Scotiabank's Commodity Price Index Retreats in May

- U.S. Gulf of Mexico oil spill points to tighter U.S. oil supplies ahead.

TORONTO, June 30 /CNW/ - After surging in April, Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, lost considerable ground in May, dropping 4.6 per cent month-over-month (m/m), though the Index remains 22.1 per cent above a year earlier.

"Reduced investor risk appetite, linked to the Euro zone debt crisis, triggered another shift back into the safe-haven of U.S. dollar Treasury securities, pushing down commodity prices," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "Tighter credit conditions and austerity measures in Euro zone countries with the highest debt-to-GDP ratios threaten to slow global growth, with G-20 countries pledging to cut deficits in half by 2013 at the Toronto Summit."

Commodity prices received a lift in mid-June from China's decision to allow greater flexibility and a modest appreciation in its currency, more specifically, to shift the Yuan from a fixed peg to the U.S. dollar to a managed float against a basket of key currencies. Financial markets greeted the announcement as a sign that Beijing is confident in China's ongoing economic expansion and that the impact of debt problems in Europe will remain contained. Modest appreciation of the Yuan against the U.S. dollar and the euro should help to rebalance global trade flows, boosting the competitiveness of manufacturers in these countries and helping to sustain a recovery in G7 industrial activity. However, bouts of investor risk aversion are likely to continue.

Oil & Gas - Reduced Gulf of Mexico Drilling Points To Tighter U.S. Oil

Supplies Ahead

Oil & Gas led the decline in Scotiabank's Commodity Price Index in May (-7.9 per cent m/m). While Canadian natural gas export prices edged up, light oil prices in Edmonton and heavy/medium oil prices at Hardisty, Alberta dropped by more than US$14 per barrel.

"Traders bid down WTI oil prices alongside reduced risk appetite from a high of US$87.15 per barrel in early April to a low of only US$63 during the height of concern over Euro zone sovereign debt," commented Ms. Mohr. "Prices have rallied back to just under US$76 in late June, partly on concern over the outlook for drilling in the U.S. deepwater Gulf of Mexico, following the blowout and subsequent oil spill at BP's Macondo exploration well. The U.S. Gulf of Mexico currently supplies 30 per cent of U.S. domestic oil production, with 80 per cent coming from deepwater wells."

In the report, Ms. Mohr noted that the oil spill in the Gulf of Mexico will usher in a period of substantially higher drilling costs in the U.S. Gulf of Mexico Federal offshore, with exploration and development activity unlikely to return to more normal levels for some time. Even when the current moratorium on all floating exploration & development rigs is lifted, more lengthy regulatory procedures and the required redesign or retrofitting of equipment (e.g. blowout preventers) will delay development. The potential for 'elephant' fields in the relatively unexplored U.S. Gulf of Mexico was the major hope for growth in U.S. domestic supplies going forward.

"In this environment, the oil spill will likely trigger even greater interest in the Bakken light oil play in Southern Saskatchewan as well as North Dakota and Montana, the newly emerging tight oil plays in Western Canada and the Alberta oil sands," said Ms. Mohr. "Canada is the largest oil supplier to the United States, accounting for 23.7 per cent of U.S. oil imports ahead of Mexico's 13.5 per cent and Nigeria's 12.9 per cent."

Metals & Minerals

Metals & Minerals also lost ground in May (-6.3 per cent m/m), as base metal prices corrected from recent highs, only partly offset by further strength in precious metals. However, similar to oil, LME copper, zinc, nickel & aluminium prices rallied back in mid-June and remain at profitable levels for mining companies. LME copper prices are a lucrative US$2.99 per pound in late June.

"Spot gold prices touched a new all-time record high of US$1,265.30 per ounce on June 25th, as investors fretted over the integrity of paper currencies, given high government debt in the Euro zone, the United States and Japan," said Ms. Mohr.

The price of premium-grade hard coking coal from Western Canada to Asia is likely to rise from US$200 per tonne (FOB Vancouver) in JFY2010:Q1 (April to June) to US$225 in Q2. Major Japanese steelmakers have already agreed to this price increase with BHP Billiton for Australian coal. Cyclone damage at ports and rail constraints in Northeast Australia have contributed to tight world supply/demand conditions.

"Spot uranium prices continue to trade at a low ebb at US$41.75 per pound in late June", noted Ms. Mohr. "Prices are being dampened by a low level of uncovered utility requirements in the West, concern over further production gains in Kazakhstan and the barter sale of U.S. Department of Energy UF6 inventory to pay for an environmental cleanup at a closed Ohio uranium enrichment plant. Slower development in Kazakhstan within several years and an end to the U.S.-Russia HEU agreement in 2013 should bolster prices medium-term.

"Ottawa has taken the occasion of the G-20 Summit to advance Canada's uranium trade with India and China - the two major growth markets," continued Ms. Mohr. "Canada signed a bilateral nuclear co-operation agreement with India, permitting the export of uranium concentrates and nuclear equipment from Canada to India, after a hiatus of thirty years."

Forest Products

After recent strength, the Forest Products Index edged down by 1.2 per cent m/m in May, as building material prices fell back with an end to inventory restocking in the United States, offsetting further gains in pulp & paper. NBSK pulp reached a new record high of US$1,000 per tonne in the U.S. market in May and climbed further to US$1,020 in June, though prices may now be peaking.


Only the Agricultural Index gained ground last month (+1.6 per cent m/m), as stronger Atlantic Coast lobster prices and hog prices offset lower cattle, grain & oilseed prices.

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.

SOURCE Scotiabank - Economic Reports

For further information: For further information: Patricia Mohr, Scotia Economics, (416) 866-4210,; or Robyn Harper, Public Affairs, (416) 933-1093 or

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