Oil and Copper are Top Picks for Investors in 2012

TORONTO, Dec. 21, 2011 /CNW/ - After falling for three consecutive months, Scotiabank's Commodity Price Index edged up by one per cent month over month (m/m) in November, boosted by a sharp rebound in oil and firmer base metal prices. The All Items Index remained 6.7 per cent above a year earlier and will likely end 2011 just above year-ago levels. While most commodity prices remain at profitable levels, there has been a marked loss of momentum after an 18 per cent year over year (yr/yr) gain in late 2010.

The star performers of 2011 - among the 32 commodities covered in Scotiabank's Commodity Price Index - were sulphur (the No. 1 commodity for the second-year running, used in DAP fertilizers), premium-grade hard coking coal from Western Canada into Asian growth markets, potash (a fertilizer) and hogs and cattle (pushed up by herd liquidation across North America).

Gold also made the Top 10 - in seventh place with a 14.6 per cent gain from late 2010 through mid-December 2011. Heavy and light crude oil (Hardisty, Alberta heavy and Edmonton light par crude) rounded out the Top 10 in 2011 and are among our picks for investors in 2012.

"The London PM Fix for gold surged by 38.2 per cent from US$1,390.55 per ounce in December 2010 to a record high in intraday trading of US$1,921.18 on September 6, 2011, but fell back to US$1,594 on December 16," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.  "A recently stronger U.S. dollar against the euro and disappointment that the ECB has not mounted a more aggressive purchase program for the bonds of more highly indebted eurozone countries (quantitative easing) have recently pressured gold prices."

"While copper prices lost momentum after surging to an all-time record high of US$4.60 per pound on February 14, 2011, copper at US$3.30 in mid-December has stayed exceptionally lucrative for two years running, generating profit margins over 50 per cent," added Ms. Mohr.

Oil and Gas

The Oil and Gas Index rallied sharply in November (+4.6 per cent m/m and 14.9 per cent yr/yr). Despite concern over financial and economic prospects in the eurozone, Brent oil prices edged up from US$110 per barrel in October to US$111 in November and are currently US$108. A geopolitical risk premium in world oil prices resurfaced in early November, after an International Atomic Energy Agency report on Iran's alleged nuclear weapons ambitions.

Copper - Best Performing Base Metal In 2012  

The Metal and Mineral Index also edged up in November (+0.7 per cent m/m) alongside stronger copper, zinc and precious metal prices and remained 7.8 per cent above a year earlier. Copper is in a supply 'deficit' in late 2011, with global consumption exceeding refined metal production, and will remain in 'deficit' in 2012, even with a six per cent increase in world mine supply after a mere 0.4% in 2011.

"Global mine output has increased by only 1.1 per cent per annum from 2007 to 2011 in the face of rapid demand growth in China and 'emerging' Asia, lifting prices onto a higher plane," said Ms. Mohr. "Much of the recent pickup in refined copper imports into China has reflected stockpiling by property developers for use as collateral for bank credit. However, China's fabrication demand should strengthen again next spring, with prices surging back to US$4. Copper prices could average just under the US$4 mark through much of 2013."

Strong Grain Prices Incented Farmers to Apply More Fertilizer In 2011

The Agricultural Index edged down by -0.2 per cent m/m in November, but was still 10.5 per cent above a year earlier, with strength in hogs (+45 per cent yr/yr) and cattle (+23.5 per cent). Livestock prices have been pushed up by significant North American herd liquidation in recent years. Barley prices (the key feed grain in Western Canada) also climbed by 19 per cent yr/yr in November with U.S. corn supplies still tight. In contrast, wheat prices have eased back in late 2011 alongside ample world stocks relative to consumption. Canola, driven by U.S. soybeans, has also lost some ground, though prices remain high and lucrative for farmers. Potash prices (FOB Vancouver) were flat in November at US$500 per tonne (+35 per cent yr/yr). Canada's largest producer is taking downtime in view of slower sales in Southeast Asia and a request to roll back 2012:Q1 contract prices in India.

Forest Products: U.S. Housing Starts Climb to 19-Month High In November

The Forest Products Index declined by -1.9 per cent m/m in November to a level 6.2 per cent below a year earlier amid lower lumber and OSB prices and a falloff in NBSK pulp due to an inventory correction in fine paper and pulp in China. However, U.S. housing starts rose to an annualized 685,000 units in December, with strength in multiple units, signaling a steadier market going into 2012. A sustained rally in Western Spruce-Pine-Fir 2x4 lumber prices is not expected until late next year, alongside a more significant recovery in U.S. housing. Opportunities could open up in China under the new Five-Year Plan, given a massive 'social' housing program intended to boost affordable housing and provide stimulus to China's economy (36 million units from 2011-15).  Pulp prices should also begin to rally back by next spring.

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.