Commodities Drifting Sideways

Transcription

1 A monthly commodity watch September 2016 Commodities Drifting Sideways Key markets lacking direction after first-half rebound The BMO Capital Markets Commodity Price Index was unchanged in August, with energy, metals, and forest products all effectively flat during the month. August s unexciting result caps a generally indecisive summer for commodity markets, with the index s most heavily weighted components oil, gas, and gold trending more-or-less sideways since June after advancing vigorously during the first half of the year. Unfortunately, lacklustre global growth and widespread capacity overhangs suggest that commodity gains are likely to remain sluggish. The Oil & Gas Index remained essentially flat in August, with a small rise in crude almost fully offset by a mild decline in natural gas. West Texas Intermediate was quite volatile over the course of the month and into September, fluctuating within a range of US$39-48/barrel due to on-again/off-again expectations of a production-limiting agreement between OPEC and Russia. Although natural gas weakened during the first three weeks of August, the market has since rallied on reduced projections of prewinter storage and the possibility that La Niña could lead to a colder-than-normal winter in major heating regions. The Metals & Minerals Index eked out a fourth straight monthly gain with a 0.1% advance in August. Zinc was once again the top performer, rising 4.5% during the month and reaching an early- September peak more than 60% above its January low. However, after nearly eight months of steady gains, zinc is now experiencing a pullback that appears to be unrelated to supply fundamentals, which remain supportive. Meantime, copper prices remain volatile as markets scan China s economic data for signs of strengthening demand amid expectations of continued solid supply over the next few years. The Forest Products Index edged up a sliver in August just enough to keep a seven-month winning streak intact. Although U.S. home building activity slowed during the month, the decline was concentrated in the southern region, limiting influence on the market. Oriented strand board rose to a three-year high of US$306/mbf, while lumber remained steady, with spruce-pine-fir sticking at US$326/mft 2. With the building season now winding down, prices have started their usual seasonal downturn, which will likely nip the index s recent rally. The Agriculture Index shed another 2.0% in August and is now down almost 14% year-over-year. Crop prices continued to droop during the month on signs of yet another bountiful harvest in North America, while hog prices exhibited their usual late-summer swoon with a 17% decline. Ongoing weakness across most agricultural products looks set to drag the index to a ten-year low in September. ECONOMIC RESEARCH economics.bmocapitalmarkets.com Earl Sweet, Senior Economist & Managing Director earl.sweet@bmo.com Alexandros Koustas, Senior Economist alex.koustas@bmo.com Aaron Goertzen, Senior Economist aaron.goertzen@bmo.com Sarah Howcroft, Economist sarah.howcroft@bmo.com All Commodities Index BMO CAPITAL MARKETS COMMODITY PRICE INDEX (3 = 100) A Publication of BMO Capital Markets Economic Research Douglas Porter, CFA, Chief Economist Aug. Level % Change from (3=100) Mth. Ago Yr. Ago All Commodities Oil & Gas Metals & Minerals Forest Products Agriculture

2 Page 2 of 9 September 2016 Hard Bargain on Softwood Deadline for a new trade agreement is only a few weeks away Alex Koustas, Senior Economist Alexandros.koustas@bmo.com It has been nearly one year since the expiration of the Softwood Lumber Agreement (SLA) and despite the fact that the 100 day deadline set by Prime Minister Trudeau and President Obama at their meeting in March has long since passed, a new accord still looks well out of reach. Under the terms of the SLA, a one-year grace period was granted post-expiration that allowed for tariff-free access to the U.S. market during the negotiation process. We now find ourselves precariously close to the grace period s termination date of October 12th, after which U.S. authorities will be free to unilaterally enact trade restrictions. Worse yet, any tariffs applied would be retroactive to October 12th 2015, potentially dinging Canadian producers with a year s worth of export fees. However, it appears that hard quotas are the preferred trade action for U.S. authorities. In June, 25 U.S. Senators endorsed harsh market share quotas on Canadian lumber imports in a letter to U.S. Trade Representative Michael Froman. A strict quota system would mark a significant departure from the SLA agreement, presenting serious consequences for Canadian production. Under the old SLA, provinces were presented with two options (Table 1 on next page). Option A was a higher tariff quotafree structure that was scaled against a composite of wood product prices (Chart 1) and Option B was a lower tariff structure with local market share quotas. In both cases the tariffs outlined were voluntary export charges collected by the government of Canada. Option A provinces included British Columbia and Alberta while Ontario, Quebec, Manitoba and Saskatchewan opted for Option B. In this context, it is important to note the strategically important share that Canadian lumber holds in the U.S. market. Of the 24.8 billion board feet of lumber supply in the U.S. market through June, 8.4 billion, or roughly one-third, was imported from Canada. Crucially, there are few indications that American production is prepared to cope with a potential curtailment of Canadian supply. To wit, U.S. producers export only 4% of their output, leaving precious little inventory that could be immediately used to fill a shortage. A proposed quota that would cap Canadian imports at their 2014 market share (25%) would require American producers to increase production by a greater scale than they have in the past four years combined to meet demand. To be fair, there does appear to be some capacity to do so, with industry utilization trudging CHART 1 SLA TARIFF THRESHOLDS Random Lengths Composite (US$/1000 bd ft) $355+ No export charge $ Tier 3 $ Tier 2 $315 and less Tier CHART 2 PPI LUMBER AND WOOD PRODUCTS United States (y/y % chng) CHART 3 CAPACITY UTILIZATION WOOD PRODUCTS (percent) Canada United States 50 Tariff Free Grace Period Begins

3 Page 3 of 9 September 2016 below its historical level of 75%, but it would take a significant shift in production strategy to achieve it (Chart 3). From a pricing standpoint, more robust trade action would be a positive development. The market disequilibrium created by a set quota or more punitive tariffs would place upward pressure on prices in the U.S. market, just as they did following the expiration of the Lumber III agreement in 2 (Chart 2). Of course, any large swings in pricing would increase costs for intermediate users (homebuilders) and buyers of finished goods (renovation materials and furniture). Higher input costs could also lead homebuilders and manufacturers to substitute alternative materials. Canadian firms have diversified, acquiring production facilities in the U.S. to hedge against currency fluctuations and shifts in trade policy. Therefore, while a hard quota would undoubtedly have ramifications for Canadian production, it may not result in the same industry shakeout as in TABLE 1 SLA TARIFF SCHEDULE Prevailing Monthly Price (Random Lengths Index) Price Option A Option B Over US$ 355 US$ US$ US$ 315 or under No Export Charge 5% 10% 15% No export charge and no volume restraint 2.5% export charge + maximum volume that can be exported to the United States cannot exceed the region s share of 34% of expected U.S. consumption for the month 3% export charge + maximum volume that can be exported to the United States cannot exceed the region s share of 32% of expected U.S. consumption for the month 5% export charge + maximum volume that can be exported to the United States cannot exceed the region s share of 30% of expected U.S. consumption for the month It seems odd that this relatively small sector of the economy remains such a trade-related lightning rod. The SLA agreement has worked reasonably well over the past decade and the U.S. faces an uphill legal battle to make any quotas stick, having lost numerous rounds of litigation in previous disputes. Revenues for both Canadian and U.S. companies are up, earnings are healthy, and home building activity continues to improve. The recent upswing in shipments and capacity utilization for Canadian producers in 2016 is merely a reflection of the fact that they are currently operating in a tariff- and quota-free environment, one that was imposed by U.S authorities. Under the SLA structure for the past five years, the share of Canadian supply in the U.S. market, at roughly 25%, was well below historical levels - as well as quota limits - ostensibly achieving the goals of U.S. authorities. The expiration of the SLA could not come at a more inopportune time as far as the political climate is concerned. With the U.S. in the heat of an election season, the current administration has little currency to push for a resolution. The Presidential candidates present another challenge, with Donald Trump adopting a bellicose protectionist agenda, while Hilary Clinton s stance on trade has hardened somewhat, as evidenced by her opposition to the TPP. With little political capital or impetus for an agreement, authorities have all the more incentive to hold tight and let the grace period expire. Needless to say, we will be watching this space closely and adjusting our forecasts if necessary.

4 Page 4 of 9 September 2016 Energy and Materials Crude Oil Natural Gas (WTI) (Henry Hub) (Alta. Empress) Lumber Pulp Newsprint US$/bbl US$/mmbtu US$/mbf US$/tonne y-t-d September October November December January February March April May June July August m-t-d September n.a. n.a. Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

5 Page 5 of 9 September 2016 Base and Precious Metals Copper Aluminum Zinc Nickel Gold Silver US$/lb US$/oz y-t-d September October November December January February March April May June July August m-t-d September Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

6 Page 6 of 9 September 2016 Agriculture Wheat Canola Cattle Hogs US$/bushel US$/tonne US$/cwt n.a. n.a n.a. n.a y-t-d September October November December January February March April May June July August m-t-d September Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

7 Page 7 of 9 September 2016 Commodity Indices and Forecasts All Oil & Metals & Forest Agricultural All US$-terms : 3 = 100 Annual Commodities Gas Minerals Products Products Commodities C$-terms Forecast Quarterly 2014 Q Q Q Q Q Q Q Forecast Q Q Q Monthly 2015 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Commodity price indices and forecasts are by BMO Capital Markets Economics. Forecasts are independent of those used by BMO Capital Markets Equity Research.

8 Page 8 of 9 September 2016 Historical Charts: All-Commodity Index Nominal US$-Terms (3 = 100) Real US$-Terms (3 = 100) Nominal (3 = 100) US$-terms 100 C$-terms

9 Page 9 of 9 September 2016 Technical Note The BMO Capital Markets Commodity Price Index is a fixed-weight, export-based index that encompasses the price movement of 19 commodities key to Canadian exports. Weights are each commodity s average share of the total value of exports of the 19 commodities during the period Similarly, weights of sub-index components reflect the relative importance of commodities within their respective product group. The all-commodities index and sub-indices consist of the following: Weight in Weight in All-Commodities Weight in All-Commodities Weight in Percent Index Sub-Index Index Sub-Index Metals & Minerals Forest Products Gold Newsprint Silver Market Pulp Aluminum Supercalendered Paper Copper Lumber Nickel OSB Zinc Uranium Agricultural Products Potash Wheat Canola Oil and Gas Hogs Crude Oil Beef Cattle Canadian Natural Gas All Commodities Unless otherwise specified, all indices reported in this publication correspond to prices in U.S. dollars. 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