Commodities seen rallying through spring

The value of Canada’s commodities declined for a third consecutive month in February, but the price of at least one resource should rise in the next couple of months, according to the latest report from Scotiabank.

While the overall Scotiabank Commodity Price Index fell 0.7% month over month, the North American spring planting season is just around the corner, and that should boost the value of potash. The potash rally will be aided by rallying oilseed prices, led by soybeans , but expected to extend to canola as well.

Potash prices have been relatively soft lately, as buyers in Southeast Asia have deferred orders, expecting prices to decline. They might be out of luck, however, as China continues to buy at prices that support the market.

“The recent rebound in soybean, canola and palm oil prices in Malaysia/Indonesia and ongoing strength in corn prices—all requiring large amounts of potash per hectare planted—has improved farm economics and bodes well for solid fertilizer application in North America, Southeast Asia and Brazil, as 2012 unfolds,” the report says.

The Scotiabank agricultural commodity sub-index gained 1.1% in February, as prices for livestock, barley and lobster posted strong gains, offsetting flat wheat and canola prices. But the canola market appears to have turned a corner in March, rising to $628 per tonne, a 12% gain year-over-year.

Canola exports to China are expected to rise in the second half of the year, as nine crushers in that country have been granted permits to import Canadian canola.

Energy

While oilseeds may hold promise, rock-oil is far more closely watched. Petroleum and natural gas sub-index fell 3.4% month-over-month, largely due to transportation bottlenecks for heavy Western Canadian Select crude.

“While international benchmarks—Brent and West Texas Intermediate (WTI) oil prices—continued to climb in February, both Edmonton light sweet and Western Canadian Select heavy oil prices fell in Western Canada,” said Patricia Mohr, vice-president, economics and commodity market specialist at Scotiabank.

The heavy crude typically trades at a discount of about US$17.79 to West Texas Intermediate, but that discount stretched to US$19.33 in February, and blown out to US$31.44 in March.

“There is an urgent need to tap faster growing Asian markets, where world prices prevail, and to diversify away from over-supplied U.S. Midwest refining centres,” said Mohr. “Crude oil and refined petroleum products account for a huge 28.5% of Canada’s net exports of commodities and resource-based manufactured goods (2010 data), highlighting the importance of addressing this issue.”

METALS

A strong rally in base metal prices and firmer gold boosted the metal and mineral index in February, with copper hitting US$3.93 per pound on the London Metal Exchange. Demand for many industrial metals is being driven by increased economic activity in North America.

“Aside from lengthy delays in getting metal out of the LME warehouse in Detroit and lucrative warehousing deals, this strength likely reflects a significant recovery in U.S. auto assemblies,” said Mohr. “Consumers and businesses are replacing an aging fleet, with the average age of vehicles on U.S. roads now at a record of nearly eleven years, up from a normal nine.”

The Scotiabank Commodity Price Index eased for the third consecutive month in February, down 0.7% month over month. A decline in the Oil and Gas sub-component (-3.4% month over month) just offset stronger Metals and Minerals (up 1.5%), firmer Agricultural prices (up 1.1%) and a slight gain in Forest Products (up 0.8%). Despite the decline, the All Items Index remained 2.9% above a year earlier – largely reflecting historically strong oil prices.

Staff

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