Scotiabank commodity price index ends 2013 on weak note but 2014 looking better

TORONTO – Commodity prices ended last year on a weak note, a Scotiabank report suggested Tuesday as the bank’s commodity price index slipped lower in December.

However, the bank said it sees signs that some commodities have started to move up off their lows for the current market cycle and others are poised for improvements this year.

“Signs point to a bottoming in the all-items index in early 2014,” said Patricia Mohr, Scotiabank’s commodity market specialist.

The Scotiabank commodity price index for December fell 1.2 per cent from November and 6.8 per cent from December 2012.

All four of the index’s main sub-groups — metal and minerals, oil and gas, forestry and agriculture — lost ground in December and only the energy and forestry sectors showed gains for the year.

Metals and minerals dropped 0.9 per cent for the month and 18.2 per cent for the year due to a major drop in gold prices and lower demand for base metals due to weakness in the global economy.

Scotiabank said “chances are good” that the price of gold has bottomed, since it’s close to the cost of production for high-cost producers and a further decline would likely trigger production cuts.

“Gold is currently trading at US$1,261 . . . and should rally to US$1,375 in 2015, on prospects for higher inflation in the second half of the decade,” Scotiabank said.

Among base metals, the bank said copper ended last year on an upswing at US$3.26 per pound and has climbed further to US$3.32 in January.

Copper is seen by many as a key economic indicator as it is used in a wide variety of products, from consumer electronics to industrial equipment to building construction.

“A rumour that China’s State Reserve Bureau might buy 300,000 tonnes of copper in 2014, believing prices to be near a cyclical low, would wipe out this year’s projected ‘surplus’ and has lifted sentiment,” Scotiabank said.

“Actual supply and demand conditions were firm in late 2013, given the strength of China’s underlying copper consumption, which accelerated by 12 per cent in 2013, and a shortage of copper scrap.”

Scotiabank’s oil and gas index ended 2013 up 5.5 per cent on the year but down by 1.1 per cent compared with November, partly because of a bigger discount on Western Canadian Select heavy oil.

However, the bank said the spread between prices for Canadian heavy crude and West Texas Intermediate narrowed in January.

Prices for Canadian natural gas has also shot up this month, rising to US$5.18 per million British thermal units on Jan. 24, from US$3.92 in December and US$2.84 in 2012.

Scotiabank said gas prices, which have been low for several years due to a glut of supply from new sources and warm winters, have been driven up amid some of the coldest temperatures in years.

“While ample supplies are waiting in the wings for development, given the shale revolution, low inventories going into the summer cooling season will underpin prices at higher-than-previously forecast levels,” Scotiabank said.

The forestry subindex was one of few bright spots last year, although it lost ground in December, falling 2.1 per cent from the previous month. It ended the year up a slim 0.1 per cent.

“However, prices have edged up again to US$376 in mid-January. We remain optimistic that prices will strengthen further to average US$390 in 2014 alongside a multiple-year recovery in U.S. housing starts,” Scotiabank said.

The agriculture index fell 1.3 per cent in December, and 13.4 per cent from the same month in 2012.

Scotiabank said a Statistics Canada survey in December showed a much bigger canola crop than expected, a record 18 million tonnes, up from 13.9 million tonnes a year earlier.

“Significantly lower canola prices also reflect ample world supplies of vegetable oils, partly linked to stepped-up output of palm oil by Malaysia/Indonesia, and limited rail cars in Canada to move the massive crop to the B.C. Coast for export,” Scotiabank said.