Scotiabank Calls for Higher Commodity Prices

A recent Scotiabank commodity report suggests a weakening US dollar will continue to drive up commodity prices. In addition, the report states oil prices will reach $90/barrel and though the index declined by 1.8% from August to September, the bank concludes the index will increase due to oil, a lift in natural gas prices and a weak US dollar. And though we can’t argue with those findings, a few notes from the report make for perhaps a different point of view. Consider the following:

• Nymex natural gas prices rebounded $5 per mmbtu because “traders likely recognize that recent levels were unsustainably low and are anticipating some recovery in US industrial demand in industries such as steelmaking and chemicals.” (We can’t argue that recent natural gas prices appear unsustainably low but recovery in steelmaking? Just check with the steel producers on that one)
• It’s true to say that oil prices saw a boost due to a weak US dollar but the bank also believes US corporate earnings “reflect the beginning of an economic recovery.” The report notes that of 196 companies reporting earnings, 157 posted “better-than-expected earnings.” Okay, but remember, these companies report earnings against drastically reduced expectations. We believe aggressive cost cutting and improved working capital management form the basis of companies meeting expectations, not an uptick in demand
• Finally, the report says, “A weak U.S. dollar contributed to a surge in base metal prices on October 22-23, with copper climbing to a very lucrative US$3.01 and zinc to US$1.03 per pound, despite some moderation in China’s imports in recent months.” The report also discusses GDP growth in China moving from 7.9% in Q2 to 8.9% in Q3. But we fail to see the correlation between copper imports and growth.

The same company who authored the commodity report also suggested earlier this year that everyone, including pig farmers, had gotten in on the act of buying into base metals for speculative purposes and would sell once market sentiment turns (this article appeared on Bloomberg on August 18 of this year).  Based on a story we covered recently on the Chinese government promoting the sale of gold and silver to its citizens, we don’t doubt for a minute that both housewives and pig farmers got in on rising commodity markets. I don’t know about you but something about cheap loans, frothy real estate markets and commodity speculation makes me a little suspicious. I’m having a hard time thinking this is sustainable growth in China. What do you think?

–Lisa Reisman