Drop in business confidence leads investors out of commodities and equities
TORONTO: Scotiabank’s Commodity Price Index dropped 3.7 percent month-over-month in June, the seventh consecutive monthly decline. The all items index fell 19 percent below the near-term high in April 2011—right before concern over excessive Euro Zone sovereign debt. The correction remains less than half the 46 percent slide in the second half of 2008.
“A sharp loss of business confidence worldwide—linked to Euro Zone financial strains and slowing world growth—led investors to shift from riskier assets such as commodities and equities into the security and liquidity of US Treasury securities,” said Patricia Mohr, VP, economics and commodity market specialist, Scotiabank. “Oil prices—which often trade on global growth expectations rather than industry developments—were particularly dampened by poor confidence.”
Concern over a slowdown in China, with GDP slowing to 7.6 percent in the second quarter of 2012, also took a toll—particularly on industrial metal prices. But the decline in Scotiabank’s commodity price index in June may represent a near-term bottom, with commodity prices rallying back in July. Several positive proposals at the 2012 European Union Summit to shore up Euro Zone financial markets temporarily lifted sentiment for riskier assets, though uncertainty remains. China has also recently shifted to a more aggressive pro-growth monetary and fiscal policy.
The agricultural index edged up 0.3 percent month-over-month in June. US corn and soybean prices soared to all-time highs in mid-July amid hot and dry weather conditions in the US Midwest. These developments will have major implications for international food prices later this year, with the US the world’s top exporter of corn.
“Record US soybean prices have pushed up canola at the Port of Vancouver to a record high—CDN$671 per tonne to date in July,” said Mohr. “With relatively favourable growing conditions on the Canadian prairies this year, canola will likely emerge as a $10-billion crop alongside record output and prices in 2012-13. Though dry conditions will constrain Southern Ontario’s corn and soybean crops, Canada’s overall grain and oilseed revenue could also be a record this autumn.”
Oil and gas
The Scotiabank oil and gas index retreated sharply in June. While the discount on both light, sweet and Western Canadian Select heavy crude oil relative to West Texas Intermediate. Oil narrowed in June, actual prices fell to US$78 per barrel and US$66 respectively, as international oil prices lost ground. However, Brent and WTI oil prices have rallied back to US$104 and US$89 respectively in mid-July, with geopolitical tensions ratcheting up in the Middle East. The European Union imposed a full embargo on Iranian oil imports on July 1 and the US started sanctions June 28.
Debate is stepping up on a new energy policy for Canada. On the proposed Northern Gateway Pipeline, the BC provincial government has set out five prerequisites for support of heavy oil pipeline development across the province and tanker traffic on the coast. Western Canada’s oil output is expected to grow by about one million barrels per day from 2.7 in 2011 to 3.6-3.8 by 2015 (from oil sands production as well as tight oil and conventional light and heavy oil).
Metals and minerals
Metals and minerals also dropped by 1.2 percent in June with broad-based declines in base metals, iron ore, steel additives (cobalt and molybdenum) and uranium—only partly offset by an edging up in gold prices. Tightness in the global market for premium-grade hard coking coal will boost contract prices for Western Canada to US$225 per tonne in the July-to-September quarter—up seven percent from US$211.
Gold prices, at US$1,601 per ounce in late July, have held up well, but have failed to advance this year. Traders are awaiting further quantitative easing by the US Federal Reserve or the European Central Bank. The forest products index was largely flat in June, though lumber and oriented strand board prices remain above year-ago levels. A strengthening in lumber prices is expected in 2013, as a slowly improving US housing market hits a wall of limited North American supply.