TORONTO – Scotiabank Economics has finished making its list and checking it twice to find out which commodities have been naughty and nice. Cobalt, palladium and lumber were at the top of the ‘nice’ list for 2017, while natural gas, Canadian heavy oil, and iron ore topped the ‘naughty’ list.
Cobalt rode the feverish buzz around electric vehicles (EVs) and growing concerns about future supply availability to take the top spot among commodities in 2017. Its value has more than doubled over the past year to more than per pound, which can be attributed to positive sentiment, strong demand prospects and inelastic, unresponsive supply.
On the demand side, the world is increasingly running on battery power and cobalt is a core feedstock for most battery chemistries. The present excitement about electric vehicles is the perfect driver of a bull market for cobalt.
The story for palladium is similar to that of cobalt, with steadily rising demand meeting a supply situation constrained by a by-product status and driven by the investment cycle of other metals.
While cobalt is catching a bid on rising EV prospects, palladium demand is driven by classic internal combustion engines, with autocatalyst end uses accounting for roughly 80% of palladium consumption.
Record global auto sales and increasingly stringent environmental regulations—which increase the volume of catalyst required per vehicle—has kept palladium demand growing at a healthy pace.
“Despite being top performers in 2017, both cobalt and palladium suffer from their by-product status, with supply driven by what’s happening in bigger markets,” said Rory Johnston, Commodity Economist at Scotiabank. “High cobalt prices aren’t going to bring more cobalt to the market, but higher copper and nickel prices likely will, while palladium supply will be kept in check by weak platinum and nickel prices.”
Lumber rounded out the top three commodity performers of the year. Prices soared 36 per cent year-to-date to /mmbf, as continued growth in housing sector demand ran up against a supply curve that has been made pricier by the latest flare-up in the decades-long softwood trade dispute between Ottawa and Washington. Further supply tightness was caused by the worst wildfire season on record in British Columbia.
North American natural gas was the worst performer within the commodities complex in 2017, as warmer winter weather suppressed heating demand and failed to tighten a market overwhelmed by robust US supply growth; benchmark Henry Hub prices are down 27 per cent year-to-date. This price pain was amplified for Western Canadian gas, with AECO prices down 44 per cent.
While global crude oil markets have strengthened this year on strong demand growth and OPEC+ supply restraint, Canadian heavy oil (Western Canadian Select, or WCS) has weakened, both in absolute terms (down 14 per cent YTD) and in terms of its discount to WTI (from to /bbl).
The widening of the WCS-WTI differential was an anticipated development as growing Canadian crude production was expected to overwhelm pipeline takeaway capacity over the next two years, but the November spill and subsequent two-week outage of the Keystone pipeline accelerated this dynamic.
Iron ore has also missed out on the rally enjoyed by the base metals as flattening seaborne demand ran up against a supply-side coming off a multi-year investment cycle. With demand flat, lower prices were needed to balance the market by flushing out higher cost, lower efficiency producers, particularly in China.
The Scotia Commodity Price Index values for November:
- All commodity: +3.6 per cent m/m
- Oil & Gas: +6.9 per cent m/m
- Metal & Mineral: +1.8 per cent m/m
- Agriculture: +2.7 per cent m/m
- Forest Products: +2.4 per cent m/m
