TORONTO, May 13, 2013 /CNW/ - The decline in Scotiabank's Commodity
Price Index in April was quite mild - down 0.2% month-over-month (m/m)
- despite a sharp mid-month selloff in gold and talk of an end to the
'Super-Cycle' in commodity prices.
"Financial market concern over the outlook for commodity markets was
overblown mid-month," said Patricia Mohr, Scotiabank's Vice President
of Economics and Commodity Market Specialist. "While China's Gross
Domestic Product (GDP) slowed to 7.7% year-over-year (y/y) in 2013:Q1,
from 7.9% in 2012:Q4, actual demand for raw materials was robust in
China. The double-digit growth of China's passenger car market, up 20%
in Q1, reinforces its importance as a driver of growth in worldwide
auto demand and related commodities such as copper."
For more details about the Scotiabank Commodity Price Index, please read
the full report below. Highlights include world potash shipments begin
to pick up, after order deferrals last year; a rebound in U.S. oil
prices in May, lifted by optimism for a stronger pace of U.S. economic
growth as 2013 unfolds; comments on new initiatives for natural gas,
liquefied natural gas (LNG) as a transportation fuel in trucking and
for railway locomotives; and U.S. Department of Agriculture
expectations for record-large corn and soybean crops in 2013-14.
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Scotiabank's Commodity Price Index Posts Mild Decline in April
Potash — world shipments begin to pick up, after order deferrals last
Physical demand for copper remains robust in China, with prices rallying
back in May.
Natural Gas — new initiatives for LNG as a transportation fuel.
Despite a sharp mid-month selloff in gold and talk of an end to the
'Super-Cycle' in commodity prices, the decline in Scotiabank's
Commodity Price Index in April was quite mild — down 0.2% month over
month (m/m). The All Items Index remained above late-2012 levels and is
down a mere 0.1% year over year (yr/yr). Financial market concern over
the outlook for commodity markets was overblown mid-month. While
China's Gross Domestic Product (GDP) slowed to 7.7% yr/yr in 2013:Q1,
from 7.9% in 2012:Q4, actual demand for raw materials was robust in
Stronger Oil and Gas prices in April (+2.6% m/m) partially offset
declines in the Metal and Mineral sub-Index (-2.5% m/m), the Forest
Products sub-Index (-1.2% m/m) and the agricultural component (-1.6%
m/m). Both light and heavy crude oil prices rose in Alberta, as did
Canadian natural gas export prices. The discount on Western Canadian
Select (WCS) heavy oil off West Texas Intermediate (WTI) narrowed from
US$26.23 per barrel to US$23.07, pushing up WCS heavy oil from US$66.73
to US$69. Further gains are likely in May with the discount on WCS
easing further to US$13.90 and WTI oil rallying as high as US$96 on May
8, after falling to a low of US$86.68 on April 17th. Anticipation of some pick-up in the U.S. economy as 2013 unfolds —
recently lifting U.S. equity markets (the Dow Jones Industrial Average
and the Standard and Poor's 500) to new all-time record highs — has
contributed to somewhat stronger oil prices, particularly in the U.S.
Despite rising discounts on Alberta crude — linked partly to inadequate export pipeline capability to tidewater to
access the faster-growing markets of Asia-Pacific (either via the B.C.
Coast or Eastern Canada) — Alberta's crude oil output continued to rise
in 2012. In its annual survey, the Energy Resources Conservation Board reports
that Alberta oil production climbed to almost 2.5 million barrels per
day (mb/d) — up 244,000 barrels per day (b/d), with a 65,000 b/d gain
in conventional light and heavy oil output and a 178,000 b/d gain in
the oil sands. The rejuvenation of legacy oil pools in Alberta — such
as the Pembina-Cardium — through horizontal, multi-fracturing drilling
technology helped to boost conventional light oil output, after recent
declines (please see table). The Energy Resources Conservation Board
(ERCB) expects Alberta's oil output to increase another 273,000 b/d in
2013 (with start-up of Imperial Oil's Kearl Lake and Cenovus' Christina
Lake Phase E). Production should rise by a total of 573,000 b/d from
2012-15 (Cenovus, Canadian Natural Resources, Conoco/Phillips, Devon,
Dover, Harvest Energy, Husky and Nexen). To counter inadequate pipeline
infrastructure, producers are using innovative transportation solutions
to deliver their product to higher-value markets where world prices
prevail (e.g. rail to the U.S. Gulf Coast).
In contrast, the Metal and Mineral Index lost significant ground in
April (-2.5% m/m). Gold prices posted a sharp selloff in mid-April from
US$1,561.50 per tonne on April 11 to an intraday low of US$1,321 on
April 16 — and base metal prices moved lower, in reaction to a
moderately slower pace of Gross Domestic Price (GDP) growth in China in
the first quarter. However physical demand for gold strengthened noticeably in Asia and the
U.S. at lower prices, with gold rallying back to the US$1,425 level in
mid-May (limited in recent days by a stronger U.S. dollar).
The decline in London Metal Exchange (LME) copper prices from US$3.48
per pound in March to a low of US$3.09 on April 23 was overdone. Despite financial market jitters over prospects for China — with the
authorities in Beijing now comfortable with a somewhat slower GDP
growth target of 7.5% — China's physical demand for copper remains
robust. Copper prices have rallied back to US$3.35, yielding a profit
margin of 37% over average world breakeven costs including
depreciation. Industrial production in China reaccelerated to 9.3%
yr/yr in April. Copper semis production (wire and cable, tube and sheet) jumped by 18%
yr/yr in the first quarter, with strong underlying demand for air
conditioners, household appliances and cars. The double-digit growth of
China's passenger car market (up 20% in Q1) reinforces its importance
as a driver of growth in worldwide auto demand and related commodities
such as copper.
While China's copper imports fell in April due to the port strike in
Chile and the closure of a smelter in India, we expect China's imports
of refined copper to increase over the next several months due to a
severe shortage of scrap in China and lower domestic refined output.
Inventories in bonded warehouses in Shanghai have already dropped from
a peak of just under 800,000 tonnes in February to 660,000 tonnes at
the end of April and will decline further.
The Forest Products Index lost ground in April (-1.2% m/m), but remained
15.3% above a year ago (the strongest performance of any sub-component
over the past year). Both lumber and Oriented strand board (OSB) prices retreated in mid-April alongside an inventory build — during the
seasonally slow first quarter — though we expect prices to rally back
in the third quarter. Western Spruce-Pine-Fir 2x4 lumber prices have fallen to US$338 per
thousand feet board measure (mfbm) in mid-May (now oversold) — down
from US$402.80 in March. OSB prices in the U.S. North Central region
are currently US$337 per thousand sq. ft., down from US$430 in March.
Lower building material prices in April were partly offset by a US$50
jump in U.S. linerboard prices to US$740 per short ton and a US$30
increase in northern bleached softwood kraft (NBSK) pulp prices to
US$930 (also in the U.S. market). Low U.S. inventories and expectations for a revival in packaging demand
later this year allowed producers to quickly implement the linerboard
price increase (the first since September 2012). The top five producers
in the U.S. represent 75% of capacity and have considerable pricing
power. Norampac and Rocktenn — the two big players in Canada — have
also announced an increase in Canada. Good news for Ontario — a large,
new linerboard mill in Niagara Falls will start up this year (549,000
tons), while the newsprint mill in Whitby will be converted to
linerboard (300,000 tons). Current linerboard prices are lucrative, yielding margins over average
cash costs of 32% in Quebec and 48% in the southern U.S.
Finally, the Agricultural Index slipped by 1.6% m/m in April, as small declines in wheat, Atlantic Coast lobster, hogs and cattle
more than offset firmer canola and barley prices. In its first supply
and demand assessment for the 2013-14 crop year (beginning this
September), the U.S. Department of Agriculture projects record-large
U.S. and global coarse grain and oilseed crops, ending a three-year
period of very tight supplies. For corn, the ratio of U.S. ending stocks-to-use is projected to
increase from a very low 6.9% in the current crop year to 15.5% in
2013-14. Chicago Board of Trade (CBOT) futures for corn dropped by
about 2% and soybean futures edged down, after release of the report on
Friday (May 10), though losses were limited by delayed plantings this
spring due to cold, snowy weather in the U.S. Midwest. While an
influential report, we caution readers that the U.S. Department of
Agriculture (USDA) bases its initial projections on the March 28th planting intentions report, "more normal weather going forward" after
last year's drought and higher yields. These optimistic assumptions
are subject to substantial change over the growing season. Though
negative for corn, soybean and canola prices, the report is a positive
for prospective fertilizer application (including potash). Corn is one of three crops using the most potash per hectare planted.
Natural Gas — Market Development Initiatives in Transportation
Nymex natural gas prices climbed from US$3.77 per one million British thermal units (mmbtu) in
March to US$4.16 in April — the highest since July 2011 — with Canadian
export prices following suit. Prolonged wintry weather in the U.S. has
boosted heating demand and cut gas-in-storage in the normally
seasonally weak second-quarter.
Of greater importance to the natural gas industry over the medium term
are the following three developments: 1) the intense interest by
Japan in securing more liquefied natural gas (LNG) supplies to fuel its economy — a reaction to the Fukushima-Daiichi
nuclear power event; China and South Korea are also quite interested in LNG, including
potential imports from British Columbia; 2) Market development
initiatives holding promise for natural gas as a new transportation
fuel, taking advantage of historically low natural gas prices from shale and
its lower sulphur oxide and CO2 emissions than petroleum products.
Shell is planning three 250,000 tonnes per year LNG liquefaction plants
in Calgary, Sarnia and Geismar, Louisiana — to fuel 5,000 trucks per
day. Robert Transport (a leading trucking company) will be operating
180 LNG-fuelled tractor trailers by 2014. The Canadian National Railway
is testing an LNG-fuelled locomotive and BNSF and UP will test LNG
locomotives this year; and 3) the many LNG-export proposals for the
U.S. Gulf and northern coast of B.C., promising to tighten North
American supply and demand conditions for natural gas later in the
decade, if approved by government.
Potash Shipments Recover
Spot prices for potash, Free on Board (FOB) Vancouver, were largely flat
in April at US$405 per tonne for overseas markets. Prices averaged US$452.50 last December. While buyers are resisting
announced price increases in Brazil and Malaysia, we believe prices are
now at bottom. On a more positive note for Western Canada's potash
producers, shipments surged in the first quarter of 2013. Potash Corp
doubled its North American sales volumes in the first quarter. The sales improvement partly reflects the resumption of purchases by
China, following a lower price agreed with Canpotex in late December.
Overseas buyers, who had deferred orders last year awaiting lower
prices, have also stepped-up purchases. Global potash shipments (from Canada, Russia, Belarus and others) should
climb to 57.5 million tonnes in 2013, after dipping to 51.9 million
Brazil and China are likely to remain the growth markets for potash. Brazil (an agricultural power house) will likely harvest record corn
and soybean crops in 2012-13 and 2013-14, though the country faces
significant port constraints. Exporters are trucking soybeans an extra
1,000 miles to Rio Grande in the south to avoid congestion at the two
main grain ports of Santos and Paranagua. India should step up its
imports this year, after negotiating a lower price with Canpotex and
BPC in February (-US$63). However, volume gains will be limited by
another cut in the government's potash subsidy (-21.5%), likely causing
a slight increase in retail prices to Indian farmers. The subsidy for
di-ammonium phosphate (DAP) has also been reduced by 14% to rein in
India's fiscal deficit, though a huge 45% increase in food subsidies
for India's poor has also been proposed.
Spot iron ore prices, 62% Fe, delivered to northern China edged down to US$137.40 per tonne in April from US$139.87 in March and
US$147.65 a year ago (representative of spot prices paid for Labrador
Trough ore). China's crude steel production was strong in 2013:Q1
(+10% yr/yr), with daily output staying near record highs of 2 million
tonne (mt) since mid-February, and the third-highest iron ore imports
on record in April. While the normal seasonal pick-up in construction
demand this spring may be muted by property market curbs, Rio Tinto is
proceeding with its plan to boost output by 70 mt to 360 mt by 2015,
expecting China's steel production to continue to grow, albeit at a
slower 3% per annum.
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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