Lumber and OSB prices to recover in 2013, with dramatic gains in 2014
QE3 pushes U.S. dollar lower and gold higher
China's RMB1 trillion infrastructure program, triggers rebound in iron
TORONTO, Sept. 25, 2012 /CNW/ - Scotiabank's Commodity Price Index
climbed by 3.1% month over month (m/m) in August, after edging down by
0.4% in July. The rally reflected three supply-side developments: the
strength of global oil markets linked to Middle East tensions and
sharply lower North Sea output due to maintenance and strikes; a
nascent recovery in U.S. housing, in the face of tight North American
building material supplies; and historically high grain and oilseed
prices due to drought in the U.S. Midwest and parts of Russia. The All
Items Index remains 16.9% below the near-term peak in April 2011, just
prior to the advent of financial market concern over Euro zone
"European Central Bank (ECB) measures to boost a struggling world
economy through exceptionally low interest rates and massive liquidity
injections have lifted investor and business confidence in September,
triggering renewed interest in riskier assets, such as equities and
commodities," said Patricia Mohr, Vice-President, Economics and
Commodity Market Specialist at Scotiabank.
In August, oil and gas led the Scotiabank Commodity Price Index higher
(+11.2% m/m). Light oil and propane prices at Edmonton, Western
Canadian Select heavy oil prices and natural gas export prices all
The Forest Product Index also advanced by 2.3% m/m to a level 5.0% above
a year earlier. Western Spruce-Pine-Fir 2x4 lumber prices jumped to
US$310 per thousand board feet (mfbm) in August - a level not seen
since May 2006 - and oriented strand board (OSB) prices in the U.S.
north central region spiked to US$331 per thousand square feet - the
highest since April 2010.
In contrast, the Metal and Mineral Index lost further ground in August
(-2.4% m/m), as weaker base metal, iron ore and uranium prices
countered stronger gold.
The Agricultural Index also edged down by 1.2% m/m, as seasonal harvest
pressure pushed down wheat and barley prices, offsetting a rebound in
cattle prices and gains in salmon and Atlantic coast lobster. No.1
canola was largely unchanged at US$658 per tonne in store Vancouver
(close to the US$673 record high last April).
"After a challenging environment since 2008, linked to a prolonged and
sharp downturn in U.S. housing, lumber and OSB producers, as well as
medium-density fibreboard (MDF) and particleboard manufacturers, will
enjoy a substantial recovery in earnings in 2013," said Ms. Mohr. "An
improvement is already underway."
Western Spruce-Pine-Fir 2x4 lumber prices (No.2 and better) - relevant
for the B.C. interior and Prairie provinces, and the bellwether for
North America - will strengthen from an average of US$285 per mfbm in
2012 to a profitable US$315 in 2013 and US$350 in 2014. While the U.S.
housing recovery remains fragile, a pick-up in lumber prices will occur
with only a modest further gain in U.S. housing starts to the 850,000
unit mark in 2013, up from 729,000 units annualized through August this
year, but still well below the 2005-2006 peak (1.93 million).
Substantial sawmill closures in Canada and the United States since 2007
- combined with fewer logging contractors, trades people and truckers
in the building materials industry - will create challenges in meeting
higher demand. While lumber mills will be able to increase shifts in
2013, higher prices will be required to incent greater output.
Market development for B.C. and Alberta lumber in China has contributed
to a tightening of the North American supply and demand balance.
Canadian softwood lumber exports to China rose by 4.7% year-over-year
in the first half of 2012, though deliveries trailed year-earlier
levels in May and June, and decelerated from the scorching 63% gain of
2011: First Half.
"The near-term outlook for OSB - used primarily in flooring and roofing
in residential housing, but also in commercial construction - is even
more compelling than lumber," added Ms. Mohr. "Capacity re-starts will
be needed in 2013, recently spurring announcements by Georgia Pacific
and Arbec Forest Products, involving a mill in Miramichi, New
Brunswick. Limited OSB supplies for sub-flooring triggered panic buying
and a spike in prices in August. "
After languishing for most of 2012, gold prices (London PM Fix) rose
from US$1,594 per ounce in July to US$1,626 in August and to a
six-month high of US$1,784.50 on September 21, 2012, as QE3 pushed down
the U.S. dollar.
An aspect of competitive currency devaluation has emerged in the
aftermath of the Fed and ECB monetary policy initiatives, with Japan,
Turkey and Brazil injecting liquidity into financial markets to push
down rates and prevent their currencies from appreciating. These
developments all bode well for gold, a major export from Canada. High
gold and silver prices benefit most base metal producers, with high
by-product credits from precious metals offsetting rapid operating cost
Base metal prices have all rallied significantly in September, with risk
appetite returning to financial markets. London Metal Exchange (LME)
copper prices surged as high as US$3.81 per pound in the immediate
aftermath of the September 13 FOMC meeting, though prices have fallen
back again to US$3.70 later in the month. Turning to iron ore, spot
prices delivered to Qingdao China - relevant for Labrador and northern
Quebec producers - dropped from US$128 per tonne in July to US$108 in
August, falling as low as US$90 late in the month. Prices have rallied
back to US$105 in mid-September in response to an infrastructure
spending program by China.
Scotiabank 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.
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Scotiabank trades on the Toronto (BNS) and New York Exchanges (BNS).
For more information please visit www.scotiabank.com.
SOURCE: Scotiabank - Economic Reports
For further information:
Patricia Mohr, Scotiabank Economics, (416) 866-4210, firstname.lastname@example.org; or
Devinder Lamsar, Media Communications, (416) 933-1171, email@example.com.