Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, surged in April — up 6.1 per cent month over month (m/m) — to a level just 13.4 per cent below the July-2008 record high. The All Items Index has climbed 60.4 per cent from the cyclical low in April 2009. However, after 10 consecutive monthly gains, the All Items Index likely corrected sharply in May. Commodity prices are expected to consolidate in coming months — with the summer doldrums fast approaching — followed by a rally in the fourth quarter.

"Jitters over a mild growth slowdown in China and concern over the impact of high food and energy prices on global consumer spending and growth had been percolating through commodity markets in the second half of April," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "However, a severe increase in CME margin requirements for silver futures trading, up 84 per cent in multiple moves over a two-week period from April 25 to May 5, appears to have been the immediate trigger for the plunge in many exchange-traded commodity prices in early May."

China's industrial production slowed to13.4 per cent year over year (y/y) in April from 14.8 per cent y/y in March, and an average of 14.3 per cent y/y in 2011:Q1. A flash Purchasing Managers' Index for May points to a further moderate slowdown this month, though not a hard landing. Tighter credit to contain inflation (e.g. restrictions on letters of credit for raw material inventory purchases) and to curb property speculation in Tier-One Cities appears to be taking a toll on activity.

"Two unusual developments also slowing growth in China are an earthquake-related shortage of parts for Japanese auto plants in China, as well as power shortages in many regions of China linked to drought and reduced hydro-power," noted Ms. Mohr. "Government electricity rate caps, preventing the pass-through of higher thermal coal prices, have also discouraged utilities from increasing power generation."

Oil & Gas Index

The Oil & Gas Index once more led the advance in overall commodity prices in April (jumping 10.5 per cent m/m). The Edmonton par price (light oil) jumped more than US$16 per barrel — alongside surging West Texas Intermediate (WTI) oil prices — to a level only 14.8 per cent below the all-time record high in July 2008. Heavy oil prices at Hardisty, Alberta were also up more than US$10. Interestingly, natural gas export prices increased modestly, as unusually heavy U.S. nuclear plant shutdowns for maintenance pushed up natural gas prices across North America (a counter-seasonal development). WTI oil prices soared from just under US$103 per barrel in March to US$110 in April.

Metal & Mineral Index

The Metal & Mineral Index was also exceptionally strong in April (advancing 7.8 per cent m/m). After reaching a record US$330 per tonne in the 2011: April-to-June quarter, contract prices in Asia for Western Canada's premium-grade hard coking coal will likely drop to about US$280 in the July-to-September quarter. While steel output in China - 46.5 per cent of the world total — will likely fall back over the summer, possibly limited by power cutbacks — coking coal markets will be underpinned by China's increasing reliance on seaborne imports to satisfy its demand. Spot potash prices (FOB Vancouver) for overseas sales climbed from US$409 per tonne in March to US$425 in April (up US$82.50 from the low last Fall).

Uranium prices have also inched up, after dropping in the wake of Japan's Fukushima-Daiichi nuclear power plant incident. Spot prices declined from US$66.50 per pound prior to the earthquake to US$55.50 in late April, but firmed up again to US$57.50 in mid-May.  At the 7^th Annual China Nuclear Energy Conference in Beijing on May 12-13, a senior official of the China Nuclear Energy Association indicated that China's operable nuclear power capacity will likely reach 70 Gigawatts by 2020 (not far from expectations prior to the Fukushima-Daiichi event).

"The physical copper market is starting to tighten again in China," observed Ms. Mohr. "Fabricators had been destocking copper cathodes in China in 2010:Q4 and 2011:Q1 and cut imports in April alongside tightening credit and high prices, but appear to be stepping back into the market in May alongside lower inventories."

Agricultural Index

After edging down in March, the Agricultural Index rallied back strongly in April (up 5.5 per cent m/m). Agricultural commodities may be one of the best performing sectors over the balance of 2011, pointing to strong demand for fertilizers and agricultural equipment. The Canadian Wheat Board's asking export price for No.1 grade wheat rebounded to US$459 per tonne in April (up 73.4 per cent y/y) amid dry conditions in the U.S. Southern Plains, which threaten the winter wheat crop. Flooding in Manitoba and wet weather in eastern Saskatchewan have also delayed planting in Western Canada, though Russia announced last weekend that it will lift its ban on exports.  Both cattle and hog prices moved to new record highs. High feed grain prices (corn, barley) suggest only limited herd rebuilding in the United States and Canada in the coming year.

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