Commodities rally continues

It may come as no surprise, but 2010 was a very strong year for commodity prices. How strong? The Scotiabank Commodity Price Index, which tracks the price of 32 commodities, surged 17.8% on the year.

The index capped the year with a hefty month-over-month gain of 5.5% in December. Since the cyclical low, reached in April 2009, the index is now up 43.2%.

The rally continued through early January 2011, until China posted a stronger than expected GDP growth rate. That sparked fears that Beijing would move to slow growth, which would stifle global commodity demand. Still, “slow” is a relative term when it comes to China’s GDP.

“We continue to believe that China’s economy will expand at a healthy clip in 2011”, said Patricia Mohr, vice-president, economics and commodity market specialist at Scotiabank. “China’s GDP should advance by 9.5% in 2011, only slightly slower than the 10.3% of 2010.”

December’s overall rally was led by the energy sub-index, which soared by 12.2% from November. Prices firmed across the energy spectrum, with light and heavy crude, natural gas and propane all catching an up-draft.

The spread between West Texas Intermediate (the North American benchmark) and Brent crude (which impacts two-thirds of world oil supply) widened to $10. This was a result of rising WTI inventories in the hub referenced by NYMEX contracts, while colder than usual weather in Europe drove demand for Brent.

This is far from an academic issue. The Canadian oilpatch relies heavily on the U.S. as an export market, so slower growth in WTI reference prices represents a lost opportunity. New pipelines will deliver more Canadian crude directly to U.S. refining centres on the Gulf Coast, bypassing the Oklahoma bottleneck, but these are still several years away from completion, Mohr says.

In the meantime, a better strategy might be to diversify to other markets.

“Building more pipeline capacity or utilizing an existing rail link from Alberta (north of Edmonton) to the B.C. Coast for onward shipment to fast-growing Asian markets would guarantee world prices for the Alberta oil sands and other Canadian crudes,” Mohr says. “China’s petroleum consumption rose by a sizzling 12% in 2010, 19.1% year-over-year in December.”

AgriculturalThe agricultural sub-index posted the second-best gain in December, rising 8.2%. For the full year, the agricultural component soared 32.1%. The United Nations’ Food and Agriculture Organization noted in December that world food-related commodity prices topped the previous record in June 2008.

“We expect the agricultural environment to be one of the best ever seen for fertilizer application in 2011, lifting demand and prices for potash,” said Mohr.

The metals and mineral sub-index gained 3.1% in December, led by copper, which continued to setting new price records into January. Construction in China and the launch of new copper ETFs are combining to drive demand.

Forestry was the weakest sub-index in December, gaining just 0.8%. But year-over-year, forestry timber prices have appreciated 20%, and the early weeks of 2011 have been kind to the sector.

“Western Spruce-Pine-Fir 2×4 lumber prices continued to rally in early 2011, climbing as high as US$321 per thousand board feet, a profitable level for B.C. Interior producers and well above US$230 a year earlier,” Mohr explains. “Anticipation of further sales growth to China, up 68% year-to-date through October 2010, and restocking of low U.S. distribution inventories ahead of spring building boosted prices.”