Scotiabank commodity index up in March; mid-April skid shows markets skittish

TORONTO – Scotiabank says its Commodity Price Index bounced back in March after edging down in February.

The bank (TSX:BNS) says the index rose 1.6 per cent last month, giving it a slight gain overall in the first quarter compared with the average in the fourth quarter of 2012.

However, commodity markets remain skittish, with Scotiabank Economics noting the sharp sell-off in gold in mid-April and a softening of base metal prices after China reported slower-than-expected first-quarter growth in gross domestic product.

Meanwhile, Scotiabank says its All Items Index remains 15.7 per cent below its April 2011 near-term peak, just prior to the advent of financial market concern over excessive eurozone sovereign debt and the likely negative impact on global growth.

Firmer overall prices in March were led by the Oil and Gas Index, up 6.8 per cent month over month, with gains in Western Canadian Select heavy oil, natural gas export prices from Canada to the U.S. and liquefied petroleum gas prices in Edmonton and Sarnia.

The Forest Products Index also strengthened in March, rising 2.2 per cent month over month.

“While (forest products) prices have been checked in mid-April by some inventory build during the seasonally slow first quarter we expect prices to rebound in the third quarter and to move irregularly higher through first-half 2015,” it said, adding that U.S. residential construction is likely to “resume its traditional role as a locomotive driving U.S. economic recovery.”

The Agricultural Index also contributed to firmer overall commodity prices last month, rising 0.7 per cent, entirely as a result of Atlantic Coast lobster prices which shot higher as late-winter storms tightened supplies. In contrast, No.1 spot prices for canola (in store Vancouver) eased back seasonally from an all-time record high of US$674 per tonne in February to US$659. However, tight farm stocks in Canada limited the decline.

The Metal and Mineral Index lost ground in March, down 3.7 per cent, with both base and precious metals moving lower. Gold prices eased from US$1,628 an ounce in February to US$1,593 in March and plunged as low as US$1,321 in intra-day trading on April 16, before partially recovering to US$1,471 in late April.

The sharp sell-off in gold was triggered by news that Cyprus might sell 10 tonnes of the precious metal to raise 400 million euros towards its bailout package. While 10 tonnes is small compared with world central bank holdings of 31,694.8 tonnes, financial markets were concerned that this might set a precedent for sales by other distressed eurozone countries.

“In my view, it is unlikely that other eurozone countries will sell gold (under the control of national central banks rather than finance departments),” commodities market specialist Patricia Mohr wrote in the report.

“In any case, under the Central Bank Gold Agreement between European countries . . . gold sales will be limited to 400 tonnes annually (the total for all signatories).”