-   Oil prices head towards US$90
    -   A weakening U.S. dollar lifts commodity prices in late October and
        will drive prices higher through much of 2010.

TORONTO, Oct. 26 /CNW/ - After a solid gain in August, Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, declined by 1.8 per cent month-over-month (m/m) in September, pushed down by seasonal factors such as harvest pressure on grain prices. However, the All Items Index remains 4.3 per cent above the April cyclical low and will receive a big boost in October, as oil climbs to a higher plane (US$80) and natural gas prices lift off the bottom. A weakening U.S. dollar also boosted commodity prices across a broad front in late October.

Oil & Gas

According to the report, the Oil & Gas Index lost ground in September (-2.5 per cent m/m). Canadian natural gas export prices plunged to an estimated US$2.69 per thousand cubic feet (mcf) - the lowest since August 2002. Nymex prices reached a low of only US$2.50 per million British thermal units (mmbtu) in early September - below full break-even costs for the lowest-cost shale developments in the United States, before rebounding close to US$5 in late October.

"Traders likely recognize that recent levels were unsustainably low and are anticipating some recovery in U.S. 'industrial ' demand in industries such as steelmaking and chemicals," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.

"WTI oil prices also eased from US$71.14 per barrel in August to US$69.54 in September, but have rallied back over US$80 in mid-October," continued Ms. Mohr. "Much of the gain in recent weeks reflects U.S. dollar weakness, attracting investment fund interest into oil - a hard asset - as a hedge against a declining U.S. currency. A soft dollar also makes it easier for the industry to lift prices in currencies such as euros, without unduly curbing consumer demand. Oil prices are headed towards US$90 by mid-2010, as the U.S. dollar moves irregularly lower and economic recovery takes hold in the G7."

Metals & Minerals

The Metal & Minerals Index edged down in September (-1.1 per cent m/m), as lower potash, uranium and molybdenum prices and a mixed performance in base metals more than offset stronger precious metal prices.

However, spot uranium prices rebounded to US$47.75 per pound in mid-October on news of the shutdown of 75 per cent of the ore haulage system at the Olympic Dam copper/uranium mine in Australia, likely through 2010:Q1. Roughly two million pounds of uranium could be lost due to this outage (1.7 per cent of world production). News that the Senate may favour nuclear energy - which emits virtually no greenhouse gases -- in its version of the 'U.S. Energy and Climate Change' bill has also been supportive. While the recent rebound in spot prices is welcome, current prices are insufficient to spur new mine development and are expected to move higher medium-term.

Spot potash prices (FOB Vancouver) also edged down from US$486 per tonne in August to US$480 in September - below near-record levels of US$862 a year ago. "Belarusian Potash Company hopes to conclude a 2010 contract soon with China (possibly at US$400-435 per tonne, FOB loading port) - a development which should restart the market and set the tone for other contract negotiations in early 2010", comments Mohr. China currently has about 2-3 million tonnes of potash inventory and should start buying again when stocks recede to 2 million. Canadian potash exports are expected to pick up moderately in 2010. Farmers have under-applied many fertilizers this year, given uncertain economic conditions and still high potash prices.

"A weak U.S. dollar contributed to a surge in base metal prices late last week, with copper climbing to a very lucrative US$3.01 and zinc to US$1.03 per pound, despite some moderation in China's imports in recent months," commented Ms. Mohr. "Supply disruptions at Olympic Dam, the world's fourth-largest copper mine, and at Century Zinc, the world's second-biggest zinc mine, have pushed up prices."

Forest Products

The Forest Products Index was the only sub-component to increase in September (+0.6 per cent m/m). U.S. commercial printers & smaller publishers accepted a US$35 newsprint price increase in September, though larger publishers with contract or formula pricing will delay the increase until October. The net result, overall newsprint prices rose US$10 to US$445 per tonne in September, after plunging since late 2008. Canadian dollar appreciation will likely contribute to higher U.S. lumber prices in early 2010.

Agriculture

The Agricultural Index led the decline in September (-6.1 per cent m/m). Favourable growing conditions in many countries, including an extended frost-free harvest period in September in the United States and Western Canada, have resulted in large world crops of wheat, feed grains and rapeseed (canola), pushing down grain & oilseed prices. World wheat production is forecast by the U.S. Department of Agriculture to reach 668 million tonnes in 2009-10, the second highest on record, with global ending stocks up 53 per cent from two years ago. While the Canadian Wheat Board's asking export price for No. 1 grade milling wheat has fallen significantly from the February 2008 peak, prices started to edge up again in October. A weak U.S. dollar against the euro, the Australian dollar and the Russian ruble is lifting international wheat values.

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