A monthly commodity watch January 2018

Transcription

1 A monthly commodity watch January 2018 Commodity Index Hits Pause in December Stronger oil prices can t offset broad-based declines in metals, forest products, agriculture Forecast Rollout on Page 2 The BMO Capital Markets Commodity Price Index slipped 0.2% in December after five months of solid gains and ended 2017 still up 10.3% year-over-year. The energy index bucked the trend as oil prices charged toward the US$60 mark. While many commodities moved sharply higher by mid-january, some moderation is expected in the headline index through the first half of The Oil & Gas Index increased for the sixth consecutive month on support from oil. Natural gas weakened moderately through much of December, but rallied sharply near the end of the month as the onset of very cold weather spurred heating demand, pulling more supply out of storage. Overall, the energy index rose 1.8% in December to a level 9.4% higher than a year earlier. Trends in both oil and natural gas early in 2018 suggest the rally in the energy index will be sustained through January. The Metals & Minerals Index slipped in December, ending a mostly positive year with a 1.1% decline. Prices for most metals trended lower in late November and early December before staging a comeback at the turn of the year. Base metals were hit by fleeting Chinese demand concerns that were later allayed by positive economic data and tightening supply. Precious metals dropped in advance of the Fed s latest rate hike but quickly recovered thereafter. Firming oil prices, a weaker U.S. dollar and strong global macro outlook bode well for the start of The Forest Products Index dropped 3.8% in December. Oriented Strand Board prices fell US$79 to average $301/msf, returning to levels consistent with balanced market conditions after a posthurricane surge. Lumber prices started the month as expected, with a bout of softening towards US$440/mbf, until an outstanding housing starts report prompted an abrupt about-face. Prices are pushing back towards cyclical highs through the first two weeks of January, fundamentally altering market expectations. The four key supports are: stronger single family starts (which use 3x the lumber as multis), greater supply-side constraints, lean buyer inventories and the USITC s final determination on duties. The Agriculture Index ended 2017 on a sour note, sliding 2.6% in December to its lowest level of the year. Crop price weakness continued to weigh heavily on the index as markets digested an incredible fifth-straight North American bumper harvest, while cattle prices also took a modest step back. Only hog prices advanced during the month, posting a typical seasonal gain. 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) Dec. Level % Change from (2003=100) Mth. Ago Yr. Ago All Commodities Oil & Gas Metals & Minerals Forest Products Agriculture A publication of BMO Capital Markets Economic Research Douglas Porter, CFA, Chief Economist economics.bmocapitalmarkets.com

2 Page 2 of 12 January Forecast Rollout Energy Oil began to rally early in 2017 on evidence that compliance by OPEC and its partners (OPEC+) with their production restraint agreement was relatively high and that the accord would be extended past the first half of the year. The uptrend was reinforced by strong demand, which began to reduce global inventories. The deviation of U.S. crude oil inventories from their five-year average declined from +36% in February to +9% at the end of the year. And, taking into consideration rising demand for crude, the number of days of forward consumption has now fallen to close to its five-year average. Following a late-november decision by OPEC+ to extend its agreement through 2018, West Texas Intermediate (WTI) rose in December for the sixth consecutive month to an average of US$57.90/barrel, up 11.2% from a year earlier and close to 56% above two years earlier. That uptrend continued into early January, with WTI breaking through the $63 mark ENERGY PRICES on civil unrest in Iran and exceptionally cold temperatures in parts of North America, which raised heating demand and disrupted some output. We expect the rally to temporarily lose momentum as rising U.S. oil production causes OPEC+ cohesion to weaken. Saudi Arabia prefers to hold firm, possibly at the expense of a further market share decline, to keep oil prices elevated prior to the privatization of part of its national oil company at the end of the year, as well as to generate sufficient revenues to meet rising fiscal demands. Russia and some other members, however, are becoming impatient with market share losses and are concerned that if prices rise too quickly, then accelerated production of U.S. tight oil will once again lead to a price crash. We anticipate some softening in WTI to the mid-$55 range as refinery demand undergoes a seasonal slowing over the next few months and as OPEC+ compliance weakens. However, pricing should strengthen later in the year and in 2019 in response to relatively robust growth in oil demand, combined with lower inventories and some restraint on North American output from the increasing focus of producers on efficiency and shareholder returns rather than solely on output growth. WTI is projected to climb from an average of US$50.91/barrel in 2017 to $57 in 2018 and $60 in Natural gas prices have recently been supported by exceptionally cold weather through much of North America, leading to record draws out of underground storage. U.S. inventories have plunged from being 17.5% above their five-year average early in 2017 to 12% below in early January. While the recent deep freeze caused the spot price for Henry Hub to spike to the US$7 mark (per million British thermal units, or mmbtu), futures remain restrained by expectations that U.S. producers can quickly ramp up output. Longer-term positives for pricing include the growing U.S. infrastructure for exporting liquefied natural gas (LNG) and the rising share of natural gas in power generation as aging coal units are decommissioned. In the near term, however, global LNG markets are oversupplied and U.S. exports are facing strong competition from sources in the Middle East. And, if natural gas prices rise too quickly relative to coal, power generators with dual-fuel capabilities might switch back to coal, restraining the demand for natural gas. Therefore, we expect Henry Hub to remain bound in the lower-us$3/mmbtu range over the next two years, rising from an average of US$2.99 in 2017 to $3.10 in 2018 and $3.20 in Natural Gas² Crude Oil¹ forecast ¹ WTI (US$/bbl : lhs) ² Henry Hub (US$/mmbtu : rhs)

3 Page 3 of 12 January 2018 Metals Precious metals were little changed in 2017 on average, lagging base metals and oil after outperforming in Though gold started the year on an upswing, a number of factors acted to keep a lid on prices, including stillsubdued inflation, prevailing financial market stability, receding political uncertainties in Europe and an improving global economic backdrop favouring risk over safe-haven assets. Market conditions will remain broadly similar in , with lingering geopolitical risks and evolving inflationary pressures underpinning investment demand, countered by the gradual removal of monetary accommodation by central banks around the world. We expect gold to continue tracking in the US$1200-$1350/oz range, averaging $1280 in 2018 and $1295 in 2019, up from $1258 in Silver edged down in 2017, weighed by an investor preference for gold that pushed the gold:silver ratio back above its long-term trend. Further METAL PRICES (Jan = 100) consolidation in global industrial activity including strengthening demand for the production of solar panels should benefit silver over the medium term, lifting the average price from US$17.06/oz in 2017 to a projected $17.60 in 2018 and $18.00 in After a year in which zinc, copper and aluminum all posted gains in excess of 20% (with nickel notching a still-impressive, though less stellar, 8.4% advance on an average annual basis), the outlook for base metals remains solid. Backed by robust demand, particularly outside China, and mounting evidence of impending supply deficiencies, we anticipate more moderate singledigit increases in On the demand side, economic indicators point to synchronous global growth: manufacturing PMIs are rising, jobless rates are at multi-decade lows in many advanced economies and the world output gap is expected to turn positive this year for the first time since Meanwhile, supply-side concerns reflect a dearth of new mining projects in recent years and a firming drive by the Chinese authorities to enact reforms aimed at deleveraging, reflation and environmental sustainability. Zinc topped the base metals charts in 2016 and 2017 and is expected to remain in the lead this year given pronounced tightness in the physical market that has drained visible inventories to critically low levels. We forecast the average zinc price to rise from US$1.31/lb in 2017 to $1.40 in 2018 before easing to $1.36 in 2019 as output capacity is gradually reinstated. Copper is likely overvalued at current prices; however, we are now more bullish on the red metal following news of a clampdown on Chinese scrap imports and potential labour-related supply disruptions. As the refined market moves closer to a deficit position (expected in 2019), we expect copper to rise from US$2.80/lb on average in 2017 to $2.95 in 2018 and $3.15 in The outlook for aluminum has also improved as China (the world s top producer, providing over half of the global supply of primary aluminum) moves to enforce illegal capacity cuts while the U.S. pursues trade action against imported aluminum products from China. Slower Chinese exports will help to push aluminum up from US$0.89/lb in 2017 to an expected $0.95 in 2018 and $0.98 in In the nickel market, a wave of excitement surrounding future demand for electric vehicles has buoyed nickel prices above the US$5.00/lb-mark since the fall. However, in view of continued strong growth in global mine supply this year and a still sizeable inventory overhang, we believe this trend is unsustainable. Nevertheless, the average nickel price will likely register modest gains in the next two years, rising from US$4.72/lb in 2017 to $4.85 in 2018 and $5.00 in 2019, before climbing more steeply in the next decade Base Metals Precious Metals forecast

4 Page 4 of 12 January 2018 While the fundamental picture is clearly improving across the base metal spectrum (i.e., demand strong, stocks declining, soft U.S. dollar), prices at current levels are highly vulnerable to shifts in investor sentiment. Possible catalysts for a correction include a deterioration (however minor) in the Chinese growth outlook or the authorities appetite for supply-side reforms, a drop in oil prices, a faster pace of Fed tightening resulting in U.S. dollar appreciation or signs of producers responding to higher spot prices, even if slated output additions are years from hitting the market. Forest Products The forest products index is poised to slip somewhat in 2018 after temporary factors pushed prices well beyond equilibrium levels in late Wildfires in B.C. combined with hurricanes Harvey and Irma led to a massive upswing in wood product pricing which saw certain grades reach record levels. Meantime, anti-dumping and countervailing duties administered by the U.S. Department of Commerce squeezed an already tight market, allowing Canadian producers to pass costs onto end-users, boosting pricing. While a confluence of synchronized natural disasters of the magnitude experienced in 2017 is unlikely to be seen again in 2018, the key factors underpinning the strength in wood products prices should only grow in stature and support robust pricing. First, the housing recovery in the United States continues to advance despite supply-side limitations. More FOREST PRODUCT PRICES importantly, the composition of growth has improved with strength building in the single-family home segment which uses three times the amount of lumber as the multi-unit segment. Second, strong pricing is leaving buyers gun-shy and at risk of being undersupplied come building season. Even those who wish to take longer lumber positions are being constrained by bank credit limits. The situation is very similar to what was seen in the summer of 2017 and presents some upside risk to pricing. Third, the U.S. International Trade Commission officially imposed combined countervailing and anti-dumping duties averaging 20% for Canadian producers (this applies to softwood lumber, not boards). This all but ensures that the early-year price bump passed onto consumers as a result of the duties is here to stay as long as the market remains tight. Fourth, it is increasingly evident that markets had overestimated the available B.C. lumber supply, the reality of which is now being properly reflected in pricing. August s wildfires only accelerated the manner in which markets processed this element. Though we re expecting a downward drift in lumber pricing from their current lofty levels, the timing of the 2017 surge will see the annual average for Spruce-Pine-Fir climb $9 to US$410/mbf in Oriented strand board prices, which have already returned to near equilibrium levels, are expected to average US$320/msf: a $37 decline from their 2017 average, though still very strong on a historical basis, as demand keeps pace with capacity expansion. U.S. dollar softening will provide support for pulp prices, which continue to benefit from relatively strong global demand, particularly from China. Capacity cuts in China, import restrictions on recycled paper and a growing captive market have boosted shipments to the region, which accounted for 50% of the increase in global demand in The North American market also provided support with a 4% increase in volumes in New capacity, which has come online slower than expected, will weigh against any significant price increases. Our forecast is for prices of NBSK to remain fairly stable, averaging US$940/tonne in New preliminary countervailing duties (CVD) have been set by the U.S. Department of Commerce (DOC) for all Canadian producers of uncoated mechanical and groundwood grades, including newsprint. Duties are set Spruce- Pine- Fir¹ 200 Market Pulp² forecast ¹ (US$/mbf : lhs) ² (US$/tonne : rhs) 1,200 1,100 1,

5 Page 5 of 12 January 2018 to average 6.5% but vary widely by plant. Furthermore, the DOC conducted a review of duties on supercalendered paper and published revised rates ranging from 0% to 15.6%. Despite waning demand, the market for newsprint remains tight given considerable capacity shutdowns. The recently announced duties could throw some volatility into a very stable Canadian pricing environment, but we are predicting flat pricing at US$540/tonne (with capacity adjusting) given that the secular decline in newspaper circulation has left clients unable to bear a greater cost burden. The supercalendered segment has been one of the hardest hit of all paper grades with demand declining by 9% in Significant capacity shutdowns have managed to keep North American operating rates around 90%, maintaining market tightness, and further cuts should see prices keeping level at US$750/tonne. All paper grades will see support from a softening US dollar. Agriculture Crop prices remained in the dirt throughout 2017 AGRICULTURAL PRICES (Jan = 100) amid a fifth-straight bumper harvest in North America and 140 forecast generally supportive growing conditions the world over. In the Livestock United States, composite crop yields 1 are estimated to have been an 130 impressive 11% above trend in 2017, with farmers posting not only 120 the highest corn yield ever, but the second-highest soybean yield 110 (after the prior year s record) and the third-highest wheat yield. With total U.S. acreage relatively steady and production across the 100 rest of the world somewhat above trend, global crop markets 90 remain extremely well supplied. Demand, for its part, has been 80 relatively supportive given stronger global economic growth, rising Crops livestock and dairy production (a positive for feed demand), and 70 innovation on industrial crop uses. However, even sturdy demand 60 growth hasn t made a meaningful dent in today s towering stockpiles. Currently, the U.S. Department of Agriculture expects global wheat stocks to reach an all-time high relative to consumption at the end of the 2017/18 marketing year (i.e. just prior to the 2018 harvest), while corn and soybean stocks are expected to recede only modestly from recent highs. Of the four key North American crop products, only the canola market lies toward the tighter end of the spectrum, but prices have nevertheless remained depressed due to the weight of soybean abundance on oilseeds in general. Unfortunately for producers, the current glut of crops will likely take time to work down, even if brisk demand growth is sustained and global crop yields revert to trend. Crop prices are therefore expected to recover only gradually from current lows particularly in the oilseed space, where somewhat stronger returns relative to wheat and corn have led producers to rotate acreage toward soybeans. Canola prices are therefore expected to rise from an average of US$393/tonne in 2017 to just $405 in 2018 and $415 in 2019 (as a reference point, canola has averaged nearly $460 over the past decade). With U.S. wheat acreage now at its lowest in over a century, wheat prices should see a somewhat less lethargic upturn from an average of US$4.36/bushel in 2017 to $4.60 in 2018 and $5.10 in In the livestock space, hog prices posted a moderate recovery in 2017 after a supply-induced plunge to 14-year lows in late Although the upturn has left hog prices somewhat low by recent standards, producer margins are now estimated to be in line with longer-run norms thanks to the low feed price environment. However, firmer margins are motivating continued expansion, which is raising the risk of another leg down in pricing. Indeed, the U.S. pig crop (i.e. the number of new piglets bred) is rising rapidly and reached an all-time high in late 2017 despite the hog herd already being the largest since the 1940s (when animal weights were far lower). Even with 1 Composite yields are calculated by BMO Economics and include corn, soybeans, wheat, and canola.

6 Page 6 of 12 January 2018 rising net exports of pork, it does not appear that markets will be able to absorb the coming increase in supply, especially with other livestock segments also in expansion mode. As a result, CME hog prices are expected to lose ground over 2018 and average US$71/cwt during the year as a whole slightly higher than the average of $70 in 2017, but only due to a stronger starting point. Falling prices should prompt greater breeding restraint over the year, setting the stage for an increase to $73 in Cattle prices posted only a modest recovery in 2017 after collapsing in 2016 but in today s ultra-low feed cost environment, this has been enough to put estimated margins above historical norms. As a result, herd expansion continues apace, with the U.S. calf crop soaring through the first half of 2017 (the latest available data), though the pace likely slowed somewhat in the second half of the year, judging by the increase in the share of heifers heading to the slaughterhouse. As in the hog space, it is unlikely that markets will be able to digest much additional supply at current prices, despite favourable trends in trade. Cattle prices are therefore expected to ease from an average of US$118/cwt in 2017 to $115 in Given the segment s lengthy gestation and development cycle, prices are expected to remain in the $115 range through 2019 as animals bred today continue to make their way to market. In both the cattle and hog segments, the key risk to pricing is the possibility of a crop failure, which would launch feed costs skyward, shift livestock producers into herd reduction mode, and dramatically increase the supply of animals available for slaughter.

7 Page 7 of 12 January 2018 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 n.a. 479 n.a. n.a January February March April May June July August September October November December m-t-d January n.a. 479 n.a. n.a. Forecast 2018 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.

8 Page 8 of 12 January 2018 Base and Precious Metals Copper Aluminum Zinc Nickel Gold Silver US$/lb US$/oz y-t-d January February March April May June July August September October November December m-t-d January Forecast 2018 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.

9 Page 9 of 12 January 2018 Agriculture Wheat Canola Cattle Hogs US$/bushel US$/tonne US$/cwt y-t-d January February March April May June July August September October November December m-t-d January Forecast 2018 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.

10 Page 10 of 12 January 2018 Commodity Indices and Forecasts All Oil & Metals & Forest Agricultural All US$-terms : 2003 = 100 Commodities Gas Minerals Products Products Commodities Annual C$-terms Forecast Quarterly 2016 Q Q Q Q Q Q Q Forecast 2018 Q Q Q Monthly 2016 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Commodity price indices and forecasts are by BMO Capital Markets Economics. Forecasts are independent of those used by BMO Capital Markets Equity Research.

11 Page 11 of 12 January 2018 Historical Charts: All-Commodity Index Nominal US$-Terms (2003 = 100) Real US$-Terms (2003 = 100) Nominal (2003 = 100) US$-terms C$-terms

12 Page 12 of 12 January 2018 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. General Disclosure BMO Capital Markets is a trade name used by the BMO Financial Group for the wholesale banking businesses of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Limited and BMO Capital Markets Corp are affiliates. This document is issued and distributed in Hong Kong by Bank of Montreal ( BMO ). BMO is an authorized institution under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong) and a registered institution with the Securities and Futures Commission (CE No. AAK809) under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). BMO does not represent that this document may be lawfully distributed, or that any financial products may be lawfully offered or dealt with, in compliance with any regulatory requirements in other jurisdictions, or pursuant to an exemption available thereunder. 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