Commodity prices are poised for a rebound in 2013 following the declines experienced in many of Canada’s resource sectors this year despite a summer rally, according to a new report from Bank of Nova Scotia.
In a commentary accompanying its Commodity Price Index for November, Scotiabank says prices will get a lift as buyers restock raw materials after liquidating inventories or deferring orders in 2012.
“This is already the case in China, where a pickup in orders from steel producers, after a sharp inventory correction last summer, has boosted spot iron ore and coking coal prices,” writes Scotiabank commodity market specialist Patricia Mohr.
“Lumber and OSB (oriented strand board) are our top investor picks — expected to post a multiple-year recovery through mid-decade,” Mohr added, citing a growing recovery in the U.S. housing market.
Meanwhile, figures in the bank’s latest monthly index painted a less rosy picture for this year. After a late-summer rally, overall prices began slipping in October and fell 2.3% month-over-month in November, Scotiabank said.
Scotiabank says the commodity prices it tracks are down 8.4% overall in the first 11 months of this year, compared with the comparable period of 2011.
“We are experiencing another bout of concern over the outlook for global growth and the potential fallout from the U.S. fiscal cliff in early 2013, dampening oil and grain prices,” Mohr said.
“That’s only partially offset by news that China’s economy is revving up again, lifting base metal prices, especially copper.”
As a result, Mohr said prices are currently 16% below the near-term peak in April 2011, just prior to the advent of concern over excessive eurozone sovereign debt and the negative impact on global growth.
The oil and gas sub-index has led decline, with the index down 14.4% in November from a year earlier as lower light and heavy crude oil prices in Alberta and considerably softer propane prices in Edmonton and Sarnia, Ont., overpowered a slight gain in Canadian natural gas export prices.
While international oil prices remained strong in 2012, a price discount on Edmonton light crude oil emerged and there was a bigger discount on Western Canadian Select (WCS) heavy oil, largely the result of inadequate export pipeline capacity.
“The cost to the Canadian economy of these wide oil price discounts is enormous,” said Mohr.
She estimates the Canadian heavy crude discount cost about US$9 billion in 2012 compared with West Texas Intermediate,”plus another US$17.7 billion due to the WTI discount off world prices, as measured by Brent (crude).”
The Metal and Mineral sub-index has also lost ground in 2012, down 13.1% year over year despite the fact that most base metal prices held up well.
However, double-digit declines in coking coal, iron ore and steel alloying metals alongside stagnant world steel production and a mid-summer inventory correction in China’s steel industry more than offset the relative strength in some base metals.
On a more positive note, the Forest Products sub-index posted a substantial recovery in 2012, up 12.9% through November.
“After a challenging environment since 2008 linked to a prolonged and sharp downturn in U.S. housing, oriented strand board and lumber producers enjoyed a substantial recovery in earnings in 2012,” the bank said.
Meanwhile, a modest recovery in U.S. housing starts is “hitting a wall of tighter supply, given substantial mill closures since 2006, the equivalent of 140 sawmills across the U.S. and Canada,” it added.
Agriculture was another pocket of strength in 2012, up five per cent year over year.