• Investors rush to cash and U.S. Treasury securities amid an uncertain economic outlook in the Euro zone and the United States. 
• The outlook for potash remains firm. 

TORONTO, Sept. 30, 2011 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, fell by 3.3 per cent month over month (m/m) in August. The All Items Index stayed elevated — only moderately below (-5.2 per cent) last April's near-term peak in commodity prices.

"Financial market concern over Euro-zone debt challenges and the political gridlock in the United States — threatening to undermine steps to bolster the economy — intensified in mid-September," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "China's economy — of vital importance to global commodity markets — also appears to be slowing, leading to some unwinding of commodity positions by financial institutions."

The report notes that financial market concerns have recently triggered a flight from riskier assets such as equities and commodities — dependent upon reasonable world economic growth — to cash and the liquidity of U.S. Treasury bonds. Expectations that U.S. growth may remain exceptionally slow, with minimal inflation, has likely increased the attractiveness of Treasury bonds, despite very low yields.  These developments lifted the U.S. dollar last week, dampening gold and silver prices.

Gold investors were also disappointed that the Federal Reserve Board, at its meeting on September 21, did not announce a third round of Quantitative Easing (QE3), which would have expanded its balance sheet and overall liquidity, and might ultimately have proven inflationary. Spot gold dropped as low as US$1,532.72 per ounce on September 26 in intraday trading — a drop of US$388 from the record US$1,921.15 on September 9, though prices have since rebounded over US$1,600.

The Metal and Mineral Index edged down in August by -0.4 per cent m/m, as moderate declines in base metals and uranium more than offset strength in gold, silver and cobalt. LME copper prices — the bellwether for base metals — declined from US$4.36 per pound in July to US$4.10 in August and have lost further ground in September.

"Current copper prices at US$3.16 remain quite profitable for mining companies, yielding a 54 per cent profit margin over average world breakeven costs including royalties, depreciation and interest expense, despite the correction," noted Ms. Mohr. "Recent surveys on the ground point to soft orders for China's copper fabricators in the fourth quarter, though global supply and demand conditions are expected to remain largely balanced, in fact, in a slight deficit of 30,000 tonnes. Copper prices could well rally back as 2012 unfolds."

Spot potash prices for overseas sales (FOB Vancouver) remain at an average of US$490 per tonne in August and September — up from US$379 last December and 43 per cent above a year earlier. Prices for the standard grade will increase by US$25 to US$535 (cfr or delivered) in Southeast Asia in the fourth quarter, though sales have so far been spotty, with ample inventories in Malaysia and Indonesia, built up earlier this year. A price increase of US$30 has also been announced by BPC for the granular grade in Brazil.  Solid fertilizer application should continue in 2012, with farmers incented by historically high feed grain and oil seed prices and generally low stocks.

The contract price for Western Canada's premium-grade hard coking coal in Asia is likely to decline from US$315 per tonne (FOB Vancouver) to a still very lucrative US$285 in the fourth quarter (JFY2011:Q3). Prices have been easing back from a record US$330 at the beginning of the fiscal year, when severe flooding and curtailed shipments from Queensland, Australia drove up prices.  Prices will remain 36 per cent above a year ago. 

WTI oil prices (the bellwether for North America) fell from just over US$97 per barrel in July to US$86 in August and a low of US$79.85 on September 23, before rebounding to US$82 on the 29th. The world supply and demand balance for crude oil tightened in the first half of 2011, with significant production outages in the Alberta oil sands and in the North Sea and the loss of Libyan output.

While Saudi Arabia stepped-up its production by about 1 mb/d from April to June, largely offsetting the disruption in Libya (though not on a quality basis) the call on OPEC oil continued to rise in the third quarter, likely averaging 31.3 mb/d — exceeding actual OPEC output of 30.2 mb/d by more than 1 mb/d. OPEC will meet again on December 14 to consider its output policy for 2012.

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