Economic News/Trends and Analysis — June 29, 2009

Scotiabank's Commodity Price Index Begins to Recover in May

    -  China leads world recovery in oil & base metal demand, as the Asian-
       led 'super-cycle' returns.
    -  Oil prices approach 'mid-cycle' levels, with record imports into
       China, and will likely climb to US$90 in 2010, as China builds
       'strategic' stocks.

    TORONTO, June 29 /CNW/ - Scotiabank's Commodity Price Index, which
measures price trends in 32 of Canada's major exports, touched bottom in
April, after plunging 45% below the July 2008 peak, and rallied back by 2.2%
month-over-month (m/m) in May. While G7 demand continues to struggle, China's
dragon has breathed life back into commodity prices.
    "Despite a deep global recession, China's imports of refined copper and
iron ore were at record levels in the first four months of 2009, with China
leading the global economic recovery," says Patricia Mohr, Vice-President,
Economics and Commodity Market Specialist at Scotiabank. "China's industrial
activity has re-accelerated in the past three months, with a massive
infrastructure spending program starting to kick in and an end to last year's
domestic housing correction - pushing up internal demand for metal-intensive
household appliances. Commodity traders sense that elements of the Asian-led
'super- cycle' are returning. China's economy has partly 'de-coupled' with a
still weak G7 economy - a positive development for Canada, where exports of
commodities and resource-based manufactured products loom large, accounting
for 50.9% of Canada's merchandise exports in 2008, of which one-quarter was
energy."
    The Oil & Gas Index led the gain in overall commodity prices in May,
rising 4.4% m/m. A large jump in Alberta light and heavy crude oil prices and
slightly higher propane prices more than offset very soft Canadian natural gas
export prices to the United States. WTI oil prices leapt from US$49.95 per
barrel in April to US$69 in late June (climbing as high as US$73.23 on June
12).
    "The gain not only reflects signs of a turnaround in the U.S. and global
economy, but more importantly the big rebound in China's petroleum demand
accompanied by record oil and product imports," says Ms. Mohr. "China is now
more dependent than the United States on imports for its petroleum
consumption. China's drive to build its 'strategic' oil stocks will have
profound implications for oil markets and has caused us to revise up our WTI
oil price forecast to US$63 for 2009 and US$90 for 2010."
    The Metal & Mineral Index also strengthened markedly in May, up 4.2% m/m,
with widespread gains in base metals, gold, silver and uranium. Spot uranium
prices bottomed at US$40 in early April and have edged up to US$54 in
mid-June. The Agricultural Index climbed by 3.7% m/m in May, as grains,
oilseeds (especially canola) and livestock advanced. Only the Forest Products
Index retreated (-4.4% m/m), as the start of a rally in NBSK pulp prices was
swamped by lower building material prices, plunging newsprint prices and
widespread declines in fine paper prices, alongside exceptionally weak U.S.
print-media advertising.

    Oil & Gas

    WTI oil prices have jumped by almost US$20 in the past two months.
According to Ms. Mohr, what may not be well recognized is the pick-up in
China's oil demand in April and May and its importance in boosting oil prices.
"China is currently the world's second-largest oil consumer after the United
States. The bulk of global demand growth for petroleum in the coming decade
will come from China and other emerging markets such as India and Brazil
rather than the United States or the G7."
    China's implied petroleum consumption rose by 6.0% year-over-year (yr/yr)
in May - up from 3.9% in April - marking the biggest yr/yr gain since August
2008. Refinery runs were a record in China in May - boosted by the turnaround
in industrial activity, near record auto sales and some stock building by
consumers, in anticipation of administered price hikes on June 1 (6-7%).

    Metals & Minerals

    LME copper prices climbed from US$1.99 per pound in April to US$2.07 in
May and have averaged a very profitable US$2.27 to date in June - yielding a
44% profit margin over average world break-even costs including depreciation
and interest expense. Prices rose to a near-term peak of US$2.39 on June 11 on
news that China's copper imports rose to a new record high in May (the third
record in as many months) - evidence of the dominance that China now commands
in global commodity markets.
    Potash prices (FOB Vancouver) were unchanged at US$712.50 per tonne in
May, though export volumes remain exceptionally low. Some overseas buyers were
forced to curtail purchases in late 2008 due to the withdrawal of 'trade
credit' and continue to balk at near record prices for standard potassium
chloride (MOP) and potash in NPK blends.
    "Buyers are awaiting news on annual contract negotiations between BPC
(Belarusian Potash Company) and then Canpotex (representing Western Canada's
three producers) and India -- likely to settle before China, where contract
negotiations are expected to be protracted," says Ms. Mohr. "Potash demand is
strong in India and inventories relatively low at an estimated 0.5-0.6 million
tonnes. In today's environment, a roll-over of India's 2008 contract price of
US$625 cfr (about US$600 netted back to the Port of Vancouver) would be
considered a positive result for potash producers.
    "While potash prices will likely decline over the summer, we expect a big
rebound in prices in 2010, given this year's marked deferral in world
fertilizer application," concludes Ms. Mohr.

    Scotia 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.

For further information: Patricia Mohr, Scotia Economics, (416)
866-4210, pat_mohr@scotiacapital.com; or Patty Stathokostas, Scotiabank Public
Affairs, (416) 866-3625, patty_stathokostas@scotiacapital.com

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