Deteriorating global demand hit Canadian commodity prices hard in July, say TD economists in the August TD Commodity Price Report.

The 18-item TD Commodity Price Index fell by more than 7% last month, following a sizeable 5% decline in June, pushing the index to its lowest level in 21 months.

Natural gas and lumber fared the worst, but the weakness was broadly based, with 12 of 18 commodities registering lower prices. Only prices of agricultural products (except wheat) and lead bucked the downtrend.

“Although gains in crude oil and lumber prices early this month suggest a rebound in August, the scope for commodity prices to rally on a sustained basis in the near term is limited,” says Craig Alexander, senior economist at TD.

Weak international demand will continue to constrain commodity prices, TD suggests. While financial markets remain optimistic that a U.S. recovery is in the cards, recent U.S. economic reports support expectations that the revival won’t come before the fourth quarter of 2001.

Meanwhile, overseas demand is slackening, reflecting widespread manufacturing recessions in Europe and Asia. This suggests that global economic growth is likely to remain on a downward trajectory until well into the fall, further eroding demand for raw materials. “Any increase in commodity prices in the near term will have to come from supply adjustments by producers,” notes Alexander.

The buildup of natural gas inventories for use next winter is proceeding apace. “U.S. gas inventories are almost 15% higher than this time last year, suggesting that the seasonal increase in gas prices this winter will fall well short of the spike experienced last winter,” observes Alexander.

Meanwhile, OPEC has responded to declining oil prices with a surprise announcement that it would cut output by 1 million barrels per day effective September 1. “In the coming months, crude oil prices have limited upside, but should remain within OPEC’s target range of US$22-28,” says Alexander.

Base metal prices continued to fall in July, with monthly price losses ranging from almost 11% for nickel to 3% for aluminum. In addition to a typical seasonal dip during the summer months, declining industrial demand has fuelled the drop in prices. “The key driver for a reversal of fortunes in base metal prices is a recovery in U.S. manufacturing, which is unlikely before this winter,” notes Alexander.