- Top 'picks' for investors in 2010 - hard coking coal, oil and potash & nitrogen fertilizers.

TORONTO, Dec. 21 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, strengthened markedly in November, climbing 5.3 per cent month-over-month (m/m). While Oil and Gas led the way (+10.4 per cent m/m), strong gains were also recorded in other sub-components - Forest Products (+5.6 per cent m/m), Metals and Minerals (+2.5 per cent m/m) and Agricultural Products (+2.5 per cent m/m). The All Items Index has now advanced by 17.3 per cent from its cyclical low in April 2009.

"The rally in commodity prices in 2009 has been extraordinary - faster than normal and from a higher base," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "Elements of the Asian-led 'super-cycle' have returned, with the China juggernaut leading the way. The revving up of China's industrial activity from a low of only 3.8 per cent year-over-year (y/y) in January and February to 8.3 per cent in March and then 19.2 per cent in November has catapulted base metals into four of the top five best performing commodities of 2009." China now accounts for 38.8 per cent of world consumption of the four key base metals compared with the United States' 10.3 per cent.

According to the report, in 2010, commodity prices should continue to move higher alongside the following developments: ongoing strength in China's economy, with GDP expected to advance by 9.5 per cent, up from this year's estimated 8.3 per cent; some re-stocking of basic materials across the G7, a development which has yet to occur; and continued interest by investors in commodities as an 'asset class', with interest shifting from passive, commodity-index investing to more active strategies, using hedge funds.

"While this year's gains in commodity prices have been centered in exchange-traded commodities, the spring of 2010 should see increases in negotiated prices under annual contracts for coking coal and iron ore and potash prices should start to rebound," commented Ms. Mohr.

A number of Canadian trade initiatives should also help to expand markets for Canadian producers, notably, negotiation of a bilateral nuclear cooperation agreement with India (to be signed by the time of the June 2010 G-20 summit in Ontario) and the development of a new wood-frame construction building code for Shanghai, with help from Canada and similar to Canadian codes, helping to boost lumber sales into that market.

"Of the 32 commodities in the 'Scotiabank Commodity Price Index', copper posted the second-largest price increase in 2009 at 126 per cent -- second only to lead at 146 per cent - measured from December 2008 through December 16, 2009," said Ms. Mohr. "While China has re-stocked copper and currently has high inventories totaling about 800,000 tonnes, it appears increasingly unlikely that copper prices will pull back sharply in early 2010. China's high stocks are likely 'willingly' held and hedge funds favour copper, given a stellar medium-term supply/demand outlook."

Rounding out the list of the top five performing commodities in 2009 were zinc (116 per cent), nickel (78 per cent) and crude oil (75 per cent).

Top Picks for 2010

Ms. Mohr's top picks for 2010 are: hard coking coal, crude oil, potash and nitrogen fertilizers, copper, gold and lumber.

-   Hard coking coal: The annual contract price for Western Canada's
        premium-grade hard coking coal sold to Japanese and other Asian steel
        makers is expected to climb from today's US$128 per tonne to at least
        US$169 in Japanese Fiscal Year 2010 (+32 per cent, beginning in
        April). International supplies of premium-grade hard coking coal are
        tightening, with stepped-up demand in China and Japan and port and
        rail constraints in Australia."

    -   Crude oil: The fifth best-performing commodity in 2009, crude oil
        should come in second to hard coking coal in 2010. Supply/demand
        conditions should tighten as a 1.5 million barrel per day increase in
        consumption-led by 'emerging Asia' - outpaces a 0.3 mb/d increase in
        non-OPEC supplies. China's petroleum consumption bounced back last
        April and posted a 10.3 per cent y/y gain in October (+4.2 per cent
        YTD). Vehicle sales in China at 12.9 million units have overtaken
        sales in the United States - with the gap likely widening further in
        2010. 'Strategic' stockpiling by China will significantly add to
        world demand in coming years, but may await additional storage
        facilities in 2011.

    -   Potash: While prices are likely to end 2009 on a weak note, potash
        prices are expected to strengthen significantly by the second half of
        2010, as overseas shipments pick up to China and especially to Brazil
        and Southeast Asia (for sugar cane, soybeans and palm oil). "The year
        2010 will be a transition year for potash to much stronger market
        conditions in 2011."

    -   Copper: Copper is likely to stay quite elevated through the first
        half of 2010. While there is a risk that tighter U.S. monetary policy
        in the second half of 2010 and some easing in speculative demand in
        China could derail copper prices later next year, limiting the annual
        average price to US$2.95, copper will likely rebound strongly in 2011
        and move substantially higher (to at least US$3.30 and possibly as
        high as US$4.00).

    -   Lumber: U.S. lumber consumption will rise by about 10 per cent in
        2010 in a market with little inventory in the distribution system -
        causing price spikes from time to time," concluded Ms. Mohr. "After
        operating below average mill cash costs across North America for much
        of 2009, lumber prices should recover back up to full-in cash costs
        for 2010 as a whole, if not slightly better."

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