Canadian commodity prices kicked off the New Year on a soft note and are likely to trend lower over the course of the year, say TD economists.

In the February issue of the TD Commodity Price Report, the TD Commodity Price Index expressed in U.S. dollars was virtually unchanged in January, recording a mere 0.1% dip.

Even allowing for a retreat in the Canadian dollar, the index measured in terms of the domestic currency only managed a small increase of 0.4% last month.

“However, the flat performance of the headline index masked a very mixed outturn by the individual components,” said Craig Alexander, vice president and deputy chief economist at TD Bank Financial Group.

Eight of the 18 commodities in the index recorded higher prices, seven experienced lower prices, while three were unchanged. The strongest price performers were crude oil and zinc, while the weakest performers were natural gas and silver.

“Following a powerful rally since the end of 2001, the TD Commodity Price Index appears to be near a peak,” said Alexander. This reflects the expectation that the pace of growth in global demand for raw materials will moderate in 2005 and 2006, as world economic growth gradually slows.

“Although demand for commodities will remain healthy, the less bullish backdrop will lead to an unwinding of many speculative positions that financial market participants have put on commodities in the past that pushed prices for selected products beyond the levels warranted by supply-demand fundamentals,” remarked Alexander.

However, the TD economists say the pullback in prices will be constrained by relatively tight supply conditions for many commodities. The TDCI is expected to be a moderate 8.5% over the course of 2005 and 2006, which will leave the index 51% above its level in December 2001.

“Although prices for energy, forest products and base metals are likely to give up some of their recent gains, the level of prices will generally remain extremely profitable for Canada’s commodity sectors,” stated Alexander. The precious metals group is expected to prove a key exception to this general pullback, as gold is expected to benefit from renewed weakness in the U.S. dollar.