U.S. growth and a steadying Chinese economy are giving a boost to beaten-up commodities, slowing a multiyear slide that has weighed on Canada’s most important exports.
Commodity prices have been on a downward slope for the better part of three years, as limping western economies and a slowing China curbed demand for raw materials.
More recently, however, signs of stability in key commodity-consuming regions have provided some optimism that the worst could be over.
The widely watched Thomson Reuters-Jefferies CRB index of commodities has climbed 4 per cent from its recent low earlier this month. Natural gas has been a standout among commodities, surging about 25 per cent since early December.
From zinc to copper and oil, a range of commodities is expected to find a floor this year as markets overcome recent hurdles and factories boost production to meet rising consumer demand, according to some analysts.
For Canada, an end to the commodity collapse is especially good news. Commodities and resource-based goods account for about 50 per cent of Canada’s merchandise exports and much of the resource-heavy Toronto Stock Exchange.
Few are predicting a return to booming demand for commodities. But a bottoming-out would be welcome news for producers.
Bank of Nova Scotia’s Patricia Mohr is calling for a “modestly positive” rise in the bank’s commodity price index in 2014. She says prices for the 32 commodities in the list are levelling out after a 5.4-per-cent drop last year.
Ms. Mohr is most bullish on zinc, a metal used to galvanize steel and found in everything from construction to furniture and automobiles. Record vehicle sales in 2013 are expected to continue gaining this year. As demand grows, the global zinc supply will shrink as the market absorbs the impact of the closing of four key mines, including two in Canada, Ms. Mohr argues.
“I think it’s going to be the next big play for the mining sector,” said Ms. Mohr, who forecasts zinc prices will rise from 87 cents (U.S.) a pound in 2013, to 98 cents this year and $1.30 by 2015.
Judith Dwarkin, chief energy economist for ITG IR, expects the harsh weather sweeping across eastern North America to continue to bolster natural gas prices in 2014. She predicts Henry Hub natural gas will average $4.50 (U.S.) per million British thermal units this year, up from $3.73 in 2013.
“All of the dramatic swings we’ve seen in gas prices have been weather-related,” she said.
Indeed, demand for natural gas in the United States on Tuesday reached its second-highest total on record, touching 133 billion cubic feet a day, according to Bentek Energy, a division of Platts.
The frigid weather means storage withdrawals for the week of Jan. 30 will reach 281 Bcf, which is six Bcf shy of the all-time storage withdrawal record set during the week ending Jan. 10, according to Bentek Energy.
Martin King, vice president of institutional research at FirstEnergy Capital, expects West Texas Intermediate crude, the North American benchmark, to average $93.50 a barrel in 2014. While that’s below the average of about $98 last year, he argues oil won’t fall sharply as a result of healthy supply from U.S. oil fields, as many fear.
“It won’t be a crash – I think a lot of people are expecting a crash – but we think things are just going to soften up a bit on that front,” he said.
Supply in the global market could get backed up as production in the U.S. grows, but the excess supply can be controlled by the Organization of Petroleum Exporting Countries, Mr. King said. Production out of Libya and Iran remain international wild cards.
Last year’s breakup of an eastern European potash cartel threatened to dampen prices as new supplies flooded the market. But one former member of the group, Uralkali, recently signed a $305-a-tonne potash deal with China. The price is well below that of past years, but was higher than expected and is thought to signal a floor for other contracts, including an upcoming one with Brazil, a major buyer of the crop nutrient.
In uranium markets, Ms. Mohr expects prices to show some life nearly three after the Japanese tsunami triggered a nuclear disaster and closed the country’s 50 reactors. Sixteen of those reactors are expected to restart this year and prices for the nuclear fuel should rise 17 per cent by 2015 as demand rises.
Still, there are risks in relying on demand for commodities in emerging markets, particularly China, which is in the midst of an economic transformation that has not been altogether smooth, said Sonny Scarfone, an economic analyst with TD Bank in Toronto.
“The issue is, as they try to reform and have a more liberal economy, more consumer-driven, how easy is that transition when you have a country that has four times the population of the U.S.? There’s a lot of question marks on that.”