Scotiabank’s commodity price index, which measures price trends in 32 of Canada’s major exports, bounced back by 3.4% in July to a level only 1.2% below the all-time record in May.

The metal and mineral index snapped back to within 1.6% of its May peak as investment funds renewed their positions in key base metals, encouraged by China’s accelerating GDP growth (up 11.3% year-over-year in Q2) and low exchange stocks. Concern over potential supply disruptions, such as difficult labour negotiations at Escondida in Chile — the world’s largest copper mine, which has been on strike since early August — also pushed up copper prices.

Nickel prices on the London Metal Exchange soared to a fresh record high of US$15.76 per pound on Aug. 24 — well above the previous US$10.84 cyclical peak of 1988 — as a result of strong global nickel demand from the stainless steel and superalloys sectors, production difficulties in Australia and Indonesia and critically low ‘visible’ inventories on the LME, which are equivalent to less than half a day of global consumption.

“Nickel prices will remain unusually elevated through much of 2007 and are likely to average US$9.75 per pound in 2006 and US$7.50 in 2007. Spot uranium prices also continue to climb and are headed over US$50 per pound in the second half of 2006,” said Patricia Mohr, vice president and commodity market specialist, Scotia Economics.

In July, the oil and gas index also surged toward its May peak, as light crude oil prices in Edmonton reached a record $75.66 per barrel. The outbreak of hostilities in the Middle East raised concerns over possible supply cutbacks from Iran. Though international oil prices have eased back again in August with a fragile ceasefire, ‘geopolitical’ supply risks remain. The United Nations Security Council has set an Aug. 31 deadline for Iran to end its uranium enrichment or possibly face sanctions.

In recent years, a tight global supply of drilling rigs and oil field service workers has been one of the factors limiting the pace of new oil field development, despite near record prices. Offshore drilling activity this year has been capacity constrained in West Africa, India and the Persian Gulf, especially Saudi Arabia and Qatar. “While soaring profits have recently encouraged rig owners to step up their orders for new equipment, expansion of the drilling fleet through 2007 will be quite modest (especially for semisubmersibles used in deepwater),” said Mohr.

Strength in metals and energy in July more than offset a further edging down in the forest product index, as falling building material prices just offset strong gains in pulp and paper. “U.S. housing starts have slipped from a cyclical peak of 2.123 million units annualized in the first quarter of 2006, but remain relatively high at 1.795 million in July. However, the correction in lumber prices and, to a lesser extent in OSB, has been more rapid than anticipated, partly because the industry has geared up to serving a U.S. construction market with two million housing starts”, said Mohr.

In July, the agricultural index also eased, as moderately lower cattle and hog prices countered a rally in wheat — linked to drought on the U.S. Plains. Although prices lost ground last month, Canadian cattle prices continue to recover from the May 2003 discovery of BSE and are up 7.7% in the year-to-date. The all items index is 17.3% above a year ago.