1. Art and Diseño

Global Economics
Patricia Mohr 416.866.4210
[email protected]
January 29, 2015
Scotiabank
Commodity Price Index
Commodity Prices Tumble To Lowest Level Since Mid-2009

Oil prices will recover moderately by mid-2015, alongside an international supply-side adjustment.

A ‘safe-haven’ bid re-emerges for gold, lifting TSX gold equities.

Global potash shipments were likely a record in 2014.
Scotiabank’s Commodity Price Index plunged in December to
mid-2009 levels (-10.3% m/m and -15.4% yr/yr) — close to the
recessionary low of the ‘Great Recession’. A fight for market
share in international oil and iron ore markets as well as general
unease over lacklustre global economic conditions and an almost
‘deflationary’ environment — particularly in the euro zone and
Japan — contributed to widespread softness in commodity prices.
The sharp drop in oil prices noticeably sideswiped base
metals and other commodities. Ongoing jitters over a slowdown
in China also pulled down industrial metal prices, even though
China managed to post GDP growth of 7.3% yr/yr in 2014:Q4 —
unchanged from Q3. China is now all-dominant in materials,
accounting for 47.9% of world consumption of the four key base
metals, the United States a mere 8.9%. With the United States
one of the few major economies expected to post a brighter
outlook in 2015, the recent upward spike in the U.S. dollar has
created headwinds for many dollar-denominated commodities and,
in some cases, may even be pulling prices down; The Dollar Index
(DXY) has surged 19.4% since May 6, 2014.
Scotiabank’s Commodity Price Index will drop further in January.
However, given the significant price decline which has already
occurred, it appears likely that commodities will touch bottom in
the first half of 2015. Central banks (especially the ECB and the
Bank of Japan) are attempting to reflate economic conditions
through ‘quantitative easing’ and ultra-low interest rates.
The Oil & Gas Index led commodity prices lower in
December (-23.3% m/m and -27.5% yr/yr). Light, sweet oil prices
in Edmonton fell almost 25% m/m, WCS heavy oil 32.5% and
propane at Edmonton & Sarnia 37% — as WTI oil dropped from
US$76 per barrel in November to US$59 in December (currently
US$44). Propane (priced off benchmarks in the U.S. Gulf) has
been particularly weak. Canadian natural gas — bound for the
United States — was the only energy product to strengthen last
month. Oil traders & physical investors appear loath to take a
position in oil until it becomes clear that international supply &
demand conditions will move back into balance, a development
we expect in 2015:H2.
Scotiabank Economics
Scotia Plaza 40 King Street West, 63rd Floor
Toronto, Ontario Canada M5H 1H1
Tel: 416.866.6253 Fax: 416.866.2829
Email: [email protected]
Scotiabank Commodity Price Index
220
200
140
120
100
80
Plunging oil & iron ore prices push
Index to lowest level since mid-2009
Arab Oil
Embargo
40
180
140
120
100
All Items
80
October 2001
Bottom
20
200
160
December 2014: -10.3% m/m
-15.4% yr/yr
60
0
April
2011
New record high
in July 2008
180
160
220
Index: Jan. 2007=100
-46% in 2008:
60
July to
December
40
20
72 76 80 84 88 92 96 00 04 08 12 16
0
A trade-weighted U.S. dollar-based Index of key
Canadian commodity exports. Shaded areas denote
U.S. recession periods.
Oil Prices Drop Below
Mid-Cycle Production Costs
140
120
60
40
20
0
140
Record High:
July 11, 2008: US$147.90
100
80
*
US$ per barrel
120
100
WTI Oil Prices
80
Avg. Oil Production 'Breakeven
Costs' U.S. & Canada: US$60-61*
Iranian
Revolution
Iraq
Gulf War
War
60
+
Arab Oil
Embargo
60 65 70 75 80 85 90 95 00 05 10 15 20
40
20
0
+ January 28, 2015: US$44.37.
* Mid-cycle breakeven costs including royalties and
9% after-tax return for over 100 plays across U.S. and
Canada; excludes 'upfront' land acquisition costs,
seismic and infrastructure costs. 20% lower
service/drilling costs in 2015 and some tax relief could
pull down North Dakota breakeven costs to roughly
US$56. Lower costs also expected in Canada.
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank.
Opinions, estimates and projections contained herein are our own as of the date hereof and are
subject to change without notice. The information and opinions contained herein have been
compiled or arrived at from sources believed reliable but no representation or warranty, express or
implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts
any liability whatsoever for any loss arising from any use of this report or its contents.
TM
Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank Commodity Price Index is available on scotiabank.com, Bloomberg at SCOT and Reuters at SM1C
January 29, 2015
Global Economics
Scotiabank
Commodity Price Index
A supply-side adjustment is already getting underway (specifically in the U.S.
shales, as targetted by Saudi Arabia and the Gulf Co-Operation Council
members of OPEC). The number of U.S. oil-focused drilling rigs has fallen from a
peak of 1,609 on October 10, 2014 to 1,317 on January 23, 2015 (-7.0% yr/yr). While
much has been made of the resilience of U.S. oil production, we believe that reduced
funding and moves by producers to protect their balance sheets, pulling back from
more marginal fields, will eventually lead to a slowdown in output. Scotiabank
petroleum reservoir engineers estimate that a sustained 30% drop in drilling activity is
needed to level out U.S. oil production from the North Dakota Bakken, the Permian
and the Eagle Ford Basins, after the remarkable 1.28 mb/d gain over the past 12
months (January 2014 to January 2015). Active rigs have already fallen 13.7%
below the 2014 average.
Global capital spending on exploration & production could drop by 30% in 2015,
including an already announced 27% drop in capex by oil & gas producers in Canada
(not including service & drilling companies). However, Western Canadian oil
production should still advance by 150,000 b/d. M&A activity will pick up once
buyers and sellers agree that oil prices have stabilized.
The Metal & Mineral Index eased back in December (-1.4% m/m, -10.9% yr/yr) and
likely declined further in January. A pullback in base metal prices (excepting nickel &
cobalt) more than offset stronger gold and precious metal prices. LME copper prices
tumbled below the US$6,000 per tonne mark (US$2.72 per pound) on January 14, as
Chinese hedge funds — encouraged by plunging oil prices — shorted the market.
Widespread anticipation that copper prices would move lower in 2015, alongside new
copper mine supply, may also have encouraged selling. Prices remain at a low ebb in
late January at US$2.49 (still yielding a slight 10% profit margin over average world
breakeven costs including depreciation).
Copper has likely been ‘over-sold’, given the fifth-highest imports into China on
record in December, new fiscal stimulus by Beijing to spur the economy (speeding up
spending on 300 infrastructure projects) and a planned 24% increase in capital
spending by the State Electricity Grid (likely geared towards copper cable). Mining
companies have recently cut projected output for 2015 by 300,000 tonnes (Rio Tinto
at Kennecott, BHP Billiton at Escondida and Glencore at Alumbrera), helping to trim
an expected surplus this year to a modest 250,000 tonnes.
The Forest Product Index inched lower in December (-0.4% m/m, -2.4% yr/yr), but
posted the smallest decline of any sub-Index. A slight pick-up in Western Spruce-PineFir 2x4 lumber prices to US$338 per mfbm was just offset by a second small decline in
newsprint prices to US$595 per tonne in the Eastern U.S. and slightly lower NBSK pulp
prices to US$1,020 per tonne (-US$5). While OSB prices in the U.S. North Central
region also edged down from US$219 to US$204 per thousand sq. ft., we expect a big
pick-up in the second half of 2015.
U.S. Dollar Spikes Higher…
1.60
120
The recovery in U.S. housing starts in 2014
US$
index
per €
1.50
was disappointing, with starts totalling 1.004
euro
110
1.40
million units — only a slight gain from 930,000
100
1.30
in 2013. First-time home buying was
constrained by still high unemployment among 1.20
90
younger age groups and tighter bank lending
1.10
80
standards than in the previous decade, both
1.00
U.S. Dollar
70
factors constraining household formation.
Index (DXY)*
0.90
Nevertheless, signs point to some relaxation of
... Creating headwinds for commodity prices
0.80
60
98 00 02 04 06 08 10 12 14 16
lending standards in 2015, overall employment
growth has picked up significantly (the U.S.
* Weighted geometric mean of U.S. Dollar
against euro (57.6%), Sterling (11.9%),
unemployment rate is a mere 5.6%) and rental
Canadian Dollar (9.1%), Swedish Krona (4.2%)
Low Oil Prices Begin To
Trigger Supply-Side Adjustment
1,800
1,800
Number of rigs
Data to January 23, 2015
1,600
1,600
1,400
1,400
1,200
1,200
1,000
1,000
800
800
U.S. Oil Rotary
Rig Count
600
600
400
400
200
200
0
88
91
94
97
00
03
06
09
12
0
15
Data Source: Baker Hughes Incorporated.
Canadian rig count: oil-targetted -43.4% yr/yr,
+137% since late 2014.
U.S. Drilling Activity
Starts To Be Curbed
yr/yr % change
October 10:
1,609 rigs, +17.7% yr/yr
20
20
15
15
U.S. Oil
Rotary Rig
Count
10
10
5
5
0
0
-5
-5
January 23, 2015:
1,317 rigs, -7.0% yr/yr
-10
Jan-13
Jul-13
Jan-14
Jul-14
-10
Jan-15
Data Source: Baker Hughes Incorporated.
'Safe-Haven' Bid Re-Emerges For Gold,
But Stronger U.S. Dollar Is A Risk…
2,000
US$ per ounce
New Record:
Sept. 9, 2011 spot
US$1,921.15
1,800
1,600
1,800
1,600
1,400
1,400
+
Fed Quantitative Easing
1,200
2,000
*
1,200
1,000
1,000
Jan 21, 1980
peak US$850
800
800
Gold Prices
London PM Fix
600
600
400
400
200
0
200
... With possible Fed monetary
tightening in 2015:Q2
75
80
85
90
95
00
05
10
15
20
0
+ London PM Fix on January 28, 2015: US$1,288.
4,000
TSX Gold Equities Rally In Early '15
Index: 1975 = 1,000
4,000
3,500
3,500
3,000
3,000
2,500
2,500
2,000
2,000
TSX - Gold Equities
+29.0% 2015 YTD
(-1.4% yr/yr)
1,500
1,000
500
0
1,500
1,000
500
TSX-Diversified Metals Are 'Oversold'
-13.4% 2015YTD; -33.1% yr/yr.
07
08
09
10
11
12
13
14
15
16
Data to January 28, 2015.
and Swiss Franc (3.6%).
2
0
January 29, 2015
Global Economics
Scotiabank
Commodity Price Index
vacancy rates are below average at 7.4%.
U.S. housing starts should total around
1.2-1.3 million units in 2015-16, lifting lumber
& OSB prices.
A soft Canadian dollar — at a mere
US$0.798 on January 26 — the lowest
since April 1, 2009, when the Scotiabank
Commodity Price Index reached its cyclical
bottom during the ‘Great Recession’ — will
significantly boost export receipts from
forest products.
The Agricultural Index also eased in
December (-3.7% m/m, 5.4%yr/yr). Slightly
lower hog, wheat and canola prices more
than countered stronger barley prices. An
unusually large salmon run in B.C. also
pulled down Pacific Coast salmon prices
(-41% m/m). Barley prices at Lethbridge,
Alberta were buoyed by last autumn’s
small harvest in Western Canada. Rail car
tightness and a strong U.S. dollar have
restrained imports of U.S. corn (a competing
feed grain).
Scotiabank Commodity Price Index
December 2014
Growth (per cent
Trends change)
Weights
(Compound Annual Growth Rates)
All Commodity Price Index
100.0
One
Month
-10.3
One
Month
-73.0
Three
Months
-51.2
One
Year
-15.4
Five
Years
-1.8
Industrials
Oil & Gas
Metal & Minerals
Forest Products
84.7
39.9
30.1
14.7
-11.7
-23.3
-1.4
-0.4
-77.5
-95.8
-15.5
-4.3
-57.6
-81.3
-15.9
-9.9
-17.4
-27.5
-10.9
-2.4
-2.8
-6.1
-1.9
4.7
Agriculture
15.3
-3.7
-36.4
-3.3
-5.4
3.2
Sept
2013
Dec
Index: January 2007 = 100
Dec
2014
Nov
Oct
All Commodity Price Index
112.0
124.9
130.9
134.0
132.3
Industrials
Oil & Gas
Metal & Minerals
Forest Products
107.8
95.3
117.7
121.8
122.1
124.2
119.4
122.2
129.2
137.2
121.2
124.1
133.6
144.9
122.9
125.0
130.5
131.4
132.1
124.8
Agriculture
134.7
139.9
140.2
135.9
142.4
Re-designed Index: Net export weights in 2010, data re-estimated back through 2007, January
2007=100. As of April/May 2014, the Edmonton Par was replaced with MSW Light, Sweet Crude
Oil prices at Edmonton, with price differentials off WTI near-by futures from TMX/Shorcan Energy
Brokers.
After climbing to a record US$108 last July,
hog prices in Ontario have trended down to
US$72 per hundredweight in December.
Falling prices in the United States have taken a toll on prices in Canada. The latest U.S. Department of Agriculture quarterly hog
report revealed a record average litter size, with producers over-reacting to the impact of last year’s PED virus. Cattle prices
remained firm at US$154 in December, given much slower herd expansion across North America.
Gold Prices Rally, As A ‘Safe-Haven’ Bid Re-Emerges
In contrast to many commodities, gold prices have strengthened in recent months — a welcome development for the
Toronto Stock Exchange & the TSX Venture — the home of more than 60% of the world’s publicly traded gold
producers. Uncertainty over global growth and pressure on some oil-related currencies (the Russian ruble) has given gold a
renewed bid as a ‘safe-haven’. The Swiss National Bank’s decision to abandon the Swiss franc’s 1.20 euro cap, ahead of
expected ‘quantitative easing’ by the ECB on January 22 (later confirmed), roiled currency markets, driving up gold prices. The
ECB’s Euro 60 bn per month ‘bond-buying programme’ or ‘QE’ (both sovereign & private-sector debt) from March through at
least September 2016 was far bigger than expected and is intended to push down yields, stave off economic stagnation by
boosting inflation and weaken the euro, giving a competitive boost to euro zone exporters. The net result, the London PM Fix
climbed to a high of US$1,295.75 on January 22 and is US$1,288 late month (approaching the US$1,300 mark).
The recent rise in gold has occurred alongside a stronger U.S. dollar, with investors possibly doubting whether the Fed will
actually tighten monetary policy near-term. However, assuming the Fed lifts the Federal funds rate in 2015:Q2 (possibly in
June), gold prices would be checked. Nevertheless, we have upwardly revised the price forecast for gold to an average
US$1,250-1,275 for 2015-16.
The outlook for the physical gold market appears to be fairly strong, with record or near-record bullion imports into India in 2014:H2.
The Reserve Bank of India removed the 80:20 rule on imports on November 28, 2014, under which importers had to export 20% of
imported bullion before any new shipments could be made (a measure intended to shore up India’s trade balance). Interestingly,
world gold mine production could actually decline in 2017, given the deferral of new mine development in recent years.
After retreating to quite low levels, silver prices have also firmed up to US$17-18 per ounce, a positive development for the
world’s major producers in Mexico (Penoles, Frisco) and Peru (Buenaventura, Antamina, Volcan, Hochschild and Milpo).
Mexico is the world’s ‘top’ silver producer, accounting for 20.7% of world production, and Peru the second largest, with a 14.4% share.
3
January 29, 2015
Global Economics
Scotiabank
Commodity Price Index
In line with other base metals, LME zinc prices also eased back in December and mid-January. However, prices have
rebounded to US$0.96 per pound late month and are holding up well. Prices are still expected to strengthen markedly
through 2016, alongside significant global mine depletion (the closure of Century in 2015:Q3 and Lisheen by early 2016).
Global auto sales & production will continue to be a bright spot in the world economy, lifting demand for galvanized steel
(including in China, where domestic auto manufacturers wish to improve the quality of their vehicles).
Potash
Spot potash prices for the standard grade (FOB Vancouver) were unchanged in December at US$320 per tonne — up
only modestly from a low of US$295 in January 2014. However, the operating performance of Canada’s three major producers
has improved over the past year, with record global demand in 2014 (58-60 million tonnes). North American producer sales
increased by more than 10% alongside strong consumption in domestic and overseas markets (especially in Brazil). Producer
inventories are in better shape than at the beginning of 2014, declining 47% yr/yr in 2014:Q3 and were likely at quite low levels in
Q4. The demand outlook in 2015 could turn mixed, as Brazil’s consumption growth slows and North American application eases
due to low crop prices. However, shipments to China, SE Asia and India are expected to be fairly strong.
Scotiabank All Commodity Price Index 1
220
200
180
Growth Trends
(per cent, annual rate)
Last Year
-15.4
Last 5 Years
-1.8
Index: Jan. 2007=100
220
200
180
160
160
140
140
120
120
100
All Items
100
80
80
60
60
40
All Items –
Inflation adjusted 2
20
20
0
40
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
0
1. A trade-w eighted U.S. dollar-based index of principal Canadian exports.
2. Index deflated by U.S. Producer Price Index for Intermediate Goods.
– Shaded areas represent U.S. recession periods.
4