Commodity price index declines

After rising for several months, The Bank of Nova Scotia’s commodity price index declined by 1.1% in March. A substantial drop in agricultural prices and a smaller decline in forestry products and oil and gas more than offset the slight gain in metals and minerals.

A tighter U.S. monetary policy — intended to dampen inflationary expectations — also took a toll on some commodity prices, reports economist Patricia Mohr. In particular, U.S. investment fund buying of base and precious metals waned alongside higher interest rates, though the funds still have substantial positions.

But while the metal and mineral index edged up in March, it slipped in April. Gold prices dipped to US$374 per oz. alongside lower silver and platinum prices, as a result of some easing of political tensions in South Africa and rising U.S. interest rates. Short-term rates in the U.S. are at a 2-year high, increasing the cost of holding gold.

Zinc prices were hovering at US41 cents per lb. — a level well below average cash costs. Western world inventories continue to climb and represent about 17 weeks’ supply, far exceeding the 6.6 weeks at the end of 1986 when prices started to recover in the previous business expansion.

Zinc supplies rose by about 2.7% last year, outpacing the 0.7% gain in consumption. Western world smelters failed to cut output despite an 8% reduction in mine concentrates.

Mohr says zinc prices will probably continue to move lower in the near-term, though several developments should steady market conditions later in the year. Japanese smelters have recently announced production cuts, and tight global supplies of concentrates will reduce Russian exports of toll-treated material in 1994.

European car sales have also picked up and industrial activity appears to be bottoming on the Continent. A 5% drop in Western European demand and an 8% decline in Japan almost offset last year’s strong consumption gains in the U.S., Taiwan and South Korea.