Scotiabank's Commodity Price Index Tumbles In April, Likely Touching Bottom

    TORONTO, May 20 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, plunged 6.2 per cent
month-over-month (m/m) in April to a level 45.4 per cent below the cyclical
peak of July 2008. The year-over-year (y/y) decline in commodity prices has
also been in the 40 per cent range.
    "The All Items Index is now at or close to bottom, with a number of key
commodities, uranium, propane and NBSK pulp, probably touching cyclical lows
in April," says Patricia Mohr, Vice-President, Economics and Commodity Market
Specialist at Scotiabank. "Spot uranium prices have already rallied back to
US$51 per pound in mid-May."
    Ms. Mohr finds that while investor interest in commodities and China's
demand may taper off seasonally in the late summer, prices should be supported
above recent lows, and will likely rally again in the fall alongside three key

    -   Even if revival in the U.S. economy is slow in the second half of
        2009, the Asian 'tigers' are likely to lead world economic recovery,
        with bigger fiscal stimulus programs than in the G7 and more
        potential for domestic spending (i.e. non-export-led expansion);
    -   The 'reflation trade', with investment managers and hedge funds
        positioning portfolios to take advantage of rising commodity prices
        and inflation as the world economy reflates over the next 2-3 years;
        the iShares Trust Dow Jones Basic Materials Sector Fund ETF has
        outperformed the S&P 500 Index since U.S. equity markets bottomed
        around March 9; and
    -   A growing interest in hard assets rather than paper currencies or
        U.S. Treasury bonds by China and sovereign wealth funds, as evidenced
        by China's huge direct investment in Australian mines and interest by
        Asian utilities (South Korea, Japan and possibly China) in locking up
        guaranteed supplies of uranium through investment in Canadian mines.

    The Metal and Mineral Index, down 11.3 per cent m/m, led the All Items
Index lower in April. While base metal prices continued to strengthen
alongside China's stronger industrial activity and strategic stockpiling, a
sharp downward adjustment in coking coal prices in Western Canada, following
annual contract negotiations with Japanese steelmakers, pulled the Index
lower. The price of premium-grade hard coking coal (Teck's Elkview brand)
dropped from last year's record US$300 per tonne to US$128 (FOB Vancouver) for
Japanese Fiscal Year 2009, beginning in April.
    London Metal Exchange copper prices grabbed the headlines again by
climbing from US$1.70 per pound in March to almost US$2.00 in April. Prices
touched US$2.16 on April 16, yielding a high 41 per cent return over average
world break-even costs including depreciation, up substantially from a low of
only US$1.26 on December 24. Copper is seen as a strategic metal in China and
the country's imports jumped in the first quarter of 2009, though China's
demand usually tails off seasonally in the third quarter.
    Spot uranium prices eased from an average of US$42.85 per pound in March
to US$41.63 in April, but have snapped back to US$51 in mid-May.
    "While uncovered utility requirements over the next twelve months are
low, Asian utilities, a major investment fund and the world's largest uranium
miner (Cameco) have been active buyers, anticipating higher prices to come,"
says Ms. Mohr. "China will start construction on five new reactors this year
and is attempting to build a uranium inventory. While recent weakness in the
spot market pulled down the base price for long-term contracts, prior to
escalation on delivery, to US$65 from US$70 in mid-April, we expect a rebound
by 2010."
    A total of 436 reactors are currently in operation worldwide, with
another 45 under construction and 112 planned, mostly expected in operation
within eight years. China will dominate this expansion with 12 reactors under
construction and at least 33 planned, on top of its current 11 units in
operation. India, with six under construction and 10 planned, Russia and South
Korea will also loom large. These ambitious programs are triggering rising
interest by Asian utilities in securing long-term guaranteed supplies with
miners, often in return for finance.
    "Recent spot prices in the US$40 to US$45 per pound range were clearly
too low to be sustained over the medium-term, as they are below price levels
required to justify investment in new capacity," concludes Ms. Mohr. "Recent
prices covered full break-even costs for many existing mines, though costs at
the higher end of the US$25-65 range have recently triggered mine & processing
plant closures in the United States. However, we doubt that recent prices have
been high enough to cover the substantial capital costs for major new mine
development, even if unit operating costs are low with substantial economies
of scale."
    West Texas Intermediate (WTI) oil prices edged up from US$48.06 per
barrel in March to US$49.95 in April and have averaged US$57 to date in May.
Prices touched a six-month high of US$60.42 in intraday Nymex trading on May
19 on signs the U.S. recession may soon ease and on oil export disruption from
Nigeria, where militants blew up two pipelines.
    However, actual U.S. petroleum consumption remains subdued. A recent jump
in China's crude oil imports, stepped-up refinery runs and double-digit
declines in gasoline and gasoil stocks partly reflect increased gasoline and
gasoil exports, but likely also point to a coming pick-up in domestic demand.
India, shrugging off the global recession, is the one major oil consuming
country where demand remains robust, with gasoline and gasoil sales up 12.8
per cent and 8.8 per cent respectively in March.

    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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