In my Blog entry of March 20, 2008, entitled Playing Chess in Three Dimensions, I set out the reasons why it has become so important to pay attention to world commodity markets and why that task has become such a challenge.

Below, set out as “snippets”, are some of the most interesting observations with respect to commodities that I have come across in my recent reading.

• New Record Highs: The prices of oil, potash, wheat and gold all reached new record highs in January, 2008. Potash and sulphur are minerals used as fertilizer. Sulphur is a by-product of oil and natural gas extraction.

• Wheat: The stock (i.e., inventory) of wheat in Canada is currently at its lowest level on record, going back to 1972. U.S. wheat stocks are at their lowest level since just after the Second World War. The bottom line is that global wheat stocks are at a 30-year low.

• Thermal Coal: Prices for thermal coal, which is used in electric power generation, are soaring. The worst snowstorms in 50 years halted coal production in China in February and stopped rail delivery to power plants around the country and to other countries, such as South Korea.

• Iron Ore: Supply conditions in the global iron ore market remain abnormally tight. In line with other recent contract signings, Companhia Vale do Rio Doce (of Brazil) has agreed on a 65% increase in price to supply iron ore to the world’s largest steelmaker, ArcelorMittal (based in Luxembourg). The world’s two other major iron ore producers, Rio Tinto and BHP Billiton (both with properties in Australia) may try to negotiate 70%-plus price hikes with Baosteel of China. Freight is extra and the distance from Australia to China is a lot shorter than CVRD’s route from Brazil. This will be a break from the past when only a single world price for iron ore was set.

• Oil: OPEC members traditionally cut back their production in the spring quarter of each year. This is the period of time when energy demand in the northern hemisphere is at its lowest. It lies between the heating demands of winter and the air conditioning requirements of summer. Summer is also a time of heavy gasoline usage tied to holiday road-trips.

Admittedly, the above are just fragments of information. There isn’t room in a Blog to be comprehensive or to tie all of the relevant facts together. However, I am hoping to convey a sense of what is happening in commodity markets.

Should you want more, I would refer you to the source publications. The foregoing was mainly extracted from the most recent commodity reports written by Scotia Economics at Scotiabank and by TD Economics within the TD Bank Financial Group.

Alex Carrick

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