Commodity Blog

Archive for November 28th, 2008

Commodity prices are falling at their fastest pace in decades, cutting a swath through the economy as tumbling crude puts Alberta oilsands projects on ice and crashing base metal prices shutter mines across the country.

Scotiabank reported Thursday its monthly commodity price index fell 16.6 per cent in October, the sharpest monthly decline since the index was created in 1972. The oil and gas sub-index led the plunge, off 21.8 per cent.

Those declines took their latest victim Thursday, with the announcement by Royal Dutch Shell of its second oilsands project delay in as many months. Oil prices tumbled from an average $103 US a barrel in September to $76.72 US in October, and is now trading around $54 US.
Similar cutbacks, such as Petro-Canada‘s mid-November delay of its $21-billion Fort Hills project, will slash oilsands investment in 2009 by 20 per cent to $16 billion from $20 billion, according to the Canadian Association of Petroleum Producers.

Scotiabank’s metals and minerals index was equally dire. It plunged 15.9 per cent in one month driven by nickel and zinc prices now only matching average global costs of production, making mining a break-even prospect at best for many producers.

That has led mining companies around the world to sharply reduce operations. Reuters news service listed 63 announcements in November alone of mining companies, many of them global players, cutting back operations. In October, 56 such announcements were made — following six in September — reflecting the increasing decline in metals prices over that period.

“There has been a dramatic decline in base metals prices,” said the author’s report and Scotiabank commodity specialist Patricia Mohr. Nickel is now trading around $4.63 a pound from almost $24 only months ago, and copper is at about $1.56 US a pound, down about 44 per cent so far this year.

“When you approach average world cash costs it means that part of the industry isn’t covering cash and. .. higher cost producers are actually shutting down capacity. For example, there have been four small nickel mines in Ontario that have shut down because prices aren’t high enough,” Mohr said.

The story is being across Canada in places like New Brunswick, where zinc-lead operator Blue Note Mining announced in late October it was putting its mines on ice, and in Saskatchewan, after Denison Mines said Tuesday it was delaying a uranium project in the northern part of the province.

The industry that employs 360,000 people and contributes $42 billion, or 3.5 per cent, of the country’s gross domestic product, according to data compiled by Paul Stothart, vice-president of economic affairs for the Mining Association of Canada.

He estimates half a dozen “global-scale” mines are closing in this country, “although this is simply an estimate and it may change in the future.”

Mohr feels oil prices have bottomed and are set to rebound strongly “early next decade.” But she said metals prices will at best remain or fall below current levels for the next 18 months and not begin to rebound before 2011, despite China’s dramatic 108-basis-point cut in lending rates this week that helped give a lift to base metals prices.

Canadian investors reacted strongly though to China’s announcement, with stock in mining giant Teck gaining about 44 per cent in the past two days of trading and base metal prices rising strongly.

Mohr is more optimistic about uranium, which should get a lift by Indian buying next year. Spot prices fell from $60.40 US a pound in September to $46 in October.

She’s also upbeat about potash, which remains at historically high prices with Japan recently signing purchase agreements $200 US higher than the current contract prices of about $700 US.