Scotiabank's Commodity Price Index Retreats in December

Natural Gas prices Fall to a Decade Low, Triggering U.S. 'Dry' Gas Curtailment    

Copper Prices Rally Strongly, as Chinese Imports Surge to Record High and Hedge Funds Switch to a Net Long Position

Fed's Ultra-Low Interest Rate Policy and Hints of QE3 Boost Gold   

TORONTO, Jan. 31, 2012 /CNW/ - Scotiabank's Commodity Price Index declined 1.3 per cent month over month (m/m) in December, ending 2011 down 0.1 per cent from a year ago.  After strengthening in early 2011, the All Items Index dropped 10.3 per cent from the near-term peak last April, prior to the advent of financial market concern over excessive debt in weaker euro zone countries.

"However sentiment has improved in early 2012," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank, "with some investment and hedge funds shifting from short to long positions in base metals, notwithstanding bouts of concern over the euro zone.

"U.S. economic indicators have edged up, with stronger U.S. auto sales and assemblies and orders for manufacturers, lifting prices for industrial raw materials such as steel and base metal premia in the U.S. Midwest, the industrial heartland," added Ms. Mohr. "While China has to date only moderately eased monetary policy, hedge funds are beginning to anticipate a return to pro-growth policies and are now more inclined to believe in a 'soft-landing'. The Fed's announcement that economic conditions will likely warrant keeping the Fed funds rate at ultra-low levels until at least late 2014 gave a boost to gold and industrial metal prices in mid-January."

In December, the Metal and Mineral Index fell by 1.6 per cent m/m, but remained 2.9 per cent above a year ago.  However, base metal prices have rallied strongly in January, with London Metal Exchange (LME) copper the 'star performer'.  Copper prices climbed as high as US$3.91 per pound on January 27, yielding an exceptional profit margin of 65% over average world breakeven costs.  Chinese imports of refined copper soared to a record in December.

The Oil and Gas Index retreated in December (-3.6 per cent m/m), led by natural gas.  Nymex near-by futures plunged as low as US$2.32 per Million British Thermal Units (mmbtu) on January 19 - a level not seen since 2002 - before recovering slightly to US$2.67 later in the month.

The Forest Products Index gained ground in December, rising 0.7 per cent m/m.  Stronger lumber and Oriented Strandboard (OSB) prices more than offset a further drop in NBSK pulp prices to US$890 per tonne and a slight decline in SC-A paper prices. Western Spruce-Pine-Fir 2x4 lumber prices climbed from only US$230 to US$248 per Thousand Board Feet (mfbm) in December, ending the year at a profitable US$261 - buoyed by a slight improvement in fourth-quarter U.S. housing starts to 657,000 units annualized, holiday mill curtailments and expectations of a pick-up in Chinese buying in early 2012, now occurring.

The Agricultural Index also edged ahead in December, rising 0.8 per cent m/m.  Stronger cattle, barley and Atlantic Coast lobster prices (the highest-valued fish and seafood export from Canada) more than offset a slight decline in wheat and hog prices. Cattle prices in Ontario (A1A2 steers) climbed to a record high of US$115.53 per cwt - up 20 per cent yr/yr. While the herd is being expanded again across North America, after multi-year liquidation, it will take time to rebuild - pointing to even higher cattle prices ahead.

West Texas Intermediate (WTI) oil prices advanced slightly in December to US$98.58 per barrel and have averaged US$100.38 to date in January, a substantial jump from the US$75.67 near-term low on October 4, 2011 during a bout of extreme 'risk aversion' linked to Euro zone challenges.  Spot Brent (a better world benchmark than WTI) remains elevated at US$111.12 in late January.

A wide 'geopolitical risk premium' has resurfaced in world oil prices in recent months, largely related to tightening sanctions against Iran to curb its alleged nuclear weapons ambitions.  Iran has reacted by threatening to either close the Strait of Hormuz or impose its own embargo on the EU ahead of time.

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].