Scotiabank Commodity Price Index Rallies in August

  • Lumber and OSB prices to recover in 2013, with dramatic gains in 2014 and 2015
  • QE3 pushes U.S. dollar lower and gold higher
  • China's RMB1 trillion infrastructure program, triggers rebound in iron ore prices

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 sovereign debt.

"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 rallied.

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 inflation.

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.

Scotiabank is one of North America's premier financial institutions and Canada's most international bank. With more than 81,000 employees, Scotiabank and its affiliates serve some 19 million customers in more than 55 countries around the world. Scotiabank offers a broad range of products and services including personal, commercial, corporate and investment banking. With assets of $670 billion (as at July 31, 2012), Scotiabank trades on the Toronto (BNS) and New York Exchanges (BNS). For more information please visit

SOURCE: Scotiabank - Economic Reports

For further information:

Patricia Mohr, Scotiabank Economics, (416) 866-4210,; or
Devinder Lamsar, Media Communications, (416) 933-1171,

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