A monthly commodity watch May 2017

Transcription

1 A monthly commodity watch May 2017 Energy Rebound Buoys Commodity Index in April Gold floats to six-month high as base metals reflation trade fizzles out The BMO Capital Markets Commodity Price Index rose 2.1% in April, not fully recovering its prior-month loss. Higher oil and gas prices provided the bulk of the lift, though precious metals and forest products also recorded gains. Waning investor risk appetite amid heightened U.S. political/policy uncertainty and chronic geopolitical tensions combined with renewed signs of slowing growth in China will keep commodity prices on the defensive over the near term. The Oil & Gas Index rebounded 3.6% in April. Natural gas advanced 7.7% on signs of a tightening market and some weather models pointing to a warmer-than-average summer and increased demand for cooling. Despite its monthly-average increase, crude oil actually fell from a peak of US$53.40 on April 11 th. It finished the month at $49.30 and slipped further to a low of $45.50 in early May before rallying moderately on indications that OPEC and other participating oil producers will extend their production curtailment agreement through the first quarter of The Metals & Minerals Index edged up by 0.6% in April. Gold reached a post-u.s. election high around mid-month, as developments in Syria and North Korea had investors fleeing for safety, capping off a month-long retreat in U.S. Treasury yields. The yellow metal is not expected to rally further unless the Fed s monetary normalization campaign is materially disrupted. Meanwhile, base metals continue to give back their post-election gains, though aluminum remains an exception. The Forest Products Index surged 3.8% in April on broadly based strength for wood products. The Department of Commerce s decision to impose countervailing duties (see the feature article for more details) has upended the lumber market just as seasonal demand kicks into full gear. As a result, prices skyrocketed $48 to average US$407/mbf in April, with values holding in May. Oriented Strand Board prices rose $22 to average US$329/mft 2 as solid homebuilding activity tightened supply. Prices in May have consolidated around $333/mft 2, the highest level in four years. The Agriculture Index dipped 0.8% in April as a hearty 6.2% gain in cattle prices was more than countered by a 5.5% dip in hogs and moderately lower crop prices. Earlier this month, the U.S. Department of Agriculture released its crop projections, which point to a considerable increase in soybean acreage and carry-out stocks a clear negative for canola and the oilseed space more broadly. The wheat market, on the other hand, is expected to benefit from modestly tighter conditions this year. Aaron Goertzen (Agriculture) aaron.goertzen@bmo.com Sarah Howcroft (Metals & Minerals, Editor) sarah.howcroft@bmo.com Alexandros Koustas (Forest Products) alexandros.koustas@bmo.com Earl Sweet (Oil & Gas) earl.sweet@bmo.com All Commodities Index BMO CAPITAL MARKETS COMMODITY PRICE INDEX (2003 = 100) A publication of BMO Capital Markets Economic Research Douglas Porter, CFA, Chief Economist economics.bmocapitalmarkets.com Apr. Level % Change from (2003=100) Mth. Ago Yr. Ago All Commodities Oil & Gas Metals & Minerals Forest Products Agriculture

2 Page 2 of 9 May 2017 Commodity Focus: Forestry Products Seeing the Forest for the Trees Alex Koustas alexandros.koustas@bmo.com Though many were quick to paint the April 24 th decision by the Department of Commerce to impose countervailing duties on Canadian lumber imports as a shot across the bow by the U.S. Administration, the reality is that the issue had been simmering for over a year. In March of 2016, President Obama and Prime Minister Trudeau set a hard 100 day deadline for a renewal or renegotiation of the Softwood Lumber Agreement (SLA). Suffice to say, zero hour came and went with little fanfare and with few signs that either side was even close to an agreement. The SLA expired a few months later in October and any chances for renegotiation were all but scuttled two weeks later when the U.S. Lumber Coalition filed countervailing duty and anti-dumping duty petitions (note this is all pre-president Trump era). Given the playbook up to that point, the preliminary ruling by the U.S. Department of Commerce to apply an average countervailing duty of 20% on Canadian softwood lumber came as no surprise to the Canadian industry. The fact that it was an easy target for a trade win for the Trump Administration suggests anti-dumping duties are also on the way, a baffling prospect given lumber prices are near record-high levels. Here are the key facts: The U.S. will levy a preliminary countervailing duty (CVD) of 19.88% for lumber imports from Canada. The figure is actually based on the average duties charged to the five largest Canadian exporters with assigned rates ranging from 24% to 3%. All other producers outside of the five will pay the 19.88% rate. Several, but not all, of the producers will face retroactive duties dating back 90-days from the April 24 th ruling. There will likely be additional duties imposed. The Department of Commerce has pushed back its ruling on anti-dumping duties (AD) to late June given the greater complexity of the case. Antidumping duties could range from 5% to 15% on top of the countervailing duties. The petitioner in the duty cases, the U.S. Lumber Coalition, filed a request with Commerce to align the final decisions in the CVD and AD cases. If approved, final AD/CVD determinations would likely be announced in early November. The last stage in these duty cases is a final determination from the International Trade Commission, which rules on whether the U.S. lumber industry has been injured. That ruling comes 45 days after the CHART 1: LUMBER (WESTERN MILL) PRICE SPF 2X4 (US$/mbf) Post SLA expiry: market balanced Retroactive duty period begins Countervailing duties announced 4 Nov 16 Jan 17 Mar May Source: Random Lengths CHART 2: HOUSING STARTS (mlns of units : s.a.a.r.) Singles Multis Forecast CHART 3: SAWMILL CAPACITY UTILIZATION (percent) United States Canada 65 Feb 16 Apr Jul Oct Jan 17 Source: Western Wood Products Association

3 Page 3 of 9 May 2017 final AD/CVD ruling, or likely in late December. Therefore, duties would be collected in earnest starting in early CHART 4: LUMBER (WESTERN MILL) PRICE SPF 2X4 (US$/mbf) Cash deposits for duties are required, beginning on the date the preliminary CVD or AD determination is published in the Federal Register. CVD s were published in the register on April 28 th. The Canadian government is petitioning for an exclusion to apply on finished and manufactured softwood products such as bed-frame components, garage doors, consumer products and window frames, arguing that the dispute should revolve around spruce-pine-fir used in residential construction forecast Demonstrating the elegance of free markets, prices for Western Mill 200 Spruce-Pine-Fir are up a barn-storming 30% over the past 14 weeks as producers anticipated the duties and priced accordingly (the Source: Random Lengths broader Random Lengths Framing Lumber Composite has also surged over 20%). The shift has caused confusion and chaos in the market, as most trade actions do, as it lands during the busiest order season of the year (Chart 1). With housing construction and renovation activity ramping up, hold-out buyers have been caught short and forced to stomach elevated prices. Most surveys show prospective demand well above inventories for most U.S. regions, indicating that pricing should be sustained in the short-term. All signs are that the market should remain fairly tight in 2017, with strong cyclical factors supporting lumber demand. After experiencing a couple of false starts, home building is churning ahead at a solid pace and looks poised to reach demographic demand (about 1.3 million units s.a.a.r.) by the end of the year. More importantly, single-family homes (which use 3 times the amount of wood) are gradually comprising a larger share of new starts (Chart 2). Meanwhile, tight supply in the resale housing market should continue to support strong price growth by incentivizing renovation activity, which is the largest end-use market for lumber, accounting for over 35% of demand. Canadian lumber accounts for nearly a third of U.S. supply, providing a considerable amount of market power with which to pass tariff costs to buyers, particularly during the building season. Demand is further back-stopped by a surging Canadian housing market, which is expected to outpace the 200,000 unit mark for a sixth consecutive year. Conditions on the supply side of the market further bolster the case that pricing should remain elevated for the medium-term. The fallout from 2002 s trade spat was exacerbated by a soft housing market in the wake of the tech wreck and a weak pricing environment due to overcapacity (Canadian and U.S. capacity utilization had slumped below 80%). In contrast, Canadian producers are now operating near-maximum capacity and while there is clear room for U.S. producers to increase output (Chart 3), even the most optimistic of estimates (roughly 6% production increase per year until 2020) won t be sufficient to fully cover incremental demand. In the shortterm, production simply cannot be ramped up quickly enough to break the log-jam. Our forecast is for prices to remain very strong on a cyclical basis in ; Spruce Pine Fir is expected to average US$385/mbf in 2017 before weakening slightly in 2018 to average $380/mbf as additional U.S. supply comes online, eroding some Canadian market power. Bottom Line: The Softwood Lumber Agreement appeared to be working well enough for all parties prior to its expiry, with both Canadian and U.S. firms posting larger profits and enjoying the spoils of positive cyclical factors. These factors will continue to support lumber demand and firm pricing conditions despite the tariff environment. For the time being, it appears that Canadian producers will be able to pass the costs of tariffs along to buyers, with the U.S. consumer ultimately footing the bill.

4 Page 4 of 9 May 2017 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 May June July August September October November December January February March April m-t-d May n.a. n.a. Forecast 2017 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 May 2017 Base and Precious Metals Copper Aluminum Zinc Nickel Gold Silver US$/lb US$/oz y-t-d May June July August September October November December January February March April m-t-d May Forecast 2017 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 May 2017 Agriculture Wheat Canola Cattle Hogs US$/bushel US$/tonne US$/cwt n.a. n.a y-t-d May June July August September October November December January February March April m-t-d May 4.28 n.a Forecast 2017 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 May 2017 Commodity Indices and Forecasts All Oil & Metals & Forest Agricultural All US$-terms : 2003 = 100 Annual Commodities Gas Minerals Products Products Commodities C$-terms Forecast Quarterly 2015 Q Q Q Q Q Q Q Forecast Q Q Q Monthly 2016 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 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 May 2017 Historical Charts: All-Commodity Index Nominal US$-Terms (2003 = 100) Real US$-Terms (2003 = 100) Nominal (2003 = 100) 350 US$-terms C$-terms

9 Page 9 of 9 May 2017 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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