I recently wrote a story for Market Insights that dealt with international commodity prices. My approach was mainly to look at demand factors. I feel that a supplementary article is warranted that considers more issues, particularly on the supply side.

A number of commodities (especially gold) are traditional hedges against inflation. However, a number of other commodities as well (especially oil) have also become a hedge against U.S. dollar declines. As the U.S. dollar has fallen over the past several years, the effect has been to lower potential revenue returns to oil producers. The counter-response has been to raise oil prices.

This has interesting implications for U.S. interest rate policy. Lower U.S. interest rates lend a downside to the greenback that in turn promotes higher commodity prices. See my article entitled “Fed’s Note to Self: Never lower Interest Rates to 1% Again.” Talk has been heating up about tying the price of oil to a basket of currencies rather than just the U.S. dollar. Kuwait has been one of the first OPEC nations to sever its U.S.-dollar peg.

In oil markets, production is declining in the United Kingdom, Mexico and Norway. Output from Nigeria and Venezuela is problematic due to political uncertainty. Militants are now even attacking offshore rigs in Nigeria, an area that was once thought to be impregnable. Among OPEC nations, those with the most potential to expand production are Saudi Arabia, Angola, Kuwait and the United Arab Emirates. Investments in the Tar Sands of Alberta will also raise capacity and Brazil is another major source of new oil.

The coal market is a prime example of supply disruptions that can happen in major producing nations. Australia has been plagued by severe flooding and bottlenecks at its shipping ports. China experienced severe winter weather at the start of this year that hampered delivery logistics. South Africa has ongoing problems with power outages.

In forestry, the weak U.S. housing sector has been the number-one negative influence on lumber prices. This has prompted production cutbacks and sawmill closures. Canadian producers have been further hampered by the strong Canadian dollar and a combination of quotas and/or export taxes (up to 15%) as specified under the 2006 softwood lumber agreement with the U.S.

Newsprint demand has been falling for several years. However, exports to Western Europe have kept up better than sales in North America. Consolidations within the industry (particularly the merger of Abitibi and Bowater) have reduced the number of key players. The top five producers now account for almost all output. Through production cuts and some mill closings, those five firms have been able to re-establish some control over pricing.

That’s enough for today. I’ll continue with this topic tomorrow, with more on forestry, metals and minerals and agricultural prices. TD Economics of the TD Bank Financial Group, with quarterly and weekly reports, is an excellent source of information on world commodity markets.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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