Commodity prices expected to rise gradually: economist

Although global growth is slowing, the outlook for commodities demand hasn’t flatlined, Dina Ignjatovic told the crowd at the 2016 CanaData East conference held in Toronto recently.

"Commodity prices are at or near a bottom and they will gradually trend up," said Ignjatovic, a TD economist, adding the long-term outlook for demand is bright.

"The outlook is not dismal. We do expect the long-term prices to trend up but perhaps not as high as we have seen in the past. It will be relatively subdued."

According to Ignjatovic, low commodity prices are beneficial for the construction industry.

"The fact that the prices are lower is probably a good thing for construction companies and they’re probably very happy that they’re going to stay this low," she told the Daily Commercial News in an interview following her Sept. 22 presentation.

Commodities tend to follow global growth, which has been slowing over the past few years since the recession.

"As economists we like to talk about potential growth and really what it means is it’s the natural, long-term cruising speed of commodities," explained Ignjatovic. "Going forward we do expect global growth to naturally trend down and be at a slower speed than we saw before. This is happening in the advanced economies as well as the emerging markets."

China is very important for commodities, she added. It’s the largest consumer of several commodities and accounts for a lot of the growth in demand. Despite the anticipated slow growth, commodity demand in China is still expected to rise, because of its size.

"Just pure arithmetic will tell you that it’s been growing at a double-digit pace for so many years (prior to the recession) that even if we see a slowdown in commodity demand growth in level terms, there is still going to be an increase in demand for several commodities for the next decade," said Ignjatovic.

Oil has seen the biggest change over the last two years. Global oil inventories are at record levels, she noted.

"The reason why oil prices change so much is the fact that supply was outpacing demand for so long and has left a huge glut in the market," explained Ignjatovic. "Inventory this year is well above last year or even the five-year average and it’s going to take a long, long time for those inventories to be worked down. This is really going to keep a lid on prices."

Overall, Ignjatovic said the oil market is expected to be in a more balanced position by the middle of next year.

"And when I say balanced, I mean supply growing more in line with demand," Ignjatovic commented, adding they expect to see a gradual rise in oil prices to the mid-$50 range by next year.

Oil production is expected to rise in Alberta as two oilsands projects are under construction. One is expected to be completed later this year and the other in 2017.

"Production is pretty much back to normal," said Ignjatovic. "There was one company that did not restart production, but on the whole we do expect to see an increase in oilsands production going forward."

When asked about mining in Ontario and the Ring of Fire, Ignjatovic said it could be beneficial to the economy in the future. The Ring of Fire, located 500 kilometres northeast of Thunder Bay, Ont. has a mineral potential said to be worth $60 billion and includes the largest deposit of chromite ever discovered in North America.

"I think we’re a long way out from having mass production right now but in the future, if it does get developed, it could be a boost to the Ontario economy and for Canada. Right now I think it’s too much in the early stages."

When it comes to lumber, prices tend to follow the U.S. housing market, Ignjatovic stated.

"We have seen uptakes since the housing market started to recover from the crash," she said. "The one thing I would say for the lumber market is yes, U.S. demand will continue to support demand in prices but the Softwood Lumber Agreement between Canada and the U.S expires in October."

The countries have yet to reach an agreement on a new one, she added.

"The U.S. is playing hardball," Ignjatovic said. "They are not willing to give into anything and they’re trying to up protection for their country and Canada is saying they’re not going to make a deal just for the sake of making a deal. They want it to be a good deal that actually does something for Canada."

Worst case scenario, the agreement expires  and the U.S. implements tariffs on Canadian lumber exports to the U.S., Ignjatovic explained.

"Canada has said they would fight these tariffs and they have done so in the past," said Ignjatovic. "They have taken similar things to the WTO (World Trade Organization) and won. The problem is WTO files can take years to actually come out with the results."