-   Financial market turbulence takes a toll on commodity prices, though
        copper and oil prove resilient.

    -   Potash prices at the Port of Vancouver jump to new record highs in
        July. Higher crop prices enable Asian and Brazilian farmers to pay
        record prices for fertilizers.TORONTO, Aug. 23 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, fell by 0.7 per cent in
July, the second consecutive monthly decline, though the Index remains
10.5 per cent above a year earlier. The Metal and Mineral Index led commodity
prices lower, coming off a spectacular record in May, as softer prices for
nickel, steel-alloying agents, zinc and uranium more than offset stronger
copper and new price records for potash and lead.
    "While metal and mineral prices lost ground in July, the decline was not
generally related to financial market fallout from defaults in the U.S.
subprime mortgage market," says Patricia Mohr, Vice-President, Economics and
commodity market specialist at Scotiabank. "However, metal prices finally
succumbed to a widening credit squeeze in the United States and Europe in
mid-August, with prices for zinc, aluminium and nickel dropping to more than
12-month lows on August 16-17."
    Hedge funds, involved in the securitization of subprime mortgages, were
forced to liquidate their profitable commodity market positions to cover
margin calls, stepped-up bank collateral requirements and fund redemptions by
investors.
    Widening credit spreads, including a backup in commercial paper rates,
recent equity market turbulence and a very weak U.S. housing market, with
falling house prices, have also raised fears over a further U.S. economic
slowdown, centered in consumer spending, with a knock-on impact on global
growth. However, the need to raise cash, rather than a fundamental
reassessment of the metal price outlook, largely accounted for the August 16
sell-off by hedge funds. The Federal Reserve Board's subsequent 50 basis point
cut in the U.S. discount rate on August 17, to improve liquidity and bolster
confidence, has led to a modest rally back in base metal prices.
    Copper prices have proven to be quite resilient, actually rising in July
to US$3.62 per pound alongside strikes or potential strikes at mines in Chile,
Peru and Mexico and at the CCR refinery in Montreal in an environment of low
global stocks. Inventories on the London Metal Exchange (LME), Comex and
Shanghai Metal Exchange fell to only 4.3 days of global consumption in June
and remain low at 4.7 days in mid-August.
    "While copper prices dropped to a low of US$3.16 on August 17, copper
stayed well above the US$3 mark, higher than in early 2007, and has rebounded
to US$3.28, underpinned by prospects for renewed strength in China's imports
in the fall," says Ms. Mohr.
    Turning to mineral-related fertilizers, sulphur prices at the Port of
Vancouver leapt from US$50 to US$91 per tonne in July, the highest price since
March 1991, amid robust demand for phosphate fertilizers in markets such as
China and limited international supplies.
    Potash prices are also moving from record to record, averaging US$202.50
per tonne FOB Vancouver in July, boosted by strong demand in Malaysia and
Indonesia for palm oil and in Brazil for sugar cane production, both linked to
biofuels. Potash prices for Canadian shipments to Malaysia and Indonesia are
expected to rise to a spectacular US$330 per tonne (on a delivered basis) by
early October (levels already achieved by Russian producers).
    West Texas Intermediate (WTI) oil prices have also proven to be fairly
resilient to recent financial market developments, underpinned by expectations
of tight market conditions in late 2007. Prices strengthened from US$67.53 per
barrel in June to US$74.15 in July and reached a new Nymex intraday trading
record of US$78.77 on August 1. While recently losing some ground, alongside
normal profit taking and as hedge funds sold long futures positions to
generate cash, prices remain relatively high at US$69 in mid-August. OPEC is
unlikely to agree to raise output when it meets on September 11. OPEC believes
that stepped-up output would only result in higher oil inventories, rather
than refined product supplies, given U.S. and global refinery constraints.
    The Forest Product Index inched up in July, as stronger prices for pulp
and a temporary rally in OSB just offset slightly lower prices for lumber,
newsprint and No. 3 offset paper. Northern bleached softwood kraft pulp prices
rose from US$810 per tonne in June to US$830 per tonne in July in the United
States, the highest level since January 1996. Producers have announced another
US$20 hike for September.
    After falling to only US$146 per thousand square feet in the first five
months of 2007, well below average mill variable costs, oriented strandboard
(OSB) prices in the bellwether U.S. Northcentral region rallied to US$169 in
June and US$191 in July, well above mill cash costs, pushed up by production
curtailments and the seasonal peak in U.S. building activity. While retreating
to US$182 in mid-August, prices probably still yield positive cash margins.
However, market challenges will remain considerable through mid-2008, given
dimming prospects for a near-term recovery in U.S. housing and the scheduled
start-up in late 2007 of large OSB mills, one in Alberta and two in the
southern United States, a capacity increase of eight per cent.
    "With tightening lending standards and U.S. builder sentiment at the
lowest level since January 1991, U.S. housing starts are expected to drop from
1.82 million in 2006 to 1.44-1.45 million in 2007 and 2008, before rebounding
in 2009," says Ms. Mohr.
    Wheat prices are likely to climb to record levels in coming months, given
the lowest projected global ending stocks for 2007-08 in 28 years. In U.S.
dollar terms, the Canadian Wheat Board's asking export price in early August
was already close to the record high of May 1996. However, the recent sharp
appreciation of the Canadian dollar is limiting actual returns for Canadian
farmers. Receipts were much higher in May 1996, when the Canadian dollar was
only at US$0.73.

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