Commodity prices plunge in October

Commodity prices dropped in Canada in October by the largest amount on record, according to data released by Scotiabank Thursday.

The chartered bank's index of 32 commodity values fell by 15.6 per cent in October compared to September. That tumble represented the biggest one-month drop since Scotiabank began calculating the number in the late 1980s.

The index, which adds up changes in everything from potash to oil and gas to arrive at a single figure, is off almost 30 per cent since its July peak.

Slowing global economic growth means that demand for many of the stones and liquids that Canada digs or pumps out of the ground is down as well, Scotiabank said.

"Recognition that much of the G7 economy is now contracting has also pushed down prices," said Patricia Mohr, Scotiabank's vice-president of economics.

"World growth is now expected to advance by less than two per cent in 2009 compared with GDP gains of five per cent in 2006 and 2007."

Price forecast 2009 (US $)Crude oil60 per barrelCopper2/lb.Nickel 4.20/lb. Zinc 0.55/lb.Source: Scotiabank Economics

Scotiabank predicts that as the global economy weakens further in November, so will the value of commodities such as oil and gas, already down 22 per cent in October compared to the same month one year earlier.

So far, however, the overall price index is still higher than it was in October 2007, albeit by a tiny 0.6 per cent.

Scotiabank said prices for potash and coking coal, used in the making of steel, are expected to remain at record levels. The value of both products remains high partly because the commodities are sold based upon longer-term contracts rather than day-to-day trading.

Unhedging the hedge

Investors have been unwinding their hedging positions, another factor putting pressure on prices, Scotiabank said.

In many cases, companies hold contracts to take delivery of a commodity, such as oil, bought at a particular price. As the value of that mineral or liquid falls, however, firms will sell what they have in order to limit the loss from the earlier purchase of the commodity.

In other cases, companies have been forced to dump commodity-linked investments in order to pay for investor redemptions or cover other financing needs, Mohr said.