Canadian commodity prices resumed their downward spiral in September, with the TD Commodity Price Index falling sharply to its lowest level in more than two years.

The 18-item TDCI fell by 7% in September, led by a plunge in natural gas prices and more moderate price declines in twelve other components of the index. “The widespread weakness in commodity prices reflects deteriorating world demand and the uncertainty created by the September 11th terrorist attacks on the United States,” says Craig Alexander, senior economist at TD Bank.

Although it is impossible to assess the full economic consequences of the terrorist strike, TD says that the disruptions will clearly exacerbate the economic slowdown underway in the U.S. “The rest of the world will not be immune to the U.S. downturn, as international trade and global corporate profits will be sharply curtailed by the weakness in the world’s largest economy,” notes Alexander.

TD economists forecast that the world economy will expand by a mere 2.2% this year. “While the current environment is negative for commodity prices, the global recession is likely to be both shallow and brief. Lower interest rates and stimulative fiscal policies are expected to fuel an economic recovery next year, which should lead to a gradual rising trend in commodity prices,” says Alexander.

Higher inventories sparked a 24% drop in natural gas prices in September. Crude oil prices dropped sharply to around US$22 per barrel in late September, thanks to declining global demand and OPEC’s decision to leave production quotas unchanged.

Base metals suffered in September, as the terrorist attacks postponed the prospects for a recovery in global industrial activity. Nickel prices fared the worst, dropping 9% in September. Zinc was down 4%. Since the start of the year, copper prices have dropped 20%, and aluminum prices fell 18%. In the wake of the terrorist attacks, gold averaged US$284 per ounce for the month, up almost US$12 from August. “In the near-term, gold will to continue to fetch a premium, with prices likely to end the year at close to US$290,” says Alexander.

Lumber prices, which surged in August after the U.S. levied a 19.3% countervailing duty on Canadian softwood lumber, gave back most of those gains in September. “Although the trade dispute will put upward pressure on prices, the economic downturn will significantly reduce construction demand for lumber, preventing producers from passing along the added costs and suggesting that lumber prices will trend lower before the end of the year,” observes Alexander.

The TDCI agricultural sub-index retreated for the second consecutive month in September, as prices of canola, flaxseed, hogs and cattle fell, more than offsetting slight increases in wheat and barley.