After posting sluggish growth in April and May, prices for Canadian commodity exports gave way to downward pressure in June, say TD Canada Trust economists in the latest issue of the TD Commodity Price Report.

The TD Commodity Price Index, expressed in U.S. dollars, fell by 2.3% last month. Lower crude oil and natural gas prices contributed significantly to the decline. Excluding energy, the TDCI was unchanged, as higher prices for base metals, precious metals and agricultural products were offset by a drop in lumber. “Although commodity prices still stand above their recent lows, the meager gains in the first half of 2002 have been disappointing,” says Craig Alexander, senior economist at TD.

For Canadian commodity exporters, the recent strengthening in the Canadian dollar is compounding the lackluster price performance in non-energy commodities. The appreciation in the Canadian dollar in June resulted in a larger 3.4% drop in the TDCI, expressed in domestic currency terms, with the non-energy sub-index falling by 1.1%. “The outlook is for the Canadian dollar to continue to strengthen in the coming months, with the currency reaching 67.5¢US by year-end – a result that will reduce the prices received by Canadian commodity exporters by a further 3% over the next six months,” notes Alexander.

The price of West Texas Intermediate crude oil slumped to an average US$25.50 per barrel in June, down US$1.50 from its level in May. Although OPEC decided at its June 26 meeting to leave the cartel’s production quotas unchanged for the next three months, the announcement had no material impact on oil prices, as energy markets judged there would be sufficient supply of crude oil in the near term. “Although demand will firm in the coming months, additional supply from non-OPEC producers, including Russia and Norway, will limit any upward pressure on oil prices,” observes Alexander. Crude oil prices are expected to hover near US$27 per barrel in the second half of this year.

Led by the trend in crude oil, natural gas prices also retreated in June. Henry Hub natural gas prices at Louisiana fell by 8% in June. Lumber prices have been on a roller coaster ride this year, fueled by developments in the Canada-U.S. softwood lumber trade dispute. Gold prices made further gains in June, averaging US$321 per ounce, up US$7 from May and US$40, or 14%, since January. “While gold retreated to just above US$310 in early July, it is still expected to end this year at close to US$330 and to rise further in 2003,” says Alexander.

In June, the base metals sub-index recouped most of the losses it recorded in May. Nickel prices led the way, rising by a strong 5.3%. Copper prices, which retreated in April and May, rose 3% in June. “Despite the gains in June, base metal prices still do not fully reflect the improving demand backdrop. Manufacturing conditions around the globe are clearly on the mend, as illustrated by recent increases in purchasing managers’ indexes and orders data. As a result, base metal prices should gain some further ground in late 2002 and throughout 2003,” suggests Alexander.

Following four consecutive monthly declines, the agricultural sub-index advanced in June, with higher prices for wheat, canola, flaxseed, cattle and hogs.