-  China's GDP accelerates to 7.9 per cent in Q2, leading world economic
       recovery
    -  Metal markets will also receive a lift in the third quarter, as U.S.
       motor vehicle output is revved upTORONTO, July 23 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, climbed by 5.1%
month-over-month (m/m) in June, bringing the overall gain from April - the
cyclical bottom - to 7.5 per cent. Despite financial market jitters in early
July, global economic indicators are turning positive for oil and base metal
demand.
    "China is the first major economy to emerge from the global downturn -
posting a 7.9 per cent year-over-year (yr/yr) GDP advance in the second
quarter, up from a low of 6.1 per cent in the first quarter," says Patricia
Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.
"The pick-up reflected stronger domestic demand, as powerful government fiscal
and monetary stimulus kicked in, more than offsetting reduced exports and a
narrowing trade surplus."
    According to the report, while U.S. industrial activity was still
exceptionally weak in June (-13.6 per cent yr/yr) - alongside auto-sector
restructuring and downsizing - the scheduled ramp-up of motor vehicle
assemblies in the third quarter, with Chrysler returning to production and
General Motors revving up its output, will boost steel and metal-intensive
industrial activity.
    "Downsizing by GM and Chrysler will keep U.S. motor vehicle assemblies 22
per cent below a year ago in the third quarter," says Ms. Mohr. "Production
will however improve substantially from the first half of 2009, when
assemblies were cut in half. The net result, sentiment in U.S. financial
markets for a moderate recovery in U.S. metal and steel demand will likely
improve noticeably through the third quarter."
    The increase in Scotiabank's Commodity Price Index was broad based in
June with all major sub-components rising.

    Oil & Gas Index

    For the second consecutive month, the Oil & Gas Index led the way,
climbing by 12.2 per cent m/m. Edmonton light crude oil and medium/heavy oil
prices at Hardisty, Alberta both jumped by almost US$10 per barrel in June
alongside stronger WTI oil prices. While oil prices retreated in the first two
weeks of July, alongside jitters over the pace and timing of economic
recovery, a solid bounce-back is expected by the fourth quarter.
    WTI oil prices jumped from US$59.21 per barrel in May to a high of
US$73.38 on July 3rd. Prices then retreated to a low of just over US$58 on
July 17, pushed down by financial market concern over the timing of economic
recovery (triggered by weaker-than-expected U.S. employment data for June,
though employment is a 'lagging' rather than a 'leading' indicator). However,
prices have rallied back to the US$65 mark in recent days, with financial
markets reassured by better-than-expected U.S. corporate earnings in the
technology sector and signs that the U.S. recession is nearing an end. U.S.
gasoline demand has climbed above a year ago.
    Canadian natural gas export prices edged up in June to an estimated
US$3.84 per thousand cubic feet (mcf), though prices were exceptionally weak
compared with year-ago levels (US$10.86). Nymex prices have fallen to an
average of only US$3.53 per million British thermal units (mmbtu) to date in
July. Prices have been pressured by slumping industrial demand in the face of
more-than-ample supplies. The development of new natural gas 'shale and tight
gas' fields has rejuvenated U.S. supplies and significantly lowered the
industry cost curve.
    "While natural gas prices should rally in the next six months, as this
year's plunge in drilling activity eventually cuts U.S. output, the lower cost
curve for the industry suggests a lower trend price for natural gas going
forward," says Ms. Mohr. "We have revised down the Nymex price forecast to an
average of US$4 per mmbtu for 2009 and US$5.25 for 2010."

    Metals & Minerals Index

    The Metals and Mineral Index strengthened significantly in June, up 4.7%
m/m. A strong rally in base metals, moderate gains in precious metals and
higher uranium prices more than offset a slight decline in potash and lower
cobalt prices.
    LME copper prices climbed from US$2.07 per pound in May to a six-month
high of US$2.45 on July 20. "The significant pick-up in China's economy and
industrial activity in the second quarter, improving G7 auto sales, the
beginning of a recovery in U.S. housing starts and a weak U.S. dollar have
recently lifted prices. Contrary to expectations, China's copper imports rose
to another record high in June," says Ms. Mohr. "While we still expect a
seasonal pullback in China's copper imports in the next several months,
following restocking by fabricators, China could 'surprise on the upside'."
    LME nickel prices also jumped to a six-month high of US$7.43 per pound on
July 20 - a profitable level - and up substantially from a low of only US$3.99
on October 24, 2008. Prices have rallied this spring and summer alongside
tightening nickel supplies in China, linked to a tentative pick-up in China's
stainless steel production, the recent sale of 60 per cent of Jinchuan's
monthly nickel production to China's State Reserve Bureau and the shutdown of
most nickel pig iron operations in China (some have recently re-started).
Roughly 60% of nickel is used in stainless steel.

    Forest Products

    The Forest Products Index also rose by 1.6% m/m (its first gain since
August 2008). While newsprint and fine paper prices continued to fall, U.S.
building material and pulp prices edged up, a welcome development for this
hard-pressed industry. U.S. housing starts bottomed at an exceptionally low
479,000 units annualized in April and inched up to 582,000 units in June,
starting a slow recovery.
    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.