- M&A activity heats up in the global mining industry, as companies
    position themselves for growth in newly emerging markets and for a
    'super-cycle' in metal prices.

    TORONTO, May 28 /CNW/ - For the second month in a row, Scotiabank's
Commodity Price Index jumped to a new record high, up 3.9 per cent in April
over March. The All Items Index has now advanced 132.2 per cent above the
cyclical low in October 2001.
    The Metal and Mineral Index posted another record high in April, the
third in as many months, and is 85.3 per cent above the previous peak in June
1988. Many metals climbed to new heights (nickel, cobalt, lead, uranium and
potash) alongside ongoing strength in China's industrial activity (up 17.4 per
cent year-over-year in April), the global upswing in metal-intensive
investment in processing plant, oil and gas drilling and pipelines and booming
aircraft orders.
    Cash-rich mining companies are moving to strengthen their position in the
global marketplace in what is turning out to be an extended 'super-cycle' for
metal prices. The opening up of many emerging economies in Southeast Asia, the
Middle East, Russia, the Baltic States and Eastern Europe, as well as strong
projected growth in China and India, has more than offset the marked slowdown
in the United States over the past year and points to a period of sustained
demand growth for metals and minerals.
    "The recent acquisition of Canada's two largest nickel producers, as well
as a host of prospective smaller transactions, reflects expectations that the
international supply/demand balance for nickel will remain in deficit through
the first half of 2008," says Patricia Mohr, Vice-President, Economics and
commodity market specialist at Scotiabank. "While prices will eventually
unwind from today's spectacular levels, prices should remain quite elevated
over the balance of the decade, given only a handful of planned major mining
developments and strong trend growth in stainless and specialty steel demand."
    The driving force behind the recent bid for Canada's largest aluminium
company, ranked third in the world with a 9.2 per cent share of global smelter
output, by a U.S.-based producer appears to be less related to expectations of
high aluminium prices and more to the need to bolster market position and
clout in a rapidly changing global environment. China's capacity expansion in
aluminium has been breathtaking since 2003, up 22.3 per cent per annum, with
China quickly emerging as the world's top producing country with 32 per cent
of global output and Chalco the world's fourth largest smelter. A Russian
company has recently catapulted into the top position in aluminium, with the
merger of three companies. The net result, industry concentration has
increased substantially in aluminium, nickel and copper in the past year, with
the top five producers now accounting for 40.1 per cent, 51.5 per cent and
39.7 per cent respectively of world production.
    "This year promises to be another strong year for global aluminium
consumption, with a gain of 8.5 per cent," says Ms. Mohr. "China's consumption
will soar by 28 per cent in 2007, boosted by expansion of the electric
transmission system, and Europe's demand remains high, more than offsetting
auto and housing-related weakness in the United States." However, an even
stronger gain in world smelter output (up 12 per cent) with substantial
capacity expansion in China, Iceland, Russia and Dubai and the re-start of
some U.S. smelters may turn the supply/demand balance from a deficit into a
surplus, as 2007 unfolds.
    Spot uranium prices have advanced to US$125 per pound in late May, up
73.6 per cent since late 2006. Global interest in nuclear power continues to
grow, with 252 new reactors now under construction, scheduled or proposed. LME
nickel prices are over US$23 per pound in late May, 142 per cent above a year
earlier, and prices for steel alloying agents (molybdenum and cobalt) are
robust.
    West Texas Intermediate (WTI) crude oil prices have increased from
US$60.74 per barrel in March to US$65.20 in late May, a substantial rebound
from weather-related weakness in early 2007. Low U.S. gasoline inventories,
linked to unusually heavy refinery outages and maintenance ahead of the
driving season (with aging refineries now being upgraded) pushed up average
U.S. retail gasoline prices to US$3.26 per gallon on May 21, a record level in
data back to 1993, even surpassing the spike in the aftermath of Hurricane
Katrina. The strength of crude oil prices also reflects a fairly snug world
supply/demand balance.
    The Forest Product Index also inched up in April, as northern bleached
softwood kraft pulp prices rose to the highest level since early 1996 and U.S.
fine paper prices showed surprising strength, more than offsetting further
slippage in lumber. However, Western Spruce-Pine-Fir 2x4 lumber prices
rebounded to US$260 per thousand board feet in late May, on news that U.S. new
home sales jumped to 981,000 units annualized in April (up 16 per cent), with
homebuilders offering sharply lower prices to spur sales.
    The Agricultural Index strengthened in April. Cash canola prices (FOB
Vancouver) rose from US$331 per tonne in March to US$337 (up 37 per cent
year-over-year), though Canadian dollar appreciation will reduce receipts for
Prairie farmers. Demand for vegetable oils is strong in China and India and a
shift in plantings by U.S. farmers away from soybeans to corn for ethanol has
propelled soyoil prices to record highs. Canadian canola/rapeseed breeders are
focusing on developing high-omega canola varieties that produce canola oils
with zero trans-fat in processed products.

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