Today's economy

What the rebound in commodity prices really means

By Kevin Press,

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Image of a drilling platform at sea.Scotiabank’s Commodity Price Index jumped a remarkable 3.1% in August, relative to the month before. That contrasts sharply with the 0.4% decline reported in July. But the good news has more to do with a reduction in global supplies than it does increased economic demand.

“The rally in August didn’t have anything at all to do with macroeconomic conditions,” said Patricia Mohr, vice-president of economics and commodity market specialist with Scotiabank. She and I spoke yesterday. “Industrial activity in the eurozone, in China and in the U.S. was actually decelerating in August.”

There are three explanations, according to the bank’s report:

  • Political turmoil in the Middle East and a drop in North Sea output due to maintenance and labour issues account for higher oil prices.
  • There aren’t enough building material supplies in North America to cope with the early stages of a U.S. housing recovery.
  • Droughts in the midwestern U.S. and Russia have driven grain and oilseed prices up sharply.

Oil and gas commodities rose 11.2% between July and August. Forest products increased 2.3%. Metals and minerals are down 2.4%, and agriculture products are down 1.2%.

The All Commodity Price Index is off 8% relative to August 2011. And it is down almost 17% compared to a high reached in April 2011, before worries about the eurozone triggered a global slowdown.

Image of Scotiabank All Commodity Price Index.

Mohr also explained that recent stimulus moves by central banks in the U.S., Europe and China have driven investors toward riskier assets, including commodities.

“The impact of the liquidity injection by central banks is to lower interest rates,” she told me. Policy makers are seeking to produce two results. “The first is to spur borrowing and make it easier for consumers and businesses to borrow. The second is to encourage businesses and consumers to shift away from cash and low-yielding Treasury securities into real capital formation. The intent is to lower the return on fixed assets to very low levels so that investors are encouraged to shift funds into productive investments.” Mohr said that second point applies particularly to the U.S. Federal Reserve’s latest round of quantitative easing.

The rise in commodity prices is good news for Canada because it boosts our merchandise trade balance. Clearly though, it does not signal a strong turnaround in global economic demand.

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[…] week Brighter Life delved into What the Rebound in Commodity Prices Really Mean.  You may be surprised by the […]

Best of Blogs - Good to be home on

[…] week Brighter Life delved into What the Rebound in Commodity Prices Really Mean.  You may be surprised by the […]

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