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The BMO Financial Group Commodity Price Index reached a new record high in February, rising 2.5 per cent in the month to 171.0 (1993 = 100).  All commodity groups with the exception of agriculture contributed to the increase, with robust demand and tight supplies continuing to be the overarching theme.

“The powerful rally in commodity markets since mid-2002 has been driven by strong demand from China, other parts of Asia, and the United States and by generally declining commodity inventories,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group. 

Sweet noted that while the strong uptrend in commodity prices of the past two years will not likely be sustained in 2005, the all-items index should hold near its average level of 2004.  By 2006, moderating global economic growth and rising production of several commodities should relieve tightness in most commodity markets and lead to generally lower prices.

The Oil & Gas Index remained essentially flat in February, with a rise in oil prices offset by a decline in those for natural gas.  However the monthly average for oil masked a run-up over the latter half of February, when U.S. benchmark WTI surged from US$46/barrel to US$55/barrel.  “This rise appears to be largely speculatively driven, as fundamentals such as inventory levels and the supply/demand balance would suggest much lower prices,” said Sweet.  “Certainly, the global market is much better supplied now than a year earlier, when the price of WTI stood at US$34.75.”

The Metals & Minerals Index rebounded in February, led by all base metals while precious metals remained essentially flat.  “Over the past 24 months, this index rose by almost 40 per cent, with particularly large gains for lead, copper, nickel and zinc,” noted Sweet.  “The price of metals should continue to be supported in 2005 by good global economic growth and low inventories.  By 2006, rising production of metals and a continuing moderation in global economic growth should result in moderate price declines.”

The upturn in the Forest Product Index continued for a third consecutive month, with the biggest one-month gain since April.  “The increase primarily reflected sizable increases in wood product prices, which continued to benefit from robust demand and tight supplies,” stated Sweet.  Paper prices were largely unchanged, while pulp prices increased for the second time in three months.

“Looking ahead, a slowing pace of home construction could soften market conditions for lumber and other wood products during the latter half of this year,” added Sweet.  “However, sustained economic growth and supply discipline should keep conditions buoyant for pulp and paper through 2005.”

The Agricultural Index continued to trend downwards in February, reflecting sizable declines for both wheat and canola.  “With large crops in key producing areas overhanging global markets, and a good wheat harvest in China reducing that country’s import requirements, prices are expected to continue moving lower over the course of the year,” said Sweet.

BMO Commodity Index for February 2005

The full BMO Financial Group Commodity Price Index report for February 2005 is available at www.bmo.com/economic.

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