Energy and Base Metals Shine on Strong Global Demand, Slowing Supply: Scotiabank Economics
TORONTO, Jan. 18, 2018 /CNW/ - Commodity markets rang in the New Year on their front foot and virtually all industrial materials are maintaining upward momentum after cementing strong gains made over the latter half of 2017.
"Along with a robust global demand, we anticipate tighter supply conditions for most industrial commodities in 2018," said Rory Johnston, Commodity Economist at Scotiabank. "A depreciating dollar and lurking geopolitical risks will also contribute to the upward trend in prices."
On the supply side, production growth is slowing as the pipeline of projects sanctioned amidst the high prices of the mid-2010s empties over the forecast horizon. However, the latest increase in prices was driven by demand considerations as markets anticipate booming demand for energy and metals on the back of the first synchronized global economic acceleration since the Global Financial Crisis.
Despite the recent price gains, Scotiabank's Commodity Price Index (SCPI) retreated by 3.5% m/m in December, depressed by the marked 9.8% m/m fall in the Oil & Gas sub-index. While global oil prices fared well through the end of 2017, the SCPI tracks the prices received by Canadian commodity exporters and the value of Canadian crude decoupled from regional benchmarks after November due to acute pipeline constraints.
Global oil markets ended 2017 with all the tell-tale signs of tight fundamentals and prices currently sit at three-year highs (WTI >US$63/bbl). While we anticipate a mild seasonal surplus in the first quarter of 2018 that could derail crude's current rally, market balances are expected to remain in deficit through most of the forecast horizon. This prompted us to upgrade our oil price outlook, with WTI now forecast to average US$57/bbl in 2018 and US$60/bbl in 2019 (up from US$52/bbl and US$56/bbl last quarter).
Closely related to the perceived health of the industrial sector, metals prices have rallied alongside global growth expectations. Base metals, in particular, have seen considerable gains since last summer, 20–40%, depending on the metal. Meanwhile, bulk commodities like iron ore that underpin the steel industry have seen more muted performance, down from last summer.
Anticipated growth in manufacturing activity is good news for base metals demand as the output of home appliances and consumer electronics rises, but slower Chinese construction activity will weigh on steel-related commodities and may temper gains in commodities like copper that are heavily leveraged against building wiring as well as electrical transmission distribution infrastructure.
Within the metals complex, zinc maintains the strongest fundamentals and prices remain near their highest level in more than a decade. While still earlier in its rebalancing cycle than zinc, copper is the metal with the most improved fundamental outlook.
Other highlights:
- Zinc is forecast to rise to US$1.60/lb through 2018–19, though prices are likely to jump far above those annual average levels when tightness becomes most acute later this year.
- Copper is expected to average US$3.05/lb in 2018 before rising to US$3.25/lb in 2019 as physical balances tighten, with near-term industry labour negotiations tipping risks to the upside.
- The forecast for gold remains unchanged at US$1300/oz through 2018-19, caught between the headwinds of rising global interest rates and the tailwinds of a secularly depreciating US dollar.
Read the full Scotiabank Commodity Price Index report online at:
http://www.gbm.scotiabank.com/scpt/gbm/scotiaeconomics63/SCPI_2018-01-18.pdf
Scotiabank 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.
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SOURCE Scotiabank
For media inquiries only: Debra Chan, Global Communications, Scotiabank, (416) 866-6443, [email protected]
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