Scotiabank's Commodity Price Index Rebounds in January

TORONTO, Feb. 27, 2013 /CNW/ - The Scotiabank Commodity Price Index started 2013 on a stronger note, rising 3.8% month-over-month (m/m) in January, after losing significant ground in late 2012.

"Riskier assets such as commodities and equities were buoyed in January by the 2012 fourth quarter pick-up in China's economy," said Patricia Mohr, Scotiabank's Vice President of Economics and Commodity Market Specialist. "However, market conditions remain skittish, with some industrial commodity prices and equity markets easing back again in late February."

For more details about the Scotiabank Commodity Price Index, please read the full report below. Highlights include the Oil & Gas Index posting the strongest m/m increase among all the sub-indices at 9.2%, led by firmer light crude oil in Edmonton and stronger propane prices in Edmonton and Sarnia. The Metal and Mineral Index also edged up in January by 0.3% m/m, as copper prices responded favourably to the pick-up in China's growth, surging as high as US$3.71 per pound late month. The arguments in favour of the Keystone XL Pipeline are also outlined.

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Scotiabank's Commodity Price Index Rebounds In January 

• Iron ore prices rally in China, as steel mills restock. 
• The Keystone XL Pipeline - strong arguments favour U.S. approval.
• Leadership within precious metals shifts from gold to the PGMs. 

After losing significant ground in late 2012, Scotiabank's Commodity Price Index started 2013 on a stronger note, rising 3.8% m/m in January. 'Riskier' assets such as commodities and equities were buoyed by the 2012:Q4 pick-up in China's economy - with GDP accelerating to 7.9% from 7.4% in Q3, accompanied by raw material re-stocking, a partial resolution of the U.S. 'fiscal cliff' (extension of most of the Bush-era tax cuts - excepting the payroll tax reduction - and stepped-up taxes on high-income earners) and expectations of some pick-up in the U.S. economy by the second half of 2013.

However, market conditions remain skittish, with some industrial commodity prices and equity markets easing back again in late-February. China's State Council - concerned over re-escalating residential property prices - up 20% yr/yr in Beijing, 14% in Guangzhou, 12% in Shenzhen and 12% in Shanghai for existing homes - announced a five-point plan to contain prices, some of which are restrictive (e.g. by requiring local governments to set home price control targets in their areas). On a more positive note, the plan also calls for increasing land and new home supply by speeding up home construction. Another ambitious 2013 target of 6.3 million units was set for affordable, 'socially assisted' housing starts - after 7.2 million in 2012 - suggesting fairly strong demand for construction materials ahead.

The Federal Reserve Board's FOMC minutes of January 29-30 also unsettled commodity markets - particularly gold - and equities, with participants discussing the merits of the Fed's very accommodative monetary policy - specifically, the purchase of US$40 bn per month of MBS (mortgage-backed securities) and US$45 bn per month of longer-term Treasury securities, aimed at boosting the U.S. mortgage market and keeping longer-term bond yields low. It should be noted that Scotiabank Economics does not expect the Fed to start withdrawing this accommodation for some time.

The gain in Scotiabank's Commodity Price Index in January was widespread, with all sub-Indices advancing. After plunging in December, the Oil & Gas Index posted the strongest increase (+9.2% m/m) - led by firmer light crude oil in Edmonton and stronger propane prices in Edmonton and Sarnia. While Western Canadian Select heavy oil (WCS) remained at a low ebb, the price edged up from a mere US$57.84 per barrel in December to almost US$62 in January. Firmer international oil prices - with WTI climbing from US$88.25 to US$94.83 amid improving sentiment for a stronger global economy - offset a widening of the WCS discount off WTI to US$32.84 in January. However, prices will recede again to about US$59 in February, with the WCS differential rising to US$36.94 (contributing to an enormous discount of almost US$58 off Brent - a 'world' benchmark). Enbridge 'apportioned' volumes on virtually full pipelines between Alberta and U.S. Midwest refineries amid high shipper nominations and operational issues. A further delay in the start-up of the BP Whiting, Indiana refinery upgrade to handle additional Alberta bitumen also hurt sentiment, with full ramp-up not expected until 2014.

The Metal and Mineral Index edged up in January (+0.3% m/m), as copper prices responded favourably to the pick-up in China's growth, surging as high as US$3.71 per pound late month. Spot iron ore prices delivered to northern China also jumped to US$150.49 per tonne - from just under US$129 in December and a low of only US$99 last September - on further re-stocking by Chinese steel mills. These gains offset softer gold prices - currently at US$1,590.50 per ounce - with hedge funds cutting positions, on signs that additional 'quantitative easing' by the Fed is increasingly unlikely. Leadership within precious metals has shifted to the PGMs - especially palladium.

The Forest Product Index posted a further gain of 2.3% m/m in January, climbing 18.9% yr/yr - the biggest increase of any sub-Index. Lumber and OSB prices continued to march higher in January amid tight supplies - as did northern bleached softwood kraft pulp (up US$20 to US$890 per tonne) - offsetting weaker newsprint (-US$15 to US$625) and SC-A paper prices (-US$40 to US$795 per ton). Western Spruce-Pine-Fir 2x4 lumber prices in the B.C. Interior rose to a quite lucrative US$382 per mfbm, jumping as high as US$390 in mid-February - a level not seen since April 2005. The previous cyclical peak was US$460 in August 2004. OSB prices have been even stronger - soaring to US$401.50 per thousand sq. ft. in the U.S. North Central region (7/16" basis) in January and US$430 in mid-February - approaching the heights of 2004-05, when U.S. housing starts averaged 2.01million units. Tight log supplies, inadequate labour and the need to refurbish shutdown mills have so far limited the supply response by producers. Tolko recently announced the re-start of its OSB mill in Slave Lake, Alberta by 2014:Q1.

Finally, the Agricultural Index rose by 1.2% m/m in January - a relatively strong performance - up 8.1% yr/yr. Price gains in canola, cattle, hogs and Atlantic Coast lobster more than countered slight declines in wheat and barley. No. 1 canola prices (in store Vancouver) climbed to US$649 per tonne - remaining near last spring's record US$673 - underpinned by strong U.S. soybean sales to China. Year-to-date U.S. soybean exports rose 40% through mid-February, with the United States holding most of the exportable supply, until Brazil's crop becomes available. While Brazil's soybean harvest is expected to be a record, labour action to protest changes to port operations have contributed to loading delays of up to 40 days.

Oil & Gas:
Prospects for the Keystone XL Pipeline 

U.S. Presidential approval of the long-delayed 'Keystone XL Pipeline' between Hardisty, Alberta and Steele City, Nebraska - first proposed in 2008 - would help to narrow currently wide discounts on Western Canadian Select heavy oil. The WCS discount off WTI (TMX/Shorcan Energy Brokers data) - at a staggering US$36.94 per barrel in February - will remain high at US$26.23 in March and will likely average more than US$25 through 2013 (well above the US$21 of 2012 and US$18 average since 2005).

The Keystone XL Pipeline would allow greater volumes of oil from Western Canada to reach the largest refining centre in the United States in Houston & Port Arthur, Texas (via Cushing, Oklahoma and TransCanada's Gulf Coast Project), where 'world' prices for both heavy and light oil prevail. WCS heavy oil should be priced close to similar-quality Mayan crude from Mexico - at US$101 per barrel in mid-January (FOB Mexico) instead of US$62.

In my view, the arguments in favour of Keystone XL approval are compelling: 1) the long-standing free-trade relationship between Canada and the United States, especially on energy;  2) the 'security-of-supply' offered by Canadian oil, expected to displace crude from politically more volatile regions of the world; and 3) critically needed transportation infrastructure for new U.S. sources of 'light', tight oil from the North Dakota Bakken and northern Texas. One-third of Keystone XL Pipeline capacity will actually be available for U.S. producers, whose prices are also discounted. With construction expected to take 18-24 months after approval, Keystone XL could be in service by late 2014 at the earliest.

Notwithstanding the benefits of TransCanada's Keystone XL and potential expansion of Enbridge's Alberta Clipper line between Canada and the U.S. Midwest, the development of additional market outlets - both in the faster-growing Asia/Pacific market and in Central & Atlantic Canada - remains vital for the Canada's oil industry. Growing supplies of light oil on the U.S. Gulf Coast, as the Cushing, Oklahoma hub is debottlenecked in 2014:H2, are likely to eventually push down prices relative to international levels in that market.   

Metals & Minerals 

Price leadership within precious metals appears to be shifting from gold to PGMs - especially palladium. While gold prices have been consolidating (-3.4% from December's US$1,689 per ounce to US$1,631 to date in February), palladium prices - an 'industrial' metal used in catalytic converters for gasoline-driven vehicles - have advanced by almost +9% from US$691 in December to US$753 so far in February.  The price of platinum (used in diesel catalytic converters) has also advanced, but at a more modest 6% over the same period.

The world palladium market swung from 'surplus' into 'deficit' in 2012, due to lower sales of Russian state stocks and higher auto-catalyst demand. While more recycling of spent converters could add to supplies in 2013, the 'deficit' is expected to widen further, with China's car sales climbing by 10%, after a 6% gain last year. Reduced South African supplies of both palladium & platinum are also likely, the result of labour strikes and industry restructuring to pare escalating costs.

Turning to premium-grade hard coking coal, the quarterly contract price from Western Canada to Asian markets dropped from US$170 per tonne (FOB Vancouver) in calendar 2012:Q4 to about US$165 in 2013:Q1 - in line with BMA contract settlements in Australia. Prices should pick up again in the second quarter. The World Steel Association forecasts a 3% increase in 2013 global steel output, after a 1.2% gain in 2012. Neptune Terminal's coal handling capacity in Port Metro Vancouver will be expanded to 18.5 million tonnes per annum.

Western Canada's potash industry received some good news in February. After deferring new orders last year, India signed a contract with Canpotex for 1.1 million tonnes of potash at US$427 per tonne cfr India - lower than the previous US$470/530 contract price, but higher-than-expected by market observers. A similar contract was concluded with Belarusian Potash Company (BPC). India has been seriously under-applying potassium in recent years - leading to an imbalance in nutrient application of growing concern to India's fertilizer association and contributing to low crop yields. The late-2012 contract between Canpotex and China for 1 million tonnes at US$400 cfr China for 2013: January-to-June shipment (-US$70) appears to have set a floor on potash prices, spurring the resumption of buying by other purchasers - especially in Asia. Global potash shipments should rebound to 56 million tonnes from an estimated 51.9 million in 2012.

SOURCE: Scotiabank - Economic Reports

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

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