Scotiabank's Commodity Price Index Climbs in March Alongside Surging Oil and Precious Metal Prices

TORONTO, April 26 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, rose by 1.3 per cent month over month (m/m) in March — the ninth consecutive monthly gain — to a level 50.9 per cent above the April 2009 low. The All Items Index is now only 18.5 per cent below the all-time peak in July 2008 (in data back to 1972). China's GDP growth — of vital importance to global commodity markets — rose by a stronger-than-expected 9.7 per cent year over year (y/y) in 2011:Q1 — only slightly slower than the 9.8 per cent of 2010:Q4.

"Despite this positive development, some commodity prices lost ground in mid-April, with institutional investors taking profits, concerned that tightening monetary policy in China — to curb rising consumer price inflation, up 5.4 per cent y/y in March — would take a toll on future growth," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.

Financial and commodity markets are also concerned that high world oil prices may dent consumer spending in both emerging as well as mature G7 economies. Stepped-up investor risk aversion linked to sovereign debt risks in peripheral Euro zone countries and Standard & Poor's placing the United States' AAA credit rating on negative watch also pressured prices in mid-April.

"Notwithstanding these headwinds, it is likely premature to call a cyclical peak in global commodity prices, and prices have rallied back in recent days alongside an exceptionally weak U.S. dollar and strong U.S. corporate profits," added Ms. Mohr.  "LME copper prices could well retest previous record highs as 2011 unfolds; China's copper demand will likely strengthen again markedly in 2011:Q2 and re-construction in Japan will eventually lift demand. However, we acknowledge that commodity prices are now at mid-cycle, with further gains likely to be more limited."

Oil & Gas

The Oil & Gas Index led the advance in commodity prices in March, surging by 6.4 per cent m/m. Light oil prices in Edmonton jumped by more than US$14 per barrel to US$99 and medium/heavy crude at Hardisty Alberta, after lagging behind, picked up even more (by US$15.71 during the month).

According to the report, the jump in oil prices since mid-February reflects the following developments: 1) a widening geopolitical risk premium in world oil prices linked to political upheaval in Libya as well as parts of North Africa and the Middle East, likely lasting for some time; 2) Premiums for light/low sulphur crude oils (WTI, Brent, Nigerian Bonny and Malaysian Tapis) over heavier/sourer grades (Mars, Oman and Urals) have widened significantly since the Libyan disruption. Saudi Arabia, Kuwait, the UAE and Qatar hold the vast bulk of OPEC spare capacity, but only limited volumes of low sulphur oil.  The world has a shortage of light, sweet crudes.

"A 25 per cent jump in WTI oil prices since January is reflected in rapidly increasing retail gasoline prices," stated Ms. Mohr.  "In the United States, the price at the pump for regular gasoline jumped to US$3.84 per gallon in mid-April — close to the July 2008 peak of US$4.05, when record oil prices of US$147.90 triggered a substantial drop in consumer demand. U.S. gasoline consumption appears to have slowed, with the normal seasonal pick-up during the Spring driving season not occurring — possibly moderating oil prices. However, a sharp decline in oil prices, as occurred in the Fall of 2008, appears unlikely. Nevertheless, the trend in U.S. consumer prices is worryingly up. "

Strong oil prices are triggering a welcome pick-up in drilling activity in Western Canada (up 25 per cent y/y in 2011:Q1). The revival likely reflects oil-targetted drilling (tight oil plays) rather than gas-focused drilling. NYMEX natural gas prices remain at a low ebb of US$4.39 per mmbtu, though prices have edged up counter-seasonally in April.

Metals & Minerals

The Metal & Mineral Index inched down in March (-0.1 per cent m/m), as slightly lower copper, zinc, nickel and uranium prices just offset a further gain in fertilizers and stronger precious metal prices.  Potash prices continue to climb amid high grain and oilseed prices.

"Safe-haven gold reached a new all-time record of US$1,518 per ounce in intra-day trading on April 25 — near-buy COMEX futures — while near-by silver futures climbed to US$49.82, almost reaching the record in January 1980 during the Hunt Brothers' silver squeeze," noted Ms. Mohr.  "A loss of investor faith in the two reserve currencies has driven prices higher.  Silver, a metal with large retail interest in the United States, has outperformed, with the gold-to-silver ratio falling to only 30.5 — its lowest level since the early 1980s."

Spot uranium prices have eased back from US$66.50 per pound in early March — just prior to the Fukushima-Daiichi nuclear power plant incident in Japan — to US$55.50 in late April. Spot transactions have slowed, as buyers and sellers re-assess the market outlook.

"While uranium prices will likely remain soft until the Fukushima-Daiichi plant is fully stabilized, prices should start to pick up again by late 2011," concluded Ms. Mohr. "The biggest impact of this crisis will likely be the faster adoption of new reactor technology, such as passive self-regulating reactors, not requiring cooling."

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.

SOURCE Scotiabank - Economic Reports

For further information:

Patricia Mohr, Scotia Economics, (416) 866-4210,; or
Patty Stathokostas, Scotiabank Media Communications, (416) 866-3625 or


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