  Orders from China have picked up again, after waning in the fourth quarter.

Scotiabank economists and market strategists are located in Canada, the United States, Mexico, Peru, Chile, Thailand, Hong Kong, the United Kingdom and France. The team provides in-depth commentary regarding the factors shaping the outlook for the global economy, currencies, capital markets and commodities as well as coverage of monetary and public policy issues.

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

Joe Konecny, Scotiabank Media Communications, [phone], [email protected].