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Scotiabank's Commodity Price Index edges down in May

Scotiabank's (TSE:BNS) Commodity Price Index inched down by 0.1 per cent in May, the sixth consecutive monthly decline.
Scotiabank's Commodity Price Index edges down in May

Scotiabank's (TSE:BNS) Commodity Price Index inched down by 0.1 per cent in May, the sixth consecutive monthly decline.

The All Items Index has so far fallen 15.9 per cent below its April 2011 near-term peak, just prior to the advent of concern over excessive European sovereign debt. However, the correction remains much less than the 46 per cent slide in the second half of 2008.

"Concern over slowing global growth has pulled down riskier assets such as commodities and equities," Patricia Mohr, vice-president Economics and Commodity Market Specialist at Scotiabank said.

"Disappointment that the Fed did not move to support the U.S. economy through more aggressive monetary policy easing triggered a further correction in oil and gold prices after the June 19-20 FOMC meeting."

The index closely monitors developments within Canada's commodity sector.

Scotiabank said that the Metal and Mineral Index fell by 3.0 per cent month over month in May. Base metal prices lost further ground, with London Metal Exchange copper falling to US$3.59 per pound in May and a low of US$3.29 on June 8, 2012, before rebounding to US$3.33 in late June.

Zinc and nickel prices also remain at lucrative levels, though aluminium is weak (falling below average world cash costs, partly due to smelter expansion in northwest China).

Bayfield Ventures (CVE:BYV) and Clifton Star Resources (CVE:CFO) are Canada-focused precious metals explorers while
Western Potash (TSE:WPX) is active in Canada's potash resource space.

The Oil and Gas Index advanced by 3.6 per cent in May. Despite declining international oil prices, Edmonton light, sweet oil and Western Canadian Select heavy oil rallied in May, with discounts to West Texas Intermediate oil narrowing.

WCS (bitumen blended with dilbit or synbit) rose to US$75.01 from US$70.54 per barrel in May alongside less congestion on export pipelines to the United States as well as a normal seasonal pick-up in demand.

"Saudi Arabia's deliberate over-production in H1 2012 - to offset lost Iranian oil due to sanctions and to prevent high oil prices from derailing a fragile world economy - has contributed to a sharp plunge in international oil prices in June, pressuring Western Canadian crude," Mohr added.

"Despite the coming July 1, 2012 European Union embargo on the purchase or shipment of all Iranian crude, Brent briefly dropped as low as US$88.99 on June 21from a near-term high of US$128.10 on February 24 amid global growth concerns and ample world inventories (now at normal levels)."

Nextraction Energy (CVE:NE) operates in the Viking Provost Field in Alberta as well as in the US.

The Forest Products Index continued to be a bright spot in May, up 3 per cent month-on-month, the fourth consecutive monthly gain. While other sub-indices have fallen below year-ago levels, forest products have climbed modestly above a year earlier.

The Agricultural Index eased seasonally in May, down 3.5 per cent on April, after strength over the spring. Canola prices fell back to a still lucrative US$651 per tonne from a near-record US$673 in April. Wheat prices also lost ground.

Turning to natural gas, NYMEX near-by futures prices appear to have bottomed at US$1.91 per million BTU on April 19, climbing to US$2.49 in May and US$2.68 in late June. Only the very lowest-cost of the 'liquids-rich' natural gas shales such as Eagle Ford and Marcellus can be produced profitably at prices below US$2.

The 'dry' portion of the Marcellus requires US$3. Anticipation of a hot summer across North America has also bolstered prices — both in the United States and Canada.

Spot uranium prices remain at a low ebb. While prices inched up from US$51.45 per pound in April to US$52 in May, prices have eased back to US$50.75 in late June. 

However, anticipation of a recovery in market conditions over the medium-term encouraged buyers to bid up base-contract prices for term commitments to US$61.50 in late May — the first increase since the Fukushima-Daiichi incident.  China is expected to resume approvals for new nuclear power plants soon.

Spot iron ore prices lost ground in May, dropping to US$136.67 per tonne from US$147.65 in April. However, prices have steadied in recent weeks, with China's steel production holding up at a high level. 

Gold prices remain volatile, with the market looking for aggressive monetary policy easing by the Fed or the European
Central Bank.

Market conditions for potash are lacklustre, with the market dampened by high producer inventories - reflecting a lack of new business in India - and awaiting a third-quarter contract with China.

India has cut potash subsidies for farmers (likely due to budgetary constraints), raising effective prices in India. However, buying by India should resume around August. Volumes remain good into Brazil.

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.

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