-  OPEC maintains production cuts in the face of global refinery
        bottlenecks, pushing up oil prices over the US$75 mark in mid-July.
    -   Strong demand in India and Brazil send potash prices to record highs.TORONTO, July 26 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, edged down by 0.5 per
cent in June, after reaching a new record high in May (134.9 per cent above
the October 2001 cyclical low). The pause, after multiple consecutive records,
reflects an easing in the Metal and Mineral Index from extraordinary heights.
The 4.9 per cent month-over-month drop in the Metal and Mineral Index just
offset a snap-back in the Forest Product Index, up 4.3 per cent, alongside a
temporary seasonal rebound in building material prices, a solid 3.5 per cent
advance in the Agricultural Index and a 1.1 per cent gain in the Oil and Gas
Index.
    Turning to oil markets, West Texas Intermediate (WTI) and Brent oil
prices moved well above the US$75 per barrel mark in mid-July. Despite a
fairly tight global oil supply/demand balance, OPEC has maintained its output
restraints, implemented last October and earlier this year, believing that
stepped-up oil production would only result in a build-up of crude oil stocks
rather than greater gasoline and other product supplies, given refinery
constraints in the United States and elsewhere.
    "U.S. crude oil distillation capacity has only increased marginally by
0.8 per cent per annum from 2000-2007, with the bulk of U.S. capital
expenditures on refining geared towards meeting tightening sulphur content
standards for gasoline and diesel as well as the replacement of MTBE with
ethanol in gasoline", says Patricia Mohr, Vice-President, Economics and
commodity market specialist at Scotiabank. This year's elevated number of U.S.
refinery outages, which have pushed down gasoline stocks and led to relatively
high prices partly reflects challenges in meeting tighter product
specifications as well as aging infrastructure.
    "OPEC members have indicated that they may be prepared to boost output
when the Cartel next meets on September 11, if it appears that high prices
might derail global growth and provided the oil is needed," says Mohr.
"However, OPEC's decision remains the wild card in forecasting prices later in
the year. While U.S. refinery utilization is beginning to improve, at least
seasonally, boosting gasoline yields, we believe refinery constraints will
continue to support high refined product prices through 2008. High gasoline
prices have contributed to this year's strength in crude oil. The net result,
we have revised up our WTI oil price forecast to US$65 per barrel for 2007 and
2008, from US$63 and US$60 respectively, a positive development for the
Alberta oil sands."
    Global oil consumption has strengthened in the year-to-date in the United
States, China and other emerging markets in the face of OPEC production
restraints. OPEC-Ten output, excluding Iraq and new member Angola, was 26.6
million barrels per day in June 2007, 1.9 million barrels per day below the
September 2006 level, prior to agreed production cuts. The reduction has
actually been higher than the targeted 1.7 million barrels per day cut, with
political unrest in Nigeria shaving output further over the spring.
    Production cuts in Venezuela's Orinoco tar sands have largely been in
support of OPEC's policy. However, the recent departure of two major oil
companies from Orinoco upgrader projects, having failed to agree with PDVSA on
diminished equity and compensation terms, following their effective
re-nationalization, raises questions as to their ongoing viability. Rising
output in Angola has only been a small offset.
    Turning to metals and minerals, the Index retreated in June, as lower
copper, nickel, zinc, aluminium and precious metal prices more than offset
strength in molybdenum and record prices for uranium, lead and potash.
    Average potash prices at the Port of Vancouver jumped from US$183 per
tonne in May to US$192.50 in June (a new record). Canadian producers
implemented price increases in India, up US$50 to US$270 cfr (delivered prices
including the cost of insurance and freight). Prices in the Brazilian market,
driven higher by sugar-cane production for ethanol, are also set to rise to
the US$280 cfr mark in July, with some suppliers negotiating US$285 for
August. Another gain of about US$25 is likely in October for big buyers,
bringing the average price to US$305 cfr, a huge increase from the US$170
level of last year. While price negotiations with buyers in China will not get
under way until September, Canpotex is likely to seek at least a US$50 hike.
Record potash prices will spur development of a new two million-tonne potash
mine in New Brunswick to start-up in 2011.
    Spot uranium prices (U3O8) also surged to a peak of US$136 per pound in
mid-June, more than double the US$65.50 of mid-December 2006. However, buyer
resistance and the normal summer slowdown in activity have pushed down spot
prices to US$120 in late July. Prices could ease further over the late summer
in view of a U.S. Department of Energy sale of UF6. However, "we believe the
fundamentals for uranium are solid and expect spot prices to rebound in the
fall, when utilities step up their contracting activity", says Mohr. The Nymex
futures price for January 2008 is at US$140 per pound.
    After climbing to a seasonal high of US$3.52 per pound in April, copper
prices slipped to US$3.39 in June. Imports of copper cathodes into China
surged by 142 per cent year-over-year in the first four months of 2007, as
Chinese fabricators restocked after using up inventories on hand in 2006.
While concern over slowing imports in May and June pushed down prices, copper
has rallied back to a very lucrative US$3.69 in late July, on news that
China's GDP growth accelerated to 11.9 per cent year-over-year in the second
quarter. Metal-intensive fixed asset investment in China climbed by 26.7 per
cent in the first half of 2007.
    Global copper consumption is expected to grow by 4.2 per cent in 2007,
with demand in the emerging world advancing by 7 per cent and more than
offsetting a 0.9 per cent decline in G7 consumption. Copper prices are
expected to gradually unwind over the next several years, as new mine
production comes on stream. However, projected new mine development is fairly
modest and it will take time before stock levels return to more normal levels.
Medium-term prices should remain quite elevated compared to the 1990s.

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