the upturn is getting clearer - desjardins.comjanuary 1, 2016 = 100 75 85 95 105 115 125 135 145...

COMMODITY TRENDS

François Dupuis, Vice-President and Chief Economist Mathieu D’Anjou, Senior Economist • Jimmy Jean, Senior Economist • Hendrix Vachon, Senior Economist

Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • [email protected] • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2017, Desjardins Group. All rights reserved.

CONTENTSEditorial ............................................................. 1Energy ............................................................... 2

Base Metals ....................................................... 4Precious Metals ................................................. 6

Other Commodities ........................................... 7Tables ................................................................ 8

After a disappointing first half of the year, we could feel the winds starting to change for commodities over the summer. At first, only metal prices capitalized on the genuine improvements to the global economic environment, while energy prices remained weak. Energy prices finally got swept up in the optimism during the fall (graph 1) and prices for Brent and WTI topped respectively US$60 and US$55 per barrel.

Geopolitical elements recently amplified the oil price recovery. Price hikes since last summer for industrial commodities have however mainly been driven by clear improvements to global economic conditions, pointing to vigorous demand for these resources. As several consumer and business confidence indexes (graph 2) are at peaks not seen in several years, the environment for commodities is likely to remain favourable in 2018. We must keep in mind, however, that another spike in prices could trigger a reaction from producers, especially in the case of oil. We thus prefer to call for recent gains to be consolidated in the short term, with modest price increases thereafter.

François Dupuis, Vice-President and Chief Economist

Mathieu D’Anjou, CFA, Senior Economist

The Upturn Is Getting Clearer

ECONOMIC STUDIES | NOVEMBER 16, 2017

GRAPH 1 Energy prices on the uptrend

Sources: Datastream and Desjardins, Economic Studies

Bloomberg Commodity Index and its component

January 1, 2016 = 100

758595

105115125135145

JANV. AVR. JUIL. OCT. JANV. AVR. JUIL. OCT.

Index Energy Industrial metals Precious metals Grains

2016 2017

GRAPH 2 Household and business confidence at a peak not seen in several years

OECD: Organisation for Economic Co-operation and Development; * Brazil, China, India, Indonesia, Russia and South Africa Sources: OCDE and Desjardins, Economic Studies

OECD member and the six main emerging countries*

Index

96,0

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2000 2002 2004 2006 2008 2010 2012 2014 2016

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ECONOMIC STUDIES

2NOVEMBER 2017 | COMMODITY TRENDS

OIL

WTI prices experienced another weak period at the end of August when several U.S. refineries shut their operations, creating concerns that demand for oil could wane temporarily. It quickly became clear however that the refineries would suffer limited damage and that the main impact of the hurricanes would be to speed up the draw-down of stocks of refined products in the United States. WTI prices recovered quickly, moving past US$50 a barrel in September. Good signs from the global economy, demand for oil and the widening view that the Organization of the Petroleum Exporting Countries (OPEC) remained determined to limit production gradually pushed WTI prices closer to US$55 a barrel by late October. Escalating tensions in the Middle East have driven prices for WTI to US$57 in the last few days, a peak not seen in more than two years (graph 3). Far from diminishing, the substantial price spread between Brent and WTI created in the hurricanes’ wake widened recently, as concerns over supply problems in the Middle East replaced worries about an oversupply of oil in the U.S., pushing prices for Brent to around US$65 a barrel. The recent jump in oil prices is keeping gasoline prices at relatively high levels, despite diminished concerns of hurricane-induced shortages (graph 4).

We will have to continue to closely monitor the situation in the Middle East. As it stands, the recent political purge in Saudi Arabia should not have a direct impact on the oil supply. This domestic situation has however also led Saudi Arabia—and Israel—to take a tougher stance against certain groups supported by Iran, such as Hezbollah in Lebanon, igniting concerns of new unrest. The collapse of the Islamic State (IS) has left a vacuum in the region. A referendum early last fall in support of Kurdistan’s independence was met with the Iraq army’s swift response to retake control of major oil fields. These latest events are clearly worrisome and they justify the sudden geopolitical premium slapped on oil prices. That said, keep in mind that the major conflict in Syria and the spectacular surge of IS in 2014 failed to stop advances in oil output, especially in Iraq (graph 5 on page 3). For the moment, our scenarios assume that recent events in the Middle East will not have any lasting effect on oil prices or supplies; however, they represent a major upside risk.

Beyond geopolitical issues, the news about oil’s global supply and demand is also encouraging. Efforts made by several oil-producing countries to rebalance the global oil market appear to be working—crude oil and petroleum product stocks in the United States declined sharply this past year (graph 6 on page 3). The drop in the number of oil drills in the U.S. in recent

EnergyStrong Economy and Geopolitical Strains Support Oil

FORECASTSStrains in the Middle East could potentially drive oil prices a bit higher in the short term. Barring a significant impact on supply in this region, it’s hard to imagine prices for West Texas Intermediate (WTI) moving past US$60 a barrel and staying there, however, as prices beyond this level would probably trigger a new surge of investment and production in the United States. Still, we have upgraded our oil forecasts a notch to reflect the improvements to the economic environment. The weather will dictate natural gas prices in the coming months; a moderate increase is expected for 2018 as a whole.

GRAPH 3 Oil prices on the upswing

WTI: West Texas Intermediate; WCS: Western Canada Select Sources: Datastream, Bloomberg and Desjardins, Economic Studies

Oil prices

US$/barrel

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2013 2014 2015 2016 2017

WTI Brent WCS

GRAPH 4 Rising crude oil prices limit drops in gasoline prices as the impacts of the hurricanes fade

*Average of Brent and West Texas Intermediate prices Sources: Datastream and Desjardins, Economic Studies

US$/barrel

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Crude oil prices* (left) Gas prices in the U.S. (right)

US$/gallon


ECONOMIC STUDIES

months (graph 7) also confirms that prices below US$50 a barrel were not enough to ensure the ongoing surge in U.S. production would continue. In addition to reflecting weak prices at the end of spring, the reduced drilling could also reflect a certain change of strategy in the shale oil industry, with investors putting greater pressure on companies to increase their profitability instead of maximizing production. The recent run-up in prices could make operating several fields more attractive, however, and trigger a new burst in drilling activity.

NATURAL GAS

After staying at relatively weak levels early this fall, natural gas prices started to climb in recent days to about US$3.20 per MMBTU (Million British Thermal Units) in the United States. This increase mainly reflects the recent cold spell in the northern half of the continent; this should boost demand for natural gas. With the restocking season about to end, stocks are slightly below their average for the last five years (graph 8). If the temperatures remain colder than normal, natural gas prices could spike temporarily. However, the outlook for a solid rise in U.S. natural gas output in 2018 leads us to continue to call for only a moderate price increases over the next year.

GRAPH 8 Unlike the last two years, natural gas inventories are not particularly high as winter nears

*From 2012 to 2016 Sources: Datastream and Desjardins, Economic Studies

In billions of cubic feet

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Average* Stocks

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GRAPH 7 The recent surge in oil prices should revive drilling

Sources: Baker Hughes, Energy Information Administration and Desjardins, Economic Studies

Millions of barrels/day

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Crude oil production (left) Active oil drills (right)

Impact of hurricanes

In number

United States

GRAPH 6 U.S. oil stocks continue to fall

Sources: Energy Information Administration and Desjardins, Economic Studies

In millions of barrels

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Commercial stocks (left) Commerical oil and petroleum product stocks

In millions of barrels

GRAPH 5 Iraqi output is up sharply in recent years, despite the major conflicts in this country

OPEP: Organization of the Petroleum Exporting Countries Sources: Bloomberg and Desjardins, Economic Studies


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OPEC output* (left) Iraqi output (right)


Crude oil output

ECONOMIC STUDIES


Many people were concerned that the sudden and spectacular price hikes for industrial metals at the end of the summer would be followed by a correction once speculators decided to cash in their gains. In the end, this fall has up to now been marked by the consolidation of the major gains made on the LME index of industrial metal prices, which stabilized at about 3200 (graph 9). This index still shows an impressive gain of about 23% since the beginning of 2017 and the four main metals that we track—aluminum, copper, nickel and zinc—all show similar advances. The acceleration in global industrial output and serious efforts by China’s government to curb pollution by limiting the production of certain metals is supporting this runup in metals prices (graph 10).

ALUMINIUM

The price of aluminum hovered at close to US$2,100 per tonne in recent months, consolidating gains of about 20% since the start of 2017 (graph 11). The outlooks on demand for aluminum remain favourable for next year, especially from the automobile industry. On the supply side, statistics confirm that the efforts made by China’s government to fight pollution are paying off, while in October China’s aluminum output declined to its lowest level since February 2016. All signs suggest that China’s producers will have to keep limiting their output in the

months ahead. The sharp downturn in aluminum inventories recorded on the LME recently reached their lowest levels since summer 2008, also suggests that prices for this metal are poised to remain high.

COPPER

Defying many skeptics, copper prices have continued to climb in recent months, moving above the level of US$7,000 per tonne a few times (graph 12). Negative sentiments toward copper early in the year were supported by the fact that surging copper production in 2016 fueled concerns that this metal market might be in a surplus situation in 2017. This did not materialize, as mining production is down this year, and the latest forecasts from the International Copper Study Group suggest that demand will outpace global production in 2017 and in 2018. Unlike other metals, increasing the supply of copper would be far more difficult, even if prices were to keep climbing. The number one global copper producer, Codelco in Chile, thus recently stated that persistent market deficits of this metal could push prices to test its historical peak of more than US$10, 000 per tonne.

Base MetalsIndustrial Metals Consolidate Their Gains

FORECASTSThe very upbeat economic outlooks for the global economy in 2018 point to sustained demand for base metals. In this context, we expect prices to continue their uptrend, and we have slightly upgraded our targets for the LME (London Metal Exchange) index of industrial metal prices. On the supply side, we will have to monitor if environmental efforts will continue to limit production in China and the response from other producers to higher prices.

GRAPH 10 The clear acceleration in industrial activity is excellent news for industrial metals

Sources: CPB - Netherlands Bureau for Economic Policy Analysis and Desjardins, Economic Studies

Volume of global industrial output

Annual variation in %

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2012 2013 2014 2015 2016 2017

GRAPH 9 Prices for industrial metals remain high

LMEX: London Metal Exchange base metal price index Sources: Datastream and Desjardins, Economic Studies

Index

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2013 2014 2015 2016 2017

LMEX 200-day average


ECONOMIC STUDIES

NICKEL

More positive sentiments towards base metals are also making nickel shine, with prices nearing US$13,000 per tonne recently, before slipping slightly (graph 13). While weak prices and restrictions in certain countries have curbed nickel production, the more favourable economic outlooks are driving up demand for nickel. Increased activity among China’s stainless-steel producers has been positive for nickel. What’s more, the growing popularity of electric vehicles could translate to a significative increase in demand for nickel, which is used to produce batteries, in the medium and long term.

ZINC

Not content with consolidating its major gains, zinc prices have gone up a little since August, moving just above US$3,200 per tonne (graph 14). The persistent deficit on the global zinc market supports the rise in zinc prices, while inventories recorded on the LME are diminishing. Environmental restrictions in China could maintain a deficit in the short term, but sooner or later, the spectacular surge in prices should trigger a response on the supply side and rebalance the zinc market.

GRAPH 14 Zinc prices and stocks


US$/tonne

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1 2501 5001 7502 0002 2502 5002 7503 0003 2503 500

2013 2014 2015 2016 2017

Price (left) Stocks (right)

In thousands of tonnes

GRAPH 13 Nickel prices and stocks


US$/tonne

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GRAPH 12 Copper prices and stocks


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2013 2014 2015 2016 2017



GRAPH 11 Aluminum prices and stocks


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ECONOMIC STUDIES


PLATINUM & PALLADIUM

After rising above US$1,000 an ounce at the beginning of September, platinum prices were sideswiped by the same factors that weighed down gold and silver prices, with prices falling back to about US$930 an ounce. Nonetheless, the tight balance between supply and demand for platinum helps us stay fairly upbeat about platinum prices. Palladium prices continued to surge, recently moving above US$1,000 an ounce for the first time in 16 years, blasting past platinum prices. Strong demand tied to the production of gas-powered vehicles and a very limited supply are behind this surge in palladium prices.

GOLD & SILVER

The last few months have not been as good for precious metals prices, with prices for gold, silver and platinum declining by a few percentage points since the end of August. It’s not surprising that rosier outlooks for the global economy and the waning of some geopolitical concerns, especially about Korea, are dimming the attraction of precious metals as a safe haven. After edging close to US$1,350 an ounce in early September, gold prices tumbled recently to about US$1,275 an ounce (graph 15). At the end of the summer, many investors believed that hurricanes and weak inflation would prompt the Federal Reserve (Fed) to put the brakes on monetary firming; the Fed has instead made clear in recent months that it intends to pursue its monetary firming. Not only did it confirm in September that it would start reducing its bond holdings, but 12 of the 16 leaders signalled that an additional key rate increase by the end of 2017 would be appropriate (graph 16). The comment in the October statement that growth in the U.S. had been solid despite the hurricanes was another signal that additional key rate increases were in store. The bond market’s resilience has up to now limited the damage for precious metals, but in our opinion, the uptrend for bond yields and the U.S. dollar should soon become clearer.

Precious MetalsGold Remains Sensitive to Interest Rate Movements

FORECASTSOur expectations for a gradual increase in U.S. key rates, and for bond yields and the greenback to post a clearer uptrend in the next few quarters, suggest that recent pullbacks in gold and silver prices could continue. We are maintaining our targets for gold prices of US$1,200 and US$1,100 an ounce at the end of 2017 and 2018. Prices for platinum and palladium should do better, given the fairly tight balance between global supply and demand for both of these metals.

GRAPH 16 Twelve of 16 Federal Reserve leaders say another key rate increase should be ordered before the end of the year

Sources: Federal Reserve and Desjardins, Economic Studies

Suitable federal funds rate increase by the end of 2017

Number of leaders

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GRAPH 15 Gold and silver prices


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Gold (left) Silver (right)

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ECONOMIC STUDIES

FOREST PRODUCTS

Prices for forest products have increased since August, reaching peaks not seen in several years (graph 17). The expiry of countervailing duties and some encouraging signs from the negotiations to settle the softwood dispute pulled down lumber prices to about US$400/mbf at the beginning of September. This downtrend did not last, however; it quickly became clear that the reconstruction after the major hurricanes that hit the United States would support demand for lumber in the coming quarters while the unprecedented forest fires in British Columbia would restrict supply. The favourable economic outlook is also encouragin for forest product demand. Hopes of quickly resolving the softwood dispute swiftly disappeared as the negotiations to renew the North American Free Trade Agreement took a worrisome turn. In this environment, we must anticipate that Canadian exports will have to deal with tariffs for an extended period. Regarding these tariffs, in early November, the U.S. Department of Commerce announced that they would be slightly less than initially estimated, but that tariffs in the area of 20% would be imposed on most producers. As such, prices for forest products should remain high in the next few quarters.

AGRICULTURAL COMMODITIES

Wheat and soybean prices have edged up somewhat since the end of August while corn prices are almost unchanged. Recent upgrades to worldwide corn production and inventories as set out in the most recent projections of the U.S. Department of Agriculture could explain this underperformance. Overall, prices for the main cereals are still weak, very close to the levels seen a year ago (graph 18). The relative calm on the grains market reflects the fact that global harvests were strong again this year, without being extraordinary, keeping inventories at comfortable levels (graph 19). It looks like prices for the main grains will remain relatively stable in the next few months, unless temperatures severely impact the harvests in the southern hemisphere.

Other CommoditiesLumber Prices Set To Remain High

GRAPH 19 Grain stocks remain high, especially for wheat and soybeans

Sources: U.S. Department of Agriculture and Desjardins, Economic Studies

Global grain stocks

Days of consumption

40

60

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Wheat Corn Soybeans

GRAPH 17 Forestry product prices

tbf: thousand board feet Sources: Datastream and Desjardins, Economic Studies

$ US/tbf

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Lumber (left) Pulp & paper (right)

US$/tonne

GRAPH 18 Grain prices


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Wheat (left)

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ECONOMIC STUDIES


SPOT PRICE

Nov. 16 -1 month -3 months -6 months -1 year Higher Average Lower

IndexReuter-CRB (CCI ) 418.5 1.0 5.8 2.1 1.3 433.7 413.9 385.8Reuters/Jefferies CRB 188.6 2.2 7.6 3.6 3.5 195.1 184.3 166.5Bloomberg Commodity Index 86.0 0.0 4.1 3.0 3.9 89.4 85.0 79.4Bank of Canada 432.0 3.4 5.3 8.3 21.0 432.0 405.1 356.9

EnergyBrent oil (US$/barrel) 62.0 7.2 21.9 19.4 32.1 64.2 53.4 45.5WTI oil (US$/barrel) 55.3 6.6 18.1 13.7 21.3 57.3 49.9 42.5Gasoline (US$/gallon) 2.59 4.1 8.7 9.4 18.7 2.69 2.38 2.15Natural gas (US$/MMBTU) 3.11 8.4 7.6 -3.7 22.9 3.76 3.02 2.34

Base metalsLMEX 3,204 -3.7 2.3 17.3 20.8 3,326 2,907 2,635Aluminium (US$/tonne) 2,087 -1.1 -0.6 8.6 22.1 2,176 1,923 1,693Copper (US$/tonne) 6,736 -5.4 3.7 20.4 24.2 7,122 6,021 5,412Nickel (US$/tonne) 11,634 -1.5 8.7 28.3 3.1 12,870 10,358 8,736Zinc (US$/tonne) 3,193 -1.1 2.8 26.1 27.4 3,365 2,821 2,429

Precious metalsGold (US$/ounce) 1,279 -1.9 0.3 3.3 4.3 1,347 1,245 1,127Silver (US$/ounce) 17.1 -1.7 2.6 2.4 1.0 18.6 17.0 15.2Platinum (US$/ounce) 937 -0.8 -2.7 -0.2 0.0 1,033 948 891Palladium (US$/ounce) 981 -2.5 9.5 22.0 37.0 1,016 832 655

Other commoditiesLumber (US$/tbf) 436 -0.9 3.1 3.8 26.7 440 401 344Pulp (US$/tonne) 1,160 2.7 5.5 7.4 16.6 1,160 1,065 990Wheat (US$/bushel) 4.31 1.7 3.4 5.1 7.7 5.64 4.31 3.77Corn (US$/bushel) 3.10 -1.9 -5.2 -10.1 -3.1 3.69 3.36 3.06Soybean (US$/bushel) 9.27 -2.2 3.2 -1.4 -3.2 10.45 9.52 8.78

CRB: Commodity Research Bureau; CCI: Continuous Commodity Index; WTI: West Texas Intermediate; MMBTU: Million British Thermal Unit;LMEX: London Metal Exchange Index; tbf: thousand of board feetNOTE: Currency table base on previous day closure.

TABLE 1Commodities

VARIATION (%) LAST 52 WEEKS

2015 2016 2017f 2018f

Target: 51 Target: 55(range: 50 to 52) (range: 48 to 62)

Target: 3.00 Target: 3.30(range: 2.90 to 3.10) (range: 2.60 to 4.00)

Target: 1,250 Target: 1,150(range: 1,240 to 1,265) (range: 1,050 to 1,300)

Target: 2,970 Target: 3,400(range: 2,940 to 2,990) (range: 2,800 to 3,900)

LMEX index—base metals 2,550 2,377

f: forecasts; WTI : West Texas Intermediate; MMBTU : Million British Thermal Unit; LMEX : London Metal Exchange IndexSources: Datastream and Desjardins, Economic Studies

Natural gas Henry Hub(US$/MMBTU)

2.61 2.49

Gold (US$/ounce) 1,160 1,249

TABLE 2Commodities prices: History and forecasts

ANNUAL AVERAGE

WTI oil (US$/barrel) 49 43

the upturn is getting clearer - desjardins.comjanuary 1, 2016 = 100 75 85 95 105 115 125 135 145...

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