Scotiabank Commodity Price Index Down in September for Second Consecutive

Scotiabank Commodity Price Index Declines for Second Consecutive Month in September

  • WTI no longer a true benchmark for Alberta light synthetic crude oil.
  • Copper prices rebound from an over-sold position in early October.  Inventories are modest in China. 

TORONTO, Oct. 28, 2011 /CNW/ – Scotiabank’s Commodity Price Index, which measures price trends in 32 of Canada’s major exports, fell by 1.1 per cent month over month (m/m) in September, the second consecutive monthly decline. The All Items Index has retreated by 6.2 per cent from the near-term high last April, just prior to the advent of financial market concern over sovereign-debt challenges in the Eurozone.

“The commodity price correction has been mild compared with the 40 per cent plunge in the second half of 2008,” said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. “While exchange-traded commodity prices declined sharply in early October, prices for oil, copper and the grains have rallied back in recent weeks on optimism that measures would be implemented to shore up the Eurozone financial system and bolster liquidity, culminating in a broad agreement on October 27.”

Nevertheless, a number of commodities not traded on exchanges (e.g. coking coal and iron ore) will likely be adjusted down in October, when quarterly contract prices are re-negotiated – dampened by uncertainty over global economic conditions and somewhat slower growth in China. The contract price for Western Canada’s premium-grade hard coking coal will decline from US$315 per tonne (FOB Vancouver) to a still lucrative US$285 in October. While prices may recede further in early 2012, the medium-term outlook for premium-grade hard coking coal remains favourable. Only 35 per cent of China’s domestic coal reserves are premium grade, while China requires 50 per cent for use in its larger blast furnaces.

The Oil and Gas Index inched ahead in September (+0.7 per cent m/m). The gain reflected a surprising increase for both light crude oil in Edmonton and Hardisty Heavy crude in Alberta – the two prices used in the Scotiabank Commodity Price Index — despite a slight decline in WTI oil.

“The price of WTI oil at Cushing, Oklahoma, the pricing point for the NYMEX contract, is no longer as relevant a marker as it once was for light synthetic crude oil from the Alberta oil sands,” noted Ms. Mohr.

WTI oil prices edged down from US$86.34 per barrel in August to US$85.58 in September. Oil prices are particularly sensitive to sentiment on the global economic outlook, falling as low as US$75.67 on October 4, before rebounding strongly to US$93 on October 27 on news of the Eurozone plan and a pick-up in U.S. third-quarter GDP growth (+ 2.5 per cent from a mere 1.3 per cent in the second quarter). However, WTI oil prices continue to trade at a wide US$20 discount to Brent — a better benchmark of world oil prices. WTI prices at Cushing, Oklahoma have been dampened by rising volumes of crude oil from the Alberta oil sands and the U.S. Mid-continent to Cushing in the face of onward pipeline constraints to refining centres in the U.S. Gulf Coast.

In contrast, the price of light synthetic crude oil (SCO) from Alberta (upgraded bitumen) has averaged US$103 per barrel in 2011 YTD – a US$9 premium over WTI oil. While this partly reflects upgrader outages in the Alberta oil sands, it also reflects a trend towards pricing SCO off its cracking parity with competing, higher-priced crude oil (such as Light Louisiana Sweet) in U.S. Midwest refining centres.

In September, the Metal and Mineral sub-component lost significant ground (-2.5 per cent m/m). Widespread declines in base metals and lower silver prices more than offset flat potash prices and gains in gold, sulphur, uranium and cobalt (a steel alloying agent).  LME prices for copper – the bellwether for base metals – dropped from US$4.10 per pound in August to US$3.77 in September and a low of US$3.08 in early October, before surging back to US$3.65 on the 27th.  Prices remain exceptionally profitable, yielding a 60 per cent profit margin over average world break-even costs including depreciation.

“Copper prices were over-sold in early October, given prospects for a supply deficit in the fourth quarter, that is, global demand will exceed refined metal supplies,” concluded Ms. Mohr. “China stepped up its purchases in early October recognizing bargain prices, pulling down LME stocks in South Korea. At the height of concern over Eurozone prospects, traders appear to have focused their profit-taking on copper, as well as nickel, given its comparatively large margin over costs and where the bulk of long positions probably resided.”

Scotia 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.

For further information:

Patricia Mohr, Scotia Economics, (416) 866-4210,
Patty Stathokostas, Scotiabank Media Communications, (416) 866-3625

Canadian Small Businesses Face Reality of Slower and Uneven Economic Growth

TORONTO, Oct. 13, 2011 /CNW/ – Canadian businesses of all sizes are likely to face challenging conditions in the months ahead, according to a report released today by Scotia Economics. Domestic prospects are being constrained by the much slower and uneven pace of economic growth in most advanced nations, amid increasing fiscal restraint and persistently high unemployment. Meanwhile, intensifying debt-related strains in the euro zone and the United States suggest that financial markets will remain volatile during this adjustment period, dampening business and consumer confidence.

“Small firms are particularly sensitive to domestic demand, so their ability to maintain momentum will depend in large part on the resilience of consumer and business expenditures,” said Adrienne Warren, Senior Economist, Scotia Economics. “We expect consumers to be cautious spenders for the time being, given high household debt loads and some recent softening in employment conditions. A more subdued outlook for housing and renovation activity will reinforce this outlook.”

However, household employment, income and spending trends will continue to have a distinct regional performance differential, with the commodity-sensitive areas benefitting from more buoyant conditions than those regions more reliant on non-resource exports to the established markets in the United States, Europe and Japan.

“While activity in Western Canada and Newfoundland and Labrador is being supported by continued strength in resource-related investments, Central and Maritime Canada’s heavier exposure to a slowing U.S. economy suggests relatively more moderate growth prospects for small and large businesses alike,” noted Ms. Warren.

The current environment favours firms whose products and services are geared to corporate customers over those that rely primarily on households. While businesses may become more conservative in new hiring and investment in the months ahead, corporate balance sheet strength provides considerable flexibility to maintain current expenditures. Small businesses also will continue to benefit from the ongoing buoyancy in resource-related activity.

According to the report, the best growth prospects for many small firms may lie in their ability to tap export markets, notwithstanding the near-term disruptions to global trade flows. The fast-growing emerging nations in Asia and Latin America in particular offer considerable growth potential. Exporters focused on the more traditional markets of theUnited States and Europe will undoubtedly be challenged by underlying weak demand and less favourable demographic trends.

“Beyond the adjustment to a more muted outlook for global demand over the near-term, small businesses must continue to adapt to broader longer-term shifts in the economic landscape,” concluded Ms. Warren. “Key issues facing small businesses include an aging population, rising immigration, skilled labour shortages, particularly in the construction trades, a high Canadian dollar, and high energy costs.”

Scotia 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.

For further information:
Adrienne Warren, Scotia Economics, (416) 866-4315
Alex Koustas, Scotia Economics, (416) 866-4212
Patty Stathokostas, Scotiabank Media Communications, (416) 866-3625