TORONTO, Feb. 26 /CNW/ - After reaching a record high in December,
Scotiabank's Commodity Price Index, which measures price trends in 32 of
Canada's major exports, dropped 5.2 per cent month-over-month in January. The
All Items Index currently stands 0.9 per cent below a year earlier.
    "A sharp decline in the Oil & Gas Index, partly linked to El Nino weather
conditions, led overall commodity prices lower in January," says Patricia
Mohr, Vice-President and commodity market specialist at Scotia Economics. "The
Metal and Mineral Index also lost ground, as investment/hedge funds and CTAs
(Commodity Trading Advisors) took profits in base metals. A moderate build in
LME inventories of both copper and zinc since late November, combined with
expectations of new mine development by late 2007, triggered profit-taking,
though prices are expected to rebound in coming months."
    According to the report, a rebalancing of portfolios by 'commodity-index
funds' during the week of January 8 alongside re-indexing of the benchmark
'Dow Jones-AIG Commodity Index' (DJ-AIGCI) contributed to a wave of
profit-taking across commodities. While gold prices also plummeted briefly in
early January, prices snapped back quickly, as momentum players and CTAs built
long positions, and as jewellery manufacturers and Far Eastern investors
stepped up their physical buying at lower prices.
    Finally, the Agricultural Index edged down in January - with slightly
lower wheat and barley prices - while the Forest Products Index inched up - as
lumber prices rallied modestly ahead of the spring building season. In view of
the downturn in U.S. markets, Canadian lumber producers are turning to
stronger markets in the Middle East, Asia and Europe, a development not seen
for many years.

    Recent Profit-Taking in Base Metals Likely Overdone

    "The recent decline in copper and zinc prices has been premature and we
expect the Metal & Mineral sub-component to bounce back in February/March,"
says Mohr.
    LME copper prices fell below US$3.00 per pound in mid-December and
averaged US$2.57 in January. Prices have been volatile, falling to a low of
US$2.37 on February 8, before climbing back to US$2.81 on February 23. While
apparent consumption of copper in China slowed last year to only 4 per cent,
as fabricators used up inventories on hand in reaction to high prices, demand
should accelerate again to about 8 per cent in 2007, as Chinese fabricators
and the State Reserves Bureau restock. With an end to the Lunar New Year
holiday on February 25 and higher imports into China in January, traders are
starting to anticipate this development. U.S. fabricators will also have to
restock, after cutting their orders dramatically in late 2006. Zinc prices are
also beginning to rebound.
    London PM Fix gold prices dipped as low as US$608 per ounce in early
January, but quickly snapped back, with strong physical buying at prices under
US$615. Gold has recently traded at a six-month high of US$683 and may well
climb to US$700 later this year. According to Mohr, the U.S. dollar appears
vulnerable to a further correction against the euro, particularly if the
spread between the Fed funds rate and the ECB re-financing rate narrows later
in the year.
    "Uranium remains our top 'pick' for commodity investors in 2007, with
spot prices soaring to US$85 per pound in mid-February (up US$10 in the latest
week) from US$72 in late December," says Mohr. "Hedge funds and utilities are
aggressively bidding for material in an environment where 80 per cent of
global output from 2008-12 is likely already committed. With prices quickly
rising in early 2007, we are revising up our average price forecast for 2007
to at least US$90. Prices appear headed towards the US$100 mark by year end."
    Mohr continues, "our expectations for a nickel 'super-cycle' also remain
intact."
    LME nickel prices rose to an extraordinary new record high of US$19.64
per pound on February 23 - driven up by strong global stainless steel demand
and LME inventories representing only half a day of global consumption.
    WTI oil prices tumbled from US$62.09 per barrel in December to US$54.35
in January - the lowest level since May 2005 - but rebounded to US$61
mid-month (still slightly below a year ago). Prices have strengthened with the
return of colder weather in the U.S. Northeast and Midwest (key heating oil
markets) as well as President Bush's proposed doubling of the Strategic
Petroleum Reserve over the next twenty years (including stepped-up buying this
spring).
    While Nymex natural gas prices also edged down to US$6.80 per million
British thermal units in January, prices have firmed up to US$7.56 to date in
February (similar to year-ago levels, but well below the record highs of late
2005 caused by hurricane outages). Colder U.S. weather in February has led to
several weeks of strong storage withdrawal (better than a year ago) and U.S.
gas-in-storage has fallen below a year earlier.
    While the Agricultural Index inched down in January, canola prices at the
Port of Vancouver jumped to more than a ten-year high - boosted by growing
European canola imports for biodiesel production. Expectations that U.S.
farmers will shift acreage away from soybeans to corn for ethanol production
have also lifted overall oilseed prices.

    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.