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____ Monday November 30, 2015 ____



Commodity Prices Rally in October, but Lose Ground Again in November

Toronto - Scotiabank's Commodity Price Index rallied 3.7% month-over-month (m/m) in October, but remained 29.1% lower than a year ago. An easing of concern over the slowdown in China's economy and a potential Fed interest rate hike contributed to the lift in commodity prices last month. However, these concerns returned in November, with investment funds bidding down oil and base metal prices.

"The further slowdown in China's industrial activity to 5.6% year-over-year (yr/yr) in October triggered renewed investment fund short selling," said Patricia Mohr, Vice President of Economics and Commodity Market Specialist at Scotiabank. "Financial markets are also expecting the Fed to begin normalizing U.S. monetary policy in December, boosting an already high U.S. dollar and pulling down dollar-denominated commodity prices.

"Base metal prices have receded again in November amid quite negative sentiment over the outlook for China -- excessively so in our view. London Metal Exchange (LME) zinc prices have retreated to US$0.73 per pound, just above average world break-even costs. However, prices appear to be 'over-sold' relative to the fundamentals. Zinc concentrates are currently in technical deficit, with estimated world demand above supply, and the mine cutbacks by Glencore and 16 Chinese smelters will tighten market conditions further in 2016.

"LBMA (London Bullion Market Association) gold prices -- currently at a low ebb of US$1,071 per ounce -- have been trading up and down as financial market expectations for a Fed rate hike rise and fall. On a more positive note, gold prices should start to rally around 2017 as mine development deferral leads to declining world gold production. Also, a tightening in 'physical supplies' should attract investors back to gold."

Other highlights from the report include:

• A widening discount on Western Canadian Select (WCS) heavy crude oil from Canada following the outage at BP's Whiting, Indiana refinery in August once more highlights the substantial cost of relying on only one key export market for the vast bulk of Canadian crude. Had oil pipeline capability been available to the B.C. Coast or Atlantic Canada, producers could have diverted crude to Asian markets, where price discounts on heavy crude similar to WCS Heavy are half U.S. levels. The decision by the U.S. to deny a permit for Keystone XL heightens the need to build oil export pipeline capability to "tidewater" for Canada's oil industry -- a dominant and important part of the Canadian economy.

• Alberta's recently announced Climate Change policy is intended to build public support for needed oil pipeline expansion.

• The Agricultural Index edged up in October (+0.6% m/m, -9.7% yr/yr). A seasonal gain in wheat, barley and canola prices, with an end to harvest pressure, just offset weaker cattle and hogs and still strong salmon & lobster prices. No.1 grade canola prices in store Vancouver rose to US$385 per tonne and remain relatively high.

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