Scotiabank's Commodity Price Index Climbs To New Heights in July

    TORONTO, Aug. 27 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, advanced by 4.0 per
cent month-over-month (m/m) in July, rising to a new record high for the
seventh consecutive month.
    "The cyclical upswing in commodity prices from the low in October 2001 -
at 226.8 per cent - is now virtually on par with the huge 235.1 per cent
advance in the 1970s in the aftermath of the Arab oil embargo," said Patricia
Mohr, Vice-President, Economics and Commodity Market Specialist, Scotia
Economics. "The strength of this upswing is a testimony to the remarkable
growth of 'emerging-market' demand this decade in the face of significant
supply constraints in many resource sectors."
    The strength in commodity prices was broad-based in July, with the Metal
and Mineral Index leading the way (up 5.9 per cent m/m). Spot potash prices at
the Port of Vancouver jumped from US$525 per tonne in June to US$763, up 277
per cent year-over-year (y/y), as Canpotex lifted some sales to the US$1,000
cfr mark (netting back to US$900 in Vancouver). LME copper prices also rose to
a new record high of US$4.08 per pound in early July, amid sporadic strikes in
Peru, and aluminium prices climbed to US$1.49 - the highest level in 20 years,
buoyed by smelter cutbacks in China to conserve electricity for the Beijing
Olympic Games. Metal prices subsequently unwound significantly in late July
through mid-August on news of a decline in 2008:Q2 GDP in the Euro Zone and a
retrenching Japanese economy, pointing to weak economic conditions across the
G7, which threaten to slow growth in 'emerging markets'. While copper prices
fell to a low of US$3.29 on August 12 (currently at US$3.44), prices remained
exceptionally lucrative - buoyed by very low 'visible' exchange stocks and
supply disruptions (likely totalling about 750,000 tonnes in 2008). China will
likely step up its copper buying again in the fall and may well announce an
'economic stimulus package' to counter G7 weakness. Policy priorities in China
are shifting from avoiding 'overheating' to supporting steady growth, with
monetary policy possibly eased by year-end.
    "Recent developments in China's electricity market point to strength in
international steam and coking coal prices in 2008:H2," added Ms. Mohr. "China
is experiencing a severe power shortage this summer (estimated at 30 GW or 4.2
per cent of China's total installed capacity) due to insufficient supplies of
steam coal."
    Thermal power plants account for 80 per cent of China's generating
capacity, but Chinese mining companies have been shifting coal to the export
market to take advantage of more lucrative prices. Spot prices for thermal
coal at Newcastle, Australia (a benchmark for Asia) climbed to a record
US$194.79 per tonne in early July, from only US$66.90 a year earlier. Port and
rail constraints continue to limit Australian exports (though considerable
expansion is underway), South Africa has prioritized coal for domestic use
given its power shortage and Indonesia (the world's biggest thermal coal
exporter) may rein in exports. The net result, Chinese exports have recently
surged to record levels, easing back prices at Newcastle to US$163.90 in
    China has now taken further steps to rein in export volumes. On August
20th, Beijing imposed a 10 per cent export tax on steam coal exports and
increased the export tax on coking coal from 5 to 10 per cent and on coke from
25 per cent to 40 per cent. Combined with a further hike in wholesale
electricity prices in China, these measures will likely curb coal exports from
China in the second half of 2008, tightening international supply conditions
and raising spot prices for both steam and coking coal in Asian markets -
important for Western Canadian coking coal producers in the lead-up to annual
contract negotiations for JFY2009.
    The Oil & Gas Index also surged in July to a new record high. Light and
medium/heavy oil prices reached new heights in Edmonton and natural gas export
prices surged. WTI oil prices have subsequently unwound from a record
US$147.90 per barrel on July 11 to US$117, as U.S. consumers quickly responded
to record prices by cutting demand, and as hedge funds began to reverse 'long
crude oil futures - short U.S. dollar positions' put in place earlier this
year. However, concern over 'geopolitical supply risks', centred in the
Caucasus, have resurfaced in late August, underpinning prices.
    U.S. petroleum consumption was down by 3.1 per cent y/y in mid-August,
with a 1.6 per cent drop in gasoline and an 8.6 per cent plunge in other
products (including jet and residual fuel oil) more than offsetting a 3.3 per
cent gain in diesel fuel & home heating oil. The falloff in U.S. demand
quickened last May, as WTI climbed above US$125 and gasoline prices moved over
US$3.79 per gallon (gasoline reached a record US$4.11 on July 16 and is
currently US$3.68). In 2008:H1, the U.S. merchandise trade deficit on
petroleum totaled US$197.9 bn (roughly 48 per cent of the overall U.S. trade
deficit), with oil averaging US$111. Lower oil prices and reduced import
volumes will help to alleviate the wide U.S. deficit on petroleum, recently
providing some support for the U.S. dollar, though the deficit will likely
remain exceptionally large.
    Western Spruce-Pine-Fir 2x4 lumber prices have rallied from US$241 per
thousand bd. ft. in June to US$277 in late August (above variable mill costs
for low-cost B.C. Interior producers plus the export tax on U.S. shipments).
OSB prices in the U.S. Northcentral region have also firmed up to US$222 in
late August (above average mill cash costs in most North American producing
regions). Mill curtailments and the need for buyers to replenish stocks
boosted prices.
    The Agricultural Index eased in July, as lower wheat and canola prices
offset gains in barley, hogs and cattle. The U.S. Department of Agriculture
expects an increase in world wheat output to lift the global stocks-to-use
ratio to a more comfortable 20.9 per cent from 18.5 per cent.

    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; or Jane Shannon, Scotiabank Public
Affairs, (416) 933-3056,

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