Commodity Markets Anticipate A Restocking-Led Recovery In U.S. Demand,
According to Scotia Economics

- 'Tight oil' plays likely to rejuvenate Western Canadian Sedimentary Basin

TORONTO, Feb. 25 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, jumped by 4.8 per cent month-over-month (m/m) in January, beginning 2010 on a strong note. The All Items Index has advanced by 26.5 per cent from the cyclical bottom in April 2009.

"Commodity prices have been exceptionally volatile in the opening months of 2010, surging in early January on speculative demand for base metals in China and as a severe cold snap across much of the Northern Hemisphere sent oil and gas prices higher," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "However, prices retreated significantly from mid-January through early February as China and then India began to tighten monetary policy to prevent inflation from heating up and asset bubbles from forming, raising concerns over a potential slowdown in emerging-market demand, albeit likely overdone."

According to the report, commodity prices are expected to strengthen in the first half of 2010, with restocking of manufactured goods and raw materials in the United States adding to demand in 'emerging-markets'. U.S. Purchasing Manager Indices have shown a marked pick-up in shipments and output in recent months. A big increase in annual contract prices for coking coal and iron ore, as tight international supplies strain to meet strong Asian demand, will add to gains.

Oil & Gas

In January, the Oil & Gas Index led the way, climbing 12.5 per cent m/m. WTI oil prices climbed to US$78.38 per barrel in January from US$74.52 in December. Prices have been exceptionally volatile in early 2010, trading in a range of US$69-83, buffeted by the ebb and tide of expectations for U.S. and global economic growth.

WTI oil prices currently sit at US$80. U.S. petroleum demand has been slow to recover, but managed to edge up by 1.3 per cent year-over-year (y/y) in mid-February. Recent weak demand reflects the severe snowstorms in early 2010, which have crippled rail and truck transport in the Eastern United States. Demand should pick up, as the U.S. industrial recovery broadens.

"New drilling technology - multi-stage fracture stimulation - is triggering new tight oil plays in Western Canada in the same way that this technology is allowing development of unconventional natural gas shales and tight sands in the Montney & Horn River areas of Northeastern B.C. and Alberta," stated Ms. Mohr. "While the Bakken light oil play in Southeast Saskatchewan is a greenfield development, multi-stage fraqing is opening up opportunities to increase recovery from mature brownfield oil fields in Western Canada."

Metals & Minerals

Metals & Minerals also advanced by 1.0 per cent m/m in January. Widespread strength in base metals and steel-alloying agents (molybdenum and cobalt) was moderated by a sharp drop in potash prices, now at a bottom.

Spot uranium prices have fallen to a low ebb of US$41.75 per pound, down from US$54 in mid-June 2009. Long-term base contract prices, prior to escalation at time of delivery, have also eased to US$60, down from US$70 a year ago.

"Last summer's announcement by the U.S. Department of Energy that it would barter significant quantities of 'surplus' UF6 inventory over a four-year period to pay for an environmental cleanup at a closed uranium enrichment plant in Ohio has hurt prices," commented Ms. Mohr. "However, in a positive development, U.S. Energy Secretary Chu recently indicated that the DOE has re-considered and will not barter volumes in FY2011-13.

"The DOE has applied for funding through the normal budgetary process," continued Ms. Mohr. "This follows President Obama's State of the Union address that stressed the merits of nuclear energy, emitting virtually no greenhouse gases, as well as considerable criticism from the uranium mining industry in the Western United States, which has faced job loss due to low uranium prices."

Forest Products

The Forest Products Index posted the second-best advance in January, rising 3.3 per cent m/m. Western Spruce-Pine-Fir 2x4 lumber prices surged to US$290 in mid-February (up 90 per cent y/y) - a genuinely profitable level over full breakeven costs including depreciation for B.C. Interior producers and the export tax into the United States.

"While the recovery in U.S. housing starts remains fragile and slow, inhibited by snow in many parts of the United States in January and February, lumber inventories across the distribution system fell to exceptionally low levels in late 2009 and U.S. dealers are now restocking in the face of supply constraints," said Ms. Mohr.

B.C. Interior lumber mills are only operating at 50-60 per cent of capacity, with Canfor and West Fraser recently stating that they will not step-up output in the near-term. Roughly 43 per cent of U.S. and Canadian lumber mill capacity is currently shut and record rainfall continues to inhibit logging in the U.S. South - boosting prices.

Agricultural Index

Finally, the Agricultural Index posted a 1.9 per cent m/m gain in January. Cattle and hog prices rallied from quite low levels and Atlantic Coast lobster prices strengthened seasonally, offsetting slight declines in wheat and canola.

"Though exports of canola seed will be hurt by China's November 15 ban on Canadian canola containing backleg, except via ports in China in regions where rapeseed is not grown, exports have resumed to Europe and rising domestic crush capacity will take up much of the slack," concluded Ms. Mohr.

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.

SOURCE Scotiabank - Economic Reports

For further information: For further information: Patricia Mohr, Scotia Economics, (416) 866-4210, pat_mohr@scotiacapital.com; or Robyn Harper, Public Affairs, (416) 933-1093 or robyn_harper@scotiacapital.com


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