Scotiabank Commodity Price Index Loses Further Ground in December

    TORONTO, Jan. 29 /CNW/ - For the fifth consecutive month, Scotiabank's
Commodity Price Index, which measures price trends in 32 of Canada's major
exports, posted another sharp decline in December, falling -5.5 per cent
month-over-month. The All Items Index has plunged by -39 per cent from the
cyclical peak in July and ended 2008 down -16.9 per cent year-over-year.
    "The shift from 'boom to bust' in many commodities has been the most
rapid in the history of the Scotiabank Commodity Price Index, which dates back
to 1972," says Patricia Mohr, Vice-President, Economics and Commodity Market
Specialist at Scotiabank. "While commodity prices are not yet at a bottom, the
pace of decline is now slowing and the forced, indiscriminate asset selling by
funds appears to be subsiding. Many prices are approaching average world cash
costs, triggering substantial production cuts, new project deferral and
tighter supplies."
    "In January, copper and zinc prices were given a temporary boost as
investment funds stepped up their positions in these metals to mirror the
annual rebalancing and re-weighting of the Dow Jones-AIG Commodity Index and
the S&P GSCI," continued Ms. Mohr. "Record investor inflows into gold ETFs
have also lifted precious metals, as retail and institutional investors seek a
'safe haven' from volatile currency and equity markets."
    Within the sub-components, the Oil & Gas Index once again led the decline
in overall commodity prices in December, tumbling 10.6 per cent
month-over-month. The Forest Product Index fell by a sharp 5.4 per cent
month-over-month, as Western Spruce-Pine-Fir 2x4 lumber prices retreated to
levels not seen since February 1986. The Metal and Mineral Index lost further
ground (-4.0 per cent month-over-month), though base metal prices have
rebounded slightly in January. Finally, Agricultural prices (-0.5 per cent
month-over-month) inched lower in December, though the decline is also

    Oil & Gas

    WTI oil - the key reference price in North America - averaged a mere
US$41.77 per barrel in December - reaching a low of only US$33.87 on December
19. Prices have been volatile in January - rising as high as US$50 early in
the month, as 'geopolitical' supply-side risks re-emerged and then slumping to
about US$33 mid-month alongside deteriorating and quite grim economic
indicators. However, news that the OPEC-11 (excluding Iraq) cut oil output by
a substantial 1.55 million barrels per day in January and that Saudi Arabia
will reduce its production and shipments in February - even more than agreed -
lifted prices back to US$45-46 mid-month.
    After a -0.3 per cent decline in 2008, world petroleum consumption will
fall by about -1 per cent in 2009, declining sharply in the United States
through the third quarter, before leveling out late in the year. However,
global oil production is also likely to drop. Oil output in non-OPEC regions
actually fell by 600,000 barrels per day in 2008 and will show little (if any)
growth in 2009. While U.S. and OECD oil inventories remain high and it will
take time before today's more-than-ample stocks start to recede, a combination
of OPEC cuts and stalled non-OPEC supply should begin to pare inventories by
    "A sharp decline in global capital spending on new field development
likely sets the stage for a strong recovery in prices early next decade," says
Ms. Mohr. "The Canadian Association of Petroleum Producers estimates that
project deferrals in the Alberta oil sands alone will cut capital spending
from $20 billion in 2008 to $11 billion in 2009."
    Nymex natural gas prices are currently very soft at only US$4.48 per
million British thermal units (mmbtu), well below US$7.99 a year ago. AECO-C
prices are a mere US$4.35 per thousand cubic feet. The Nymex natural gas price
forecast has been revised down to US$5.25 per mmbtu for 2009, with a modest
pick-up to US$6.80 in 2010. This is consistent with WTI oil prices averaging
US$50 in 2009 and US$65 in 2010.
    "Current natural gas prices are insufficient to spur a recovery in
'conventional' drilling activity in Alberta, despite recent transitional
royalty relief offered by the Alberta government for 'new' drilling over the
next five years," says Ms. Mohr. "However, producers will maintain extensive
drilling programs in the Horn River and Montney 'shale and tight sands' plays
- mostly in Northeastern B.C. - in view of excellent drilling results and
expectations that these plays could ultimately more than triple Canadian
natural gas reserves from today's 60 trillion cubic feet. However, drilling
activity in Western Canada could drop by -15 per cent in 2009, before a modest
recovery gets underway again in the second half of 2010."

    Metals & Minerals

    According to Ms. Mohr, the rapid decline in base metal prices from
strength in the first half of 2008 has been unprecedented and reflects in part
the forced exit of hedge funds from commodity market positions due to fund
redemptions and curtailed credit in the fourth quarter of 2008.
    "LME copper is a good example, falling from a record US$4.08 per pound on
July 3, 2008 to a low of only US$1.26 on December 24 - below the 90th
percentile of world 'direct cash costs' at about US$1.45, triggering
substantial mine closures and project delays," says Ms. Mohr.

    Forest Products

    Western Spruce-Pine-Fir 2x4 lumber prices have plunged to US$136 per
thousand board feet (mfbm) in mid-January amid the further collapse of U.S.
residential construction. U.S. housing starts are expected to total a mere
650,000 units in 2009, before recovering moderately to 850,000 units in 2010
and moving back to more normal levels in the 2011-13 period. Near-term mill
closures are likely.
    "In Canada, Ottawa's 2009 Budget will provide a modest, but welcome boost
to building material demand through the home renovation tax credit, $12
billion in funding for infrastructure projects across Canada and spending on
social housing," concludes Ms. Mohr.

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

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