Scotiabank's Commodity Price Index Soars Again in May, Reaching A New Record High



    - Saudi Arabia will host a meeting of oil consumers and producers on
    June 22 in an attempt to talk down record oil prices.

    TORONTO, June 19 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, surged to new heights
in May, climbing 3.9 per cent month-over-month, the fifth consecutive record
in as many months in 2008.
    The Oil and Gas Index led the way in May, surging 10.5 per cent
month-over-month and 65.9 per cent year-over-year. Energy prices strengthened
across the board, with Canadian natural gas export prices climbing over
US$10.60 per thousand cubic feet (mcf), pushed up by record oil prices. West
Texas Intermediate (WTI) oil soared to new heights of US$139.12 per barrel in
intraday Nymex trading on June 6, alongside Middle East tensions, linked to
Iran's refusal to end its uranium enrichment, and a world supply system with
only limited spare capacity to offset supply disruptions. Prices touched an
even higher US$139.89 on June 16 alongside a soft U.S. dollar.
    "In an effort to calm world oil markets, Saudi Arabia has invited major
oil consumers and producers to a meeting on June 22 to discuss measures which
might be taken to curb soaring oil prices," said Patricia Mohr,
Vice-President, Economics and Commodity Market Specialist at Scotiabank.
"While the Kingdom will reportedly boost output temporarily to cool prices,
this development does not address the underlying reason for record oil prices,
limited exploration access by oil companies, particularly foreign oil
companies, in many areas of the world including Russia, contributing to only
slow new field development outside of OPEC."
    Saudi Arabia began to boost output by 300,000 barrels per day in mid-May
towards a target of 9.45 million barrels per day (mb/d) by June and is
reportedly mulling a further increase to about 9.7 mb/d, possibly announced at
its oil summit, for an overall increase of 500-550,000 b/d. If implemented,
the Kingdom's output will climb to 91 per cent of its maximum sustainable
production capacity (10.65 mb/d) and capacity utilization across the cartel
will rise to 93.8 per cent.

    Metals & Minerals

    Potash prices at the Port of Vancouver jumped to US$525 per tonne in May
from US$504 in April and will likely climb to an average of more than US$800
by late 2008. Both BPC and IPC (acting on behalf of Silvinit) have now sold
cargoes of standard potassium chloride to South East Asia at US$1,000 cfr
(delivered). Prices for granular material in Brazil, partly bound for sugar
cane and ethanol production, will likely rise to US$800 cfr in July and
US$1,000 in August. Most farmers can afford to pay high prices for potash,
given rising yields from potash application and today's high crop prices
(especially in biofuels).
    In contrast to soaring mineral-related fertilizer prices and ongoing
strength in coking/steam coal prices, base metal prices have lost ground in
the past two months alongside unease over prospects for slowing global growth
and anticipation of new mine development, especially in zinc. Spot uranium
prices have also fallen back to only US$57 per pound, likely oversold and near
a bottom, while term-contract prices remain steady at US$90.
    London Metal Exchange (LME) copper prices have eased back from a record
high of US$4.03 per pound on April 10 to US$3.80 in May and are currently
US$3.76. However, copper prices remain resilient and are very lucrative for
miners. China's industrial production rose by a solid 16 per cent
year-over-year in May, up from 15.7 per cent in April, despite a substantial
tightening in monetary policy since the spring of 2006.
    "Important for B.C. and Quebec, LME aluminium prices are also performing
well and should average about US$1.35 per pound in 2008 and 2009, up from
US$1.20 in 2007," added Ms. Mohr. "Growth of aluminium semis production in
China ballooned by 40 per cent in 2007 and has advanced by another 35 per cent
year to date. Global demand growth will average 8 per cent in 2008-09."
    Ms. Mohr also added that, equally important, after emerging as a net
exporter of aluminium earlier in the decade - following substantial domestic
smelter expansion - China is expected to return to net importer status in
2009. Tight electricity supplies in China and South Africa, likely lasting for
several years, are also hiking smelter costs.

    Agriculture

    The Agricultural Index lost ground in May for the second consecutive
month, but remains 40 per cent above a year ago. The Canadian Wheat Board's
asking export price for No. 1 grade wheat has eased from US$530 per tonne in
April to US$484 in May and US$409 in early June. However, barley prices at
Lethbridge climbed from US$229 per tonne in April to US$241 in May and are
US$230 in mid-June, underpinned by surging U.S. corn prices. Near-by corn
futures on the Chicago Board of Trade have soared to US$7.46 per bushel, up
from US$4.42 a year earlier, on delayed corn plantings this spring and
torrential rains and flooding over much of the U.S. Corn Belt (Iowa and
Illinois).
    "U.S. corn inventories at the end of the 2008-09 crop year will be cut in
half, possibly more, increasing upward pressure on ethanol prices for
gasoline," said Ms. Mohr. "The spring planting season in Canada has also been
unusually cold, dimming the crop outlook."

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.





For further information:

For further information: Patricia Mohr, Scotia Economics, (416)
866-4210, pat_mohr@scotiacapital.com; or Paula Cufre, Scotiabank Public
Affairs, (416) 933-1093, paula_cufre@scotiacapital.com


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