Scotiabank's Commodity Price Index Soars to New Heights in January, Despite U.S. Slowdown

    TORONTO, Feb. 25 /CNW/ - Scotiabank's Commodity Price Index posted a new
record high in January 2008, surging 4.5 per cent month over month and
20.2 per cent year over year.
    "Though the sub-prime mortgage-related slowdown in the United States
continues to take a toll on building material prices, global supply-and-demand
conditions remain very tight for many commodities," says Patricia Mohr,
Vice-President, Economics and Commodity Market Specialist at Scotiabank. "This
partly reflects the ongoing strength of 'emerging-market' demand as well as
supply disruptions."
    Oil, potash, wheat and gold reached new record highs in January. The
Agricultural Index led the way, surging to unprecedented levels, up 56.7 per
cent year over year, while the Industrial segment, oil and gas, metals and
minerals and forest products, also reached new heights.
    West Texas Intermediate (WTI) oil prices remain exceptionally high,
though volatile. Prices have increased from an average of US$91.74 per barrel
in December to US$92.93 in January, ranging from a high of US$100.09 in
intraday trading on January 3 to a low of US$86.99 on January 23. Oil closed
on the Nymex above the US$100 mark for the first time on February 19 and 20
and has averaged US$93.52 so far this month.
    "Our forecast for WTI remains on the high side of consensus expectations
at US$90 in 2008 and at least US$85, if not US$90, in 2009," said Ms. Mohr.
"The latest surge in oil prices reflects the likelihood that OPEC would cut
production at its March 5th meeting, should prices or demand ease
substantially as a result of the U.S. slowdown. The cartel typically nudges
output down in the seasonally slow spring quarter.
    "OPEC appears to be firmly in the driver's seat, given the slow pace of
new oil field development in non-OPEC regions. The cartel is attempting to
avoid its mistake of the late 1990s, when OPEC boosted production just ahead
of the 1998 Asian currency crisis, triggering a sharp decline to US$10."
    Ongoing geopolitical supply risks are also underpinning prices. Venezuela
has cut oil supplies to ExxonMobil in a dispute over compensation for the
company's Orinoco tar sands project, effectively nationalized last year. It
should be pointed out that the volumes involved are small, 90,000 barrels per
day compared with U.S. petroleum consumption of 21.2 million barrels per day.
Concern over rising energy and food inflation is attracting renewed funds
inflows into commodities in late February.
    After easing in December, the Metal and Mineral Index also rallied back
strongly in January. Potash and sulphur prices, fertilizer-related minerals,
continue to jump from record to record, gold (London PM Fix) reached a new
peak of US$929.40 per ounce on January 30 and US$945 on February 21, amid U.S.
dollar weakness, and base metals rebounded across a broad front.
    "For fiscal year 2008, we have revised up our forecast for 'premium-grade
hard coking coal' contract prices from Western Canada to Japan to at least
US$185 per tonne (FOB Vancouver)", says Ms. Mohr. Current prices are about
US$94. A very tight international coking coal market in late 2007 has been
transformed into an unprecedented squeeze by rains in Queensland, Australia,
flooding mines and triggering reduced output by major producers. Thermal coal
prices have also soared following a two-month suspension of China's exports,
linked to snowstorms and widespread power outages in China.
    Only the Forest Product Index fell in January. Lumber and OSB prices
dropped below average cash costs in many regions of North America, offsetting
gains in NBSK pulp, newsprint and supercalendered-A paper (up US$60 per ton).
    A classic 'spike' is unfolding in wheat and canola. The price of dark
northern spring wheat in Minneapolis, a high 14 per cent-protein bread wheat,
which drives the Canadian Wheat Board's asking export price for the
No. 1 grade, skyrocketed from an already lucrative US$11.11 per bushel in
December to an extraordinary peak of US$19.73 on February 15, more than triple
the US$5.51 of a year ago. Prices averaged US$4.69 from 2000 to 2007.
    "Wheat ending stocks in Canada in 2007-08 are expected to drop to
4.9 million tonnes (the lowest in modern times), after several years of poor
growing conditions and strong demand for food and ethanol production on the
Prairies (using feed wheat)," said Ms. Mohr. "In mid-February, surging U.S.
exports triggered another drop in the U.S. Department of Agriculture's
projected U.S. wheat ending stocks to the lowest since 1947-48, and in global
stocks to a 30-year low."
    The Canadian Wheat Board's asking export price for No. 1 grade wheat
(13.5 per cent protein) jumped to an extraordinary C$798 per tonne on
February 8 and, for the past three months, has been well above the previous
C$416 peak of May 24, 1996. Prices averaged only C$252 in the previous two
crop years. Strong world demand - following several years of drought in
Australia and dry growing conditions in Canada, the Ukraine and Russia -
accounts for the strength.
    While wheat prices will likely ease back seasonally next spring and
summer, as new crop supplies become available, prices should remain elevated
for some time. The U.S. Department of Agriculture expects very tight market
conditions for wheat and 'coarse grains' at the end of 2007-08, with the world
stocks-to-use ratio falling to only 14 per cent - the lowest on record.

    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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