Scotiabank's Commodity Price Index Rallies in March

TORONTO, April 29, 2013 /CNW/ - Scotiabank's Commodity Price Index rose by 
1.6%month over month (m/m) in March, after edging down in February, and 
inched up slightly in the first quarter of 2013 from the fourth-quarter 
average. However commodity markets remain skittish, with a sharp selloff in 
gold in mid-April and softer base metal prices, after the release of China's 
slower-than-expected first-quarter GDP advance, 7.7% year over year (yr/yr), 
down from 7.9% in 2012:Q4. 
"Firmer overall prices in March were likely a surprise to financial markets," 
said Patricia Mohr, Scotiabank's Vice President of Economics and Commodity 
Market Specialist. "The advance was led by the Oil and Gas Index (+6.8% m/m), 
with gains in Western Canadian Select (WCS) heavy oil, natural gas export 
prices from Canada to the U.S. and liquefied petroleum gas (LPG) prices in 
Edmonton and Sarnia." 
For more details about the Scotiabank Commodity Price Index, please read the 
full report below. Highlights include: a gold price sell off in mid-April was 
triggered by a potential Cyprus bullion sale; Asian contract price for 
premium-grade hard coking coal posts surprising gain in 2013:Q2; Market 
conditions for copper and nickel are likely to be lackluster in the next 
several years, as new mine supply comes on stream, however, the "Super Cycle" 
in base metals will return in the second half of the decade, with zinc the 
next big base metal play. 
Scotiabank 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. 
Scotiabank is a leading multinational financial services provider and Canada's 
most international bank. With more than 82,000 employees, Scotiabank and its 
affiliates serve some 19 million customers in more than 55 countries around 
the world. Scotiabank offers a broad range of products and services including 
personal, commercial, corporate and investment banking. In December 2012, 
Scotiabank became the first Canadian bank to be named Global Bank of the Year 
and Bank of the Year in the Americas by The Banker magazine, a Financial Times 
publication. With assets of $736 billion (as at January 31, 2013), Scotiabank 
trades on the Toronto (BNS) and New York Exchanges (BNS). For more information 
please visit 
For high-resolution video clips visit For more 
Scotiabank economic publications visit,,3112,00.html 
Scotiabank's Commodity Price Index Rallies In March 
Scotiabank's Commodity Price Index rose by 1.6% month over month (m/m) in 
March, after edging down in February, and inched up slightly in the first 
quarter of 2013 from the fourth-quarter average. However commodity markets 
remain skittish, with a sharp selloff in gold in mid-April and softer base 
metal prices, after the release of China's slower-than-expected first-quarter 
GDP advance, 7.7% year over year (yr/yr), down from 7.9% in 2012:Q4. The All 
Items Index remains 15.7% below the April 2011 near-term peak, just prior to 
the advent of financial market concern over excessive eurozone sovereign debt 
and the likely negative impact on global growth. 
Firmer overall prices in March - likely a surprise to financial markets - were 
led by the Oil and Gas Index (+6.8% m/m) - with gains in Western Canadian 
Select heavy oil (WCS), natural gas export prices from Canada to the U.S. and 
liquefied petroleum gas (LPG) prices in Edmonton and Sarnia. NYMEX natural 
gas prices climbed to US$4.41 per million metric British thermal units (mmbtu) 
on April 19 - the highest since July 2011 - on prolonged wintry weather in the 
U.S., increasing space heating demand and cutting U.S. gas-in-storage 4.2% 
below the five-year average for this time of year. Natural gas prices were 
only US$2.53 a year ago. 
The price of WCS heavy oil also rose from a mere US$58.38 per barrel in 
February to US$66.73 in March and about US$68 in April - a welcome development 
for Alberta's hard-pressed steam assisted gravity drainage (SAGD) bitumen 
producers. The discount on WCS heavy oil off West Texas Intermediate (WTI) 
narrowed markedly from a record high of US$36.94 in February to US$26.23 in 
March, to US$23.07 in April and an even lower US$13.90 for May (TMX/Shorcan 
Energy Brokers) - partly due to a seasonal pick-up in demand for Western 
Canada's crude, as U.S. Midwest refineries returned from an unusually high 
level of maintenance in early 2013. (Please see below for further comments 
on this development.) 
The Forest Products Index also strengthened in March, rising 2.2% m/m. 
Western Spruce Pine Fir 2x4 lumber prices in the B.C. Interior (the bellwether 
for North America) jumped as high as US$408 per thousand board feet (mfbm) 
mid-month, while Oriented strand board (OSB) prices in the U.S. North Central 
region climbed to US$430 per thousand square feet, approaching the previous 
peaks during the heydays of 2004 (US$460 and US$520 respectively). Profit 
margins were stellar at 25-30% on lumber and 54% on OSB. While prices have 
been checked in mid-April by some inventory build - during the seasonally slow 
first quarter - we expect prices to rebound in the third quarter and to move 
irregularly higher through first-half 2015 (over US$450). U.S. residential 
construction is likely to resume its traditional role as a locomotive driving 
U.S. economic recovery. For the first time in almost five years, U.S. 
housing starts climbed over the one million unit mark in March (1.036 million 
The Agricultural Index also contributed to firmer overall commodity prices 
last month, rising 0.7% m/m. The gain was entirely centred in Atlantic Coast 
lobster prices (the highest value fishery in the Maritimes), with prices 
skyrocketing as late-winter storms tightened supplies. In contrast, No.1 spot 
prices for canola (in store Vancouver) eased back seasonally from an all-time 
record high of US$674 per tonne in February to US$659. However, tight farm 
stocks in Canada limited the decline. 
The Metal and Mineral Index lost ground in March (-3.7% m/m), with both base 
and precious metals moving lower. Gold prices (London PM Fix) eased from 
US$1,628 per ounce in February to US$1,593 in March and plunged as low as 
US$1,321 in intra-day trading on April 16, before partially recovering to 
US$1,471 in late April. Physical demand for gold (coins and bullion) has 
picked up - especially in Asia - indicating support for gold at recently lower 
prices. The U.S. Mint sold the most gold coins in April since late 2009. 
The sharp selloff in gold prices on Friday, April 12, 2013 and Monday, April 
15, 2013 (the steepest two-day decline in 30 years) was triggered by news that 
Cyprus might sell 10 tonnes of gold to raise 400 million euros towards its 
bailout package. While 10 tonnes is small compared with world central bank 
holdings of 31,694.8 tonnes, financial markets were concerned that this might 
set a precedent for sales by other distressed eurozone countries. Italy 
holds 71.3% of its foreign exchange reserves as gold (a significant 2,451.8 
tonnes), Portugal 383.5 tonnes and Spain 281.6 tonnes. 
In my view, it is unlikely that other eurozone countries will sell gold (under 
the control of national central banks rather than finance departments). In 
any case, under the Central Bank Gold Agreement (CBGA) between European 
countries or CBGA (effective until September 2014), gold sales will be limited 
to 400 tonnes annually (the total for all signatories). A suggestion by two 
investment banks that investors "short" gold also contributed to the 
correction from April 12-16, 2013. 
Gold prices were already languishing in early 2013, as investors shifted from 
gold to U.S. equities, anticipating that the U.S. economy would start to pick 
up in 2013:H2 and that the Fed would not need to apply even more quantitative 
easing to kick start the U.S. economy. The January Federal Open Market 
Committee (FOMC) minutes revealed discussion by some participants over the 
merits of the Fed's asset purchase program (the monthly purchase of US$45 
billion of mortgage-backed securities plus US$40 billion of longer-dated 
Treasury securities) - a form of quantitative easing.  While the Fed is 
unlikely to begin withdrawing this program until 2014, the mere discussion of 
its withdrawal was enough to unnerve some gold investors. In addition, the 
failure of Basel III to include gold in the liquidity coverage ratio for banks 
also hurt gold, as did the concern by some mutual funds that world economic 
risks were shifting from inflation to deflation (we are not of this view). 
The gold price forecast for 2013-14 has been moderately revised down. 
Brent oil - the international benchmark for light crude oil prices - eased 
from US$116 per barrel in February to US$109 in March, falling as low as 
US$97.69 on April 17 in the wake of the mid-April correction in industrial 
commodity prices. While snapping back to US$103, prices remain at a lower 
ebb in late April - likely reflecting subdued world crude demand, amid 
exceptionally high spring maintenance at refineries across Europe, the U.S. 
and Asia, and stronger North Sea production in late 2012. As much as 6.8 
million barrels per day (m b/d) of refinery capacity will be offline in April 
due to spring maintenance, though world petroleum demand should pick up again 
as second-quarter downtime comes to an end. Interestingly, the spread 
between Brent and WTI oil has narrowed from US$20.75 in February to US$9.95 in 
late April. While mostly related to a more comfortable supply picture in 
northern Europe, the recent expansion of the Seaway Pipeline between Cushing, 
Oklahoma and Texas has also helped. 
The recent narrowing of price discounts on WCS heavy oil off WTI reflects 
three developments, one of which is temporary: 1) a seasonal increase in 
demand for Western Canada's crude oil, as U.S. Midwest refineries returned 
from an unusually high level of maintenance downtime in early 2013; 2) 
operational enhancements allowing greater volumes through the pipeline system, 
after apportionment by Enbridge at the turn of the year; and 3) the stepped-up 
use of rail, allowing more Alberta crude to find its way to the higher-value 
refining market in Texas, where world prices prevail. 
While the Seaway Pipeline (Enbridge/Enterprise Partners) from Cushing, 
Oklahoma to Texas was expanded to a design capacity of 400,000 barrels per day 
(b/d) in February 2013, actual volumes through the pipeline have been limited 
to 300,000 b/d - shipping more light than heavy crude oil. The overall 
pipeline system from Canada to the U.S. still constrains flows of Western 
Canada's oil to Texas, where heavy Mayan crude from Mexico (only marginally 
higher in quality than WCS Heavy) is currently priced at US$96 per barrel - 
above WTI oil at US$91 - and US$25 above the US$68 garnered by heavy oil 
producers in Western Canada (subtracting a US$2-3 per barrel quality discount, 
but not adjusting for transportation costs). Presidential approval of the 
Keystone XL Pipeline - connecting Hardisty, Alberta to Steele City, Nebraska - 
would allow greater volumes of Canadian crude to reach Texas refineries (many 
of which are configured to handle heavy oil and are thirsty for this 
feedstock), significantly boosting prices for Alberta and Saskatchewan heavy 
However more pipeline capability to tidewater on the West and East Coasts of 
Canada is also critical to provide the export and market optionality needed to 
guarantee higher world prices for Canadian light and heavy crudes. Prices 
for Saudi Arabian heavy crude delivered to China averaged US$106 in 2013:Q1. 
Given the low cost of tanker shipping and pipeline transportation, the netback 
for Alberta sales of heavy crude in China would have been quite high in the 
first quarter (probably more than US$95) had transportation infrastructure 
been available. The cost of tanker shipping from the B.C. Coast to China is 
only US$3-4 per barrel. 
London Metal Exchange (LME) copper prices eased from US$3.66 per pound in 
February to US$3.48 in March, dropped to a low of US$3.09 on April 23 
(oversold) - following news that China's GDP slowed to 7.7% yr/yr in 2013:Q1 - 
and then rallied back to US$3.20 late month. Prices remain lucrative, 
yielding a 34% profit margin over average world breakeven costs including 
depreciation for mining companies. Despite financial market jitters, 
fabricator-demand has been picking up in China, with stronger end-use 
indicators for air conditioners, power cable and inter-connect markets. 
After rising by a mere 1.7% per annum from 2008-12, world 'brownfield' mine 
expansion finally appears to be getting underway - a development which will 
probably dampen prices in the next several years. However recent suggestions 
that copper prices were about to fall below US$3 are well ahead of market 
conditions. We expect copper prices to average US$3.40 per pound in 2013, 
US$3.20 in 2014 and slightly below US$3 in 2015. Copper is expected to rebound 
in the second half of this decade, with an end to the current round of copper 
mine expansion and ongoing demand growth in China and 'emerging markets'. In 
2011 (latest data available), auto ownership in China was a mere 70 per 1,000 
people and in India 20 compared with 793 in the U.S. and 588 in Western 
Europe, pointing to strong metal and gasoline demand going forward. The Bull 
Run will return. 
Spot potash prices (Freight On Board Vancouver) edged down again from US$410 
per tonne in February to US$407.50 in March - below the US$452.50 of last 
December. However, prices appear to be at a bottom, with a moderate recovery 
expected in the second half of 2013. While this year's price recovery may be 
limited, shipment volumes should rebound more substantially, as buyers restock 
after deferring orders last year. High grain and oilseed prices should also 
incent farmers to apply more potash fertilizer this spring. World shipments 
should jump to 56 million tonnes in 2013 from 51 million last year. 
Premium-grade hard coking coal investors also received some good news 
recently, with the quarterly contract price between the BHP 
Billiton-Mitsubishi Alliance and Nippon Steel increasing by US$7 to US$172 per 
tonne (Freight On Board Australia) for 2013:Q2 (April-June). This points to 
firmer prices in the second quarter for Western Canada's hard coking coal at 
Vancouver bound for North Asian markets. 
Patricia Mohr, Scotiabank Economics, (416) 
866-4210,; or Joe Konecny, Scotiabank Media 
Communications, (416) 933-1795, 
SOURCE: Scotiabank - Economic Reports 
To view this news release in HTML formatting, please use the following URL: 
CO: Scotiabank
ST: Ontario
-0- Apr/29/2013 11:00 GMT