Scotiabank Commodity Price Index Eases Back In December

    TORONTO, Jan. 28 /CNW/ - Commodity prices began 2008 with considerable
momentum, with oil, potash, gold and wheat all reaching new record highs,
according to Scotiabank's Commodity Price Index report, which measures price
trends in 32 of Canada's major exports. Though negative sentiment on U.S.
economic prospects and a global equity market sell-off weighed mid-month,
aggressive Fed monetary policy easing and ongoing strength in China steadied
prices later in January. However, market conditions will likely be volatile.
    "After easing in December, commodity prices entered 2008 with
considerable strength", said Patricia Mohr, Vice-President, Economics and
commodity market specialist at Scotiabank. "Gold, fertilizer-related minerals,
oil and wheat all posted new record highs in early January."
    Gold prices (London PM Fix) soared to new heights of US$913 per ounce on
January 15, 2008. While a soft U.S. dollar has been a key factor, gold prices
have also strengthened in euros, indicating that stepped-up credit risks, weak
and jittery equity markets and record oil prices have been equally important
in boosting investor interest. In the first eight days of trading in 2008, the
S&P 500 Index posted its worst decline since 1982.
    While gold prices corrected sharply to US$871 on January 21, 2008,
alongside profit-taking and as funds were forced to sell lucrative gold
positions to cover equity market losses, gold rebounded to reach a new record
of US$918.25 on January 25. South Africa's largest gold and platinum mines
have suspended operations temporarily due to a power shortage. Gold may well
test the US$1,000 mark as 2008 unfolds.
    "Official sector gold sales in Europe under the Central Bank Gold
Agreement should level off in 2008, after rising 32.7 per cent in 2007, and it
would not be surprising to see stepped-up buying by the investment funds of
non-European countries with large dollar reserves," said Ms. Mohr.
"Exceptionally high oil prices, posing some inflation risk, and a
flat-to-downward trend in global mine production since 2002 have also
supported gold prices."
    A temporary decline in the Oil and Gas Index and lower Metal and Mineral
prices, reflecting fund concern over a U.S. economic slowdown linked to the
sub-prime mortgage meltdown, with some knock-on impact on global growth, led
the All Items Index lower in December. The Forest Product Index also edged
down, as very weak U.S. building material prices just offset strength in
Northern Bleached Softwood Kraft (NBSK) pulp and the start of a rally in
newsprint and supercalendared-A paper prices. However, the improvement in
newsprint prices comes at a substantial cost - further sharp capacity
shutdowns in 2008:Q1 (centered in Eastern Canada) by North America's largest
newsprint manufacturer. Only the Agricultural Index was up in December, as
U.S. dollar wheat and canola prices surged to new record highs and livestock
prices improved. The grain and oilseed complex posted explosive price gains in
    Potash prices (FOB Vancouver) jumped from US$265 per pound in November to
US$302.50 in December, up 72.9 per cent year-over-year and will continue to
climb through the first half of 2008, driven by global interest in biofuels
and tight world supplies of grains and oilseeds. While sulphur prices (FOB
Vancouver) were unchanged in December at US$190 per tonne, prices have
reportedly jumped to the US$300 mark in early 2008. Global project delays in
oil and gas have constrained sulphur supplies in an environment of strong
demand for diammonium phosphate fertilizer (DAP).
    West Texas Intermediate (WTI) oil prices climbed to a new all-time record
of US$100.09 per barrel on January 3, 2008. U.S. petroleum consumption likely
levelled off in late 2007, dampened by US$90-plus oil prices, though gasoline
demand has been remarkably resilient. While oil prices retreated to US$86.99
on January 23, 2008, as traders fretted that a sharp slowdown in the U.S.
economy would pare petroleum consumption, oil moved back over US$90 on January
    London Metal Exchange (LME) copper prices have also rallied to US$3.20
per pound so far this month, after falling to US$2.99 in December. Hedge funds
stepped up their positions in copper again in early January. Fabricators in
China are likely boosting copper cathode imports, given very low stocks in
China. Prices on the Shanghai Futures Exchange have recently been above LME
levels. Traders were reassured by the recent release of industrial production
numbers for China showing a 17.4% yr/r gain in December.
    "While renewed concern over a sharp U.S. economic slowdown dampened
commodity prices in mid-January, aggressive monetary policy easing by the
Federal Reserve Board, prospects for a U.S. fiscal stimulus package and the
release of strong GDP growth statistics for China have steadied commodity
prices, at least temporarily," said Ms. Mohr. "China posted growth of 11.4 per
cent in 2007, the fastest pace in thirteen years, though growth will likely
slow to about 10.5 per cent in 2008. While Japan's economy will be weak in
2008, exports to the United States only account for 8% of China's and 2% of
India's GDP. China is increasingly decoupling from U.S. growth."

    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,; Paula Cufre, Scotiabank Public Affairs,
(416) 933-1093,

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