Commodities seen gaining strength

Commodities started 2010 off on a strong note, with the price Canada’s top export materials jumping 4.8% in January, according to the latest reading of the Scotiabank Commodity Price Index.

Prices spiked in early January as a cold snap in the northern hemisphere drove energy prices higher, and base metals rose on speculative demand from China.

“However, prices retreated significantly from mid-January through early February as China and then India began to tighten monetary policy to prevent inflation from heating up and asset bubbles from forming, raising concerns over a potential slowdown in emerging-market demand, albeit likely overdone,” said Patricia Mohr, vice-president, economics and commodity market specialist at Scotiabank.

But prices are expected to continue to rise throughout the first half of the year, as the U.S. economy recovers and businesses restock.

Scotia’s oil and gas index gained 12.5% in January, as West Texas Intermediate crude climbed to US$78.38 per barrel. Throughout January, the price has swung from as low as $69 to a high of $83, as traders try to get a handle on U.S. and global economic growth.

Meanwhile technological advances borrowed from the shale gas sector are expected to increase production in conventional oil fields.

Forest products were the next best performers as a sector, rising 3.3% month-over-month. Canadian forestry companies have stated they will not be reopening idle mills any time soon, while logging in the southern U.S. has been limited due to adverse weather conditions.

“While the recovery in U.S. housing starts remains fragile and slow, inhibited by snow in many parts of the United States in January and February, lumber inventories across the distribution system fell to exceptionally low levels in late 2009 and U.S. dealers are now restocking in the face of supply constraints,” said Mohr.

Scotia’s agricultural index climbed 1.9% in January, despite weakness in wheat and canola.

The metals and minerals sector climbed 1.0%, with gains in base metals being offset by slumping potash prices. The fertilizer component is now seen to have bottomed out.

Also trading near its lows, uranium could soon get a boost from a commitment made by U.S. President Barack Obama to build more nuclear power plants.

(02/25/10)