TORONTO, April 26 – Scotiabank’s Commodity Price Index, which measures price trends in 32 of Canada’s major exports, posted a new record high in March — the second in the past two months. The All Items Index jumped by 3.6% in March to a level 73.6% above the cyclical low in October 2001. The Oil and Gas Index led the way, with substantial gains in light and heavy crude oil and propane prices and a slight gain in natural gas. The Metal and Minerals Index rose to the highest level since January 1989, as investment funds increased their base metal positions amid tight global supplies. The Forest Product Index also edged up in March, with slight gains in lumber, OSB, newsprint and uncoated freesheet paper, as did the Agricultural Index.
According to the report, the current cyclical expansion in commodity prices since the October 2001 bottom is already among the most powerful of the post-World War II era — second only to the upswing of 1972 to 1980 — driven by the 1973 Arab oil embargo, concern over global ‘resource scarcity’ in an environment of strong world growth and huge stockpiling of raw materials by Japanese trading houses.
“In inflation-adjusted terms, the current upswing has actually been stronger than in the 1970s — this time triggered by China’s rapid industrialization and under-investment in the resource industries in the 1990s,” says Patricia Mohr, Vice-President and commodities specialist, Scotia Economics. “Though U.S. growth has moderated and conditions are soft in Europe, China’s expansion remains on track, with robust GDP growth of 9.5% in the first quarter of 2005 and business fixed investment up 22.8% year-over-year. China’s industrial production rose by 15.1% year-over-year in March.”
Oil and Gas
West Texas Intermediate crude oil climbed from an average of US$48.05 per barrel in February to US$54.63 in March — surpassing last October’s previous peak. Prices reached a new intra-day record high of US$58.28 on April 4th (in daily data back to 1947).
“Oil traders recognize that most OPEC countries (excluding Iraq) are now running their fields at 95-100% of maximum sustainable capacity (averaging 97.6%), with only Saudi Arabia and the United Arab Emirates having any surplus capability to meet growing world demand or ‘geopolitical supply’ disruptions,” says Mohr. “While easing back from the early-April peak, prices remain exceptionally strong at US$55 in mid-April.”
Though prices could ease in the second quarter — normally a period of seasonally weak demand — jitters over U.S. gasoline supplies, as the summer driving season approaches in late-May, could limit the downward drift (despite seemingly ample U.S. gasoline inventories — currently 6% above a year earlier and 5% above normal).
Metals and Minerals
The Metal and Mineral Index rose by 3.9% month-over-month in March alongside broad-based strength in base and precious metals, potash and uranium. Nickel and aluminium led the way. Global nickel markets remain in deficit (world consumption exceeds supplies), pushing down LME inventories from 20,892 tonnes in late 2004 to only 7,110 in mid-April. Nickel-containing stainless steel production was still strong in the United States and Japan in the first quarter of 2005, though some slowdown may be in store in the second half of the year. China will ramp up two new stainless steel mills in 2005-06, possibly slowing exports from Japan. Longer-term, Canada’s largest nickel producer is optimistic that China’s ambitious nuclear power expansion will continue to power nickel demand.
Global copper supplies remain exceptionally tight. While mine capacity is being ramped up, smelter constraints are limiting the availability of refined metal. Peak prices for this business cycle may not yet have been seen. However, smelter expansion (about 500,000 tonnes) could slowly ease market conditions by late 2005.
“Uranium prices — used for base-load electricity generation and little impacted by cyclical developments — continue to trend higher. Spot uranium prices rose from an average of US$21.40 per pound in February to US$22.00 in March and to US$23.50 on April 18. Prices were only US$17.60 a year earlier and US$10.30 two years ago. We continue to rank uranium as a top commodity-pick over the balance of the decade,” comments Mohr.
“While U.S. demand for groundwood specialty papers soared in early 2005, U.S. daily publishers reduced their newsprint consumption. To contain costs, publishers continue to trim newsprint use by reducing basis weights and shifting from broad sheets to narrower tabloids with fewer pages,” says Mohr. “Nevertheless, given capacity closure and conversion to faster growing paper grades, North American mill-operating rates averaged a high 96% (97% adjusted for indefinitely idled capacity). While many producers delayed the scheduled US$35 hike in newsprint prices to April, a price increase totalling about US$25 is still expected this spring, taking prices to a marginally profitable US$595 per tonne).”
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
Patricia Mohr, Scotia Economics, (416) 866-4210
Nadine Ricketts, Public Affairs, (416) 933-1093