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Scotiabank Commodity Index set to end 2016 on high note

The surprise rally of bulk commodities, especially metallurgical coal, has lost some momentum in the final weeks of 2016

The surprise rally of bulk commodities, especially metallurgical coal, has lost some momentum in the final weeks of 2016

Photo by Bloomberg

21st December 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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VANCOUVER (miningweekly.com) – The Bank of Nova Scotia expects its benchmark Scotiabank Commodity Price Index to finish the year up 25%, with all sub-indices showing positive performance, the third largest Canadian banking group said Tuesday.

The oil and gas index rose 55% in the year to November after both oil and natural gas reached cycle-lows in the first quarter of the year, while the metals and minerals index rallied convincingly, up 27% on coal and zinc strength.

"It's a reasonably happy holiday season for commodity producers after one of their toughest collective years on record. We expect oil, natural gas, zinc, nickel and gold to gain ground in 2017, while copper, aluminium, coal and iron-ore prices are expected to slide back from currently-inflated levels,” Scotiabank commodity economist Rory Johnston stated.

Scotiabank singled out bulk commodities, zinc and natural gas as the top performers this year, despite some losing steam towards the end of the year.

According to the analyst, the surprise rally of bulk commodities, especially metallurgical coal, has lost some momentum in the final weeks of 2016. The rapid run-up in the prices of bulk commodities was the biggest commodity surprise of 2016. Prices were boosted by a “perfect storm” of supply disruptions, coupled with stronger demand on the back of Beijing's stimulus push, and stoked higher still by bullish speculation concentrated on Chinese exchanges.

Metallurgical coal, used primarily in the production of steel, led the bulks group upwards, rising 295% from $78/t on January 1, to $309/t by November 11, according to Scotiabank.

Zinc saw acute supply reductions that have supported, and will continue to support prices higher. Zinc prices started the year at $0.70/lb and rose steadily through the year, reaching a year-to-date high of $1.32/lb in early December. “Zinc's rise was a supply story through and through in an industry that hasn't seemed able to reduce production despite a persistent low-price environment,” Johnston noted.

Meanwhile, natural gas prices are heating up as temperatures fall in North America. Natural gas prices were weighed down to a 23-year low in early March by a substantial inventory overhang that had accumulated over the warmest winter in 121 years. The combination of higher structural demand and cooler temperatures has worked inventories back down to more typical levels and prices have recovered.

Conversely, Scotiabank fingered gold, aluminium and copper as the underperformers of 2016.

Despite a strong rally over most of the year, interest rates trumped uncertainty by year-end, resulting in gold collapsing as inflation and resulting interest rate expectations rose on the back of pledges by president-elect Donald Trump’s campaign to cut taxes and spend $1-trillion on American infrastructure. 2016 was supposed to be gold’s year. A string of referenda and election surprises, from the UK’s Brexit vote to the election of Trump, ran counter to polling projections and consensus expectations.

“These sudden jolts could reasonably have been expected to inflame uncertainty, increase investor risk aversion, and send the prices of safe-haven assets like gold soaring. Indeed, many observers were calling for gold to reach $1 500/oz should these binary events go against consensus,” Johnston said, adding that while the market is currently focused on Fed policy, 2017 is likely to bring political uncertainty back to the fore with a variety of European referenda and elections scheduled to take place over the coming 12 months.

Meanwhile, Scotiabank advised that aluminium is unlikely to escape chronic overcapacity any time soon and fundamental prospects are not promising, However, aluminium still managed to gain more ground than expected in 2016 after benefiting from optimism toward the base metals space that emerged in the fourth quarter. Nevertheless, the aluminium industry remains in a state of chronic overcapacity, with subsidised Chinese smelters distorting any disincentive function that low prices would typically provide.

Despite its recent rally, copper remains weighed down by supply, Scotiabank warned. The red metal has experienced a peculiar year, which saw it looking like a sure bet for worst performer during the first nine months of 2016, before a surprise rally lifted prices by nearly 30% year-to-date. However, copper's fundamentals point to a two-to-three-year period of surplus supply, and prices have already started to pull back, Scotiabank said.

Edited by Creamer Media Reporter

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