Scotiabank’s Commodity Price Index climbed by 3.1% in August, after edging down 0.4% in July. The rally reflected three supply-side developments including: the strength of global oil markets; a recovery in U.S. housing; and historically high grain and oilseed prices.
Oil & Gas led the index higher (+11.2%).
In contrast, the Metal & Mineral Index lost further ground in August (-2.4%), as weaker base metal, iron ore and uranium prices countered stronger gold.
In fact, after languishing for most of 2012, gold prices (London PM Fix) rose from US$1,594 per ounce in July to US$1,626 in August, and to a six-month high of US$1,784.50 on September 21.
Read: How to read the commodities market
Scotiabank’s report highlights that countries are trying to devalue their currencies in the aftermath of the Fed and ECB monetary policy initiatives. Japan, Turkey and Brazil have been injecting liquidity into financial markets to push down rates and prevent appreciation. These developments all bode well for gold—a major export from Canada. High gold and silver prices benefit most base metal producers, with high by-product credits from precious metals offsetting rapid operating cost inflation.
Meanwhile, the report notes substantial sawmill closures in Canada and the U.S. since 2007—combined with fewer logging contractors, trades people and truckers in the building materials industry—will create challenges in meeting higher demand. While lumber mills will be able to increase shifts across North America in 2013, higher prices will be required to cause even greater output. Considerable price volatility is expected next year.
Read: An in-depth look at commodity ETFs
B.C. and Alberta lumber sales in China have contributed to tighter North American supply and demand. Canadian softwood lumber exports to China rose by 4.7% in 2012. But deliveries trailed year-earlier levels in May and June, and decelerated from the scorching 63% gain of 2011.
Canadian mills have recently re-focused on the U.S. market amid softer economic conditions in China. With China’s private-sector construction activity expected to rebound in 2013, Scotiabank expects sales to this market to pick up again.
Read: Wealthy clients want commodities, real estate
China was the destination for 22.3% of Canadian softwood lumber shipments in 2012. For Western Canada alone, China accounted for 28% of shipments.