Scotiabank's Commodity Price Index Soars in April; Though Reduced Investor
Risk Appetite Pulls Back Prices in May

    -   World oil demand will recover in 2010, despite Euro zone austerity
        measures slowing global growth prospects.

TORONTO, May 28 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, posted a strong advance in April, climbing 4.2 per cent month-over-month (m/m). Commodity prices rose 31.4 per cent above the April 2009 cyclical low.

"While commodity prices surged in early April, this strength may have represented the high-water mark for 2010, though not for the business cycle, with investors fleeing risk in May," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "The tough austerity measures recently announced in Greece, Portugal, Spain and Ireland as well as in the United Kingdom and Italy - in addition to prior retrenchment - will slow global growth.

"However, recent concern over the potential for a slowdown in China, partly linked to measures to cool a red-hot property market in Tier-1 cities, is likely overblown with GDP still expected to advance by nine per cent in 2011," continued Ms. Mohr. "China largely drives global commodity markets - accounting for almost 40 per cent of world demand for the four key base metals compared with 16 per cent in Western Europe and 10.5 per cent in the United States."

Special Feature: Crude Oil - Largely Balanced Global Supply/Demand Conditions

Since the global credit crisis of late 2008, WTI oil prices have been driven largely by the ebb and tide of international economic indicators and prospects for global economic growth rather than by actual oil supply/demand conditions. Investment funds have largely driven prices, with only a limited impact from the physical trade.

"This month's report attempts to shine a light on actual supply and demand conditions for crude oil and concludes that the market is largely balanced, though not tight," said Ms. Mohr. "However, in view of financial market concern over Euro zone growth, we have moderately revised down the WTI oil price forecast to US$79 per barrel for 2010 and to US$80 for 2011."

Turning to the outlook, world oil consumption started to turnaround in 2009:Q4, edging up by 0.8 per cent year-over-year (y/y), after plunging by 1.24 million barrels per day (mb/d) or -1.4 per cent in 2009. While Euro zone challenges will slow recovery, global oil consumption should climb back to 86.2 mb/d in 2010 (+1.4 mb/d), though demand may remain slightly below the 86.4 mb/d peak of 2007.

Key crude oil demand highlights in 2010:

    1.  China will remain the growth leader, with a gain of about eight per
        cent. This projection may prove conservative, given strength so far
        in 2010. China's implied petroleum consumption advanced by 18.2 per
        cent y/y in 2010:Q1 and by 12 per cent y/y in April, with particular
        strength in naphtha as a feedstock for two new one million tonne
        petrochemical plants.

    2.  Though a much smaller consumer than China, India's petroleum
        consumption was little affected by the late-2008 global credit crisis
        and is likely to rise by another 100,000 barrels per day (b/d) to
        3.4 mb/d in 2010.

    3.  The Middle East itself is a growth market for crude oil, spurred by
        rapid industrialization - including petrochemical and aluminum
        smelter construction.

    4.  Petroleum consumption in the United States, still by far the world's
        largest oil consuming country, was soft in early 2010, but started to
        recover in March and is now mounting a solid advance - up 6.9 per
        cent y/y to 19.5 mb/d in the four weeks ending on May 21
        (gasoline +1.2 per cent, diesel and home heating oil +15.8 per cent
        and all other products +10.7 per cent).

    5.  In contrast, oil demand in Europe appeared to be in
        'structural decline' even before the Greek debt crisis. While Greece
        and Portugal are small oil markets (414,000 b/d and 272,000 b/d
        respectively), Spain is a more substantial market (1.48 mb/d in
        2009); these countries accounted for 14.2 per cent of European and
        2.6 per cent of global consumption last year. Austerity measures in
        these countries as well as in the United Kingdom and Italy could pull
        overall European petroleum consumption down to 14.8 mb/d in 2010 -
        another -2.4 per cent drop.

"Overall, world petroleum consumption should advance by 1.4 mb/d in 2010 - well above the increase in non-OPEC supplies at 0.7 mb/d - even with the drop in European consumption," noted Ms. Mohr. "The net result, the call on OPEC crude oil - a measure of market tightness - should edge up in 2010 to 28.8 mb/d. OPEC output in April was slightly higher at 29 mb/d."

Metals & Minerals

The Metal & Mineral Index surged in April, jumping 10.3 per cent m/m - with broad-based strength in base & precious metals and steel-alloying agents (cobalt and molybdenum).

According to the report, the price of Western Canadian premium-grade hard coking coal bound for Asian markets climbed from US$128 per tonne to US$200 (FOB Vancouver) in the first quarter of the new fiscal year, following annual contract negotiations with Japanese steel makers. In view of tight international supplies, spot prices (FOB Australian ports) at US$213 in late May remain well above the contract price, pointing to flat-to-slightly higher prices in the July-September quarter.

While copper and other base metal prices have pulled back on Euro zone austerity measures, prices remain at lucrative levels. LME copper at US$3.12 per pound yields a 53 per cent profit margin over full break-even costs including depreciation and is likely to remain above the US$3 mark in 2010 and 2011.

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 Patty Stathokostas, Public Affairs, (416) 866-3625 or

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