Commodity prices rally in March: Scotiabank

But markets skittish following gold sell-off and softer Chinese GDP.

April 29, 2013

All Items Index remains 15.7% below the April 2011 near-term peak.

TORONTO — Scotiabank’s Commodity Price Index rose by 1.6% in March, after slipping in February, and crept up in the first quarter from the fourth-quarter average. However, commodity markets remain skittish following the sharp sell-off of gold in mid-April and softer base metal prices after the release of China’s slower-than-expected 7.7% year over year first quarter GDP advance. They were down from 7.9% in the fourth quarter last year.

Here are the highlights:

• The All Items Index remains 15.7% below the April 2011 near-term peak, just prior to the advent of financial market concern over excessive euro zone sovereign debt and the likely negative impact on global growth.

• Firmer overall prices in March were led by the Oil and Gas Index (6.8% month over month) with gains in Western Canadian Select heavy oil (WCS), natural gas export prices from Canada to the US and liquefied petroleum gas (LPG) prices in Edmonton and Sarnia, Ont.

• NYMEX natural gas prices climbed to US$4.41 per million metric British thermal units (mmbtu) on April 19, the highest since July 2011, on prolonged winter weather in the US, increasing space heating demand and cutting US gas-in-storage 4.2% below the five-year average for this time of year. Natural gas prices were $2.53 a year ago.

• The price of WCS heavy oil rose from $58.38 per barrel in February to $66.73 in March and about $68 in April.

• The discount on WCS heavy oil off West Texas Intermediate (WTI) narrowed from a record high of $36.94 in February to $26.23 in March, to $23.07 in April and an even lower $13.90 for May (TMX/Shorcan Energy Brokers), partly due to a seasonal pick-up in demand for Western Canada’s crude, as US Midwest refineries returned from an unusually high level of maintenance in early 2013.

• The Forest Products Index rose 2.2%. Western Spruce Pine Fir 2×4 lumber prices in the BC Interior (the bellwether for North America) jumped as high as $408 per thousand board feet (mfbm) mid-month, while Oriented strand board (OSB) prices in the US North Central region climbed to $430 per thousand square feet, approaching the previous peaks during the heydays of 2004 ($460 and $520).

• Profit margins were 25% to 30% on lumber and 54% on OSB. Prices were checked in mid-April by some inventory build-up during the first quarter, Scotiabank expects prices to rebound in the third quarter and to move irregularly higher through the first-half 2015 (more than $450).

• US residential construction is likely to resume its traditional role as a locomotive driving economic recovery. For the first time in almost five years, housing starts climbed over the one million-unit mark in March (1.036 million annualized).

• The Agricultural Index also contributed to firmer overall commodity prices in March, rising 0.7%. The gain was entirely centred in Atlantic Coast lobster prices, with prices skyrocketing as late-winter storms tightened supplies.

• No.1 spot prices for canola (in store Vancouver) eased back seasonally from an all-time record high of $674 per tonne in February to $659. However, tight farm stocks in Canada limited the decline.

• The Metal and Mineral Index was down 3.7% in March, with both base and precious metals moving lower. Gold prices (London PM Fix) eased from $1,628 per ounce in February to US$1,593 in March and plunged as low as US$1,321 in intra-day trading on April 16, before partially recovering to US$1,471 in late April.

• Physical demand for gold (coins and bullion) has picked up – especially in Asia –indicating support for gold at recently lower prices. The US Mint sold the most gold coins in April since late 2009.

• The sharp sell-off in gold prices on April 12 and April 15 was triggered by news that Cyprus might sell 10 tonnes of gold to raise 400 million euros towards its bailout package. Although 10 tonnes is small compared with world central bank holdings of almost 32,000 tonnes, financial markets were concerned that this might set a precedent for sales by other distressed euro zone countries. Italy holds 71.3% of its foreign exchange reserves as gold (a significant 2,500 tonnes), Portugal 383.5 tonnes and Spain 281.6 tonnes.

Click here for the Scotiabank Commodity Price Index report.