-   World potash shipments normalize after last year's slump, but
        significant price recovery awaits 2011.

TORONTO, July 21 /CNW/ - After tumbling in May, Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, lost further ground in June, declining 1.9 per cent month-over-month (m/m), but remained 21.4 per cent above the April 2009 cyclical low.

"Prices retreated alongside the spectre of slowing growth in China - of critical importance to raw material demand - ongoing concern over the 'sovereign debt crisis' in Europe, reignited on June 7th by financial difficulties in Hungary, and little financial market confidence in the 'sustainability' of the U.S. industrial recovery, once restocking and fiscal stimulus fades," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.

Metals & Minerals

After surging in early April - likely the high-water mark for 2010 - the Metal & Mineral Index declined in June for the second consecutive month, falling 3.6 per cent m/m. Base metal prices moved lower alongside concern over the outlook for China - which accounts for almost 40 per cent of world consumption of the four key base metals (39 per cent in 2009).

"The release of economic statistics for China on July 15 confirmed a slowing economy, with GDP up 10.3 per cent year-over-year in Q2 after explosive growth of 11.9 per cent in Q1," said Ms. Mohr. "China's economy will likely wane further in Q3, though growth should still advance by 10 per cent in 2010, slowing to nine per cent in 2011. In our view, China will reflate its economy quickly should growth slow more than desired, below eight per cent. Sustained, albeit slower, world GDP growth lies ahead."

While edging down following release of China's Q2 data, industrial metal prices remain quite lucrative, reassured by China's still solid growth. LME copper prices at US$2.96 per pound in mid-July yield 54 per cent profit margins over average world mine break-even costs.

"Demand for copper was still very high and climbing in China at least through May, as indicated by a rising price 'premia' for copper, currently at 6.8 US cents at 'bonded warehouses' in Shanghai," commented Ms. Mohr. "While China's copper consumption will likely ease in 2010:Q3, for seasonal as well as fundamental reasons, demand should pick up again moderately later in the year."

According to the report, Beijing's recent renewal of the "home appliance subsidy scheme" through late 2012, China's plan to encourage production of electric vehicles and the ongoing upgrade of the country's power infrastructure will underpin copper demand. China's copper consumption should grow by 10 per cent in 2010 and eight per cent in 2011, after 2009's extraordinary 28 per cent. Global supply/demand conditions may shift into genuine deficit in 2011 (the first since 2006), even with weak Euro zone demand and stepped-up mine development, keeping average copper prices around US$3.

Potash prices (FOB Vancouver) for overseas sales have been largely treading water in the first half of 2010. Spot prices for KCL were unchanged in June at US$347.50 per tonne, after bottoming in February at US$342.50. However, global shipments of K(2)O equivalent appear headed towards a solid recovery in 2010 to 30 million tonnes - with gains in Brazil, India and China - after an unprecedented slump to only 18.8 mt in 2009 (43.2 per cent of world mine capacity).

"Last year's weak demand reflected high prices for potash relative to other fertilizers, large carry-in stocks and uncertainty over grain prices, after hedge funds liquidated futures positions during the 'credit crisis' of late 2008," Ms. Mohr noted. "There may be an emerging consensus among suppliers that it is more important to get demand back on track than to boost prices.

"Potash prices should rebound moderately in 2011, as the global shipments-to-capacity ratio climbs back over 70 per cent," continued Ms. Mohr. "However, it is important to realize that the heady US$800 prices of second-half 2008 reflected a global potash shipments-to-capacity ratio averaging 83 per cent in 2007-08 - triggered by a surge in demand for crop-based biofuels in reaction to surging oil prices as well as strong international grain markets."

Oil & Gas

The Oil & Gas Index firmed up in June (+3.4 per cent). Light and heavy crude oil prices in Alberta rallied back, after a sharp correction in May, and natural gas export prices were bolstered by a heat wave in the United States.

After tumbling US$10 per barrel in May, WTI oil prices partially recovered in June, rising to an average of US$75.40 per barrel and are US$77 in mid-July. The ebb and flow of investor sentiment on prospects for global growth continue to drive prices.

Forest Products

The Forest Products Index pulled back sharply in June (-7.1 per cent m/m). While NBSK pulp prices reached a new record high of US$1,020 per tonne (up US$20) and U.S. newsprint, uncoated freesheet and supercalendered-A paper also strengthened, lumber and OSB prices plunged from recent very profitable levels. Prices faltered with an end to inventory restocking by U.S. dealers and in reaction to weaker U.S. new home sales and housing starts, following expiry of the first-time homebuyers' tax credit in April.

Agriculture

The Agricultural Index rebounded in June (+3.3 per cent), as stronger wheat, barley and canola prices offset lower hog prices.

"After sliding in recent years, world grain prices appear poised for improvement," concluded Ms. Mohr. "Global ending stocks of coarse grains are projected to drop to 16 per cent of consumption in 2010-11, down from 17 per cent in 2009-10 and 18 per cent in 2008-09 - the result of lower U.S. corn stocks and severe drought in Russia's Volga & Urals regions and in Kazakhstan, cutting barley output. Severe dryness across Russia's entire spring wheat belt is also lifting wheat prices."

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