Scotiabank's Commodity Price Index Eases Temporarily in February

- Japanese steel makers agree to a 55 per cent price increase for Western Canadian hard coking coal for FY2010:Q1; iron ore prices are likely to jump even more.

TORONTO, March 29 /CNW/ - After four consecutive monthly gains, Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, edged down by 0.7 per cent month over month (m/m) in February.

"Financial market concern over sovereign debt risks in Greece, Portugal and Spain reduced investor risk appetite in early February, leading to a shift to 'safe-haven' U.S. dollar Treasury securities and temporarily pushing down dollar-denominated commodity prices," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "Despite this development, the All Items Index remains 25.7 per cent above its cyclical low in April 2009, and will likely rebound again in March, with risk appetite returning."

Metals & Minerals

The Metal & Minerals Index fell by three per cent m/m in February, alongside a temporary pullback in base metal, gold and silver prices, though prices have snapped back in March. "Scotiabank's Commodity Price Index will receive a big boost in April, as contract prices for coking coal from Western Canada to Japan are adjusted up, following annual negotiations," added Ms. Mohr. "Contract prices for Teck Resources' premium-grade hard coking coal will increase from US$128 per tonne (FOB Vancouver) to US$200 for the April-to-June quarter. Nippon Steel, JFE Steel Corp, Sumitomo and others agreed to the increase, following the BMA (BHP Billiton Mitsubishi Alliance) settlement in Australia (at the same price)."

While the settlement is for the April-to-June quarter only, the March 24th declaration of force majeure by BMA (the world's largest coking coal exporter) on its shipments from Hay Point, Australia -- due to cyclone damage at the port -- have lifted international spot prices to US$230-$240 - likely ensuring high contract prices in the second quarter as well. BHP Billiton has been keen to shift from annual benchmark to quarterly pricing to better align prices with much higher spot levels. Tight global supplies of the premium-grades and ongoing rail and port constraints in Australia have contributed to high prices. China likely emerged as a 'permanent' net importer of premium-grade hard coking coal in 2009, given inadequate domestic supplies of high-quality grades.

"Canadian iron ore producers will also enjoy huge price gains in 2010, judging from annual contract negotiations now underway between Australian and Brazilian miners and steel makers in Asia and Europe," continued Ms. Mohr. "Prices will be driven up by recovering steel production and iron ore demand in the G7 as well as steel mill capacity expansion in China. Iron ore imports rose to record levels in China last spring (+40.2 per cent in 2009), as the country's huge infrastructure spending program spurred steel output. China's steel production now accounts for almost half of world production (46.6 per cent in 2009)."

The spot price of Indian iron ore (63 per cent Fe) delivered into Northern China - a key bellwether - has surged to US$154-$157 per tonne in late March alongside tight global supplies of higher-quality ore, concern that India may increase its tax on exports and projections indicating reduced Indian iron ore available for export (due to India's own domestic demand). Spot prices from India are now 122 per cent above the current annual contract price for Hamersley Fines from Australia delivered to northern China (US$69.52 per tonne) - pointing to a very large increase in annual contract prices, once negotiations are concluded for the 2010 Fiscal Year (beginning in April). India is the third-largest exporter of iron ore to China after Australia and Brazil, though its exports declined in FY2009.

Oil & Gas

After substantial gains in recent months, the Oil & Gas Index slipped by 4.5 per cent m/m in February, as lower Canadian natural gas export prices and softer medium/heavy crude oil prices at Hardisty, Alberta offset a slight gain in Edmonton light oil prices. WTI oil eased from US$78.38 per barrel in January to US$76.45 in February, but has climbed back to US$81 to-date in March - the highest level since September 2008 (just prior to the credit crisis).

"Despite climbing a wall of worry over prospects for global economic recovery, world oil demand is growing again (up 1.78 million barrels per day (mb/d) or 2.1 per cent year over year (yr/yr) to 86.15 mb/d in February)," stated Mohr. "While China remains the growth leader, U.S. consumption also picked up in February (+2.7 per cent yr/yr, with strength in feedstocks and specialty products like naphthas, lubricants and asphalt)."

In contrast, NYMEX natural gas prices have fallen to only US$3.87 per million British thermal units (mmbtu) alongside early spring weather and a shift down in the industry's cost curve linked to development of new, low-cost 'shales' and 'tight sands' in the United States. Prices are now below equivalent coal at US$4.25-4.30 per mmbtu.

Forest Products

In contrast to Oil & Gas and Metal & Minerals, the Forest Products Index advanced by a strong 8.1 per cent m/m in February. While U.S. housing starts have only edged up from the April 2009 low, lumber and OSB prices surged to genuinely profitable levels, as U.S. dealers re-stocked in an environment of mill curtailments and low log decks. Roughly 43 per cent of lumber mill capability is currently shut across Canada and the United States.

NBSK pulp prices (northern bleached softwood kraft) rose by US$30 to US$880 per tonne in the United States in February and to US$910 in early March, surging in the aftermath of the earthquake in Chile.

"The 8.8 magnitude earthquake in Chile - centered in its major pulp producing region - has cut global market pulp capability by 7.5 per cent, sending shock waves through global pulp markets," concluded Ms. Mohr. "Prices could reach new record highs in the second quarter."

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 Patty Stathokostas, Public Affairs, (416) 866-3625 or patty_stathokostas@scotiacapital.com


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