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Commodity price outlook mixed for coming year

Copper, coal should have price hikes, but forest products, natural gas likely won't do as well

BY SCOTT SIMPSON, VANCOUVER SUNDECEMBER 25, 2009


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Forecast: Copper, coal should have price hikes, but forest products, natural gas likely won't do as well.
Photograph by: Sue Ogrocki, Reuters
Prices should be strong in 2010 for copper and coal, two of British Columbia’s top commodity exports, according to a new report from Scotiabank economist Patricia Mohr.
Steelmaking coal, for which B.C. is one of the world’s top exporters, is Mohr’s pick as top-performing commodity in 2010, with a projected 32-per-cent price hike next year.
Copper prices are expected to remain high for at least the first half of 2010 — the average global profit margin for copper producers in 2009 is 59 per cent — and should be strong for at least five years, according to the December edition of Mohr’s Scotiabank commodity price index. Both projections favour Vancouver’s Teck Mining, which is Canada’s top exporter of both steelmaking coal and copper — as well as smaller operators around B.C.
However, the outlook is not as good for two other commodities that are central to the B.C. economy — forest products and natural gas. Mohr said in an interview she expects modest improvement in lumber prices with marginal recovery of the U.S. new housing market.
Natural gas prices, meanwhile, will continue to be constrained as a result of production innovations in the United States.
Overall, Mohr says commodity prices have recovered at an “extraordinary” pace from the global economic recession of 2008, thanks to largely to a robust Chinese economy.
Lead prices jumped 146 per cent in the 12-month period from December 2008 to 2009, followed by copper (126 per cent), zinc (116 per cent), nickel (78 per cent) and crude oil (75 per cent).
“Despite a deep global recession in early 2009, China’s imports of many key base metals and iron ore quickly moved to record highs, reflecting strategic stockpiling by China’s state reserve bureau at bargain prices and then re-stocking by manufacturers.”
Mohr notes that in January 2009, China’s industrial activity advanced 3.8 per cent compared to the same period a year earlier, but jumped 19 per cent year to year in November.
She expects continued interest by investors in commodities as an asset class, including a speculative interest by hedge funds.
Fixed-price one-year contracts for highest quality coking coal, one of the port of Vancouver’s principal exports, are still being negotiated, but Mohr notes that spot prices out of Australia have jumped to about $170 US per metric tonne compared to an average $129 for the current coal year ending March 31, 2010. “Last year’s firm contract price for hard coking coal out of southeast B.C. was $128 per tonne” for delivery to Vancouver, Mohr said in a phone interview from Toronto.
Mohr said one of the reasons for stronger than anticipated prices is that Australia, the world’s number one exporter of steelmaking coal, has persistent infrastructure bottlenecks, including railways and deep sea ports that operate at capacity.
North American natural gas spot prices have more than doubled this year, but Mohr said the long-term trend is for lower prices compared to three years ago “because of the new natural gas shale and tight sands developments in the U.S.”
“These new unconventional sources of natural gas have totally changed the economics of the natural gas industry in the past year and a half. “
Natural gas, the biggest source of commodity royalty revenue for the B.C. government, fell to a low of $2.51 per unit on the New York Mercantile Exchange (NYMEX) in early September before bouncing up to $5.83.
“I think the prices could rebound with some recovery of some [U.S.] industrial activity and industrial demand for gas into the first half of 2010. But once you get over $6 or $6.50, the shale developments are extremely lucrative and I think what will happen is that you will have a flood of new development and it will knock the price back again.”
Lumber producers need to make about $215 US per thousand board feet to cover average cash costs and Mohr noted that for most of 2009, prices were actually below cash costs
“I think in 2010, prices will move up to average mill cash costs. There may be certain times of the year when prices move to genuinely profitable levels.”