Scotiabank's Commodity Price Index Edges Down in October

• Montreal and Atlantic Canada:  A potential market for Western Canada's oil   
• Copper prices remain resilient, as new mine development in 2012 again fails to meet expectations      
• Forest product equities rally amid a solid Lumber and OSB outlook for 2013-2014

TORONTO, Nov. 22, 2012 /CNW/ - After two months of strong gains, Scotiabank's Commodity Price Index edged down in October by 0.2% month over month (m/m). Risk aversion returned mid-month, alongside another bout of concern over the outlook for global growth.  The All Items Index currently stands 14.1% below the near-term peak in April 2011 - just prior to the advent of financial market concern over excessive Eurozone sovereign debt - and has fallen by 5.2% this year. 

"Oil and gas prices rose across the board in October, with firmer natural gas and propane prices in Edmonton and Sarnia, as well as slight gains in light and heavy crude oil in Alberta," said Patricia Mohr, Vice President, Economics and Commodity Market Specialist at Scotiabank.

While still low, natural gas export prices to the U.S. market jumped from US$2.52 per thousand cubic feet (Mcf) in September to an estimated US$2.94 in October, after touching bottom at an exceptionally weak US$2.06 last April. Expectations of a return to normal winter temperatures across the U.S. and Canada - after an abnormally warm winter last year - boosted prices, despite record high U.S. gas-in-storage (3,908 billion cubic feet going into the heating season in November).

International oil prices, as measured by Brent, rose as high as US$115 per barrel mid-month, before losing ground to US$110 in mid-November.  Light oil prices in Edmonton also inched ahead to US$93.14 per barrel last month and Western Canadian Select (WCS) heavy oil to US$79.86, with the discount on WCS relative to West Texas Intermediate (WTI) oil narrowing seasonally to only US$9.71.

"In addition to proposed export pipeline development to the B.C. Coast, the reversal of Enbridge's Line 9 from Ontario to Montreal will provide another welcome market for Western Canada's oil, helping to narrow the large current discounts on WCS heavy oil (and even on light crudes) off WTI oil," said Ms. Mohr.

Enbridge is expected to apply for a National Energy Board (NEB) permit for this reversal within the next month and should be able to flow crude eastward to Montreal by 2014, allowing refineries to access crude from Western Canada and displace more expensive overseas imports (priced at Brent or higher).

"Because petroleum products are sold at world prices, integrating operations from crude oil production through refining allows producers to essentially capture world prices for crude oil - one of the merits of domestic refining," added Ms. Mohr.

The Metal and Mineral Index lost ground in October (-3.4% m/m), as a mixed performance by base metals and sharp declines in premium-grade hard coking coal and uranium more than offset slightly stronger gold prices and a rebound in spot iron ore prices delivered to China.

The contract price for Western Canada's premium-grade hard coking coal dropped from US$225 per tonne to US$170 (Free on Board Vancouver) in 2012:Q4 (calendar quarter), pushed down by an inventory correction last summer in China's steel industry, reducing demand for coking coal and iron ore.

According to the report, London Metal Exchange (LME) copper prices edged up from US$3.65 per pound in September to US$3.66 in October.  World refined copper consumption has slowed to only 1.9% in 2012, with higher consumption in China (up 6.3%) , the Middle East including Turkey (6%) and the United States (1%), just offsetting a 7% decline in Europe and Russia. However, the anticipated increase in copper mine production this year has again failed to meet expectations (up only 3.9%).

Spot prices for iron ore (62% Fe), delivered to northern China have firmed up to US$122 per tonne in early November, after touching a low of US$90 in late August.

"World steel output has turned sluggish," said Ms. Mohr. "However China's industrial production has picked up again from 8.9% year over year (yr/yr) in August to 9.6% in October - led by gains in steel products, ferrous metals and electricity generation."

Steel mills in China have been stepping up their output once more, given strong infrastructure spending and rising home sales, pointing to some recovery ahead in steel rebar demand.

Gold prices (London PM Fix) rose to a six-month high of US$1,791.75 per ounce on October 4, 2012 boosted by the U.S. Federal Reserve announcement of a third round of quantitative easing (QE3).  Financial markets expect a Barack Obama Presidency to be positive for gold, with Chairman Ben Bernanke staying at the helm of the U.S. Federal Reserve until 2014 and very accommodative monetary policy continuing.

According to the report, the Forest Product Index edged lower in October (-0.3% m/m). Oriented Strand Board (OSB) prices in the U.S. North Central region eased back to a still very lucrative US$300 per thousand square feet, after panic buying drove OSB to US$347.50 in September. However OSB has turned higher again in November and lumber prices continue to rally on expectations that stronger U.S. housing starts in 2013 will hit a wall of limited supply, given the substantial mill closures of the past five years.

The Agricultural Index also fell slightly in October (-0.3% m/m), as lower canola prices just offset stronger wheat and barley and steadier livestock prices (hogs and cattle).  No.1 grade canola at the Port of Vancouver declined to US$653 per tonne, but remains 21% above a year earlier.

Scotiabank 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.

Scotiabank is one of North America's premier financial institutions and Canada's most international bank. With more than 81,000 employees, Scotiabank and its affiliates serve some 19 million customers in more than 55 countries around the world. Scotiabank offers a broad range of products and services including personal, commercial, corporate and investment banking. With assets of $670 billion (as at July 31, 2012), Scotiabank trades on the Toronto (BNS) and New York Exchanges (BNS). For more information please visit www.scotiabank.com.

SOURCE: Scotiabank - Economic Reports

Patricia Mohr, Scotiabank Economics, [phone], [email protected]; or
Devinder Lamsar, Media Communications, [phone], [email protected].