TORONTO, Ont.– The Scotiabank Commodity Price Index is likely to finish the year up 25%, with all sub-indices showing positive performance. The Oil & Gas index rose 55% year-to-November after both oil and natural gas reached cycle-lows in the first quarter of the year, while the Metals & Minerals index was up 27% on coal and zinc strength, Scotiabank announced.
“It’s a reasonably happy holiday season for commodity producers after one of their toughest collective years on record,” said Rory Johnston, Commodity Economist at Scotiabank. “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.”
The rapid run-up in the prices of bulk commodities, most notably metallurgical coal, was the biggest commodity surprise of 2016. Prices were boosted by a “perfect storm” of supply disruptions together with stronger demand on the back of Beijing’s stimulus push, stoked higher still by bullish speculation concentrated on Chinese exchanges.
Zinc: Acute supply reductions have and will support prices higher – Zinc prices began 2016 at $0.70/lb and rose pretty consistently 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.
Natural Gas: Prices heating up as temperatures fall – Natural gas prices had been weighed down to a 23-year low in early March by a substantial inventory overhand 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.
Interest rates trump uncertainty by year-end – 2016 was supposed to be gold’s year. Instead, gold is collapsing as inflation and resulting interest rate expectations rise on the back of pledges by the Trump campaign to cut taxes and spend US$1 trillion on American infrastructure.
The aluminium industry remains in a state of chronic overcapacity, with subsidized Chinese smelters distorting any disincentive function that low prices would typically provide, said the Scotiabank report.
Despite its recent rally, copper remains weighed down by supply. Copper has experienced a funny year, which saw the red metal looking like a sure bet for worst performer during the first 9 months of 2016 before a surprise rally lifted prices by nearly 30% YTD. However, copper’s fundamentals point to a 2-3 year period of surplus supply, and prices have already begun to recede.