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
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
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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
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
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
For further information:
Patricia Mohr, Scotiabank Economics, (416) 866-4210, firstname.lastname@example.org; or
Devinder Lamsar, Scotiabank Media Communications, (416) 933-1171, email@example.com.
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