The commodity conundrum
Prairie Manufacturer Magazine looks at which resources are up, which are down, and where they are trending in the months ahead.
By Joanne Paulson.
Jayson Myers, former president and CEO of Canadian Manufacturers & Exporters, once quipped, “There are only three ways to generate new wealth in an economy: You can grow it, you can extract it, or you can manufacture it. Everything else is a trickle-down from that wealth creation.”
In Western Canada, our economic and social wellbeing is intrinsically linked to all three — often more directly than most other global jurisdictions, through interdependent value chains.
As a basic example: The world needs to eat. By 2050, humanity must produce more food than in the previous 10,000 years combined. And, to meet that demand, farmers are becoming increasingly efficient, yielding more crop on fewer acres. That requires fertilizer derived from Prairie potash, mined using Prairie equipment, to grow crops planted and harvested using Prairie agricultural implements, which then supply Prairie value-adding processing facilities before export. All these activities, meanwhile, are reliant on Prairie-extracted minerals, such as oil and natural gas.
So, when one of these three drivers is adversely impacted by market conditions, they all tend to suffer, and Alberta, Saskatchewan, and Manitoba bear the brunt of the hurt. The most recent downturn has been especially painful due to the breadth and depth of softened prices across many of our chief commodities, including potash, oil, natural gas, and uranium.
But, according to Steve McLellan, CEO of the Saskatchewan Chamber of Commerce, although there may be some short-term pain, surviving in a resource-based economy is a long-term play, and the future for these four in particular still looks bright.
“We remain very optimistic on all of them,” says McLellan, who is one of the region’s most vocal champions on the national stage when it comes to responsible resource development. “We know the world has the demand we can supply. We know that commodity markets are cyclical. We’ve lived through the peak years, and we’ll live through the slow years.
“Structurally, we have concentrated reserves, and established, best-in-class companies that are very productive from an operational viewpoint. Patience is, as in life, a virtue in business.”
Of course, that does not mean the West is in total control of its destiny. Commodities are subject to a plethora of international pressures and events, ranging from changes in governments and policies to the threat of terrorism. Even here at home, politics of the day have prevented industry’s ability to construct new pipelines that would take Prairie oil to tidewater.
Yet, McLellan maintains the fundamentals of supply and demand position Western Canada at a strategic advantage. Skyrocketing populations and an emerging middle class in places like India and China need what we have, and there are few other places they can get it.
“Whether you’re talking commodities, agriculture, or manufacturing, if you’re betting against Western Canada, you’re placing a losing bet.”
The 2017 story of potash has been one of restrained hope. Unfortunately, most of the ‘pink gold’ has stayed in the ground instead of being pulled into inventory.
After reaching historic highs in 2008, plateauing near $1,000 USD per tonne, potash prices and deliveries tanked along with most other commodities in the wake of the 2008-09 financial crisis. It has been a long road back since then, yet noticeable strides have been made.
In its third-quarter conference call with analysts, PotashCorp officials pointed to lower inventories and a rising demand, even as the company announced record quarterly sales volumes.
China is on pace to increase its potash fertilizer consumption by 8.6 per cent from 2013 through 2018, while inventories are expected to fall in the New Year by 100,000 – 200,000 tonnes. In India, stockpiles are about 20 per cent lower year-over-year, and consumption is projected to spike 5.6 per cent. In other parts of the world, PotashCorp sees 5.1 per cent growth in the rest of Asia by 2018, and 3.6 per cent in Latin America.
Prices have already begun to react. Globally, they improved for the fifth consecutive quarter, up to roughly $180 per tonne from $150 in the same period last year.
For PotashCorp, which is in the final stages of merging with Calgary-based Agrium, all signs point to a positive 2018.
“We expect that the rising consumption trends in place today will continue,” says President & CEO Jochen Tllk, “with the potential for another record shipment year in 2018.”
On October 27, the Brent Crude benchmark for oil hit $60 USD per barrel for the first time since 2015. Three days later, it was still there, being encroached upon by the West Texas Intermediate (WTI) hovering around $54 USD per barrel.
The price was, at least in part, reacting to the news by Saudi Arabia and Russia that the two countries would declare their support to extend cuts to oil production ahead of an upcoming Organization of the Petroleum Exporting Countries (OPEC) policy meeting.
As recently as this past summer, Alberta’s Finance Minister, Joe Ceci, said in his government’s quarterly update the Province was basing its budget and risk adjustment on a price of $49 per barrel, in recognition of the lingering volatility.
Oil bottomed out in 2016 at approximately $26 per barrel, in spite of some pundits ominously forecasting it could fall below $10. That didn’t come to fruition, but oil stayed below $50 on the WTI for much of the first three quarters of 2017.
Phil Flynn, a senior energy analyst with The PRICE Futures Group, contends the price “won’t be lower for too much longer,” as oil supply continues to drop off at an extraordinary pace, and output in the shale and Gulf of Mexico regions of the United States sputters.
Flynn predicts oil prices will rise for the rest of 2017, and likely to the end of the decade.
Touted as a cleaner-burning, environmentally-conscious alternative, natural gas is considered by some to be the ‘fuel of the future.’
Why, then, is its price so low, and why has it languished for several years in Western Canada? At one point this summer, natural gas prices — as a technicality — actually dropped to zero, and then went negative. In other words: It was more expensive to pull out of the ground than to buy it.
It turns out the temporary price crash was the result of pipeline maintenance, causing a backup in supply. Nevertheless, prices have been basement-low for years, thanks to gloomy demand in Canada and increased shale production in the U.S.
At the 30,000-foot level, the U.S. Energy Information Administration seems to think the price south of the border will start to recover slightly, as they already have in that country so far this year. The Henry Hub spot price, one of the main indicators in the sector, pegged natural gas at an average of $2.61 USD per thousand cubic feet (Mcf) in 2016. It has jumped to $3.14 more recently, and the 2018 forecast is set for $3.31.
Canadian prices are a much different story. They are typically much lower than the Henry Hub price, although they tend to move along with the benchmark. Deloitte anticipates the Alberta natural gas price, or AECO, to hover around $2 CAD per Mcf to the end of the year.
Deloitte, though, is somewhat bullish on the future for natural gas — with one major caveat: It will take some time.
“While the U.S. has growing options to sell its gas, including to Mexico and on the LNG (liquefied natural gas) market, Canada has only two options: Domestic consumption and exports to the U.S.,” the company stated in its September forecast. “The lack of market choice leads to volatility and depressed prices in Canada, as the ability of U.S. producers to quickly increase production to meet the growing export market means Canadian plays struggle to compete.
“This trend is expected to continue even as several additional U.S. LNG projects are completed over the next few years.”
Of all the natural resources in Western Canada, uranium has had arguably the roughest ride.
Ever since the cataclysmic tsunami in Japan wiped out its Fukushima Daiichi nuclear reactors in 2011, markets have remained timid. At the time, Japan had 50 operating reactors; only five have come back online, dealing a stark blow to the demand side of the global equation.
The ensuing drop in the price of U308 has forced uranium mining firms in Western Canada to tighten their belts. Saskatoon’s Cameco Corporation has been no exception.
In his third-quarter statement, Cameco CEO Tim Gitzel noted the average year-to-date spot price of uranium was down another 20 per cent compared to the 2016 annual average. Only weeks later, the company announced it would be suspending operations at its Key Lake and McArthur River sites for roughly 10 months, temporarily cutting 845 jobs.
There is, however, reason for hope. As population rises, so too does the demand for cheap, clean electricity. There are more than 50 nuclear reactors currently being built around the world, including 20 in China.
Analysts Rob Chang and Mike Kozak of Cantor Fitzgerald in Toronto share that optimism. Despite minimal upticks projected for 2018 — $23 USD per pound by the second quarter (up from the current range of $20) — 2019 could see prices of $32.75, and north of $40 in 2020.
Inventory is the main culprit pulling on the reigns, at about five years’ worth of global demand based on 2017 production. The duo, though, suggests once supplies deplete, look out. Their long-term call is for a “violent” price spike to $80, perhaps in 2025.
Back in Saskatchewan, that’s news to Steve McLellan’s ears.
“If the world wants green energy, uranium is a fabulous source. We need to have people understand and accept the science. Then, they will apply it more widely.”