Commodities for 2011: Bet on Copper, Potash and Uranium

by: Market Blog

By David Berman

If you’re looking back at investment strategies that worked in 2010, then commodities would make the list. Within Canada’s S&P/TSX composite index, materials surged 33.1 per cent this year, beating the 13.1 per cent gain for the index. And while energy stocks lagged with an 8 per cent gain, well, it’s still a decent positive return.

Meanwhile, the CRB commodity price index rose 15.1 per cent, thanks to standout performances by silver and nickel.

Patricia Mohr, vice-president and commodity market specialist at the Bank of Nova Scotia, released her 2011 forecasts on Tuesday. She sees more gains ahead, particularly for her top picks: palladium, copper, potash, coking and thermal coal, and uranium.

Much of her enthusiasm for commodities is based on – you guessed it – China, where she sees another year of strong economic growth of 9.5 per cent.

“While China will move to a more ‘prudent’ monetary policy to contain rising inflation (+5.1 per cent year-over-year in November), China is likely to achieve a ‘soft-landing’ for its economy, shifting from an export-driven to a more consumer-based expansion (with strong intra-Asian trade also underpinning growth),” she said in her note.

Beyond the China argument, though, she also expects that ongoing quantitative easing by the U.S. Federal Reserve – as it attempts to revive the economic recovery and bring down unemployment – will encourage capital inflows into commodity-intensive emerging economies, also stoking commodity prices.

And thirdly, there’s the currency argument: “The U.S. dollar/euro rate may lose ground again later in 2011 – boosting dollar-denominated commodity prices – as markets react to tough fiscal austerity and reform measures taken in Europe compared with a delay in required U.S. measures.”

Beyond these overall drivers, though, she see some commodities benefiting more than others. Palladium, used in catalytic converters for gas-fuelled vehicles, should get a boost from expanding car sales in Asia. Uranium will benefit from China’s ongoing goal to double its nuclear energy capacity. Copper prices should rise as mine production fails to keep up with rising global demand, creating supply-and-demand issues.

As for potash, Ms. Mohr noted that prices for the three crops most reliant upon potash – U.S. corn, palm oil in Malaysia and Indonesia, and sugar cane – are all high. That should give farmers an incentive to spread on the fertilizer a little more liberally in 2011.

And, finally, coal: China’s coal-burning steel mills are restocking even as Australia’s exports have been hampered by heavy rains.

“Seven large new steel plants in China will require high coke strength, benefitting Western Canadian producers,” Ms. Mohr said. While the growth of China’s steel output may slow in 2011, construction of eight cross-China high-speed rail links and expansion of property development to Tier 3 and 4 cities will underpin demand.”

That’s right, gold and crude oil are notably absent from Ms. Mohr’s top picks – but she doesn’t see doom and gloom ahead for either commodity. She argues that the supply and demand fundamentals beneath oil are relatively balanced. As a result, she expects relatively modest gains, with the price of oil trading at an average of about $93 (U.S.) a barrel in 2011. Oil traded at about $89.30 on Tuesday.

As for gold, she expects the price to rise to $1,500 an ounce in 2011, before settling back to about $1,450 an ounce in 2012. That would represent a new record high in nominal terms. However, with gold trading at $1,382 right now, the percentage gains would be less than 9 per cent.