Scotiabank Commodity Price Index
Transcription
Scotiabank Commodity Price Index
Global Economics Patricia Mohr (416) 866-4210 [email protected] Best Wishes for the Holiday Season! December 18, 2014 Scotiabank Commodity Price Index Year-End Review and Outlook for 2015 Top ‘Picks’ for investors in 2015 — Zinc, Nickel and OSB. WTI oil prices at US$56 are ‘over-sold’ — soon to trigger a sharp correction in U.S. drilling activity, bringing supply back into line with demand. Oil prices will snap back by mid-2015. M&A activity will heat up in the oil sector, while ‘non-core asset divestiture’ will increase in mining. Scotiabank’s Commodity Price Index dropped -4.8% m/m in November (-6.1% yr/yr) and will end 2014 in a ‘deflationary’ mode. Significant capacity expansion and the defence of market share by major oil and iron ore producers — against a backdrop of lacklustre world economic growth — account for the softness at the end of the year. The decision by Saudi Arabia not to reduce output to shore up international oil prices, but instead to allow prices to drop to levels curbing U.S. ‘shale’ development appears to be having a negative impact on confidence in a wide variety of other commodity as well as equity markets. While lower oil prices will boost U.S. & global consumer purchasing power and spending, when oil prices fall to abnormally low levels (broaching average production costs), the overall positive impact on GDP growth is not as clear, and may in fact be de-stabilizing in some oil-producing countries; the oil sector & related industries account for over 11% of U.S. business investment. The Oil & Gas Index led commodity prices lower in November (-9.9% m/m), though the year-over-year decline was more limited at -4.9%. Energy prices will fall further in December. Western Canadian Select Heavy oil (WCS) has retreated to US$46.29 per barrel so far in December, given the further plunge in WTI oil prices to an average of US$62.29 (a mere US$55-56 mid-month) and a slightly wider discount of US$16. Margin calls on WTI futures have exacerbated the downward spiral in oil prices. Oil Prices Move Into 'Over-Sold' Territory 100 60 0 120 100 WTI Oil Prices 80 Avg. Oil Production 'Breakeven Costs' U.S. & Canada: US$60-61* Iranian Revolution 40 20 140 Record High: July 11, 2008: US$147.90 120 80 * US$ per barrel 140 Iraq Gulf War War + 60 40 Arab Oil Embargo 20 60 65 70 75 80 85 90 95 00 05 10 15 20 0 + December 17, 2014: US$56.47. * Mid-cycle breakeven costs including royalties and 9% after-tax return for over 100 plays across U.S. and Canada; excludes 'upfront' land acquisition costs, seismic and infrastructure costs. Commodity Price 'Sweepstakes' Top Five Performing Commodities in 2014* 'Picks' for 2015 (% price increase Dec 13/13 to Dec 15/14) (yr end/yr end) 1) Sulphur (fertilizer), FOB Vancouver + 2) Cattle 3) LME Nickel 4) MW Dealer Cobalt 5) LME Zinc 6) Spot Uranium 7) LME Aluminium + 8) Hogs 43.2% Zinc 36.6% 19.8% 17.6% 11.6% 7.3% 6.7% 3.5% Nickel OSB WTI oil prices below US$60 are heavily ‘over-sold’ and are ‘unsustainable’ at that level. Prices are now below ‘mid-cycle break-even costs’ averaging US$60-61 across the United States and Western Canada (US$65 + Memo Item: Palladium (London PM Fix) +12.2%; Prices in Ontario. for SAGD bitumen in Alberta & US$69 in the North Dakota * Among 32 commodities covered in the Scotiabank Commodity Price Index. Bakken). A sharp, fairly rapid reduction in drilling activity in the United States as well as in Canada is already underway (please see charts on page 2). While oil companies will seek to maintain existing production, ‘decline rates’ in North Dakota are rapid (35-40% per annum) and even higher in the Eagle Ford shale (45-55%). Scotiabank Economics Scotia Plaza 40 King Street West, 63rd Floor Toronto, Ontario Canada M5H 1H1 Tel: (416) 866-6253 Fax: (416) 866-2829 Email: [email protected] This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank Commodity Price Index is available on scotiabank.com, Bloomberg at SCOT and Reuters at SM1C December 18, 2014 Global Economics Scotiabank Commodity Price Index U.S. upstream capital spending will drop by at least 20% in 2015 and production growth will slow markedly within 12 months. U.S. Drilling Activity Starts To Be Curbed 20 Bitumen output in the Alberta oil sands does not experience rapid decline rates and will be less affected in 2015, though capital spending will likely be cut by 20%. There will also be an international supply-side adjustment — especially in Russia, Iraq, Iran and West & North Africa (Libya) — eventually bringing world supply back into balance with demand, setting the stage for a rebound in prices. While an extended period of lower oil prices (sub-US$80) is expected over the next several years, the percentage gain in WTI prices by late 2015 will likely be double-digit (possibly 25% to US$70). The Metal & Mineral Index edged down by -1.5% m/m in November, posting the worst year-over-year decline of any sub-component (-10.4%). The 2014 decline was centred in ferrous metals (iron ore & coking coal). Despite slower growth in China’s steel production (+2.1% in 2014 YTD), the world’s three-largest iron ore producers in Western Australia and Brazil — who are on the bottom of the world cost curve and earn the bulk of their revenue from iron ore — decided to expand mine capability and market share, deliberately driving out higher-cost producers as prices fell (e.g. in the Labrador Trough and Western Africa). The net result, spot prices for 62% Fe, Fines delivered to northern China have plunged to only US$68.80 per tonne in mid-December from US$136 a year ago. Contract prices for Western Canada’s premium-grade hard coking coal bound for Japan & Asia also dropped to US$119 per tonne in 2014:Q4 and will likely be US$117 in 2015:Q1 compared with US$152 in 2013:Q4. Base metals were a ‘bright’ spot in 2014 — largely ignored by equity markets — and are among our ‘picks’ for investors in 2015. LME nickel and zinc ranked No. 3 and 5 within the ‘Top Five’ best-performing commodities of 2014 — among the 32 commodities covered in the Scotiabank Commodity Price Index — with price gains of 19.8% and 11.6% respectively in the year through December 15, 2014. Aluminium rallied in 2014, up 6.7% yr/yr, with strong global demand (e.g. for light weighting in cars) catching up to smelter capability. Cobalt — a by-product of nickel production in the Sudbury Basin — performed well (+17.6% yr/yr). However, a focus by investors on copper, widely expected to edge down in 2015 alongside ongoing mine expansion, seems to have taken the shine away from these metals in equity markets. Spot uranium prices bottomed in June 2014, given Japanese approval of two nuclear reactor restarts, posting a 7.2% yr/yr gain to earn it a 5th place ranking. After a recent election win, Japan’s Prime Minister is expected to push for additional reactor restarts to boost a sagging Japanese economy. Spot prices climbed as high as US$44 in midNovember, before utilities backed away, with price resistance at the US$40 mark. However, the base term-contract price has increased from US$45 to US$49, a positive sign for a gradual recovery in coming A Bull-Run In Cattle Prices years. Cameco’s Cigar Lake mine in 180 180 Saskatchewan continues to ramp up towards 160 US$ per cwt (hundredweight) 160 18 million pounds by 2018. 140 140 The Forest Products Index drifted lower in November (-1.5% m/m, -4.1% yr/yr), with a seasonal falloff in lumber and OSB prices and slightly lower NBSK pulp prices. Western Spruce-Pine-Fir 2x4 lumber prices are US$339 per mfbm in mid-December and will average US$349 in 2014 — slightly below US$356 in 2013. Only a modest improvement in Fed Steer Prices 120 Nebraska 100 80 80 Alberta 60 U.S. BSE-related Ban Implemented May 2003 40 Data to November 2014. 00 02 04 06 08 10 12 15 U.S. Oil Rotary Rig Count 10 10 December 12: 1,546 rigs, +9.6% yr/yr 5 5 0 Jan-14 Apr-14 Jul-14 Oct-14 0 Apr-15 Jan-15 Data Source: Baker Hughes Incorporated. To date, the rig count decline has been centred in vertical wells and, to a lesser extent, horizontal wells. Canadian rig count: oil-targetted -15.7% yr/yr, -6.0% YTD. U.S. Drilling Activity — Shale Basins 35 yr/yr % change 30 35 30 25 25 Permian 20 20 15 15 Williston Basin* 10 10 5 5 0 0 -5 -5 Eagle Ford -10 -15 Jan-14 Apr-14 Jul-14 Oct-14 -10 -15 Apr-15 Jan-15 Data Source: Baker Hughes Incorporated. * North Dakota, South Dakota and Montana. Nickel Prices 25 25 US$ per pound, LME official cash settlement price 20 15 10 2013 $6.80 2014e $7.67 2015F $9.00 2016F $11.50 Indonesia's ban will turn today's world supply & demand balance for nickel from 'surplus' to 'deficit' by mid-2015. 20 15 10 5 5 Jan. 12, 2014 Indonesian Ore Ban 0 00 02 04 06 08 10 12 14 16 0 December 17, 2014: US$7.00. Zinc — The Next Big Base Metal Play 2.50 2.50 US$ per pound 2.00 Zinc prices could climb as high as $1.60-1.70 in 2016-17 Zinc demand will be boosted by greater auto use of galvanized steel in China 1.50 1.00 2016F + US$1.60 2.00 1.50 1.00 0.50 20 98 20 October 10: 1,609 rigs, +17.7% yr/yr 60 20 0 15 120 100 40 yr/yr % change 14 16 0 0.50 Credit Crisis Late 2008 LME Zinc Prices 0.00 00 02 04 06 08 10 12 14 December 17, 2014: US$0.96. 2 16 0.00 December 18, 2014 Global Economics Scotiabank Commodity Price Index U.S. housing starts to about 1 million units, up from 930,000 in 2013, combined with mill restarts checked lumber prices. Nevertheless, a further gain to US$370 is expected for 2015 and US$390-400 for 2016, with housing starts advancing to 1.2 million and 1.40 million respectively. Stronger U.S. employment conditions and the return of ‘first-time’ buyers should buoy residential construction, despite tight lending standards. OSB prices will likely outperform in 2015, with very high demand on North American mill capacity expected in the second half of the year. The mill restarts, which held back prices in 2014, are now over. The Agricultural Index edged down by -0.2% m/m in November and is -3% below a year earlier. However, cattle posted the second-largest price advance of 2014, driven to record levels in both Canada and the United States by successive years of herd liquidation. Herd rebuilding will take time, with prices likely remaining lucrative for cow-calf ranchers and feed lot owners in 2015. Scotiabank Commodity Price Index November 2014 Growth (per cent Trends change) Weights (Compound Annual Growth Rates) All Commodity Price Index 100.0 One Month -4.8 One Month -44.6 Three Months -31.1 One Year -6.1 Five Years 0.4 Industrials Oil & Gas Metal & Minerals Forest Products 84.7 39.9 30.1 14.7 -5.7 -9.9 -1.5 -1.5 -50.5 -71.3 -16.7 -16.8 -34.3 -47.7 -21.4 -10.8 -6.7 -4.9 -10.4 -4.1 -0.4 -1.3 -1.4 5.3 Agriculture 15.3 -0.2 -2.4 -13.0 -3.0 4.7 Index: January 2007 = 100 Nov Oct 2014 Sept Aug 2013 Nov All Commodity Price Index 124.6 130.9 134.0 136.8 132.8 Industrials Oil & Gas Metal & Minerals Forest Products 121.9 123.6 119.4 122.2 129.2 137.2 121.2 124.1 133.6 144.9 122.9 125.0 135.4 145.4 126.8 125.7 130.7 130.0 133.3 127.4 Agriculture 139.9 140.2 135.9 144.9 144.2 Re-designed Index: Net export weights in 2010, data re-estimated back through 2007, January 2007=100. As of April/May 2014, the Edmonton Par was replaced with MSW Light, Sweet Crude Oil prices at Edmonton, with price differentials off WTI near-by futures from TMX/Shorcan Energy Brokers. Zinc & Nickel — ‘Picks’ for 2015 To build shareholder value in a lacklustre global economy, mining companies will focus on ‘divesting non-core assets’ and ‘spinning-off undervalued operations’ (e.g. Sudbury nickel). Ongoing capital spending discipline will continue. The recent appreciation of the U.S. dollar on a trade-weighted basis (e.g. against the Canadian dollar, the Chilean peso and the Peruvian sol) as well as soft diesel prices are significantly reducing mine operating costs in Canada and other countries. Diesel accounts for as much as 30% of mine cash costs. Zinc is a ‘Top Pick’ for 2015. Prices strengthened in the second half of 2014, averaging US$1.03 per pound, with investors and commodity funds expecting zinc concentrates to move into a supply-side ‘deficit’ by 2016 alongside significant mine depletion. Century — the world’s third-biggest zinc mine — is expected to close in 2015:Q3 and Lisheen in Eire by late 2015 or early 2016. Prices remain resilient at US$0.96 in mid-December (9 US cents higher than a year ago), despite further signs that China’s economy is slowing. The Flash Purchasing Manager Index (PMI) for Manufacturing in December edged down to 49.5, slipping below the 50 demarcation line separating expansion from contraction (for the first time in seven months). This may reflect a lull over the winter months in China’s construction activity. While China has recently lowered benchmark interest rates, we would argue that further easing is warranted, in view of the downside risk for China’s economy. On a more positive note, China’s motor vehicle sales (cars & light trucks) advanced by 9.2% through November 2014 and should grow by another 7% in 2015. Chinese domestic manufacturers are under pressure to increase the quality of their motor vehicles, likely boosting the use of galvanized steel. The same trend is evident in India, where galvanized sheet should increase from 7% of the weight of a car to 20% by the end of the decade. In the first sign of a response by mining companies to the coming shortfall in zinc, Vedanta has announced its intention to proceed with developing the Gamsberg zinc mine in South Africa (250,000 t/a by early 2018). We expect interest in ‘junior mining projects’ in zinc to intensify within several years. Nickel prices should also outperform in 2015, benefitting the Sudbury Basin, Thompson Manitoba, northern Quebec (Raglan) and Labrador (Voisey’s Bay). Prices will climb from this year’s US$7.67 average to at least US$9.00 in 2015 (+17.3%) and US$11.50 per pound in 2016. This largely reflects the impact of Indonesia’s ban on the export of all ‘unprocessed’ nickelcontaining ore on January 12, 2014, in a bid to encourage foreign buyers to upgrade ore in Indonesia. In 2013, Indonesian ore 3 December 18, 2014 Global Economics Scotiabank Commodity Price Index accounted for a large 33.5% of world mined nickel, with large shipments destined for Nickel Pig Iron (NPI) plants in China used to produce stainless steel. While China managed to step up imports of nickel-containing ore from the Philippines, as an offset, the monsoon season has recently slowed Philippine shipments and further growth of Philippine exports to China will not be sufficient to offset lost Indonesian supplies. Nickel prices are expected to soar once NPI plants in China have used up their inventory on hand — forcing Chinese stainless steel producers to turn to more costly imports of FeNi and nickel cathode. Progress in building ore processing facilities in Indonesia has been slow, with renewed supply of ‘processed ore’ from Indonesia unlikely until late 2016-17 (one project will start up). The global supply & demand balance for nickel is expected to turn from ‘surplus’ to ‘deficit’ by 2015:Q2, even assuming a slower pace of stainless steel production gains in China (5.5% in 2015, after a 10% gain in 2014). Palladium was the strongest of the precious metals in 2014, with a 12.2% yr/yr gain. Strong demand for auto catalytic converters for small-engine gasoline-driven cars and supply constraints boosted prices. Gold edged down in 2014, checked by a significantly stronger U.S. dollar and prospects for tightening U.S. monetary policy by the spring of 2015. However, physical demand for gold has recently been underpinned by general economic uncertainty. Scotiabank All Commodity Price Index 1 220 200 180 Growth Trends (per cent, annual rate) Last Year -6.1 Last 5 Years 0.4 Index: Jan. 2007=100 220 200 180 160 160 140 140 120 120 100 All Items 100 80 80 60 60 40 All Items – Inflation adjusted 2 20 0 40 20 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 0 1. A trade-w eighted U.S. dollar-based index of principal Canadian exports. 2. Index deflated by U.S. Producer Price Index for Intermediate Goods. – Shaded areas represent U.S. recession periods. 4