Commodity prices on the rise

Many of Canada’s export commodities enjoyed a rally in price at the end of 2009, according to the December reading of Scotiabank’s Commodity Price Index, which rose 2.9% month-over-month.

Since the bottom of the commodity cycle in April 2009, prices have rebounded 20.7%, driven by investors, rather than industrial demand. Scotia sees this trend continuing into 2010.

“The search for higher returns, given near-record low interest rates across the globe and exceptionally low U.S. Treasury yields, spurred a US$60 billion inflow into commodity-related investments in 2009,” says Patricia Mohr, vice-president, economics and commodity market specialist at Scotiabank.

That drove global commodity assets under management to about US$235 billion by the end of 2009, compared with just $6 billion to $10 billion in 2000.

“No where is this more evident than in the base metals, where fund and speculative interest has been driven by the China and emerging Asia story,” Mohr says.

The metal and minerals sub-index set the pace for the overall index, with a price increase of 2.9%. Base metals, gold and sulphur were leaders, but the declining prices for silver, cobalt, potash and uranium limited the sub-index’s gains.

Copper prices, already considered rich at $3.03 per pound in November, surged to $3.17 in December and have hit $3.36 since the new year. Analysts expect it will continue on toward the $4.00 mark in 2011.

Among the dragging minerals, potash is expected to climb from a cyclical bottom of $345 per tonne (reached in January), as U.S. fertilizer demand picks up.

“We continue to view 2010 as a transition year for potash, with dealers restocking modestly given the reduced risk of holding inventories, on the way to stronger market conditions in 2011,” says Mohr.

The energy sector posted a 2.8% month-over-month gain as natural gas and propane prices firmed up, countering a decline in crude oil.

“[West Texas Intermediate] prices remain volatile and have pulled back to US$75, with warmer weather returning to the United States, demand remaining sluggish and the market fretting over President Obama’s proposed restrictions on U.S. commercial bank proprietary trading,” says Mohr. “On a more positive note, the large U.S. inventory overhang of oil and products is now largely gone.”

The forest products sub-index gained 2.8% in December, led by a pick-up in U.S. building material prices and a rebound in newsprint prices.

“A relatively strong Toronto construction market is providing some offset for hard-pressed Canadian lumber producers,” says Mohr. “Canadian lumber consumption now accounts for 20% of the U.S./Canadian total, up from 10% previously.”

The agricultural sub-index rose 3.5% on higher prices for Atlantic lobster, some improvement in livestock prices and slight gains in wheat and canola.

(01/26/10)