TORONTO, Aug. 27 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, fell by 4.6 per cent
month-over-month (m/m) in July, after two consecutive monthly gains. However,
the All Items Index remains 3.1 per cent above the cyclical low in April, and
is likely to bounce higher in coming months, with tentative signs of an
economic turnaround in some G7 countries joining the recovery in China.-   The Oil & Gas Index led commodity prices lower in July (-7.5 per cent
        m/m), with broad based declines in Alberta light and heavy crude oil,
        Canadian natural gas export prices and propane prices in Edmonton and
        Sarnia.
    -   The Metal & Minerals Index also dropped by 5.2 per cent m/m in July.
        A significant downward shift in spot potash prices (FOB Vancouver)
        from US$710 to US$492.50 per tonne in July - following the lower-
        than-expected contract settlement between Russian-producer Silvinit
        and IFFCO (India's main farmers' procurement co-operative) and
        slightly lower gold and silver prices more than offset widespread
        strength in base metals (especially copper).
    -   The Forest Product Index eased slightly last month (-0.3 per cent
        m/m), though the Sub-Index is in the process of bottoming.
    -   The Agricultural Index also retreated by 4.2 per cent m/m in July,
        with grain prices falling alongside almost ideal growing conditions
        in the United States and prospects for the second-highest U.S. corn
        crop in history.

    Alberta Oil Sands - The Case for Diversifying Export Markets to China and
    'Emerging Asia'In the report, Patricia Mohr, Vice-President, Economics and Commodity
Market Specialist at Scotiabank discusses the arguments in favour of
diversifying export markets for the Alberta Oil Sands to China and 'Emerging
Asia'.
    "Canada has the world's second largest 'proved' oil reserves at 178.1
billion barrels - second only to Saudi Arabia's 264.2 billion - 97% of which
are found in the Alberta oil sands. Iran, Iraq, Kuwait and Venezuela round out
the top six," says Ms. Mohr. "As such, the Alberta oil sands represent a key
'strong suit' for the Canadian economy; the development of lucrative export
outlets and transportation infrastructure for this resource is key to Canada's
growth prospects."
    The United States is currently the world's largest consumer by far of
petroleum products, with consumption totaling 19.8 million barrels per day
(mb/d) in 2008. The development of new pipeline capacity to the United States
has understandably been a first priority for Alberta's 'oil patch', with
interest in export outlets to Asia lagging behind.
    Development of two mainline pipelines are proceeding to key U.S. refining
centres, despite the downturn in oil markets since mid-2008 and the deferral
of some oil sands projects. Enbridge's Alberta Clipper Project is being
constructed between Hardisty, Alberta and Superior, Wisconsin with onward
pipeline linkage to refining centres in Chicago and Patoka in southern
Illinois. The Enbridge system is designed to ship batches of both light
synthetic crude oil and blended bitumen. TransCanada is also constructing the
Keystone Pipeline from Hardisty, Alberta to refining centres in Wood River and
Patoka, Illinois and then to Cushing, Oklahoma by Q1 2011 and has proposed the
Keystone XL expansion project which would take crude oil as far south as the
refining centres of Houston and Port Arthur on the U.S. Gulf Coast by Q4 2012.
    "However, a solid case can be made for a second export outlet for the
Alberta oil sands, for example via the proposed 'Enbridge Northern Gateway
Pipeline' from the Edmonton area to Kitimat, B.C., with onward tanker
transport to markets in 'emerging Asia'," comments Ms. Mohr. "Interest in this
proposal was revitalized last year, with ten funding partners currently
exploring the possibilities - much in the same way that 'unconventional
natural gas' from B.C.'s Horn River will likely be exported by Kitimat LNG
rather than shipped to currently over-supplied North American markets. The
Northern Gateway Pipeline may begin the permitting process by filing with the
National Energy Board by late 2009."
    According to Ms. Mohr, the two key arguments that support developing
another export outlet for the Alberta oil sands are:1)  It is commercially 'risky' to rely on only one major export market.
        More specifically, prices may not fully reflect world levels, if
        particular U.S. refining markets are over-supplied from time-to-time,
        as occurred in the 1980s, when prices for Canadian crude oil in U.S.
        Midwest refining markets were noticeably discounted.
    2)  In the coming decade, the 'growth' markets for petroleum will almost
        certainly be in China, 'emerging Asia' including India and the Middle
        East.China has led the recovery in global oil consumption in 2009, with
implied oil demand up 3.5 per cent year-over-year to 8.1 mb/d in July and
record crude oil imports (4.6 mb/d). China's net product imports surged 43.3%
yr/yr in July, with China now more import dependent than the United States.
    "Despite little U.S. growth in oil demand in the past decade, Canadian
crude oil exports to the United States increased substantially - from 1.598
mb/d in 1998 to 2.493 mb/d in 2008,' says Ms. Mohr. "Canadian crude oil will
likely increasingly displace oil from Venezuela and Mexico in U.S. Gulf Coast
refining centres such as Houston, ensuring further export growth. However,
from a commercial and public policy perspective, there are benefits from
diversifying export outlets, even if overall transportation costs to Asia
exceed pipeline costs to the United States, as some studies indicate."
    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.