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Commodity Prices Slip As War News and Economic Softness Dampen Expectations, Says BMO Economic Report  


After surging strongly in the months leading up to the war in Iraq, commodity prices slipped by 3.5 per cent in March, leaving the BMO Financial Group Commodity Price Index at 134.5 (1993 = 100). This drop ended the string of consecutive monthly commodity price increases since November 2002.

“Commodity markets reacted negatively to the understandable anxiety about the war and the weak economic prospects for the first half of this year,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.  “However, to put this in perspective, the decline only partially retraced the dramatic forty per cent increase in the commodity index since mid summer 2002.”

The Oil and Gas Index fell 5.4 per cent for the month leaving it at 245.4 (100=1993).   Both crude oil and natural gas prices declined, reflecting both relief that the damage done to Iraqi oil fields had not been greater and, specifically in the case of natural gas, the approaching end of the cyclical high-demand winter season.  “The ‘war premium’ of about US$5/barrel has now come out of the oil market but prices are still US$6/barrel higher than our forecasted supply-demand equilibrium point,” said Sweet.  “Given the prospects for a reasonably quick resolution to the Iraqi crisis, expectations are now mounting that markets will quickly rebalance and prices should continue to drop.”

The Metals and Minerals Index suffered a substantial 2.5 per cent decline in March but still remained 4.7 per cent higher than at this point last year.  Gold prices retreated as its value as a “safe haven” commodity declined, while base metals were negatively impacted by discouraging US economic data.  Nickel prices fell by 2.6 per cent for the month, Copper was down by 1.4 per cent and Aluminum dropped by 2.4 per cent.  The index is now 108.2 (100=1993).

“Given the current global economic environment and weak producer demand, metal and mineral prices will likely remain sluggish during the next few months and then gain momentum during the second half of the year as the pace of economic growth quickens,” said Sweet.

Forest product segments moved in different directions in March, leaving the sub index down by a slight 0.7 per cent.   On the pulp and paper side, newsprint prices remained flat at US$475/tonne despite an attempt by producers to raise prices by US$50.  Conversely, prices for pulp were successfully raised for the second month running (by US$40 to US$540/tonne), aided by continued tight availability.

The market for wood products was dampened by poor weather and a slowdown in wholesaler and distributor seasonal restocking.  “Lumber markets still require a better alignment between supply and demand to shake their slump,” said Sweet.  “We expect to see a seasonal pickup in demand over the next few months, which should support some slight price increases.”

The Agricultural Index continued its steady decline with a drop of four per cent in the month to 96.3 (100=1993).  The index has now declined in five of the past six months, although prices are still 20 per cent higher than a year ago.  “With the exception of corn, the prospect of higher crop output in the major exporting and importing countries points to a further downward drift in the price index over the next few months, following sharp gains during much of the past two years,” said Sweet.  “Nevertheless, on an average annual basis, BMO Financial Group’s Agricultural Index is projected to rise by a little over four per cent in 2003 before leveling out in 2004.”

BMO Financial Group Commodity Price Index for March 2003


March 2003 Level
(1993 = 100)

Per cent change
from month ago

Per cent change
from year ago

All Commodities 134.5 -3.5 23.8
Oil & Gas 245.4 -5.4 69.4
Metals & Minerals 108.2 -2.5 4.7
Forest Products 89.6 -0.7 -6.3
Agriculture 96.3 -4.1 20.1

The full BMO Financial Group March 2003 Commodity Price Index report is available on the BMO website at