Scotiabank's Commodity Price Index Retreats Further in September

    TORONTO, Oct. 28 /CNW/ - For the second consecutive month, Scotiabank's
Commodity Price Index, which measures price trends in 32 of Canada's major
exports, lost significant ground in September, declining 6.8 per cent
    While still 24.5 per cent above a year earlier in September, commodity
prices will retreat further in October alongside faltering global economic
prospects, ushered in by a U.S. and European banking crisis, deleveraging by
financial institutions and sharply tighter global credit conditions.
    "The decline in commodity prices has been heightened by a massive
unwinding of futures and commodity-index investment positions by hedge funds,
shifting out of commodity investments deemed too risky in a global
deflationary economic environment," says Patricia Mohr, Vice-President,
Economics and Commodity Market Specialist at Scotiabank. "Investment in
commodity index-linked securities fell from about US$200 billion at the end of
June to no more than US$150 billion in September and will plunge in October."
    The decline in Scotiabank's Commodity Price Index in September was led by
the Oil & Gas sub-index, with a decline of 10.6 per cent month-over-month and
the Agricultural sub-index, with a decline of 8.9 per cent, the two sectors
where hedge fund outflows from futures markets have been the greatest.
    West Texas Intermediate (WTI) oil prices tumbled from US$116.68 per
barrel in August to US$103.76 in September to only US$63 on October 27.
Current prices are below year-earlier levels, the lowest since March 2007 and
only 43 per cent of the US$147.90 peak on July 11. In a bid to shore up market
conditions, OPEC announced a cut to its formal production quotas at its
October 24 emergency meeting.
    "The reduction should largely bring world supplies back in line with
demand, though the market remains skeptical that the cut will be enough in
view of uncertain global economic conditions," added Ms. Mohr. "The cartel
stands ready to cut further at its December 17th meeting, fearing that 'the
collapse in oil prices may jeopardize many existing projects and lead to the
cancellation or delay of others, possibly resulting in a medium-term supply
shortage' and we concur with this statement."
    The report adds that oil prices at US$60 are sufficient to yield an
adequate rate of return on equity for legacy projects in the Alberta oil
sands, over and above all costs including depreciation and interest expense.
However, sustained prices at US$60 would cause significant delays in new
project development.
    "While it is difficult to find a silver lining from these delays, given
the vital role of the oil & gas sector in Canada's economy and industrial
base, a likely global slowdown in capital spending in 2009 will cut steel
prices and eventually lower capital costs for oil sands development," said Ms.
Mohr. Medium-term, oil prices are expected to return to the US$85 level.

    Potash prices rise, despite decline in the Metals & Minerals Index

    The Metal and Mineral Index has lost 9.7 per cent since the July 2008
peak and will plunge in October. Both base and precious metal prices dropped
in September, with only potash and cobalt bucking the trend.
    The report states that average spot potash prices (FOB Vancouver) climbed
from US$802.50 per tonne in August to a new record of US$862.50 in September
and were stable in mid-October at about US$865 (at US$1,000 cfr in many
markets and 243 per cent above a year earlier). A strike at three of Potash
Corp's mines in Saskatchewan, record low North American inventories and
sold-out contract volumes at major potash producers continue to underpin
    The report also adds that China needs to restock potash in 2009, after a
50 per cent year-over-year plunge in its imports in 2008 year-to-date (YTD),
the impact of major shippers shifting volumes to other markets earlier in
2008. A small number of producers control world supplies. The net result,
while potash prices could ease moderately in 2009, this market will be
relatively resilient.
    Base metal prices have moved from boom to bust since mid-July, as
investment funds massively exited their positions. While prices are very
over-sold, uncertainty over global economic prospects and selling by some
funds into rallies are likely to keep prices at a low ebb over the balance of
the year.
    London Metal Exchange (LME) copper prices have declined from US$3.46 per
pound in August to US$3.17 in September to US$1.67 on October 27, the lowest
level since July 2005, though prices should rally in early 2009. LME nickel
and zinc prices have retreated even more than copper, falling below average
world breakeven costs including depreciation and interest expense.

    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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