Canadian economy gets jolt from surging commodities

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The Canadian economy is getting a timely assist this winter from a broad-based upswing in commodity prices, helping to soften the blow from the second wave of COVID-19 and spurring talk of another “super cycle” in key resources.

From lumber to iron ore, soybeans to canola, just about everything has clawed back to prepandemic prices or multiyear highs. Excluding energy, a Bank of Canada commodity price index has surged 36 per cent from April, taking it close to a record.

Even oil is looking up. Ten months after it tumbled into negative pricing, the U.S. benchmark has rallied to around US$60 a barrel, just as production climbs in Alberta.

There’s reason to believe the rebound has legs. China has carved out a V-shaped recovery, and industrial production has surged to record levels in emerging markets. The U.S. economy is poised to get a boost from another round of stimulus. And in Canada, companies and households are sitting on billions in excess cash, creating a potential wave of demand.

“Commodity prices have risen significantly in light of improved growth performance in China in particular, but they also reflect a generally more positive global outlook for the year,” said Scotiabank chief economist Jean-François Perrault in a recent report.

“Higher commodity prices are another form of wealth shock for the Canadian economy.”

Perhaps no industry has benefited more than lumber. With people stuck at home, many homeowners are investing in renovations. Others want more space, leading to frenzied sales. In both the United States and Canada, home construction is running strong. And with interest rates so low, it’s become more affordable for some buyers.

In turn, lumber prices have soared to record highs. “It’s hard to find a negative economic indicator these days in our business,” said Bart Bender, senior vice-president of sales and marketing at Vancouver-based lumber producer Interfor Corp. , on a Feb. 5 earnings call.

Another standout is agriculture. Between February and November, real GDP in that industry climbed 6 per cent – the strongest performance by a major industrial sector in Canada over the course of the pandemic. Over all, the economy is down 3.5 per cent.

In particular, crop production is generally strong. The need to eat hasn’t faded in the pandemic, with grocery stores capitalizing on restaurant restrictions. But “the larger story would actually be Chinese demand,” said Chuck Penner, owner of LeftField Commodity Research in Winnipeg.

China is quickly rebuilding its hog herd after it was decimated by African swine fever, creating a boon for animal feed. It also struggled last year with poor weather that damaged crops, and the hit to inventories was probably worse than advertised, Mr. Penner said. “Suddenly, China started buying massive volumes of soybeans and corn.”

As a result, exports are booming. The value of canola exports increased 48 per cent in 2020 from a year earlier, according to Statistics Canada. Fresh fruit, vegetables and pulses were up 23 per cent. Wheat climbed 18 per cent and animal feed by 14 per cent.

That’s helped out Canadian railways. Potash and grain shipments were up sharply last quarter. Both Canadian National Railway Co. and Canadian Pacific Railway Co. have reported record grain shipments in just about every month over the past year.

“With a record harvest in Canada and the strongest demand in the U.S. that I’ve seen for a number of years, we expect the momentum in grain to continue into 2021,” said John Brooks, executive vice-president at CP, on a Jan. 27 earnings call.

At times, the Bank of Canada has flagged a stronger loonie as a potential concern for trade. Its appreciation of late has less to do with domestic factors than a weakening of the U.S. dollar.

Still, the bank recently tamped down those concerns, given the nature of why the greenback is weaker – the Federal Reserve is fully locked into an era of dovish monetary policy, aimed at reviving the world’s largest economy from its pandemic setback.

“Our models show that despite an appreciation of the [Canadian] dollar that might result from the Fed lowering interest rates, on net we’re better off because there’s more activity and more demand for Canadian exports,” said BoC deputy governor Lawrence Schembri in a speech to Stanford University. “The appreciation mitigates that effect, but on net, it’s still beneficial for us when the Fed cuts interest rates and has an easier monetary policy.”

In the energy sector, which accounts for nearly half of the country’s commodity production, the situation is much different from last spring. For instance, real GDP in mining, gas and oil extraction grew 3.9 per cent in November as a number of Alberta facilities restarted crude production. Output is still lower than before the pandemic.

“Stronger oil prices mean the bottom lines of companies working in the energy sector are stronger,” said Marc Desormeaux, senior economist at Scotiabank. “There’s more activity, more investment [and] more job creation as a result.”

As ever, the outlook is murky. Oil prices are notoriously difficult to forecast; certainly, no one had predicted that crude would go negative, as it did last April. And it’s an open question of how demand will evolve. Border restrictions may curb leisure travel for some time, while other sources of fuel demand – say, business travel – could be permanently altered.

In that sense, the outlook for commodities is not unlike that of the wider economy: Getting the virus under control is critical, and vaccinations play directly into that.

“More widespread vaccinations translates into stronger demand, which translates into stronger price gains across the spectrum of metals and commodities,” Mr. Desormeaux said.

With a report from Mark Rendell

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