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Global Economic Research October 26, 2010

November 16, 2007

Patricia Mohr (416) 866-4210
pat_mohr@scotiacapital.com

Scotiabank’s Commodity Price Index Rises Further In September

• This year’s stronger-than-expected recovery in world potash shipments begins to lift prices in
Southeast Asia and Brazil. Blockbuster USDA report sets off further rally in U.S. corn prices,
suggesting strong U.S. fertilizer application ahead.
• Prospects for a further round of Fed ‘quantitative easing’ weaken the U.S. dollar, boosting
commodity prices and extending the ‘commodity price super-cycle’.
• Palladium — a top ‘pick’.

Potash Prices Begin To Rally
S cotiabank’s Commodity Price Index posted its third consecutive
monthly advance in September, edging up by 0.6% m/m. The
All Items Index is now 27.1% above the cyclical low in April 2009 and
1,200
In S.E. Asia & Brazil
US$ per tonne
1,200

Spot Potash Prices
will surge in October, with gains in base & precious metals, grains and 1,000 (FOB Vancouver) 1,000
+
fertilizers. World food prices have ratcheted up in recent months, Canpotex and BPC
800 announce substantial 800
pointing to strong fertilizer application in the coming year. shipments to Braz il &
Malaysia in 2010:Q4 at
The Metal & Minerals Index led commodity prices higher in 600 higher prices. 600

September, climbing 4.1% m/m. This sub-component has now surpassed 2008-09 US$633
400 400
last April’s near-term high (after the 2008 recession) and will climb further 2010F US$350 +
2011F US$415 US$342.50
in October. LME copper prices jumped as high as US$3.82 per pound on 200 (Sept.) 200
October 14 — not far from the all-time record of US$4.08 on July 3, 2008.
Fundamentally tight world supplies, with a widening ‘deficit’ expected 0
00 02 04 06 08 10 12
0

between refined copper consumption and production in 2011, and Sulphur prices surge from US$80 per tonne in
anticipation of a ‘soft landing’ in China’s economy account for this strength. August to US$112 in September (FOB
Vancouver) alongside stronger DAP demand.
The ‘soft landing’ was confirmed on October 21 with the release of China’s
GDP growth in 2010:Q3 at 9.6% yr/yr, down only modestly from 10.3% in
Q2, and consumer price inflation still relatively contained at 3.6% yr/yr. Lucrative U.S. Corn Prices
Copper prices rose to a new 28-month high of US$3.86 on October 25 on Suggest Strong Spring
Fertilizer Application
renewed U.S. dollar weakness after the G20 meeting. 8
US$ per bushel
8
*
Precious metals have also outperformed, with spot gold prices 7
Peak price: US$7.55
7

reaching a new record high of US$1,387.35 per ounce on October 15, 6 June 27, 2008 6
on comments from the Fed Chairman suggesting another round of +
5 5
‘quantitative easing’ when the Fed meets on November 2-3.
4 4
The Agricultural Index jumped by 4.0% m/m in September with 3
20-year average
3
broad based strength in grains & oil seeds (especially wheat and 'Credit
2 2
canola). The Canadian Wheat Board’s asking export price rose by 10.9% Crunch'
No. 2 Yellow Corn
m/m and 41% yr/yr in September. The Forest Products Index also edged 1
CBOT Nearby Futures
1

up by 1.1% m/m, as Western Spruce-Pine-Fir 2x4 lumber prices 0 0
rebounded back towards average mill cash costs plus the 15% export 90 92 94 96 98 00 02 04 06 08 10 12

charge for shipments to the United States. While U.S. housing starts + Data to October 25, 2010.
U.S. corn stocks-to-use ratio: 2008/09 = 13.9%;
remain in the doldrums, stepped-up buying by China catapulted prices 2009/10e = 13.1%; 2010/11f = 6.7%.

Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor This Report is prepared by Scotia Economics as a resource for the
clients of Scotiabank and Scotia Capital. While the information is from
Toronto, Ontario Canada M5H 1H1
sources believed reliable, neither the information nor the forecast shall
Tel: (416) 866-6253 Fax: (416) 866-2829 be taken as a representation for which The Bank of Nova Scotia or
Email: scotia_economics@scotiacapital.com Scotia Capital Inc. or any of their employees incur any responsibility.

Scotiabank Commodity Price Index is available on: www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C

this was followed by a USDA crop report on October 8 — cutting the estimated corn yield to 155. economy and head off 98 00 02 04 06 08 10 12 ‘deflation’ through an extended period of unusually low interest rates.000 tonnes to Southeast Asia (mostly 2.50 per pound in mid.00 Sque e ze (De c. + with grid lock in the U.000 Be a r Ste a rns developments lie behind the commodity price rally since the May/June correction Ja n 21. dollar also Upw a rd re vision in makes it easier for raw material producers to boost dollar prices.8 bushels per acre (still high. gains in steel-alloying agents (molybdenum & cobalt) and surging Lumber Prices Rally 400 400 sulphur prices.200 1.50 0.92 on October 15. 2010: US$1.Global Economic Research October 26. Dollar Weakness & Gold 140 28 also been lifted by a ‘deficit’ on corn in China and rising Chinese imports (1. 2010 back to profitability in October.50 4.00 China ’s coppe r consum ption for 2010 3.50 1.C. (delivered) in December.S. a trend expected to persist in 2011. recently allowing Canpotex to sell 150.50 per tonne (standard grade) — treading water since the beginning of 2010.50 on July 3.S.1% in 2009-10. corn stocks-to-use ratio (including exports) is projected to fall to only 6. dollar weakness are normally associated with higher commodity US$ per pound 4. lumber importer Spot potash prices (FOB Vancouver) were largely unchanged in September at 200 Western Spruce- 200 US$342. 2008) 2. phosphate and potash fertilizers. as producers seek to increase dollar prices to offset rising local currency costs Record High: US$4.50 + into commodity-intensive ‘emerging economies’ in a search for higher returns. pushing down the U. 24.3 DXY Index US$ per ounce million tonnes in 2009-10 — the highest in 15 years — possibly climbing to 7 mt in 120 U. 1. rising to US$410 cfr offsets weakness in U. 2 .387.70.7% in late 2010-11.50 & tight globa l supplie s buoy price s. Oct. market. and 40 8 2. two key 1.4% m/m. Low During Cre dit 2. In addition to expectations for ongoing strength in China’s demand. The demand recovery has been much-better-than B. sulphur prices (FOB Vancouver) — used in DAP or diammonium phosphate 80 16 fertilizer — climbed 40% m/m in September to US$112 per tonne to post the Silver Prices* single-best performance of the thirty-two commodities in the Scotiabank 60 (London Fix) 12 Commodity Price Index.400 Ne w Re cord: + offset stronger propane prices (a petrochemical feedstock) in Edmonton and Sarnia.S.337.S.50 Index since late June. The Metal and Minerals Index surged in September with widespread strength in base & precious metals. Spot uranium prices also edged up from US$41.400 1.50. Together * Spot silver: near-term high US$24. 15. other crop prices such as coffee (at a 13-year high).S.00 translates into less in other currencies. significantly lower medium/heavy 1.5 bn bd ft. Expectations for a further round of Fed ‘quantitative easing’ (QE2) (injecting Silver outperforms gold. for hogs and cattle) in 2010-11. in 2010 = over 28% of B. Congress on addressing a large federal government deficit Index of U. this move has called into question the ‘integrity’ of the world’s key Copper Prices reserve currency. QE2 may also trigger renewed capital inflows 1. has contributed to the 2. 2008 3. The long-term base contract price has 300 Japan as Canada's 300 second biggest increased to US$62 (prior to escalation at the time of delivery). dollar and bolstering precious metal prices. Dollar DXY Index + 24 2010-11). CBOT corn prices have U. production (output from 15 mills).35 spot 1.00 recent rally in commodity prices. triggering a jump in international grain & 200 200 oilseed prices.00 Metals & Minerals 80 84 88 92 96 00 04 08 12 Data to October 25.032.6% decline in the U. as the increase 3. A severe drought across the spring wheat and barley growing region of the London PM Fix 400 400 FSU-12 last spring and summer.00 prices.08 3.S. announced new contract volumes into Brazil with granular prices moving to the US$410 0 09 10 11 0 mark in December and January.600 New Record High 1. BPC has now sold a significant number of 100 Stepped-up demand from China 100 cargoes to Brazil for granular product at progressively higher prices.C. dollar against six key currencies.S. lumber sales to China on track to reach anticipated.S.g. sugar cane and rice 100 20 are also strong — pushing up demand for nitrogen.S. 2008 US$1. The 10. 25. but much lower than 0 75 80 85 90 95 00 05 10 15 0 expected) — and pointing to quite tight international corn supplies (a key feed grain London PM Fix on Oct.50 of production (e. An edging down in the Edmonton Par price for Gold Reaches light crude oil (likely to bounce back in October). amid Silver Prices Lifted By strong demand and the lowest ending stocks since 1996-97.200 Ma rch 17. The Oil & Gas Index was the only sub-component to decline in September. falling 7. 2010. 0. Pine-Fir 2x4 Prices While prices have only edged up in October. the U. up from about US$390 cfr in October.00 1. Alberta and weaker natural gas export prices more than 1. 2010. A weaker U. US$ per mfbm July to US$48 in mid-September and are currently US$52 — boosted by a production China surpasses shortfall at Energy Resources of Australia (ERA). down from 13. in Canadian or Australian dollars).S. 1980 800 800 (caused in part by the Euro zone ‘debt crisis’): pe a k US$850 600 Gold Prices 600 1.00 * 4.S.00 extending the ‘commodity price super-cycle’. Approach Previous Record 4. relative to GDP. 20 4 liquidity by buying Treasury bonds) to revive the U.50 LME Copper Prices 0.600 US$ per ounce crude oil prices at Hardisty. Canpotex has also pushing up prices contra-seasonally in October.00 0.000 follow ing colla pse of * 1. 2010 US$1.50 Periods of U. dollar DXY 2.

shales (excepting Marcellus) cannot be economically exploited below US$3.1 supplying roughly 500.0 152. Rising auto- catalyst demand in China and other ‘emerging markets’.4 138. with OPEC production of 29.2 * 184.9 As an indication of the demand recovery this year.8 52.32 per mmbtu in mid-October (a shoulder period). falling from US$76. linked to a shift to natural gas.0 105.3 5.1 2. Silver (a cheaper alternative) has outperformed gold in September and October.3 -22.6 5. with another US$75 reportedly just announced for 2011. All markets have Weights One Three One Five Ten accepted the US$405 cfr price level for standard Month Months Year Years Years in late 2010. Turning to precious metals.5%) has surpassed pre-recessionary levels in 2007. Unless quickly reversed in November at the start of the North American heating season. However.6 0. While world consumption growth will likely slow in 2011 (+1.S.4 5.2 11. China may be starting to quietly build the second round of its petroleum reserves. Spot palladium prices should average US$510 per ounce in 2010 and US$650 in 2011.2 223.6 184. Oil and Gas* 247.2%). the temporary closure of the Houston Ship Channel and expectations that a ‘double-dip’ downturn will be avoided in the United States. Global supply/demand conditions are roughly in balance.8 6. as even the low-cost U.S.42 million 2010 2009 tonnes. light & heavy trucks) at 13.Global Economic Research October 26.9 271.6 million units in 2009 surpassed U. Surprisingly. with silver climbing to US$25-30. as well as an incomplete recovery in the United States).5 83. Brazilian potash imports climbed by Index 1997 = 100 101% yr/yr through August to 3. rather than All Commodity Price Index 100 8. as fiscal austerity measures take hold in mature G7 economies.9 21.6 259. Imports into China also rose by 62% to Industrials* 191. gaining from its role as both an ‘industrial’ and a ‘precious’ metal.2 mb/d in 2010:Q3 in line with the 2010 ‘call’ for OPEC crude at 29. At the same time.14 mt). in the face of supply constraints.9 7.0 * 181. likely pushing the supply/demand balance into deficit..7 158.2 27. Record U. WTI oil prices should average US$78. palladium supply comes from limited sources (such as Norilsk nickel operations in Russia and byproduct output from South African platinum mines).7 of improving market fundamentals and a desire Oil and Gas 16 -60. involving more than Fores t Products 40 13.1 mb/d.1 55.9 US$50 per ton this Fall.3 254.6 * 267.6 continuing with spot sales.8 148.7 148. Competitively priced 3 .9 by China to secure longer-term supplies.9 730. dollar.S.5 231. up from only US$265 in 2009 and US$352 in 2008. Palladium — a Platinum Group Metal used in auto-catalysts — is a commodity ‘pick’ for 2011.4 15. Sales from Russian state palladium stocks (just under 1 million ounces in the past two years) may drop near zero in 2011 and Swiss stockpiles are declining.8 264. keeping markets in rough balance. prices have rebounded back to US$82 so far in October alongside a weak U.S.3 12. albeit from very low levels a year ago.3 * 191.5 123. China’s sales will advance by 25% to 17 million in 2010 and another 17% to almost 20 million in 2011 and its auto emissions standards will tighten. farm income and high crop prices should lead to strong fertilizer application next spring. NYMEX natural gas prices have dropped to a seasonal low of only US$3. Sinofert of China and Canpotex have signed a 3-year supply Industrials 83 1. with Canada Fores t Products 106.9 104. silver prices (London Fix) rose to a near-term high of US$24. Global demand (at about 86. this largely reflects strong growth in ‘emerging markets’.3 one million tonnes per annum — likely a sign Metal and Minerals 27 62. Sept Aug July June Sept Canada was the second-largest supplier selling All Commodity Price Index* 185.6 million. China’s vehicle sales (cars.0 19.50 in 2010 and an upwardly revised US$85 in 2011. the increase in non-OPEC supply from oil & biofuels will be only 0. development drilling will be curtailed. vehicle sales at 10.5 mb/d.5 agreement for 2011-13.5 1.1 105. The latest data *Natural gas and propane prices are subject to revision.2 Russia’s 1. with OECD demand still below 2007-08 consumption (mostly due to a sharp structural decline in Europe.S. Agriculture 17 60.6 22. However.55 due to concern over a sub-par U. will boost prices. economic recovery and slowing global growth.1 2.5 24.49 per ounce on October 14. Oil & Gas WTI oil prices lost ground in September.9 11.000 tonnes — just below volumes from Belarus. 2010 Malaysia for palm oil production) at US$405 cfr Scotiabank Commodity Price Index for standard product and US$420 for granular.76 to date in October — the lowest since August 2008 — and could well move lower in coming months. The gold-to-silver ratio has fallen to 57.0 In the U.1 20.1 * 187.8 mt through July. shows a 17% drop in North American inventories relative to the five-year average.000 tonnes (second to Metal and Minerals 282.4 * 267.9 mb/d in 2010 — +2.50. potash prices are set to rise by Agriculture 154.7 nearly 2.67 per barrel to US$75.0 177.4 1.S.0 -8. Granular supplies are reportedly tight in the Growth Trends (per cent change at annual rates) United States and Brazil.

1 240 Last 5 Years 2.000 units annualized in September and 603. Energy is by far the single biggest source of surplus in Canada’s merchandise trade. as a 71.S. with a recovery in ‘industrial’ use (+10. Producer Price Index f or Intermediate Goods.C. Canada’s net energy exports (excluding electricity) rose to an annualized C$52. Very low inventories in the U.3 bn through August 2010 (+ 23% yr/yr). 2.000 units so far this year —little recovery from the 551. Active drilling rigs have picked up by 65% through September. Index def lated by U. housing starts (a mere 610. Lumber prices have recovered markedly in 2010.Global Economic Research October 26. annual rate) 240 Last Year 21.000 units of January to September 2009).3 220 220 Last 10 Years 5.6%) and ongoing strength in gas-fired power generation (+7. but also structural and molding & SHOP products.6 200 200 180 180 160 160 140 140 All Items 120 120 100 100 80 80 60 All Items – 60 2 Inflation adjusted 40 40 20 20 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1.S.S.000 b/d increase in light & heavy crude oil exports and slightly stronger natural gas prices and volumes (+1%) to the United States more than offset lower refined product exports.S. 4 . averaging US$249 to date compared with only US$171 from January to October a year ago. Scotiabank All Commodity Price Index 1 280 280 Grow th Trends Index: 1997=100 260 260 (per cent. Forest Products Western Spruce-Pine-Fir 2x4 lumber prices edged up to US$231 per mfbm in September and soared to a profitable US$259 in late October. – Shaded areas represent U. This reflects growing shipments from B.S.3% yr/yr through July). recession periods. to China — not only of low-grade lumber for concrete forms.1%). demand picks up from time to time. dollar-based index of principal Canadian exports. when U. 2010 natural gas has led to a robust pick-up in U. demand this year (+5.S.S. A trade-w eighted U. The improvement has occurred despite still weak U. distribution system and mill capacity closures across North America also cause prices to spike. centred in SAGD projects in the Alberta oil sands and ‘tight’ oil plays in Western Canada.