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Scotiabank's Commodity Price Index Tumbles in October

Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, plunged 15.6 percent month-over-month in October, the sharpest monthly decline in the history of the Index.

The sudden and unusually sharp decline since the July peak (-28.8 percent) reflects the exit of many hedge funds from long commodity futures positions and commodity index-linked investments, forced by fund redemptions and tighter credit, as well as a shift to record short positions by funds and trading companies.

"Recognition that much of the G7 economy is now contracting has also pushed down prices," says Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "Global economic prospects have been marked down further, despite a massive fiscal stimulus package just announced by China. World growth is now expected to advance by less than 2 percent in 2009 compared with GDP gains of 5 percent in 2006 and 2007."

Within the sub-components, the Oil & Gas Index led the decline in October, down 21.8 percent from September, and will drop further in November, the report said. West Texas Intermediate (WTI) oil at US$54 per barrel in late November is almost US$100 per barrel lower than its US$147.90 peak on July 11, 2008, though prices have edged up in recent days. However, oil prices are oversold at the US$50 level. Should prices be sustained around US$50 in 2009, much needed capital spending on new field development will be curtailed in higher-cost producing regions of the world, setting the stage for a strong recovery in prices in the early part of the next decade.

The Metal & Mineral Index lost significant ground in October, though the Index remained 5.1 percent above a year earlier. Double-digit declines in base metals, sulphur and uranium, and a more moderate drop in precious metals swamped an increase in potash.

Average spot prices for potash (FOB Vancouver) edged up from US$862.50 per tonne in September to US$869 in October and remain at this level in November.

Spot uranium prices dropped from US$60.40 per pound in September to US$46 in October, reaching a low of only US$44 on October 20, with forced liquidation by hedge funds and other investors facing cash flow difficulties. However, prices have recovered to US$55 in mid-November, with a large increase in spot buying by Asian utilities, traders and producers taking advantage of bargain prices. India will resume buying uranium concentrates next year, following agreement by the Nuclear Suppliers Group, the report said.