Scotiabank's Commodity Price Index Retreats in January

• Special Report: The Scotiabank Commodity Price Index is re-weighted to reflect the growing dominance of oil in Canada's net exports.

TORONTO, Feb. 28, 2012 /CNW/ - Scotiabank's Commodity Price Index - re-designed to reflect 2010 net export weights and rebased to January 2007 equal to 100 - fell by 1.7 per cent month over month (m/m) in January.  However, the All Items Index remained 2.5 per cent above a year earlier, given the recent strength in oil prices and the huge dominance of crude oil and refined petroleum products in Canada's net exports of commodities and resource-based manufactured goods -- now almost a third of the total.

Nevertheless, the Oil and Gas Index led the All Items Index lower in January (- 2.9 per cent m/m).  Both light, sweet crude oil prices at Edmonton and Western Canadian Select heavy oil at Hardisty, Alberta inched down. Crude oil prices in Western Canada dropped sharply in early February, as an unscheduled outage at a Whiting, Indiana refinery temporarily cut demand for Canadian crude (now back on stream).

"Space on some pipelines has been apportioned for March shipments, partly reflecting inadequate export pipeline capacity to the U.S. and Asia to handle Canada's growing oil production - also leading to unusually wide discounts for both light, synthetic crude and WCS relative to WTI," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "World oil prices continue to climb -- with Brent currently at US$126 per barrel and WTI oil at US$108 -- amid heightened tensions over Iran's nuclear program and the likely loss of some Iranian crude to world markets.  As a result, we have upwardly revised the average price forecast in 2012 for Brent to US$125 and for WTI oil to US$110."

The Metal & Mineral Index also fell (-1.8 per cent m/m) in January.  Base metal prices rallied strongly, as investment/hedge funds shifted from short to long positions, in light of better-than-expected U.S. economic indicators. Copper prices will average higher in February than in January - as will zinc, nickel and aluminium -- though copper has eased back to a still lucrative US$3.83 per pound late-month.  Spot uranium prices remain at a low ebb, averaging US$52 per pound in January and February.  Base prices for term-contracts (prior to escalation) dropped by US$2 to US$61 in late January.  During a recent trip to China, Prime Minister Harper announced that Canada and China had successfully completed substantive negotiations towards an agreement that will allow increased exports of Canadian uranium to China.

• Scotiabank's Commodity Price Index is Re-designed To Reflect Large Shifts in Canada's Resource-Based Economy

With this edition, the Scotiabank Commodity Price Index has been re-designed and re-weighted to reflect recent dramatic shifts in Canada's net exports. As of January 2012, the Index is based on 2010 net export weights -- with data re-estimated back through 2007.

The Scotiabank Commodity Price Index - the first Index designed to track commodity prices of interest to Canadians and Canada's resource producers - was first introduced in 1987.  Index values were estimated back to 1972 to show the impact of the 1973 Arab oil embargo. The Index has only been re-weighted once before in April 1999, with the weight of each component based on its export value in 1995-97, with the exception of crude oil and refined petroleum products, uncoated freesheet paper and linerboard, where net exports were used.

"The shift in the trade weights in the new Index is dramatic, with Oil & Gas -- including crude oil and refined petroleum products, natural gas and NGLs -- now accounting for 39.9 per cent of the overall Index, up from 16.6 per cent previously," stated Ms. Mohr.  "In contrast, the weight of Forest Products -- wood products and pulp, paper and paperboards -- has declined sharply to 14.7 per cent, from 39.8 per cent previously."

"Metals & Minerals are holding up well, with the weight rising slightly to 30.1 per cent from 26.8 per cent, partly due to the inclusion of the rapidly expanding iron ore trade from Labrador/northern Quebec to China as well as Europe," added Ms. Mohr. "The weight of the Agricultural Index is relatively unchanged at 15.3 per cent -- compared with 16.8 per cent previously -- with canola gaining ground and farmers and agribusiness benefitting from lucrative prices.  The large shifts noted above are relatively recent -- starting in 2006-07, but becoming quite pronounced in the aftermath of the 2008-09 U.S. recession."

Structural change in Canada's resource industries account for these shifts, notably:

1)	Canada has emerged as an oil-dominated economy due to the substantial growth of the oil industries in Western Canada and Newfoundland, involving not only the Alberta oil sands, but also greenfield tight oil plays such as the Bakken in southeast Saskatchewan. With crude oil and refined petroleum products now accounting for a huge 28.5 per cent of Canada's net exports of resource-based materials, building adequate pipeline infrastructure to tap export markets -- particularly the growth markets of Asia - is vital for the Canadian economy.
2)	Canada remains a great mining country. Significant industry growth in potash, coking coal, gold and nickel - as well as the inclusion of iron ore -- has boosted the weight of Metals & Minerals within the Index. China's third-largest steel producer has equity interests in three mining ventures in the Labrador Trough - likely spurred by high-quality ore and a desire to diversify supply sources away from the three large mining companies that currently dominate over 80 per cent of world seaborne trade.
3)	Prolonged downturn in U.S housing starts takes a toll on Lumber and Oriented Strandboard. In contrast, the weight of lumber and wood products has dropped to a mere 4.0 per cent (from double-digits previously). After peaking at 2.27 million units annualized in January 2006, U.S. housing starts eased back cyclically through 2007 and then plunged during the 2008-09 recession. The recovery to date has been exceptionally slow (699,000 units in January 2012), though U.S. housing starts should rebound by mid-decade to levels more in line with underlying demographic demand (1.4-1.5 million units).  In the meantime, industry and government trade promotion to diversify markets for Canadian lumber -- particularly to China - is paying off. Canada emerged as the top supplier of lumber to China in 2010 and will benefit from China's massive social housing program in the 12^th Five-Year Plan.

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
Patty Stathokostas, Scotiabank Media Communications, [phone], [email protected].