2010: A year of strength for commodities

Investors who decided early in 2010 that commodities and the companies that produce them would be good performers found they were handsomely rewarded by year-end, with some commodities seeing prices more than double over the year.

Many analysts predict 2011 will see a continuation of the boom, although price volatility will likely be a hallmark of the year and price gains may not be as strong as in 2010.

Some analysts also warn of a "bubble" risk in some commodities, such as gold and silver, but there's no consensus on this.

First, the big picture.

Scotiabank, which produces a widely watched index that tracks the prices of 32 commodities, said its price index is up 36 per cent from the low point it hit in April 2009.

Some of the price gains in 2010 were nothing short of spectacular. Metals and minerals enjoyed the biggest gains, with sulphur up 153 per cent. Palladium and iron ore prices doubled, and copper hit a record high late in 2010, capping a year when prices surged by a third.

Big gains — more than 30 per cent — were also seen in silver, nickel, molybdenum, grains and oilseeds, and uranium. Even long-suffering lumber prices surged.

All of this has been good news for Canada's many commodity producers and for resource stock prices. The mining sub-index at the TSX rose more than 40 per cent in 2010; the materials sub-index jumped more than 30 per cent.

As for 2011, Scotiabank commodities specialist Patricia Mohr pegs palladium, silver, copper, potash and uranium as her top picks for the new year.

Mohr likes palladium — which is used mainly in catalytic converters for gasoline-powered vehicles — because of "rapid growth in motor vehicle sales in emerging Asia and tightening vehicle emission control standards."

She also expects palladium supplies to shift from a slight surplus in 2010 to a "significant" deficit in 2011.

Bullish calls on copper

Copper is another metal that is expected to outperform in 2011. Inventories are at a six-year low and demand in the coming year is expected to outpace supplies by a wide margin.

Goldman Sachs said in December that it expects copper to top $11,000 US a tonne in 2011 and added that prices "could spike substantially above these levels, most likely in late 2011." Copper is now trading at about $9,300 US.

Demand for copper stands to get a boost from several companies' announced plans to launch an exchange-traded fund that will track the price of copper. These funds will actually buy the metal, further pressuring supplies.

In mid-December, analysts at global investment firm UBS raised their target prices for base metals and diversified mining companies by about seven per cent on average.

"UBS believes that the re-acceleration of cost inflation through wage pressure, grade declines, energy costs, environmental costs and new taxes and political risk will continue to support base metals at elevated levels," the UBS analysts wrote.

"While concerns about China's monetary policy and European debt pose a near-term risk, we believe that the anticipated Chinese restock in February-May 2011, possibly supplemented by a growth recovery in the U.S., provides a seasonal opportunity for the metal equities."

To be sure, many metal company stock prices have already seen healthy rebounds from the depths they hit back in 2008. Teck Resources, Lundin Mining and Uranium One, to name three, saw their shares gain at least 50 per cent in 2010.

UBS raised its forecast for copper prices by 13 per cent and uranium by 24 per cent in 2011.

Days of cheap oil over?

Oil prices ended 2010 at a two-year high around $90 US a barrel. While that's still a long way from the record $147 US a barrel seen in 2008, there are analysts who see a return to those levels — and higher.

Jeff Rubin, the former chief economist at CIBC World Markets and author of Why Your World is About to Get a Whole Lot Smaller, thinks that the record will fall sometime in 2011 and that oil could hit $200 in 2012.

"The strongest manufacturing numbers coming out of the Chinese economy in a seven-month period, coupled with plunging oil inventories in the world's largest energy-consuming economy, have sent oil prices to a 25-month high," Rubin wrote in his blog in early December. "With no let-up in China's fuel demand, the world should be looking at triple-digit oil prices again within a quarter."

Scotiabank analyst Patricia Mohr doesn't see oil prices surging as high as Rubin does, at least not in 2011. She's calling for an average of $93 to $95 US a barrel over the next year.

Few analysts, however, see an imminent increase in slumping natural gas prices. Inventories are way too large for that.

Gold fever  

Among precious metals, gold shows the widest divergence in forecasts. While some boldly predict that $2,000 US or even $5,000 US an ounce is in the cards, others say gold has already moved into bubble territory and is overdue for a plunge.

It's not easy to forecast gold prices because the usual drivers of supply and demand often take a back seat to worries about currency woes. The more the world thinks the U.S. dollar or the euro are in trouble, the higher gold trades. 

PricewaterhouseCoopers' Canadian mining group recently released a survey that found a majority of top executives and investors at 44 mining companies feel gold prices will continue to rise in 2011 but not at the same rate they have been. About 40 per cent of the executives thought gold prices would peak at about $1,500 US an ounce.

What is beyond dispute is that gold has had a truly impressive run. Gold was trading just below $1,400 in mid-December — an increase of about 25 per cent in the past year and a quintupling over its level of 10 years ago. 

The bottom line is that many Canadian resource companies are likely to see robust returns in the near future, bolstering shareholder returns and adding billions in royalties and taxes to government coffers. Consumers, of course, have borne the brunt of rising gasoline prices.

Hewers of wood ...

Canadians may point with pride to such international success stories as Research In Motion. But natural resources still drive our export sector.

With demand for many of our agricultural products, metals and minerals, and energy products widely expected to remain strong — and with prices widely forecast to increase in 2011 — the growing value of those exports could serve to support the value of the Canadian dollar, which was again hovering around par with the U.S. currency at year's end. 

"Parity for the Canadian dollar is something that's here to stay for quite some time," Camilla Sutton, the Scotia Capital chief currency strategist, predicted in November. "We look at our forecast at Scotia Capital, [and] we have Canada sustainably through parity all of next year."

And if many of the experts are right, the current bullish commodity cycle may turn out to have very long legs.