October 5, 2012

U.S. housing to drive steel, says TD Bank economist at CanaData

GREG MECKBACH

digital media editor

Oil is overvalued, cheap natural gas has caused some utilities to convert from coal and a rebounding U.S. housing market should drive prices for steel and Canadian lumber, according to an economist who spoke at the recent CanaData Construction Industry Forecasts conference.

Dina Ignjatovic, economist for autos, commodities and other industries at TD Bank Financial Group, was one of seven speakers at this year’s event.

The price of oil now is about $91 a barrel and “that is overvalued,” Ignjatovic said, adding demand for metals is expected to be strong in emerging markets such as India and China, but there was “limited capital expenditure” in resource projects.

VINCE VERSACE

Dina Ignjatovic delivers her thoughts about commodities during CanaData.

“If you’re investing in, say, a mine it doesn’t just take a few months to develop,” Ignjatovic told an audience of about 150. “It takes years. With capital expenditures low, with projects delayed, it will take time for a lot of these projects to come back online.”

CanaData was produced by Reed Construction Data Canada, publisher of DCN, and held at the Liberty Grand Conference Centre at the Canadian National Exhibition grounds in Toronto last month.

Ignjatovic discussed recent price fluctuations and future projections for 18 different items covered in the TD Commodity Price Index.

Despite the debt problems faced by the United States and several European governments, “the underlying drivers of commodity prices are generally positive,” she said.

The worldwide supply of oil is high, and at the time of her presentation, the price of West Texas Intermediate oil was about $91 per barrel.

“I would say that is over-valued, given where supply and demand is,” Ignjatovic said, adding prices should be in the $75 to $80 range. She attributed recent prices to geopolitical tensions, including the sanctions against Iran.

She added natural gas prices dropped below $2 per million BTUs this year, and should be $2.50 to $3 in the “near term,” which is low compared to historical norms.

“The supply in Canada and the U.S. right now is really high,” she said, even though Hurricane Isaac in August shut down some production.

“Given all the supply and developments <0x2026> natural gas prices are not expected to go too high too soon and we expect them to remain low.”

She added some American utilities have been switching from coal to natural gas for electrical power production.

Steel prices started out high this year but fell because production outpaced demand in China, and as a result, U.S. producers reduced their output.

“We do expect home building activity in the U.S. to pick up next year which should support demand for steel.”

Because economists predict a rise in the U.S. housing market, TD also forecasts an increase in demand for Canadian lumber, she said.

Other CanaData speakers included: Stuart Barron, National Director of Research and Director, Real Estate Finance for Canadian Markets at Cushman & Wakefield Ltd.; Ryan Berlin, Economic and Housing Market Analyst, Urban Futures; Alex Carrick, chief economist of Reed Construction Data; Mark Casaletto, vice-president and general manager of Reed Construction Data Canada; and Peter Norman, Chief Economist of Altus Group and General Manager of Altus Group Economic Consulting.

Norman gave a cautionary message on the home construction market, noting that since 2001, the number of households formed has been less than the number of housing starts. He said in Canada, we are building “slightly too many apartments and not enough single family homes.”

Ignjatovic also delved into detail on the U.S. and European debt woes.

In Europe “a lot of the problems are far from resolved,” Ignjatovic said, adding it will be political leaders who determine how the situation turns out.

The U.S., she said, is facing a “fiscal cliff.”

“There are spending cuts and tax hikes that are set to come into play at the start of next year and if these are allowed to come into play that will shave about five percentage points off of growth,” but she added whoever is elected president in November “is not going to let this happen.”

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