EDITORIAL PAGE — Inflated expectations?

It isn’t surprising that people are perplexed over a resurfacing of inflation, as reported in the general press. Talk of inflation befuddles the average Canadian because, according to the official statisticians in Ottawa, this country is actually running negative inflation numbers (or, to deploy the academic term, deflationary numbers) — in the minus 1% range (annualized), to be precise.

But the inflation picture from the point of view of commodity prices is quite different, and seems to be pointing toward escalating consumer prices once the higher quotes for raw materials ripple into the finished goods sector. For example, the Bank of Nova Scotia’s commodity index (published regularly in this paper) has climbed by 17% since the beginning of the year, and this is what has the experts concerned about the potential of inflation. And, of course, many people in the mining sector are bullish on base metals and the companies that mine the stuff. At the recent annual meeting of one mining company, a corporate executive took us aside to point out just how steep the decline in copper stocks on the London Metal Exchange (LME) has been since the beginning of the year. His conclusion was that, with a squeeze imminent in LME stocks, copper prices have only just begun their long ascent. Remember, only three months ago, copper traded at US85 cents per lb. Today, it hovers in the US$1.06-per-lb. range.

John Lydall, an analyst with First Marathon Securities, takes note of the copper situation in his latest monthly report. “In February this year, the LME copper inventory was 600,000 tonnes; today it is 367,000 tonnes . . .” Even adding to this the comparatively small portion of metal at the Commodity Exchange of New York and larger inventories elsewhere, the market is tight with only about six weeks’ worth of copper consumption held in stock. Naturally, we hope the recent rise in prices for base metals continues. But as Lydall points out, there may yet be hurdles to overcome. In the copper market, plumetting supplies might have been affected by speculative or hedge investments from commodity funds. Purchases by these investment funds, says Lydall, “may have artificially accelerated the inventory drawdown and this metal may find its way back into the market.”

He is watching for cash metal (spot prices) to become dearer than forward quotes (say, three months out). “If this occurs, it will be a very bullish indicator.”

The behavior of copper has also helped nudge prices of the other metals. Lead, zinc (even though LME stocks are still far too high), nickel and aluminum have all improved in price. The generally bullish view was confirmed recently when the lead underwriter for nickel producer Inco’s US$150-million convertible debenture issue exercised its option to pick up another US$22.5 million worth of the debentures.

So there’s little question the metals are flashing inflationary signals. And while we don’t pretend to be experts on the other commodities — such as coffee, cocoa, soybeans, lumber and oil — which make up the total picture, we have noted increasingly bullish indications in these areas as well. Don’t get us wrong. We’re not fans of rampant inflation. But we are cheering a rise in base metal prices. And, lest we forget, a little inflation wouldn’t hurt the price of gold either.