Scotiabank's Commodity Price Index Retreats Further In March

    -  Spot potash prices drop to Southeast Asia, but significant production
       curtailments point to a turnaround by late 2009

    -  Base metal prices rally, as China's industrial activity picks up

    TORONTO, April 27 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, lost further ground in
March, falling 2.8 per cent month-over-month (m/m) to a level 32.7 per cent
below a year earlier. The global economic contraction, estimated at -1.5/2.0
per cent in 2009 on a purchasing power parity basis, and tighter credit
conditions for businesses and households have contributed to a 41.8 per cent
plunge in overall commodity prices from the spectacular cyclical peak of July
    The All Items Index will fall further in coming months, as a number of
key commodity prices are adjusted down, following annual contract negotiations
with buyers. However, "green shoots are starting to appear, recently lifting
prices for base metals and oil," says Patricia Mohr, Vice-President, Economics
and Commodity Market Specialist at Scotiabank.
    "Firstly, after a marked slowdown in late 2008 and early 2009, China's
industrial activity likely bottomed at 3.8 per cent year-over-year (yr/yr) in
January-February and picked up to 8.3 per cent in March, as China's fiscal
'pump-priming' started to kick in with incentives for rural households to
purchase consumer durables, a massive infrastructure spending program and
government prompting of state-owned banks to boost lending," comments Ms.
    "Secondly, government subsidies in China and Germany aimed at encouraging
scrappage of older vehicles and replacement with more fuel-efficient, lower
emission models are also helping to counter the late-2008 collapse of global
vehicle sales," added Ms. Mohr. "Thirdly, while tentative, improving
expectations that the worst of the U.S. banking and credit crisis might be
over, suggesting that the U.S. recession may end by late 2009, have helped to
lift both equity markets and exchange-traded industrial commodity prices.
After bottoming at US$32.40 per barrel in mid-December, WTI oil prices have
climbed back into a broad US$45-54 trading range since mid-March alongside a
double-digit rally in the S&P 500 Index."
    The Metal & Mineral Index (-4.3 per cent m/m) led the All Items Index
lower in March. While base metal prices (especially copper) rallied strongly,
lower precious metals and a decline in spot potash prices pulled down the
Index. Spot potash prices in March fell to a still lucrative US$710 per tonne
in Vancouver from a record US$872.50 (a last done level, reflective of
shipments in 2008).
    The Oil & Gas Index lost further ground in March (-2.6 per cent m/m).
While crude oil prices strengthened markedly, Canadian natural gas export
prices to the United States dropped to the lowest level since December 2002
amid weak U.S. industrial and gas-fired electricity demand. The Forest Product
Index also retreated (-3.3 per cent m/m), with the pulp and paper industry
hurt by the worst U.S. advertising decline for newspapers and magazines since
the 1930s.
    The Agricultural Index was the only sub-component to rise in March (+2.0
per cent m/m). Canadian and U.S. farmers will likely favour oilseeds when they
plant their crops this spring. U.S. soybean prices have climbed by 32% from a
low in early December, lifting canola prices, with drought in Argentina
reducing global soybean stocks to a 5-year low and stockpiling by China.
    After reaching a record high in late 2008, spot potash prices (FOB
Vancouver) eased back to US$710 per tonne in March, with Canpotex selling two
cargoes to Malaysia and Indonesia at US$735 (delivered), still very high
compared with an average of US$193 from 1999-2008. The near-term outlook
depends heavily on annual contract negotiations with Chinese buyers, led by
Belarusian Potash Company (BCP), not likely to be settled until late May (at
the earliest).
    Global shipments tumbled in late 2008 and early 2009 partly in reaction
to record prices and last fall's plunge in grain prices.
    "While spot potash prices could ease back to the US$650 mark in coming
months, prices will likely rebound over US$700 in 2010", says Mohr. "In
keeping with past practice, major potash producers, in this concentrated
industry, have cut world production by 12 million tonnes in 2008-09 (21 per
cent of effective capacity) to bring supplies down in line with lower demand.
Global stocks should return to normal levels by mid-2009. The potential for a
severe under-application of fertilizers, especially potash and phosphates, in
2009 may cut global grain and oilseed yields, setting the stage for
significantly higher nutrient application and prices in 2010."
    According to Mohr, while gold prices are expected to stay high in 2009,
investor interest is likely to gradually shift first to equities and then to
industrial commodities in the next several years.

    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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