Methanex Corp T.MX

TD Notes

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Canadian Small-cap Model Portfolio Commodity Watch

Several commodities came under pressure last week with the rising spread of the Delta variant underscoring concerns about global economic growth, particularly in China, in our view. We believe that the recent relative decline in the Canadian dollar and Australian dollar is also not supportive of higher commodity prices (Exhibit 1).

• Base metal prices were broadly lower last week with copper (-2.7%), zinc (-1.8%), and nickel (-1.8%) all declining. A slowing Chinese economy, confirmed by the decline in the 10-year bond yield, could pull base metal prices lower, in our view (Exhibit 2).

• Energy futures plunged last week. Weakness within the sector was widespread with sharp declines in WTI oil (-7.7%) and Brent (-7.4%), along with Canadian heavy oil (-8.2%) and syncrude (-11.1%). Although total crude & petroleum and gasoline inventories declined last week, rising COVID-19 restrictions have weighed on expected global energy demand. Natural gas (+5.8%) and propane (+2.5%) were positive outliers.

• Methanol prices climbed to a 52-week high last week (Exhibit 3). We believe that rising methanol prices could pull Methanex Corp. (MX-T, portfolio weight 3.0%) higher. Further supporting MX are the positive revisions to consensus earnings following Q2/F21 results late last month (Exhibit 4). MX's 2021 consensus earnings estimate increased to US$4.26 from US$3.40 (+25%) and its 2022 consensus earnings estimate increased to US$2.28 from US$1.91 (+19%).

• Gold was lower last week (-2.9%) following a better-than-expected U.S. nonfarm payrolls report on Friday. With expectations rising that the Fed may reduce its monetary stimulus, small cap gold stocks have underperformed gold bullion and large caps. We are underweight gold (Exhibit 5).

• The relative strength we had witnessed in silver over gold through the pandemic has reversed. Silver declined 4.8% last week and has declined 11.5% over the past three months versus declines of 2.9% and 3.9%, respectively, for gold (Exhibit 6).