Potash prices touch bottom, spurring stepped-up buying in the United States

TORONTO, Jan. 26 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, ended 2009 on a strong note, advancing 2.9 per cent month-over-month (m/m) in December and up a solid 20.7 per cent from the cyclical bottom in April. Investor interest in commodities as an 'asset class' drove commodity prices forward, a trend which continued in early 2010.

"The search for higher returns, given near-record low interest rates across the globe and exceptionally low U.S. Treasury yields, spurred a US$60 billion inflow into commodity-related investments in 2009 - boosting global commodity assets under management to about US$235 billion by late 2009 compared with a mere US$6-10 billion in 2000," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "No where is this more evident than in the base metals, where fund and speculative interest has been driven by the China and emerging Asia story."

Metal & Minerals

The Metal & Minerals Index climbed by 2.9 per cent m/m, leading industrial commodity prices up in December, as significant gains in base metals, gold and sulphur more than countered slight declines in silver, cobalt, potash and uranium.

LME copper prices rose from an already lucrative US$3.03 per pound to US$3.17 in December and now stand at US$3.36 (yielding an exceptional 62 per cent profit margin over full breakeven costs). Gold prices also reached an all-time high of US$1,226.56 per ounce in intra-day trading on December 4.

Forecasts for base metal prices have been revised up, with copper now expected to average a very lucrative US$3.00 in 2010 and US$3.50 in 2011, climbing as high as US$4 next year.

"Both zinc and aluminium prices have recently increased in sympathy with copper, with prices reflecting investor interest in metals as assets over the medium-term rather than current supply/demand conditions," commented Ms. Mohr. "In the case of zinc, a metal which looms large in Canada, investors appear to be discounting tighter supply/demand conditions within several years, with the global balance shifting from today's surplus to deficit in 2011 and supplies becoming genuinely tight by 2013.

"Zinc concentrate supplies are expected to dwindle relative to smelter requirements, as many mines deplete in the 2011-15 period," continued Ms. Mohr.

Of the 32 commodities covered in the Scotiabank Commodity Price Index, lead was the strongest performing commodity in 2009. Strong battery demand in China for E-Bikes (electrically driven bicycles) contributed substantially to this stellar performance.

Spot potash prices at the Port of Vancouver edged down from US$480 per tonne in November to US$460 in December and dropped to about US$345 in mid-January. However, prices appear to have found a bottom, with Canpotex reducing prices in overseas and U.S. markets, following Belarusian Potash Company's contract settlement with China. Fertilizer shipments have recently picked up in the United States for all three major nutrients - potash, phosphates (DAP or diammonium phosphate) and nitrogen (urea), following under-application by U.S. farmers in 2009.

"We continue to view 2010 as a transition year for potash, with dealers restocking modestly given the reduced risk of holding inventories, on the way to stronger market conditions in 2011," said Ms. Mohr.

Oil & Gas

The Oil & Gas Index posted a 2.8 per cent m/m advance in December, as stronger natural gas export prices and a big gain in propane prices more than offset temporary slippage in light and medium/heavy crude oil.

"WTI oil prices rallied back to a high of US$83.18 on January 6, as a severe cold front across much of the United States, Britain, China, South Korea and India boosted heating oil demand," said Ms. Mohr. "However, prices remain volatile and have pulled back to US$75, with warmer weather returning to the United States, demand remaining sluggish and the market fretting over President Obama's proposed restrictions on U.S. commercial bank proprietary trading.

"On a more positive note, the large U.S. inventory overhang of oil and products is now largely gone," continued Ms. Mohr.

Forest Products

The Forest Products Index also firmed up in December (advancing 2.8 per cent m/m), led by a pick-up in U.S. building material prices (lumber & OSB) and a rebound in newsprint prices.

Western Spruce-Pine-Fir two-by-four lumber prices surged to genuinely profitable levels in mid-January. U.S. distributors are replenishing low lumber inventories ahead of the spring building season in the face of mill curtailments and tight log decks at sawmills on the B.C. Coast and in Oregon and Washington.

"Log prices got so low last spring and summer that many logging crews were laid off in the Western United States and Timber Investment Management Organizations and REITs have reined in harvests, expecting better log prices once the U.S. housing market recovers," said Ms. Mohr. "Interestingly, a relatively strong Toronto construction market is providing some offset for hard-pressed Canadian lumber producers; Canadian lumber consumption now accounts for 20 per cent of the U.S./Canadian total, up from 10 per cent previously."

Agricultural Index

Finally, the Agricultural Index rose by 3.5 per cent m/m alongside a significant increase in Atlantic Coast lobster prices (the highest-valued East Coast fishery), some improvement in livestock prices and slight gains in wheat and canola.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.