Scotiabank's Commodity Price Index Retreats in December

TORONTO, Jan. 29, 2013 /CNW/ - The Scotiabank Commodity Price Index declined 
by 4.6% month-over-month (m/m) in December, reflecting a sharp drop in the Oil 
and Gas Index (-14.6% m/m). 
"Western Canadian Select (WCS) heavy crude oil led the decline, plunging from 
US$72.47 to a mere US$57.84 per barrel in December," said Patricia Mohr, Vice 
President, Economics and Commodity Market Specialist at Scotiabank. "While 
West Texas Intermediate (WTI) oil prices edged up to US$88.25 last month, the 
WCS discount off WTI ballooned to US$30.41 and will climb further to US$32.84 
in January and US$36.94 in February." 
For more details about the Scotiabank Commodity Price Index, please read the 
full report below. Highlights include a decline in world potash shipments in 
2012, though demand should rebound in 2013 as buyers restock, incented by 
lucrative gain prices. As for forest products, in early January, lumber prices 
soared as high as US$388 per thousand board feet and oriented strandboard 
(OSB) in the U.S. North Central region to US$408 per thousand square feet, 
levels not seen since the heydays of 2005. 
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Scotiabank's Commodity Price Index Retreats in December 

    --  Canadian oil producers step up rail shipments, as an offset to
        pipeline constraints.
    --  Lumber and Oriented Strandboard (OSB) prices post remarkable
        surge, approaching the peaks during the heydays of 2005.
    --  Canpotex signs first-half 2013 potash contract with China, at a
        US$70 discount; Global potash shipments will rebound in 2013,
        as buyers restock, incented by lucrative grain prices.         

Scotiabank's Commodity Price Index ended 2012 on a weak note, dropping 4.6% 
month-over-month (m/m) in December. The All Items Index has fallen 19.7% below 
the near-term peak in April 2011, just prior to the advent of financial market 
concern over Eurozone sovereign debt - still less than half the 46% slide 
during the 'Great Recession' in the second half of 2008.

The decline in December reflected a sharp drop in the Oil and Gas Index 
(-14.6% m/m) - with the other sub-Indices - Metal and Minerals (+1.7%), Forest 
Products (+3.2%) and Agricultural products (+0.8%) all posting gains. Western 
Canadian Select (WCS) heavy crude oil led the decline, plunging from US$72.47 
to a mere US$57.84 per barrel in December. While West Texas Intermediate (WTI) 
oil prices edged up to US$88.25 last month, the WCS discount off WTI ballooned 
to US$30.41 and will climb further to US$32.84 in January and US$36.94 in 
February (TMX/Shorcan Energy Brokers trading data). Aside from March and April 
2012, the discount on WCS has only once before — in October 2007 — been 
above the US$30 mark, since this crude-blend was first introduced in 2005. 
While a discount off light oil is normal, given more complex refining required 
for heavier crudes, the discount averaged less than US$18 from 2005-11 and was 
as low as US$9.56 in 2009. (The double-discount on WCS, including the discount 
on WTI relative to Brent — a 'world' price — totalled just over US$50 per 
barrel on January 25).

A wider-than-normal discount also emerged last year on some grades of Alberta 
'light' crude oil (the Edmonton par price averaged US$8.48 per barrel less 
than WTI in 2012 and was US$13.13 lower in December — compared with a 
discount of only US$2.64 from 2005-11 — likely reflecting the increasing 
availability of light oil from the North Dakota Bakken and Eagle Ford shale in 
the U.S.). Upgraded light synthetic crude oils — produced by Syncrude 
Canada and Suncor — sell at a slight premium to WTI.

In the case of WCS heavy oil, the enormous price discount largely reflects 
three developments: 1) inadequate pipeline capacity to handle growing exports 
of blended bitumen from the Alberta oil sands as well as 'light, tight' oil 
from the Saskatchewan Bakken, exacerbated by the remarkable growth in supplies 
of 'light, tight' oil from the North Dakota Bakken and Rocky Mountains, 
competing for limited pipeline space with Canadian oil; 2) an over-reliance 
on one key export market — the U.S., especially the Midwest —'commercially 
risky' for any industry, rather than developing markets in the faster-growing 
Asia/Pacific region — resulting in a buyers' market; the delay in U.S. 
approval of the northern leg of the Keystone XL pipeline has raised further 
concern over pipeline capability and suggests the need for export 
diversification; and 3) an earlier-than-normal pattern of seasonal downtime at 
U.S. Midwest refineries in early 2012 and a delay in the BP Whiting, Indiana 
refinery upgrade (a new coker and de-sulphurization unit) to handle increased 
flows of Alberta heavy oil.

The pipeline system from Canada to the United States now has little 'operating 
flexibility' to handle disruptions (caused by reduced pipeline pressure or 
technical problems on other pipelines, backing up flows onto the system). Some 
redundancy in pipeline capacity is required. The 'opportunity cost' of these 
discounts is enormous for the Alberta and Saskatchewan economies as well as 
for Canada — reducing government royalties/income tax receipts and 
ultimately governments' ability to fund 'social services' and 'public 

Canadian oil producers — as well as many in the U.S. — are turning to rail 
to reach higher-value markets on 'tide-water' or in the U.S. Northeast and to 
'bridge' the gap ahead of pipeline development. More than six companies 
operating in Western Canada are using rail (Baytex Energy, MEG, Crescent Point 
Energy, Surge Energy, Southern Pacific Resources (STP) and Twin Butte Energy), 
transporting as much as 300,000 barrels per day (b/d) of crude oil. Rather 
than accept wide WCS discounts, Baytex Energy (a heavy oil producer) trucks 
some of its crude to a rail terminal, with a third-party mid-stream marketer 
railing the crude to higher-value markets (possibly as far south as the U.S. 
Gulf, where international prices prevail). The higher cost of rail versus 
pipeline transport is more than offset by prices closer to international 
levels. Interestingly, the price of Maya heavy oil in Mexico and sold in the 
US Gulf (a crude of similar quality to WCS) is actually priced above WTI oil 
— e.g. at US$101 (FOB Mexico) on January 11, 2013 compared with US$61 for 
WCS in Alberta and WTI oil at US$94). In its third-quarter financial results, 
Baytex Energy expected that 35-40% of its heavy oil volumes would be railed by 
year-end 2012. (Shipment by rail also does not require the use of costly 
diluents to flow heavy oil through pipelines.)

Despite challenges in moving crude oil to market, a major heavy oil project 
will come on stream in Alberta in the next several months — Imperial 
Oil/ExxonMobil Canada's Kearl Lake (110,000 b/d in 2013 — to be expanded to 
145,000 b/d within three years, 290,000 b/d by 2017-18 and 345,000 b/d by 
2020). Some of this crude is likely bound for the U.S. market. We note that 
Exxon/Mobil has its own pipeline from the U.S. Midwest to the US 

Oil and Gas 

Turning to international markets, the price of Brent oil (a world benchmark) 
was largely flat in December at US$109, but has strengthened to almost US$112 
to date in January. Prices have been boosted by a fourth-quarter pick-up in 
China's demand, a temporary outage at the Cormorant Alpha producing platform 
(part of the Brent North Sea), tensions in Algeria and Mali — renewing 
concern over 'geopolitical supply risks' — and recognition that actual world 
supply and demand conditions in the fourth quarter remained fairly tight.

WTI oil prices also picked up to US$88.25 per barrel in December and over 
US$94 so far in January — actually outperforming Brent. The discount on WTI 
relative to Brent had widened to US$22.80 per barrel in November, but narrowed 
again to US$17.55 in January. The recent expansion of the Seaway Pipeline from 
Cushing, Oklahoma to Freeport, Texas from 150,000 b/d to 400,000 b/d pointed 
to some de-bottlenecking of the over-supplied Cushing hub (the pricing point 
for the NYMEX contract), lessening the pressure on WTI oil prices mid-month. 
Shipments have since been cut back to 175,000 b/d due to constraints on the 
Jones Creek spur north to Houston. On the U.S. 'Fiscal Cliff', the extension 
of most of the U.S. Bush-era tax cuts at the turn of the year and a 
Republican-initiated suspension of the debt ceiling until mid-May has — at 
least temporarily — offered an improved window for resolving spending 
restraint, lifting spirits on prospects for the U.S. economy and oil demand. 
Natural gas export prices from Canada to the U.S. are estimated to have edged 
up to US$3.87 per mcf in December.

Metals and Minerals

The Metal and Mineral Index rose by 1.7% m/m in December, as widespread gains 
in base metals, a further rally in iron ore and slightly firmer uranium prices 
more than offset weaker gold, potash and sulphur prices. China's GDP picked up 
to 7.9% year-over-year (yr/yr) in 2012:Q4, after slowing to 7.4% in Q3. China 
achieved a 'soft landing' with 7.8% growth for 2012 as a whole. Industrial 
production also strengthened to 10.3% in December, from a low of 8.9% in 
August — lifted by infrastructure spending and an end to last summer's 
inventory correction in consumer goods and steel. The net result, LME copper 
advanced from US$3.49 per pound in November to US$3.61 in December and has 
climbed further to US$3.65 so far in January (yielding a 45% profit margin 
over full break-even costs including depreciation).

Spot iron ore prices, 62% Fe, delivered to Qingdao, China — relevant to 
Labrador producers — continued to rally in December, rising from US$120.35 
per tonne in November to US$128.87 in December — almost 30% above the low 
last September, but still 5.6% below a year earlier.

In contrast, spot potash prices (FOB Vancouver) for overseas sales (excluding 
China, which buys on a contract basis) inched lower from US$456 per tonne in 
November to US$452.50 in December and US$445 in the opening weeks of January 
— down from US$500 a year ago. Prices likely moved still lower in the second 
half of January, with Canpotex's new spot pricing in Southeast Asia at US$450 
cfr—netting back to US$410-415 in Vancouver.

World potash shipments fell in 2012, possibly to 48-49 million tonnes of KCL 
(final shipment volumes are still being tabulated), down 13% from about 54.8 
mt in 2011. While China's imports rose during the first ten months of 2012 
(+10%yr/yr), China delayed signing new contracts for seaborne imports in 
2012:H2. India also deferred new cDDDDsh and phosphates (to assist domestic 
urea manufacturers and guarantee them a 12% return on equity). Most of the 
urea consumed in India comes from domestic production, while potash and 
phosphates must be imported. While we do not think recent US dollar potash 
prices have been particularly high, a 25% depreciation of the rupee from 
mid-2011 to mid-2012 lifted potash prices in local currency terms (the rupee 
has recently edged up).

Delays in new contract volumes to India and China encouraged other buyers 
(e.g. in Malaysia and Southeast Asia) to defer orders, expecting lower prices. 
The slowdown in global growth in 2012 and weak business confidence last summer 
and early fall caused order delays for many raw materials.

The net result, Canpotex announced on December 31 that it reached agreement 
with 'Sinochem Fertilizer Macao Commercial Offshore' to supply 1 million 
tonnes of potash from January-to-June 2013 at about US$400 per tonne cfr 
China, down US$70 from the previous contract. This agreement should set a 
floor on potash prices in first-half 2013, spurring the resumption of spot 
orders from Southeast Asian buyers. High and lucrative world prices for corn 
and soybeans should also keep potash application strong in Brazil and the 
United States.

India is now seriously under-applying potash, leading to an imbalance in 
nutrient application of growing concern to India's domestic fertilizer 
association and contributing to low crop yields. The N:K ratio (nitrogen to 
potassium) is now 10:1, with the optimal being 2:1. If India is to improve its 
yields — important for food security — it must step up potash application 
again. As a result, India is expected to resume buying in coming months, 
though the order pick-up may be modest. World potash demand should rebound in 
2013 to about 54 mt, as many buyers restock.

Forest Products 

Western Spruce-Pine-Fir 2x4 No. 2 and Btr lumber prices jumped to US$370 per 
mfbm in December, surging as high as US$388 at the turn of the year — a 
level not seen since April 2005's US$400, when U.S. housing starts reached a 
cyclical peak of 2.07 million units in 2005. OSB prices in the U.S. North 
Central region also soared to US$408 per thousand sq. ft., the highest since 
October 2005 at US$413. A modest recovery in U.S. housing starts to 954,000 
units annualized in December and stepped-up shipments to China in the face 
of the shutdown of 140 sawmills (equivalent) across the U.S. and Canada from 
2006-11 have tightened supplies. While prices will likely lose ground in the 
coming months, we expect a multiple-year recovery in building material prices 
(with average yearly prices climbing through 2015).

Patricia Mohr, Scotiabank Economics, (416) 
866-4210,; or Devinder Lamsar, Scotiabank Media 
Communications, (416) 933-1171,

SOURCE: Scotiabank

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