Scotiabank’s report paints optimistic outlook for copper, zinc and nickel

As Canadian exports of iron ore and uranium to China continue to increase dramatically, Beijing will benefit from higher-quality ore and diversification of supply sources, predicts economist Patricia Mohr in the latest Scotiabank’s Commodity Price Index.

Mohr said that huge changes taking place in Canada’s resource industry have caused a reweighting of the Scotiabank Commodity Price Index, which measures price trends in 30 of Canada’s major exports.

The trade weight of metals and mineral in the index has risen slightly from 26.8% to 30.1%, “partly due to the inclusion of the rapidly expanding iron ore trade from Labrador/northern Quebec to China as well as Europe,” the report says.

“Significant industry growth in potash, coking coal, gold and nickel – as well as the inclusion of iron ore – has boosted the weight of metals and minerals within the index,” it says.

Base metals prices “rallied strongly, as investment/hedge funds shifted from short to long positions, in light of better-than-expected U.S. economic indicators, very accommodative monetary policy in the United States (with the Fed revealing that it may keep the funds rate at rock bottom levels through late 2014) and anticipation of ‘pro-growth’ policy in China.”

U.S. motor vehicle assemblies are expected to lift from 8.34 million annually to 9.7 million during the first quarter of the year, increasing demand for copper, zinc, aluminum and steel.

LME copper prices, notes the report, surged “as high as US$3.91 per pound on January 27-yielding an exception profit margin of 53.5% over average world breakeven cost including depreciation.”

“Copper prices will average higher in February than in January – as will zinc, nickel and aluminum – though copper has eased back to US$3.83 late-month,” Mohr forecasts. “Chinese buyers bought copper cathodes heavily last October…contributing to higher stocks. Much of this metal will be used as collateral for bank loans.”

“Copper prices will likely be range bound until China’s industrial demand picks up seasonally in 2012:Q2,” Mohr advises.

Other index changes

Oil and gas now account for 40%of the index, up from just 17% previously. Forest products have been reduced to just 15%, down from 40%. This represents the biggest redesign of the index since Mohr created it 25 years ago.

“We’re becoming an economy that is very oil-dominant and this is very important to recognize because it has public policy implications,” Mohr said.

With crude oil and refined petroleum products now accounting for a huge 28.5% of Canada’s net exports of resource-based materials, Mohr said that building adequate pipeline infrastructure to tap export markets — particularly the growth markets of Asia – would be vital for the Canadian economy.

The Scotiabank Commodity Price Index – the first Index designed to track commodity prices of interest to Canadians and Canada’s resource producers – was first introduced in 1987.  Index values were estimated back to 1972 to show the impact of the 1973 Arab oil embargo. The Index has only been re-weighted once before in April 1999, with the weight of each component based on its export value in 1995-97, with the exception of crude oil and refined petroleum products, uncoated freesheet paper and linerboard, where net exports were used.

 

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