COMMODITY PRICES TO TREND HIGHER, BUT UPSIDE LIMITED

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1 COMMODITY PRICE REPORT TD Economics COMMODITY PRICES TO TREND HIGHER, BUT UPSIDE LIMITED It is hard to paint the performance of all commodity prices over the last quarter with the same brush. Crude oil and gold prices were fairly range-bound over the last few months, while base metals prices have largely trended up, and agricultural prices down. Going forward, we expect commodity prices to generally trend higher; however, the upside will be limited as most markets remain well supplied and global growth is expected to remain slow. Indeed, despite a general uptrend across the commodity complex, only zinc and lumber prices are projected to return to (and exceed) post-recession norms. Crude oil prices have had a bumpy ride, oscillating within the US$40-50 dollar per barrel range over the last six months. The recent trek to US$50 per barrel stemmed largely from OPEC s agreement to cut production to million barrels per day a drop of roughly k barrels per day from September levels as well as Russia s willingness to join in the effort to curb supply. However, OPEC has yet to determine where the agreed upon cuts will come from and when they will take place, suggesting that tough negotiations lie ahead. Moreover, Iraq, Libya and Nigeria are said to be exempt from the deal, with the former two countries able to ramp up production in the coming quarters. Until actual output cuts materialize, prices will not be able to gain much further ground on a sustained basis. While prices could give up some of their recent gains, we expect them to hold above US$50 per barrel in as the market moves into a more balanced position. After nearly matching the record low in March, natural gas prices have more than doubled, reaching US$3.15 per MMBtu in October. The uptrend has been underpinned by warmer than normal weather, which slowed inventory builds and brought U.S. storage levels down closer to their 5-year average. Going forward, expectations for a colder winter relative to last year should keep natural gas prices propped above US$3.00 per MMBtu, although the well-supplied market will prevent prices from rising much above current levels. Q/Q % Chg. 40 CHART 1: Q3 COMMODITY PRICE PERFORMANCE Source: Haver Analytics, Bloomberg, RISI, TD Economics. Dina Ignjatovic, Economist,

2 CHART 2: OUTLOOK FOR BASE METALS PRICES CHART 3: GOLD PRICE FORECAST Y/Y % Chg. 1,900 US$/oz. ZINC 1,700 Forecast NICKEL ,500 1,300 COPPER 1,100 ALUMINUM 900 After losing some steam in August, base metals prices resumed their upward trend in mid-september. Zinc has been the clear outperformer this year, with prices up by over 60% from their January lows, driven by expected mine closures and smelter shutdowns in China due to environmental infractions. While zinc prices have come off their recent highs over the last few days and could decline further given that the recent run-up may have been overdone it is still expected to outperform its peers as the market deficit deepens. Nickel prices which have also given up some of their recent gains remain up by 25% since January, thanks in part to an environmental crackdown in the Philippines that has resulted in mine closures. Going forward, nickel should also fare well, as the market is expected to tighten. Meanwhile, high inventories and more balanced markets will limit the upside for copper and aluminum prices. Fed policy uncertainty held gold prices in the US$1,300- $1,350/oz range during the third quarter, but prices have since plunged from the high end of that range to as low as US$1,250/oz. The correction came alongside some unwinding in the massive net long positions that have been built up this year, and no major change in fundamentals. While Fed tightening will keep a lid on prices going forward we expect a hike in December followed by another hike in the second half of next year several factors remain quite supportive for gold. Indeed, global economic uncertainty, political risks, gradually rising inflation, unconventional monetary policy still in place around the globe Europe and Japan in particular and low global yields should put a floor under demand for precious metals. While prices could retest their recent Source: TD Securities F 2017F Source: Haver Analytics, TD Securities highs in the near term, we expect them to hover around the US$1,300/oz mark through Lumber prices are sitting 11% higher than where they started the year, with the bulk of the gains coming in the second quarter. With U.S. housing starts expected to remain on an upward trek and offshore volumes to hold steady, lumber prices should continue to rise over the forecast horizon. The one-year softwood lumber free trade standstill period expired on October 12 th with no new agreement in place. Trade representatives in Canada and the U.S. are continuing to negotiate, but the U.S. Lumber Coalition lobby group has indicated that it will wait for the most effective time to file an investigation request that could lead to countervailing and anti-dumping duties. While possible duties present some downside risk to the outlook for Canadian lumber exports, strong underlying demand in the U.S. should mitigate the impact. Agriculture prices have been losing ground since the summer began. Expectations for higher yields and harvests on top of bumper crops in each of the last three years have weighed on crop prices, although spring wheat prices have staged a rally in October on forecasts for lower-than-expected U.S. output and concerns surrounding the quality of the Canadian crop. Meanwhile, expanding herd sizes have pressured livestock prices down. Going forward, crop prices will remain under pressure, although canola has the most upside potential thanks to lower expected soybean output from South America. Similarly, ongoing growth in the supply of cattle and hogs is expected to keep a lid on livestock prices in the near term. 2

3 Spot Price Oct 14 COMMODITY PRICE FORECAST SUMMARY 2016 Q4 Annual Average Q3 2016F 2017F 2018F 2016F 2017F 2018F FORESTRY LUMBER PULP NEWSPRINT ENERGY OIL NAT GAS COAL PRECIOUS METALS GOLD SILVER NON-PRECIOUS METALS & MINERALS ALUMINUM COPPER NICKEL ZINC URANIUM AGRICULTURE WHEAT BARLEY CANOLA CATTLE HOGS

4 COMMODITY PRICE FORECAST SUMMARY: % CHANGE 2016 MEASURES & QUOTED PRICES ( $ is US$ unless stated otherwise; C$ prices converted to US$ using daily C$/US$ exchange rate ). FORESTRY* Lumber: Random Lengths' Framing Lumber Composite ($/1000 Bd Ft) Pulp: NBSK, delivered in east U.S. ($/mt) Newsprint: New York ($/mt) ENERGY** Oil: Domestic Spot Market Price: West Texas Intermediate, Cushing ($/Barrel) Natural Gas: Henry Hub, LA ($/mmbtu) Coal: Austr. Therm ($/mt) PRECIOUS METALS** Silver: Cash price: Silver, Troy Oz, Handy & Harman Base Price ($/Troy oz) Gold: Cash Price: London Gold Bullion, PM Fix ($/Troy oz) NON-PRECIOUS METALS & MINERALS** Aluminum: LME Aluminum, 99.7% Purity: Closing Cash Price (Cents/lb) Copper: LME Copper, Grade A: Closing Cash Price (Cents/lb) Nickel: LME Nickel: Closing Cash Price ($/lb) Zinc: LME Zinc: Closing Cash Price (Cents/lb) Uranium: Ux U308 ($/lb) AGRICULTURE* Wheat: Spring,14%Protein: Minneapolis ($/bu) Barley: Canada: Cash Prices: Feed Barley: Lethbridge: Grade 1 CW (C$/mt) Canola: Canada: Cash Pr: Canola: Instore Vancouver: Grade 1 Canada NCC (C$/mt) Cattle: Live Cattle Futures Price: 1st Expiring Contract Open (Cents/lb) Hogs: Lean Hogs Futures Price: 1st Expiring Contract Open (Cents/lb) Sources: WSJ, FT, Ux Weekly, Random Lenghts, Pulp & Paper Weekly, GlobalCoal, Comtex, WCE, FRBNY / Haver Analytics. * Forecasts by TD Economics; ** Forecasts by TD Securities Q4 Q3 2016F 2017F 2018F 2016F 2017F 2018F FORESTRY LUMBER 1.7% 13.6% 8.3% 6.4% 4.7% 9.0% 7.0% PULP 2.4% 2.2% -5.7% 3.8% -0.6% -5.3% 1.6% NEWSPRINT 4.5% 12.9% 0.9% 6.1% 3.7% 1.9% 5.1% ENERGY OIL -1.1% 19.3% 10.0% 3.6% -11.3% 23.1% 5.6% NATURAL GAS 33.7% 38.4% 12.1% 1.5% -6.2% 29.5% 3.5% COAL 28.2% 42.4% 6.7% 6.3% 2.9% 31.4% 6.3% PRECIOUS METALS GOLD 6.0% 20.0% -2.6% 4.7% 10.0% 1.6% 2.3% SILVER 16.6% 28.5% -5.3% 8.3% 11.9% 3.7% 4.1% NON-PRECIOUS METALS & MINERALS ALUMINUM 3.1% 6.1% 5.6% 2.6% -5.2% 5.1% 4.0% COPPER 0.8% -1.2% 3.7% 3.5% -13.7% 3.7% 4.0% NICKEL 16.3% 6.5% -1.1% 11.1% -20.7% 2.6% 8.6% ZINC 17.8% 36.8% 10.0% 13.6% 4.3% 17.1% 12.1% URANIUM -7.3% -16.8% 50.0% 0.0% -21.1% 51.1% 2.9% AGRICULTURE Annual Average WHEAT -5.5% -1.8% 0.8% 3.2% -13.2% 4.3% 2.4% BARLEY -19.0% -22.0% 8.0% 11.1% -14.8% -10.6% 11.8% CANOLA -10.0% 3.3% 2.6% 6.3% -3.6% 0.7% 9.1% CATTLE -10.3% -23.3% 20.0% 0.0% -19.9% -1.8% 6.5% HOGS -15.3% -9.9% 27.3% 0.0% -5.2% -6.2% 16.0% 4

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