Economy & Markets

Scotiabank commodities index down 35% since July

By Megan Harman |

Commodity prices tumbled for a fourth consecutive month in November, falling 9.4% from October, according to the Commodity Price Index tracked by Scotiabank.

The index, which measures price trends in 32 of Canada's major exports, has plunged 35.4% since hitting a record high in July.

“The shift from boom to bust in many commodities has been the most rapid in the history of the Scotiabank Commodity Price Index, with data back to 1972, magnified by the exit of hedge and investment funds from commodity market investments as well as a rapid markdown in anticipated global growth from 5% in 2006-2007 to only 1.5% for 2009,” commented Patricia Mohr, vice-president of economics and commodity market specialist at Scotiabank.

“A spiraling down in business and consumer confidence, the intensifying credit crunch and a sharp, sudden slowdown in global auto sales and G7 housing have contributed to the rapid deceleration, as has recent data from China indicating a marked deceleration in industrial activity.”

The oil and gas index led the decline in November, plunging 17.5% from October. Metals and minerals also fell sharply, to the point where nearly half of aluminum smelters around the world are failing to cover cash costs.

Potash and uranium prices were the only ones to advance in November. Spot potash prices at the Port of Vancouver edged up to US$872.50 per pound, and spot uranium prices grew to US$53 per pound from US$44 per pound in late October.

Gold prices have maintained their value well at US$839 per ounce in mid-December. Prices have failed to return to the peak they reached above US$1,000 in March, limited by a largely deflationary economic environment and the recent flight to the safety of U.S. Treasury securities.

The commodity price index will likely continue to fall in the next six months alongside challenging international economic conditions, according to Mohr.

But some commodities are expected to outperform, including gold—a hedge in uncertain economic times; potash, which is still at record highs; and in a two-year context, oil and uranium. Nitrogen fertilizer prices are also set to rally back as farmers plant crops next spring, according to Scotiabank.

While oil prices will start 2009 on a weak note, Scotiabank expects oil prices to average US$55 in 2009 and rise to US$70 in 2010.

“In our view, a sharp global capital spending slowdown on new oil field development, which now appears likely in 2009, will set the stage for tighter markets and a big rebound in prices early next decade,” said Mohr.

Government fiscal stimulus programs boosting infrastructure spending in the United States, the Euro Zone and China should also provide some offset to the business investment slowdown as 2009 unfolds, which could bolster commodity prices.

In addition, some renewed weakness in the U.S. dollar, linked to a spiraling U.S. budgetary deficit estimated at US$1.25 trillion, could boost gold prices going forward, according to Scotiabank.