• Palladium, copper, potash and uranium top commodity picks for 2011

TORONTO, Dec. 21 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, is ending 2010 on a strong note, up 3.0% month-over-month (m/m) in November.  The All Items Index has now surpassed the near-term peak in April prior to a two-month correction last spring -- triggered by the Euro-zone 'debt crisis' and another slowdown in the U.S. economy - and is up 36.2% from the April 2009 cyclical low.  While remaining volatile, commodity prices should strengthen further in 2011 - boosted by ongoing strength in 'emerging' market demand, after about a 12% gain in 2010 (from late 2009), though the increase may moderate.          

In 2010, the 'Top Five' commodities posting the largest price gains were all metals & minerals: sulphur (+153.3% since late 2009, a mineral used in DAP fertilizers and a by-product of Western Canada's oil & gas production), silver (+69.1%, benefitting from record ETF holdings and its role as an 'industrial' as well as a 'precious' metal), coking coal (+63.3%), nickel (+44.7% alongside rebounding global stainless steel production and strike-related supply cuts in Sudbury and Voisey's Bay) and molybdenum (+41.3%).  While not covered in the Index, palladium (+103.6% the best performing 'precious' metal) and iron ore (+103.1%) yielded exceptional returns for investors.  Grains & oilseeds (+31-40% on drought in Russia and strong Chinese demand for U.S. corn), uranium (+37.6%), copper (+32.6%) and lumber (up a surprising 31.3%) rounded out the 'Top Ten' in 2010.  

"Looking ahead to 2011, our top commodity picks include palladium, silver, copper, potash & other fertilizers and uranium," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.  "Palladium, which is primarily used in auto catalytic converters for gasoline-fuelled vehicles, but also in electronics such as blu-ray disks & LED panels, will benefit from rapid growth in motor vehicle sales in 'emerging' Asia and tightening vehicle emission control standards.  Mined supplies are quite concentrated, with over 80% of output coming from Russia, as a by-product of nickel production, and from South African platinum mines.  Only two primary palladium producers exist in North America.  The world supply/demand balance is expected to shift from a slight 'surplus' in 2010 to a significant 'deficit' in 2011, as sales from the Russian state stockpile dwindle.  This 'deficit' is likely to grow through 2015, despite a large increase in recycled supplies. 

"The capital spending cycle is beginning to swing up in mining and energy, lifting sales for equipment & heavy truck manufacturers and service providers," continued Ms. Mohr.  "Global exploration spending in non-ferrous minerals has rebounded this year to about US$12.1 billion from US$7.5 billion in 2009 and should surpass the previous 2008 peak of US$14.4 billion in 2011.  Junior mining companies have ready access to capital once more.  Interest from China in Canadian assets, particularly in the junior mining space, is intense.  Fertilizer producers and farm equipment manufacturers will enjoy strong sales."

Metals & Minerals

The Metal & Mineral Index rose by 1.8% m/m in November - led by gains in uranium and silver.  China's 12^th Five-Year Plan for 2011-15, shifting emphasis slightly from industrialization to a more consumer-based economy, is likely to be particularly positive for a number of Canadian mining sectors - uranium for nuclear power (emitting virtually no greenhouse gases) and fertilizers such as potash, needed to grow feedgrains (corn), as rising household income allows greater meat consumption.  

Spot uranium prices have strengthened markedly from US$52 per pound in late October to US$61.75 in mid-December on expectations that China's target for nuclear energy will be doubled in the 12^th Five-Year Plan.  

Turning to copper, while the red metal (a bellwether) only placed 8^th within the 'Top Ten' best performing commodities of 2010 (+32.6%), LME copper prices were already high in late 2009 at US$3.17 per pound and climbed by more than US$1 to a new record high of US$4.20 on December 14, 2010, surpassing the previous peak of US$4.08 on July 3, 2008. 

"As 2011 unfolds, we expect copper to touch US$5, yielding an extraordinary 70% profit margin over average world break-even costs including depreciation," commented Ms. Mohr. 

Potash prices (FOB Vancouver) have also rallied from a low of US$342.50 per tonne last Fall to US$370 in November.  While potash producers will likely limit price increases in overseas markets in early 2011 to accommodate buyers and not derail this year's big rebound in sales, the current agricultural environment is one of the best ever seen for potash and fertilizer application.  Prices for the three crops using the most potash per hectare planted - corn in the United States, palm oil in Malaysia/Indonesia and sugar cane - are all high and should incent farmers to dramatically step-up fertilizer application in 2011. The Food and Agriculture Organization of the United Nations continues to worry about the long-term trend towards higher food prices, expected to be at record levels by late 2010. 

Oil & Gas Index

The Oil & Gas Index surged in November, up 5.6% m/m.  WTI oil touched an intraday high of US$90 per barrel in early December (US$91 for Brent) and is US$88 mid-month (+18.5% from December 2009).  Global oil consumption has advanced by a robust 2.8% in 2010, surpassing the previous peak in 2007, with recent cold winter weather in the northern hemisphere and China burning diesel in backup generators this fall to offset mandated power cuts (to meet a 20% reduction in power use per unit of GDP in the 11^th Five-Year Plan).  Supply/demand conditions have been largely balanced, with OPEC production at 29.2 million barrels per day slightly below the 'call' for its crude.  WTI oil is expected to climb from an average of US$79 in 2010 to US$93 in the coming year (possibly US$95), boosted by ongoing strength in China's petroleum demand (+13.7% yr/yr in November to a new record high), a second round of 'strategic' stock building by China and delays in developing U.S. Gulf of Mexico 'deepwater' fields after the Macondo spill. 

Forest Products Index

The Forest Products Index rose by 3.1% m/m in November alongside a contra-seasonal surge in lumber and OSB prices and largely flat pulp & paper prices.  Western Spruce-Pine-Fir 2x4 lumber prices posted a solid comeback in 2010 (+ 31.3%, rising from no more than average mill cash costs to profitability in the B.C. Interior), despite ongoing weakness in U.S. housing starts (a mere 592,000 units YTD; 680,000 forecast for 2011).  This reflects a 56% increase in Canadian softwood lumber exports to China and a 59% increase to Taiwan through September.  

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.