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COMMODITIES: Scotiabank's Commodity Price Index - Year-End Review

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After a strong late-summer rally, Scotiabank's Commodity Price Index inched down in October and dropped by 2.3% month-over-month (m/m) in November, as commodity prices "contended with opposing forces in late 2012."

"We are experiencing another bout of concern over the outlook for global growth and the potential fallout from the U.S. fiscal cliff in early 2013, dampening oil and grain prices," said Patricia Mohr, Vice President, Economics and Commodity Market Specialist at Scotiabank. "That's only partially offset by news that China's economy is revving up again, lifting base metal prices, especially copper."

As a result, added Mohr, commodity prices have dropped 8.4% year-over-year (yr/yr) through November and are currently 16% below the near-term peak in April 2011, just prior to the advent of concern over excessive Eurozone sovereign debt and the negative impact on global growth.

The Oil and Gas Sub Index (-14.4%) led the yr/yr decline in overall commodity prices through November 2012. Lower light and heavy crude oil prices in Alberta and considerably softer propane prices in Edmonton and Sarnia more than swamped a slight gain in Canadian natural gas export prices (linked to a significant late-year rally to an estimated US$3.69 per thousand cubic feet of natural gas in November).

While international oil prices remained strong in 2012, a price discount on Edmonton light crude oil emerged and the discount on Western Canadian Select heavy oil (WCS) widened - largely the result of inadequate export pipeline capacity. "The cost to the Canadian economy of these wide oil price discounts is enormous," said Mohr. "On heavy oil alone that's about US$9 billion in 2012 from the WCS discount off WTI oil, taking into account a normal quality differential, plus another US$17.7 billion due to the WTI discount off world prices, as measured by Brent." Rail shipments are increasing, given virtual full utilization of export pipelines.

The Metal and Mineral Index also lost ground in 2012, down 13.1% yr/yr as of November. Most base metal prices held up well, with copper ending 2012 on a strong note at US$3.60 per pound (45% profit margin), up from US$3.43 in late 2011. Lead was the 5th best-performing of the 32 commodities in the Scotiabank Commodity Price Index. However, double-digit declines in coking coal, iron ore and steel alloying metals alongside stagnant world steel production and a mid-summer inventory correction in China's steel industry more than offset the relative strength in some base metals.

On a more positive note, the Forest Products Sub-Index posted a substantial recovery in 2012 (+12.9% yr/yr through November). After a challenging environment since 2008 - linked to a prolonged and sharp downturn in U.S. housing - oriented strand board (OSB) and lumber producers enjoyed a substantial recovery in earnings in 2012. A modest recovery in U.S. housing starts is hitting a wall of tighter supply, given substantial mill closures since 2006 (the equivalent of 140 sawmills across the U.S. and Canada).

Agriculture was another pocket of strength in 2012 (+5.2% yr/yr in November). Canola (an oilseed) posted the 3rd largest price increase within the Scotiabank Commodity Price Index in 2012, followed by barley (a feed grain).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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