Canadian Treasurer

July 27, 2011

Scotiabank Commodity Price Index edges down in June

TORONTO -- After falling in May, Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, eased further in June, though the decline was slight at -0.3% m/m. The All Items Index has corrected only moderately by -2.8% from the April-2011 near-term peak and remains 55.3% above the cyclical low in April 2009, following the 'Great Recession'.

"Exchange-traded commodity prices have steadied in July on the release of economic indicators pointing to a 'soft landing' for China (GDP in 2011:Q2 up 9.5% yr/yr — only slightly slower than the 9.7% of Q1 — and industrial production speeding up to 15.1%)," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.  "However, a flash PMI (purchasing managers' index) for July points to some cooling this month. Monetary policy will likely be tightened further in China to dampen inflation (CPI up 6.4% yr/yr in June) — likely posing an ongoing challenge for policy makers in Beijing."

WTI oil prices at US$99 and Brent at US$118 per barrel in late July have also rallied back, after only a brief retreat following stepped-up output by Saudi Arabia and the IEA's 'strategic stock' release (announced on June 23).

"In June, the decline in commodity prices was centred in Oil and Gas (- 3.2% m/m)," added Ms. Mohr. "Substantial declines in Alberta light and heavy crude oil and moderately lower propane prices in Edmonton and Sarnia more than offset slightly firmer natural gas export prices."

However, the Metal and Mineral Index edged up by 0.1% m/m in June. While base and precious metal prices were mixed, LME copper prices rallied to US$4.10 per pound and strengthened further in July (as high as US$4.44 on the 26 th — within 3.6% of the all-time record US$4.60 of February 14, 2011). After liquidating inventories for most of 2011, Chinese fabricators & traders increased their imports again in June, in view of the underlying strength of copper demand in air conditioners, urban power transmission and low-income housing.

'Spot' potash prices for the standard grade (FOB Vancouver), with ocean freight netted-back to the port, rose from US$445 per tonne in May to US$481 in June and US$490 in July (up US$111 since December). Both BPC and Canpotex have successively raised prices in Brazil and Southeast Asia twice this year, given strong demand, with a third price increase (US$30-40) expected soon for fall application. From January to May 2011, Brazilian MOP imports jumped 48% yr/yr, with Canada selling just over 1 million tonnes for a 35.1% market share (just below Belarus' 38.8%).

The Forest Products Index also rose by 1.4% m/m in June, as lumber and OSB prices rebounded seasonally, after falling near average mill cash costs in May. U.S. housing starts strengthened to 629,000 units annualized in June, with more than half of the gain in multiple units.

The Agricultural Index posted another strong gain in June, climbing 1.8% m/m, led by canola prices. Spot canola at Vancouver — a low trans-fat oilseed used mostly for vegetable oil and margarine/salad dressings — jumped to C$608 per tonne (+2.3% m/m and +40% yr/yr).

U.S. CBOT corn prices (arguably the most influential grain and oilseed price impacting world food prices) have eased back from a record US$7.87 per bushel on June 10, 2011 to US$6.89 in late July, on a large upward revision to the USDA estimate for U.S. corn plantings this spring. However, even with very favourable assumptions on plantings & yields, which many observers believe too optimistic given recent hot weather, strong international demand will reduce the U.S. corn 'ending stocks-to-use ratio' for 2011-12 to only 6.5 from 6.6 in 2010-11 - almost half the 13.7% average of the past ten years.  This suggests ongoing strength in grain prices and fertilizer demand.

"With G7 economic expansion likely to be in the 'slow lane' for some time — curbed by austerity programs to pare high government debt and deficits — it is vital that Canadians seek out export and direct investment opportunities in the 'emerging world' — especially Asia-Pacific and Latin America," said Ms. Mohr. "In this environment, a free trade agreement with India on goods and services, combined with an investment accord, would be particularly welcome, opening up valuable opportunities for Canadian exporters and equally valuable opportunities for India. Canada's Ministry of International Trade began negotiations with India in November 2010 and will resume discussions this Fall."

Spot gold prices touched a new record high of US$1,624.07 per ounce on July 25 on the U.S. debt ceiling impasse. At issue is both the timing of the debt ceiling increase from the current US$14.29 trillion to avoid default and the credibility of the proposed deficit reduction package. While a second EU bailout package was agreed for Greece last week, there appears to be concern over the long-term sustainability of the measures, though new powers for the European Financial Stability Facility, to prevent contagion in other countries, were a welcome development. With a selective, temporary default on some Greek bonds a virtual certainty — as private holders of Greek bonds voluntarily agree to an average 21% reduction in the net present value of their holdings through debt exchanges or rollovers — Moody's again downgraded the sovereign debt of Greece on July 25. Aside from gold, the Swiss franc appears to be the currency of choice, rising to an all-time high against the U.S. dollar on July 25 and strengthening against the euro. Gold may maintain its allure for a while longer.



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