Canadian commodity prices declined in March, ending three months of strong advances, but remained well-above year-ago levels, TD Bank Financial Group said in a report Tuesday.

The TD Commodity Price Index expressed in U.S. dollars fell 6% during the month, with the weakness broadly based, as the energy, forest products, base metals, precious metals and agricultural products sub-indices all declined. “Energy led the way, with prices for natural gas dropping 13% and crude oil retreating 7%,” said Craig Alexander, senior economist at TD Bank.

Excluding the energy component, the TDCI fell by a more modest 2.6% last month, with lumber and cattle posting the largest percentage declines. “A rally in the Canadian dollar further reduced the prices received by Canadian commodity exporters, with overall commodity prices expressed in domestic currency terms dropping 8.4%, while non-energy prices fell by 5%,” said Alexander.

The decline in March in the commodity index is less negative than it first appears. The TDCI is still well ahead of last year at this time, standing 17% higher in U.S. dollar terms and 9% in Canadian dollars terms. Furthermore, the recent decline in energy prices can be viewed as a positive development. “The lower crude oil and natural gas prices will be less of a pinch on consumer wallets and business budgets, while at the same time remaining at highly profitable levels for Canada’s energy sector,” said Alexander.

In other commodity highlights last month:

  • Once a war in Iraq became a certainty, crude oil prices tumbled, as markets anticipated a short conflict that would create minimal disruptions to Middle East crude oil supply. West Texas Intermediate crude oil fell from a peak of close to US$40 a barrel in late February to US$31 by the end of March, and dropped below the US$30 mark in early April. “Reduced political risks and an improved inventory situation should see crude oil prices fall to US$23.50 a barrel by year-end,” said Alexander.
  • Natural gas prices plunged 13% in March, tracking crude oil prices lower and reflecting reduced seasonal demand for this energy source. However, natural gas prices remain double their level of a year ago. But, Alexander noted, summer air conditioning demand and the rebuilding of inventories for next winter “are expected to keep natural gas prices at historically high levels and could even lead to a rebound in prices before yearend.”
  • After rising to more than US$382 per ounce in early February, gold prices fell significantly in March, ending the month at US$335. The liquidation of long positions by speculators, reduced safe-haven buying and a rebound in the U.S. dollar all contributed to the retreat in gold prices. TD economists predicted that improving demand, limited new supply from mines and a renewed weakening in the US$ will lift the price of gold to US$345 by yearend.
  • Lumber prices fell 10% in March, erasing all of the gains posted since the start of this year. The decline coincided with weaker U.S. home construction. However, given the poor weather conditions during the month, it is not clear that lumber demand is truly softening. The fundamental factors supporting residential housing markets — including low mortgage rates and tight inventories of unsold new homes – should support higher lumber prices this year.
  • In terms of other forest products, pulp prices rose US$40 in March, building on a US$20 increase in February. These back-to-back price increases have now reversed all of the losses pulp experienced since mid-2001. Newsprint prices were unchanged last month, but producers are committed to implementing a US$50 price hike in the near future to combat high operating costs and tight margins.
  • After five months of gains, the base metals sub-index fell 2% in March, with lead, nickel, aluminum and copper all recording lower prices. Additional supply and signs of increased weakness in U.S. and European manufacturing were the key drivers behind the decline in prices. “The outlook for base metal prices is directly tied to the prospects of global industrial production. Given the recent negative economic reports, base metals will be hard pressed to rally in the near-term, but an acceleration in economic growth in late 2003 and throughout 2004 should see prices headed higher,” said Alexander.
  • The TD agricultural product price sub-index fell 3.3% last month, as price declines for wheat, canola and cattle more than offset price increases for hogs and flaxseed.



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