• Building pipeline-rail access to the B.C. Coast is critical to narrowing wide price discounts on Western Canada's heavy oil exports
• Capital cost escalation triggers some delay in new mine development - setting the stage for tighter-than-expected supply mid- decade
• U.S. corn prices post a new record high in mid-August

TORONTO, Aug. 30, 2012 /CNW/ - Scotiabank's Commodity Price Index inched down by 0.4 per cent month over month (m/m) in July, though the pace of decline slowed from June's sharp 4 per cent drop.  The All Items Index has now fallen19.5 per cent below the near-term peak in April 2011 -  just prior to the advent of financial market concern over excessive European sovereign debt, resulting fiscal austerity and the accompanying European economic slowdown, with a knock-on impact on global growth.

"In recent weeks, riskier assets such as oil and equities have been buoyed by expectations of further Federal Reserve Board monetary policy easing to boost a slow U.S. economy (GDP up only 1.7 per cent in 2012:Q2) or a major bond purchase program by the European Central Bank in support of the sovereign debt market," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.

Scotiabank's Oil and Gas Index declined by 2.5 per cent m/m in July.  WTI oil strengthened from a low of only US$77.69 on June 28 to an average of US$92.69 in July and as high as US$97.26 on August 22 (up 25.2 per cent).  In contrast, the price of Western Canadian Select (WCS) heavy crude oil - a blend of 25 conventional and unconventional crudes - edged down from US$66.38 in June to US$64.18 in July, with the discount off West Texas Intermediate (WTI) widening to US$23.74. This disappointing WCS price performance may only partially be alleviated by pipeline expansion to U.S. Gulf Coast refineries, where international oil prices prevail. "In my view, narrowing the gap between WCS heavy crude oil and WTI oil to levels more in line with crude-quality differentials will require building additional pipeline-rail access from Western Canada to the B.C. coast, " added Ms. Mohr.

"International oil prices rallied strongly in July, as the market refocused on geopolitical tensions in the Middle East, the full imposition of a European Union (EU) embargo on Iranian oil on July 1, 2012 and U.S. banking sanctions aimed at curbing financial institutions from handling Iranian oil payments," said Ms. Mohr. "Brent has climbed from a low of US$89.23 per barrel on June 21 to an average of US$102.72 in July and as high as US$116.90 in mid-August (up 31 per cent)."

The Metal and Mineral Sub-Index inched up by 0.2 per cent m/m in July, but remained 16.5 per cent below a year earlier. Stronger copper, lead and coking coal prices offset slight declines in other base metals, precious metals and steel-additives (cobalt and molybdenum).  The recent announcements by BHP Billiton of project delays - affecting the massive Olympic Dam expansion (copper, gold and uranium) and iron ore port expansion in Western Australia - reflect concern over capital cost escalation in the face of more subdued metal prices.

"This year's under-performance of mining equities may also have encouraged a re-examination of project economics in a bid to ensure high profitability going forward, reminiscent of the decision by major mining companies to delay copper mine expansion in 2007-2008, setting the stage for the tight market conditions of recent years," said Ms. Mohr.

The Scotiabank Forest Products Index eased back by 1.3 per cent m/m in July, as Northern Bleached Softwood Kraft (NBSK) pulp prices delivered to the United States fell by US$20 to US$880 per tonne.  While Western Spruce-Pine-Fir 2x4 lumber prices eased around the July 4 holiday in the United States, prices have snapped back in August, with the market anticipating a further recovery in U.S. housing.  OSB prices are currently quite lucrative.

Scotiabank's Agricultural Index rose by 3.2 per cent m/m in July, as widespread strength in grains and oil seeds, and firmer hog prices more than countered weaker cattle.  Barley prices at Lethbridge, Alberta surged to a record high of US$274 per tonne, as Canadian farmers stepped up shipments to the United States to take advantage of record high corn prices.

Canola also remained exceptionally high in July at US$658 per tonne, underpinned by near-record U.S. soybean prices and buoyant overseas demand. Canola seed & oil has emerged as one of Canada's top export categories to China.

Scotiabank Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

Scotiabank is one of North America's premier financial institutions and Canada's most international bank. With more than 81,000 employees, Scotiabank and its affiliates serve some 19 million customers in more than 55 countries around the world. Scotiabank offers a broad range of products and services including personal, commercial, corporate and investment banking. With assets of $670 billion (as at July 31, 2012), Scotiabank trades on the Toronto (BNS) and New York Exchanges (BNS). For more information please visit www.scotiabank.com.

SOURCE: Scotiabank - Economic Reports