- This year's stronger-than-expected recovery in world potash shipments begins to lift prices in Southeast Asia and Brazil.

- Palladium is a top commodity pick for 2011.

TORONTO, Oct. 26 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, posted its third consecutive monthly advance in September, edging up by 0.6 per cent month-over-month (m/m). The All Items Index is now 27.1 per cent above the cyclical low in April 2009 and will surge in October, with gains in base and precious metals, grains and fertilizers. World food prices have ratcheted up in recent months, pointing to strong fertilizer application in the coming year.

"The Metal & Minerals Index led commodity prices higher in September, climbing 4.1 per cent m/m," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "This sub-component has now surpassed last April's near-term peak (after the 2008 recession) and will climb further in October. LME copper prices jumped to a 28-month high of US$3.86 per pound on October 25 - not far from the all-time record of US$4.08 on July 3, 2008. Fundamentally tight world supplies, with a widening deficit expected between refined copper consumption and production in 2011, anticipation of a soft landing in China's economy and a weak U.S. dollar account for this strength."

The report states that in addition to expectations for ongoing strength in China's raw material demand, two key developments lie behind the commodity price rally since the May/June correction (caused in part by the Euro zone debt crisis): firstly, a severe drought across the spring wheat and barley growing region of the FSU-12 last spring and tight U.S. corn supplies, triggering a jump in international grain and oilseed prices as well as sharply higher fertilizer demand; and secondly, expectations for a further round of Fed quantitative easing (QE2) (injecting liquidity by buying Treasury bonds) to revive the U.S. economy and head off deflation through an extended period of unusually low interest rates. Anticipation of QE2 has pushed down the U.S. dollar further, lifting dollar-denominated commodity prices, and extending the commodity price super-cycle.

Metals & Minerals

The Metal & Minerals Index surged in September with widespread strength in base and precious metals, gains in steel-alloying agents (molybdenum and cobalt) and surging sulphur prices at the Port of Vancouver (used in DAP fertilizer). Spot uranium prices also edged up from US$41.50 per pound in mid-July to US$48 in mid-September - boosted by a production shortfall at Energy Resources of Australia - and are currently US$52.

Spot potash prices (FOB Vancouver) were largely unchanged in September at US$342.50 per tonne (standard grade) - treading water since the beginning of 2010. While prices have only edged up in October, BPC has now sold a significant number of cargoes to Brazil for granular product at progressively higher prices, rising to US$410 cfr (delivered) in December, up from about US$390 cfr in October. Canpotex has also announced new contract volumes into Brazil with granular prices moving to the US$410 mark in December and January. Surprisingly, rather than continuing with spot sales, Sinofert of China and Canpotex have signed a three-year supply agreement for 2011-13, likely a sign of improving market fundamentals and a desire by China to secure longer-term supplies.

"As an indication of the strong demand recovery this year, Brazilian potash imports have climbed by 101 per cent year over year (yr/yr) through August to 3.42 million tonnes, albeit from very low levels a year ago", stated Ms. Mohr. "Potash imports into China have also advanced by 62 per cent yr/yr, with Canada the second-largest supplier to both markets.

"Precious metals have also outperformed, with spot gold prices reaching a new record high of US$1,387.35 per ounce on October 15, on comments from the Fed Chairman suggesting another round of quantitative easing when the Fed meets on November 2-3. Palladium - a Platinum Group Metal used in auto-catalysts - is a commodity pick for 2011. Spot palladium prices should average US$510 per ounce in 2010 and US$650 in 2011, up from only US$265 in 2009. Rising auto-catalyst demand in China and other emerging markets, in the face of dwindling sales from Russian state stocks, will likely push the supply/demand balance into deficit."

Oil & Gas

The Oil & Gas Index was the only sub-component to decline in September, falling 7.4 per cent m/m. WTI oil prices lost ground in September, easing to US$75.55 per barrel on concern over a sub-par U.S. economic recovery and slowing global growth. However, prices have rebounded back to almost US$82 so far in October alongside a weak U.S. dollar, the temporary closure of the Houston Ship Channel and expectations that a double-dip downturn will be avoided in the United States. WTI oil prices are likely to average US$78.50 per barrel in 2010 and an upwardly revised US$85 in 2011.

Forest Products

The Forest Products Index also edged higher by 1.1 per cent m/m in September, as Western Spruce-Pine-Fir 2x4 lumber prices rallied back (subsequently soaring to profitable levels in October with stepped-up sales to China).

"Lumber prices have recovered markedly in 2010, despite only a limited improvement in U.S. housing starts," concluded Ms. Mohr. "This reflects growing shipments from B.C. to China, not only of low-grade lumber for concrete forms, but also structural and molding & SHOP products. B.C. lumber sales to China are on track to reach 2.5 billion board feet in 2010, accounting for 28 per cent of B.C. production. China has surpassed Japan as Canada's second-biggest lumber export destination."

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