Global Economic Research March 28, 2011

Scotiabank
Patricia Mohr (416) 866-4210
Commodity Price Index
pat_mohr@scotiacapital.com

Scotiabank’s Commodity Price Index Climbs Further in February

• The Impact on Global Energy Markets of Japan’s nuclear incident.

• Kitimat LNG — offering an outlet to high-value Asian markets — boosts price outlook for B.C. and
Alberta natural gas (Horn River & the Montney).
• B.C. forest products mills gear up for re-construction in Japan.

S cotiabank’s Commodity Price Index rose by 1.1% m/m in

February — the eighth consecutive monthly gain — to a level
49% above the April 2009 cyclical low. While the tragic March 11
140
130
Uranium Prices Retreat On Japan
Fallout, Then Partially Recover
US$ per pound
140
130
Pea k US$136
earthquake and tsunami in Japan took a toll on some commodity 120 Ma rch 2011 120
110 110
prices in mid-March, the negative fallout is likely to prove Spot: US$60
LT contra ct: US$73
100 100
temporary, with Japan quickly gearing up its economy again. 90 Russian HEU Agree ment 90
LME copper prices declined for several days, but have quickly 80 Ca nce lled Options 80
rebounded above pre-earthquake levels (a lucrative US$4.41 per pound 70 70
60 US$43.40 Three Mile Island 60
in late March, yielding a 70% profit margin for mining companies). 50 Pe a k 50
Re-construction in Japan will boost demand and prices for 40 Arab Oil Low
40
lumber, OSB and plywood (especially from Canada’s West Coast), 30 Emba rgo US$7.10 in 30
20 De c. 2000 Fukushima - 20
steel and base metals over the next six-to-twelve months. 10 Nucle ar Da iichi 10
Disarmame nt incide nt
A surge in the Agricultural Index (up 4.3% m/m) led the All 0 0
72 76 80 84 88 92 96 00 04 08 12
Items Index higher in February. Wheat prices, which have lagged feed
grain & oilseed prices, were particularly strong; the Canadian Wheat
High LNG Prices In Japan & Asia
Board’s asking export price for No.1 grade milling wheat is up 68.4% Favour Kitimat LNG
yr/yr. Cattle and hog prices also jumped higher alongside herd 20
US$ per mmbtu
20

reduction across Canada and the United States and rising feed grain *Avg LNG import LNG Prices
price into Japan
prices. The Agricultural Index has now posted the strongest yr/yr in Japan*
15 15
advance of any sub-component — up 41.8%.
+
Metals & Minerals continued to climb in February (up 3.4% m/m).
10 10
Broad-based strength in base metals, a rebound in precious metals —
linked to growing political upheaval in North Africa and parts of the
Middle East — and strength in fertilizers propelled the Metal & Mineral 5 5
Index to its highest level since August 2008 (at the cusp of the ‘Great NYMEX
Recession’). Spot potash prices (FOB Vancouver) moved moderately Natural Gas

higher to US$392.50 per tonne and will advance by another US$80 in 0

98 00 02 04 06 08 10 12
0

overseas markets by mid-2011, lifted by near-record world food prices, + LNG long-term contract price into Japan: Jan 2011
spurring strong fertilizer application. US$11.48 per mmbtu; March over US$12.

In February, the Oil & Gas Index posted another surprising, but likely temporary, decline (-1.9% m/m).
While light crude oil prices advanced in Edmonton to US$85, Bow River heavy at Hardisty, Alberta fell sharply
to only US$64 — hurt by seasonally weak demand for asphalt, apportionment on the Enbridge pipeline system
due to repairs and reliance largely on one export market. However, WTI oil prices — spiking from US$89.74 in

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This Report is prepared by Scotia Economics as a resource for the
clients of Scotiabank and Scotia Capital. While the information is from
sources believed reliable, neither the information nor the forecast shall
be taken as a representation for which The Bank of Nova Scotia or
Scotia Capital Inc. or any of their employees incur any responsibility.

Scotiabank Commodity Price Index is available on: www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C
Global Economic Research March 28, 2011

Scotiabank
Commodity Price Index
February to as high as US$106 per barrel on March 24 on growing expectations of a
protracted conflict in Libya — have substantially lifted both light & heavy crude oil Libyan Conflict
prices in Alberta in March. Re-ignites Oil Prices
140 US$ per barrel * 140
The Forest Products Index also slipped in February (- 2.0% m/m). While pulp,
Record High:
paper and paperboard prices held up in the U.S. export market, lumber and OSB prices 120
July 11, 2008: US$147.90
120
+
eased back from near-term highs in January. However, Western Spruce-Pine-Fir 2x4 100
W TI prices spike as most of Libyan
100

No.2 & Btr. lumber prices have rallied back in March and remain at profitable levels. 80
oil production is curtailed.
80

B.C. and Alberta forest products companies (specialists in high-quality, Japanese- 60

Iranian
Gulf
Iraq 60
W ar
specification ‘J-grade’ lumber) have offered their support to the Japanese government in 40
Revolution
W ar 40

home rebuilding. While it will take several months for Japan to map out its plans for 20
Arab Oil
20
Embargo
re-construction, the Japanese government has already contacted ‘wooden prefabrica- 0 0
tion’ plants in Japan to quickly build a large volume of factory-built homes as 60 64 68 72 76 80 84 88 92 96 00 04 08 12

temporary dwellings in devastated areas. Construction of permanent homes will come + W TI Oil on March 25, 2011: US$105.40.
Key world benchmarks:
later. Japanese orders for ‘J-grade’ lumber and OSB are picking up for West Coast mills. ICE Brent: US$115.59
Nigerian Bonny Light: US$119.45
About 70,000 buildings (residential, commercial & institutional) were damaged Malaysian Tapis: US$121.01
(8.6% of Japanese housing starts totaling 813,000 units in 2010). Japan has a ‘Wood
First’ policy for government-funded or sponsored buildings, with wood considered an BPC Announces Second
environmentally friendly ‘green’ product, capable of withstanding earthquakes. Chinese Price Increase In 2011:Q2
demand for B.C. lumber remains firm. 1,200
U S$ per tonne
1,200

Spot Potash Prices

1,000 (FOB Vancouver) 1,000
‘The Impact on Global Energy Markets of Japan’s Nuclear Incident’
Canpotex is likely to
—‘Japan turns to LNG and Oil’ 800 follow US$50 BPC 800
price increase in May.

Of the events which followed Japan’s earthquake and tsunami, the incident at the 600 600

Fukushima-Daiichi nuclear plant near Sendai — specifically, the loss of backup 400 2008-09 US$633 400
2010 US$351
electric power needed to cool nuclear fuel rods and spent nuclear fuel — is likely to have 2011F US$475 US$415
200 (Mar) 200
the largest impact on overall commodity markets going forward.
0 0
In the near-term, Japan is turning to imported LNG and crude oil to offset the 00 02 04 06 08 10 12

loss of 9.7 GWe of shutdown nuclear capacity. Of Japan’s 55 nuclear reactors Sulphur prices (FOB Vancouver) climb from
US$179.50 per tonne in January to US$194 in
(the third-biggest fleet in the world), 11 were shut down following the tsunami (at February alongside strong DAP demand.

Fukushima-Daiichi, Fukushima-Daini, Onagawa and Tokai Daini) equivalent to almost

20% of Japan’s nuclear capability. Given little damage to LNG import terminals Resurgence In Canadian
(except one at Sendai) and under-utilized capability at natural gas-fired plants, Overseas Lumber Exports
Japan (Tokyo Electric Power Company and Tohoku Electric) has already arranged 4.0
bn bd ft
4.0

increased LNG imports for April (about 15-20 extra cargoes) mostly to supply power Another BC Trade Delegation
Heads to Beijing to Show case
3.6 3.6
to the Tokyo metropolitan area as well as the Northeast from a variety of sources (Qatar, Wood Use in Multi-Story
Buildings in China
Shell-Brunei and possibly from South Korea, Russia’s Sakhalin project, Malaysia, 3.2 3.2
Indonesia and Australia). Steam coal imports have been curtailed by damage at ports
and thermal coal plants. Japan uses a diversified mix of fuels for power generation 2.8 2.8

(roughly 28% from nuclear power, 30% from imported LNG, 25% from imported coal,
2.4 2.4
6% from oil and 11% from hydro & renewable energy). Stabilizing the power supply is
key to reviving Japan’s economy (with implications for the global supply chain in auto 2.0 2.0
90 92 94 96 98 00 02 04 06 08 10
parts and electronics).
Source: Council of Forest Industries, Random
Lengths.
It is difficult to know the precise impact on LNG prices of stepped-up Japanese
demand, as most long-term contracts and spot transactions are confidential. However,
near-by futures prices for ICE-natural gas at the U.K. ‘National Balancing Wheat Prices Climb
900 250
Point’ (NBP) — a price impacting spot LNG cargoes delivered to the United Kingdom C$ per tonne million tonnes
fcst
800
and used as a ‘benchmark’ for LNG spot market competition between the Atlantic and 700 200
Asian markets — gives some indication. NBP futures have increased from US$9.45 in 600
the week prior to the earthquake to US$10.06 per mmbtu or 6.5%. Sellers are currently 500 W orld W heat 150
Ending Stocks
asking NBP plus US$1.50 and buyers NBP plus less than US$1.00 per mmbtu. LNG 400
100
traders indicate that long-term contract prices into Japan were about US$11.48 per 300

mmbtu in January and are now more than US$12. While significant, the increase in 200 50
Canadian W heat Board's Asking
price has been more limited than in the past when Japan has turned to LNG to offset 100 Export Price No. 1 Grade W heat
interruptions in nuclear supplies, given ample new LNG supplies from the Middle East 0
90 92 94 96 98 00 02 04 06 08 10 12
0

(Qatargas trains 6 and 7 have just come on stream).

2
Global Economic Research March 28, 2011

Scotiabank
Commodity Price Index
Perhaps the more lasting impact of the Scotiabank Commodity Price Index
incident at the Fukushima-Daiichi Nuclear
Power plant (a 40-year old facility with out- Growth Trends (per cent change at annual rates)
dated technology at Unit 1), will be to trigger a Weights One Three One Five Ten
re-examination of nuclear safety procedures Month Months Year Years Years
and reactor technologies around the world
All Commodity Price Index 100 13.9 41.9 18.7 6.0 6.9
and to slow the development of nuclear
power. As an example, Germany (never at the Industrials 83 6.8 34.0 15.4 5.2 6.8
forefront of nuclear expansion) has suspended Fores t Products 40 -21.9 4.8 8.0 1.3 2.4
operation of 7 units built before 1980 pending Metal and Minerals 27 49.1 50.0 37.9 12.2 14.4
safety checks (7.076 GWe) and will re-examine Oil and Gas 16 -20.9 37.5 -6.2 -0.2 3.1
its decision to extend the life of nuclear reactors
by an average of 12 years. In assessing the Agriculture 17 66.0 101.1 41.8 11.3 7.7
impact, it should be recognized that the accident Index 1997 = 100
at Fukushima-Daiichi was the result of an
2011 2010
exceptional natural disaster — a 9 magnitude
earthquake 15-times more powerful than the 8.2 Feb Jan Dec Nov Feb
magnitude the plant was built to withstand and All Commodity Price Index* 217.1 * 214.8 * 209.1 198.9 183.0
a 15-metre high tsunami rather than a 10-metre Industrials* 222.1 * 220.8 * 216.0 206.4 192.5
tsunami, which flooded and disabled the backup Fores t Products 112.1 114.5 111.7 110.8 103.9
diesel generators needed for cooling fuel rods. Metal and Minerals 333.7 322.8 310.7 301.5 242.0
Over the medium-term, some shift from Oil and Gas* 305.3 * 311.3 * 313.1 282.0 325.3
nuclear energy to imported LNG in Japan
Agriculture 192.5 184.5 174.9 161.6 135.7
and to natural gas-fired power generation in
the United States and parts of Europe will *Natural gas and propane prices are subject to revision.
likely occur. The Fukushima-Daiichi nuclear
facility will likely be de-commissioned, TEPCO has cancelled construction of the first unit at the planned Higashidori nuclear
plant and the Ohma nuclear facility in Aomori Prefecture has been postponed. However, China, India, South Korea and Russia
— the major ‘growth’ markets for nuclear energy (planning to add 105.2 GWe of nuclear power or 66% of the world total
prior to the incident) — will almost certainly move ahead with nuclear expansion. Not to do so would enormously raise the
cost of fossil fuels for consumers worldwide (especially oil, natural gas and LNG) in the coming decade and limit the containment
of CO2 emissions. Nuclear energy emits virtually no ‘greenhouse gases’ at 17 tonnes per GWhr compared with 622 for natural gas,
1,041 for coal, 18 for hydro and 14 for wind (using a life-cycle analysis, taking into account plant fuel supply). Overall, the
Fukushima-Daiichi event will likely delay rather than derail the ‘nuclear renaissance’. Wind and solar power (alone) are not
viable choices for large-scale ‘base-load’ electricity generation.

Recent Developments Bolster Prospects for B.C. LNG Exports

Turning to Canada, EnCana’s decision to join Apache Canada and EOG Resources Canada in the Kitimat LNG project (with both
a 30% equity stake and a capacity commitment) comes at an interesting time and likely ensures that this terminal will go ahead.
Kitimat LNG will significantly lift netback returns from the Horn River (Northeast B.C.) and the Montney natural gas
shale plays (on the B.C./Alberta border). Current LNG prices in Japan of more than US$12 should yield a netback at Kitimat
of about US$7 per mmbtu after deducting pipeline tolls from Station 4a to Kitimat, liquefaction & terminal fees and ocean
transportation costs compared with less than US$4 in North American markets. While inching up in the past week, NYMEX
natural gas prices remain exceptionally low at US$4.40 and AECO-C prices in Alberta are just over US$4 — held back by the
development of 20 new low-cost natural gas shale basins across the United States, made economic by new multi-fracturing,
horizontal drilling technology, lowering the industry cost curve. Long-term contract prices for LNG in Japan are indexed to
crude oil and will climb further in coming months.
Initial capacity at Kitimat LNG would be 700 MMcf/d, with start-up around 2015. Two additional LNG export terminals have
been proposed for the B.C. Coast, one involving Royal Dutch Shell/Mitsubishi, Korea Gas and PetroChina.

Uranium Prices Retreat, Then Partially Recover

After surging to a near-term high of US$73 per pound in late January (80% above the cyclical low in early March 2010), spot
prices for uranium eased back to US$69.75 in late February, in reaction to a small sale of UF6 by a Chinese entity, which
subsequently re-purchased U3O8 volumes for processing in China. The U.S. Department of Energy also announced another sale of
surplus uranium to pay for an environmental cleanup at a closed enrichment plant in Ohio (the equivalent of 4.2 million pounds of

3
Global Economic Research March 28, 2011

Scotiabank
Commodity Price Index
U3O8 in 2011-12 and 3.5 million in 2013). Prices then lost considerable ground following news of the Fukushima-
Daiichi incident (-US$6.50 to US$60 as of March 14) and even more in subsequent days (falling below US$50), as
China announced that it would temporarily suspend approval of new nuclear projects pending completion of safety checks
at plants under construction and would update safety regulations. However, market conditions have since steadied, with
prices rising back to US$60 on March 21. Long-term base contract prices (prior to escalation) remain at US$73, though
these prices are only quoted on a monthly basis.
With a slowdown near-term in the build-out of new reactors, we have revised down our price forecast for uranium to
US$60 in 2011 and US$69-70 in 2012, but maintain a higher medium-term outlook at US$75-80. The supply/demand
fundamentals for uranium were quite positive prior to the event in Japan and some of these positives remain (e.g. the
expiry of the HEU agreement in 2013).
Japanese utilities (TEPCO, Tohoku Electric and Chubu Electric) have declared ‘force majeure’ on steam coal
deliveries, in view of damage at ports and thermal coal plants. Spot prices for thermal coal have declined from about
US$133 per tonne (FOB Australia) to US$121 after the earthquake. Steam coal demand could rise in coming months, as
Japan restarts mothballed coal-fired power plants, though LNG will likely be the fuel of choice.

Scotiabank All Commodity Price Index 1

280 280
Grow th Trends Index: 1997=100
260 260
(per cent, annual rate)
240 Last Year 18.7 240
Last 5 Years 6.0
220 220
Last 10 Years 6.9
200 200

180 180

160 160

140 140
All Items
120 120

100 100

80 80

60
All Items – 60
2
Inflation adjusted
40 40

20 20
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

1. A trade-w eighted U.S. dollar-based index of principal Canadian exports.

2. Index def lated by U.S. Producer Price Index f or Intermediate Goods.
– Shaded areas represent U.S. recession periods.