Scotiabank's Commodity Price Index Edges Down in May

• Saudi Arabia needs to curb its over-production to steady world oil prices

TORONTO, June 27, 2012 /CNW/ - Scotiabank's Commodity Price Index inched down by 0.1 per cent in May - the sixth consecutive monthly decline. The All Items Index has fallen 15.9 per cent below its April 2011 near-term peak, just prior to the advent of concern over excessive European 'sovereign' debt.  However, the correction remains much less than the 46 per cent slide in the second half of 2008.

"Concern over slowing global growth - as highlighted by weakening Purchasing Manager Indices in the Eurozone, China and the U.S. mid-Atlantic region and little progress by the Eurozone in dealing with its financial challenges - have pulled down riskier assets such as commodities and equities," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "Disappointment that the Federal Reserve Board (the Fed) did not move to support the U.S. economy through more aggressive monetary policy easing - via a third round of quantitative easing (QE3) rather than only a partial extension of the Operation Twist program - triggered a further correction in oil and gold prices after the June 19-20, 2012 FOMC meeting."

The Metal and Mineral Index fell by 3.0 per cent month over month (m/m) in May to a level 14.2 per cent below a year earlier. Base metal prices lost further ground, with London Metal Exchange (LME) copper falling to US$3.59 per pound in May and a low of US$3.29 on June 8, 2012, before rebounding to a still quite profitable US$3.33 in late June (yielding a 45 per cent profit margin). Zinc and nickel prices also remain at lucrative levels, though aluminium is weak (falling below average world cash costs, partly due to smelter expansion in northwest China).

The Oil and Gas Index advanced by 3.6 per cent m/m in May. Despite declining international oil prices, Edmonton light, sweet oil and Western Canadian Select (WCS) heavy oil rallied in May, with discounts to West Texas Intermediate (WTI) oil narrowing. WCS (bitumen blended with dilbit or synbit) rose from US$70.54 per barrel to US$75.01 in May alongside less congestion on export pipelines to the United States as well as a normal seasonal pick-up in demand.

"Saudi Arabia's deliberate over-production in 2012:H1 - to offset lost Iranian oil due to sanctions and to prevent high oil prices from derailing a fragile world economy - has contributed to a sharp plunge in international oil prices in June, pressuring Western Canadian crude," said Ms. Mohr. "Despite the coming July 1, 2012 European Union embargo on the purchase or shipment of all Iranian crude, Brent briefly dropped as low as US$88.99 on June 21from a near-term high of US$128.10 on February 24 amid global growth concerns and ample world inventories (now at normal levels)."

The Forest Products Index continued to be a bright spot in May (+3.0 per cent m/m), the fourth consecutive monthly gain. While other sub-indices have fallen below year-ago levels, forest products have climbed modestly above a year earlier (+4.1 per cent).

The Agricultural Index eased seasonally in May (-3.5 per cent m/m), after strength over the spring. Canola prices (No.1 grade in store Vancouver) fell back to a still lucrative US$651 per tonne from a near-record US$673 in April. Wheat prices also lost ground.

"With the Canadian Wheat Board (CWB) no longer quoting 'asking export prices' to the Canadian Grain Commission - given the end of its monopoly in selling Canadian wheat in export and domestic markets - we have shifted prices in the Scotiabank Commodity Price Index to Minneapolis Dark Northern Spring Wheat (No. 1, high-protein 14 per cent, delivered to the Great Lakes at Duluth)," said Ms. Mohr. "In the past, the CWB's asking export price for No.1 grade high-protein 13.5 per cent CWRS wheat has been set in the context of Minneapolis Grain Exchange (MGX) prices — the closest grade quoted on U.S. exchanges."

Turning to natural gas, NYMEX near-by futures prices appear to have bottomed at US$1.91 per mmbtu (million British thermal units) on April 19, climbing to US$2.49 in May and US$2.68 in late June. Only the very lowest-cost of the 'liquids-rich' natural gas shales such as Eagle Ford and Marcellus can be produced profitably at prices below US$2.  The 'dry' portion of the Marcellus requires US$3.  Anticipation of a hot summer across North America has also bolstered prices — both in the United States and Canada.

Spot uranium prices remain at a low ebb.  While prices inched up from US$51.45 per pound in April to US$52 in May, prices have eased back to US$50.75 in late June (partly reflecting the summer doldrums as well as another planned barter sale by the U.S. Department of Energy).  However, anticipation of a recovery in market conditions over the medium-term encouraged buyers to bid up base-contract prices for term commitments to US$61.50 in late May (+US$1.50) — the first increase since the Fukushima-Daiichi incident.  China is expected to resume approvals for new nuclear power plants soon.

Spot iron ore prices 62 per cent (Fe) delivered to Qingdao, China (indicative of prices paid to Canadian producers in the Labrador Trough) lost ground in May, dropping to US$136.67 per tonne from US$147.65 in April.  However, prices have steadied in recent weeks, with China's steel production holding up at a high level.  Gold prices remain volatile, with the market looking for aggressive monetary policy easing by the Fed or the European Central Bank.

Market conditions for potash are lacklustre, with the market dampened by high producer inventories - reflecting a lack of new business in India - and awaiting a third-quarter contract with China.  India has cut potash subsidies for farmers (likely due to budgetary constraints), raising effective prices in India.  However, buying by India should resume around August.  Volumes remain good into Brazil.  Spot prices (FOB Vancouver) edged down from US$480 per tonne in April to US$475 in May, but remain above year-ago levels of US$445.

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