Scotiabank’s Commodity Price Index, which tracks prices of 32 of Canada’s major exports, rose by 3.5% last month, reaching a new all-time record high.

“The recent surge in commodity prices, which will carry over into March, reflects stepped-up interest by commodity hedge funds and new derivative products, increasing trading volumes on many commodity exchanges. However, strong prices also reflect the potential for robust underlying demand through most of 2005,” says Patricia Mohr, vice-president and commodities specialist for Scotia Economics.

The bank’s Metal and Mineral Index surged to the highest level since February 1989, pumped as investment funds bought into tighly-supplied commodities as an asset class and as a hedge against a weak U.S. dollar. In particular, the bank noted that global copper stocks are likely at a record low while demand in China remains strong.

“China’s industrial production rose by a solid 16.9% in January and February – a faster pace than in late 2004 – with particular strength in metallurgy (+26.8%) and electronics (+over 40%),” said Mohr.
“The U.S. economy is also showing resiliency – underpinned by still very low interest rates.”

While rising commodity prices threaten higher G7 inflation, the “China factor” has so far curbed the inflationary impact, the bank says. Despite squeezed margins, manufacturers in China are competing intensely for market
share in their own domestic market and have not yet passed along high raw material costs to domestic consumers.

Forest products also strengthened noticeably in February, with pulp prices advancing and a further rally in lumber and OSB prices buffeting strong U.S. housing starts. Light crude oil prices continued to rebound, after a moderate decline in late 2004, and reached a new record high of US$57.60 in mid-March – surpassing last October’s peak, the report said.