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Credit Suisse - Another Tail Risk Bites the Dust

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					                                                                                                                        01 March 2012
                                                                                                               Fixed Income Research
                                                                                           http://www.credit-suisse.com/researchandanalytics




                                                  Commodities Advantage:
                                                  Chinese Tide Begins to Turn
                                                  Commodities Research

                      Research Analysts
                                                  Another Tail Risk Bites the Dust
                                Ric Deverell
                         +44 20 7883 2523         The economic data released over the past week continued to highlight the
                ric.deverell@credit-suisse.com    gradual improvement in global growth momentum. It is now relatively clear that
                                                  on average, European activity is in the process of stabilizing, with the second
                            Joachim Azria
                          +1 212 325 4556         LTRO further reducing the probability of a liquidity driven banking crisis on the
              joachim.azria@credit-suisse.com     continent. In the US, while ISM new orders came in modestly weaker than
                                                  anticipated, initial jobless claims fell to a new multi-year low, further
                                  Cilline Bain
                          +44 20 7888 7174        demonstrating labor market momentum.
                 cilline.bain@credit-suisse.com
                                                  More significant for commodity markets, despite the continued bearish tone of much
                           Marcus Garvey          of the commentary, it has become clear to us that the policy driven economic
                        +44 207 883 4787          slowdown in the Middle Kingdom has effectively run its course, with growth
             marcus.garvey@credit-suisse.com
                                                  stabilizing over the first two months of 2012. In addition to the bounce in the PMI, it
                              Tom Kendall         now looks like housing sales also stabilized over January and February (Chinese 0




                        +44 20 7883 2432          Housing and Commodity Demand: Healthy Growth Despite Private Dip), while the
                tom.kendall@credit-suisse.com
                                                  normal seasonal fall in steel inventories has begun, providing some comfort that
                              Stefan Revielle     steel production will begin to rebound over coming months.
                            +1 212 538 6802
              stefan.revielle@credit-suisse.com   Notwithstanding the improved data, markets experienced an air pocket on
                                                  Wednesday, despite a positive second European LTRO, as the minutes from
                           Andrew Shaw
                          +65 6212 4244
                                                  the January US FOMC meeting were released and Chairman Bernanke
              andrew.shaw@credit-suisse.com       addressed Congress. The precise reason for the nervousness is a little difficult
                                                  to understand, given that the Fed continues to point to a slowly improving
                                  Jan Stuart
                           +1 212 325 1013
                                                  economy. While many have suggested that markets have reacted to signs that
                  jan.stuart@credit-suisse.com    the likelihood of QE3 has fallen, we feel that this will prove a fleeting
                                                  negative as the reason for any reduced need for stimulus is that the
                          Ivan Szpakowski
                           + 65 6212 3534
                                                  economy is getting better. Indeed, despite better data, the Fed continues to
            ivan.szpakowski@credit-suisse.com     see a large output gap, and intends to keep policy highly accommodative for
                                                  some time – that is it would prefer growth to be above trend for a sustained
                                  Martin Yu
                        + 44 20 7883 2150
                                                  period. In our view, growth would have to accelerate materially from the
                  martin.yu@credit-suisse.com     current pace before markets should become concerned about Fed
                                             .    tightening any time soon (although the need for further stimulus has clearly
                                                  fallen). And even then, growth strong enough to get the Fed on the move would
                                                  be a positive for commodity demand, rather than the drag many fear.

                                                  Focus – Oil Price-Rally Drivers (not just Iran)
                                                  While many observers feel that the recent rally in the price of oil has been driven
                                                  primarily by fears surrounding developments in Iran, we feel that in large part
                                                  the move higher has been fundamentally based, with the diminution of
                                                  downside demand risks combining with further minor supply disruptions. Of
                                                  course, the intensifying crisis surrounding relations with Iran has resulted in an
                                                  increased risk premia. But we think it would be a mistake to attribute the increase
                                                  principally to nervous speculators reacting to geopolitical fears.
                                                  We think the trend underneath this oil price rally may have legs. We worry that as
                                                  seasonal refiner-buying of crude oil ramps up (from late March onward), balances will
                                                  tighten further. In the focus article, we discuss the factors (both bullish and bearish)
                                                  likely to play out in crude oil markets outside the US in the next few months.


ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER
IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.
                                                                                                                                                                     01 March 2012



                                               In this Issue
                                               0BMacro View – China Fears Fade                                                                                                  3
                                               1BFocus – Oil: Tighter S&D, High Utilization                                                                                     6
                                                                    10BWhat happened in February?                                                                               6
                                                                    1BWhere to Next? Risks Skewed to the Upside                                                                 8
                                               2BNatural Gas                                                                                                                  11
                                                                    12BEIA 914 shows declines, but results likely temporary                                                   11
                                               3BBulk Commodities                                                                                                             12
                                                                    13BIron Ore – Beware the Ides of March?                                                                   12
                                                                    14BThermal Coal – Poles apart                                                                             17
                                               4BPrecious metals: USD rally pulls the rug out                                                                                 20
                                                                    15BECB LTRO outweighed by Bernanke                                                                        20
                                               5BBase Metals: Buy the dip in lead                                                                                             21
                                               6BAgriculture – Month end gains                                                                                                24
                                               7BCommodity Investment Flows                                                                                                   25
                                               8BTechnical Analysis                                                                                                           27
                                                                    16BBrent Crude Oil approaches the $127 2011 high                                                          27
                                               9BTrade Recommendations                                                                                                        28

                                               Commodity Performance
                                               17B




                                               Commodity returns diverged over the past week. Iron ore rose following higher than
                                               expected tender settlements. Agricultural commodities followed closely behind, with silver
                                               and WTI also up. US natural gas led the space lower, while gold followed closely behind
                                               (following the big move on Wednesday). Heating oil, PGMs and thermal coal were also
                                               weaker. Silver remains the top performer year to date.

Exhibit 1: Commodity Performances (as of February 29, 2012)
Weekly returns, active contract                                                      Year to date returns, front month
                                          Iron Ore                                                                 Silver
                                           Wheat                                                            RBOB Gasoline

                                         Soybean                                                                   Platinium
                                            Corn                                                                        Brent

                                           Copper                                                                Aluminium
                                        Aluminium                                                                      Copper
                                            Silver                                                                      Gold
                                              WTI                                                                Heating Oil
                                                      RBOB Gasoline                                                Soybean
                                                      Brent                                                 U.K. Natural Gas
                                                      U.K. Natural Gas                                                  WTI
                                                      Lean Hogs                                                   Palladium
                                                      Thermal Coal                                               Lean Hogs
                                                      Palladium                                                     Iron Ore
                                                      Platinium                                                        Wheat
                                                      Heating Oil                                                       Corn
                                                      Gold                                                                      Thermal Coal
                                                      U.S. Natural Gas                                                          U.S. Natural Gas

 -8%       -6%        -4%         -2%                0%             2%   4%     6%    -20%   -15%    -10%        -5%           0%      5%          10%   15%   20%     25%    30%

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                                  2
                                                                                                                                                         01 March 2012



                                         Macro View – China Fears Fade
                                         The economic data released over the past week continued to highlight the incremental
                                         improvement in global growth momentum that has been under way over recent months. It
                                         is now clear that global IP growth hit a low point of around 2.7% in November (a more
                                         modest slowdown than seen in early 2011), and has since been gradually rebounding.

                                         Exhibit 2: Global IP growth troughed in November 2011
                                         Trend monthly changes (annualized)

                                           20.0%
                                                                                                  Global IP                   Forecast

                                           15.0%


                                           10.0%


                                            5.0%


                                            0.0%


                                            -5.0%


                                          -10.0%
                                                  2004           2005            2006          2007          2008      2009         2010          2011         2012

                                         Source: Credit Suisse Global Strategy



                                         The US remains the leader. Despite the modest dip in ISM new orders, in general, US
                                         data continue to improve, with initial jobless claims suggesting that the labor market
                                         continues to recover. It is also clear that, on average, European activity is in the process of
                                         stabilizing, with the second LTRO further reducing the probability of a liquidity driven
                                         banking crisis on the continent.


Exhibit 3: ISM Manufacturing PMI New Orders                                             Exhibit 4: US Initial Jobless Claims still improving
Level                                                                                   Thousands, seasonally adjusted (4-week average)

 70                                                                                      700

 65                                                                                      650

                                                                                         600
 60
                                                                                         550
 55
                                                                                         500
 50
                                                                                         450
 45
                                                                                         400
 40
                                                                                         350

 35                                                                                      300

 30                                                                                      250
   2005     2006      2007     2008      2009       2010        2011       2012            2005       2006      2007   2008       2009     2010     2011       2012

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse                              Source: the BLOOMBERG PROFESSIONAL™ service



                                         Importantly, the general sense of risk in Europe continues to fall, with Italian 10-year yields,
                                         our favorite barometer of European risk aversion, taking another substantial move lower
                                         following the second LTRO. At 5.1%, yields are now approaching the average level seen
                                         before the eruption of market concern in the middle of 2011.



Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                    3
                                                                                                                                               01 March 2012


                                      Exhibit 5: Italian 10-year yields are lower
                                      Percent

                                       7.5%                           Italy                 6%                     Average 1H 2011

                                       7.0%

                                       6.5%

                                       6.0%

                                       5.5%

                                       5.0%

                                       4.5%

                                       4.0%
                                            Jan-11       Mar-11         May-11          Jul-11            Sep-11      Nov-11          Jan-12

                                      Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse



                                      China Bears on the Run
                                      More significant for commodity markets, given the continued bearish tone of most related
                                      discussions, it has become clear to us that the policy driven economic slowdown in
                                      the Middle Kingdom has run its course, with growth stabilizing over the first two months
                                      of 2012. As information for both January and February trickles in, it has become apparent
                                      that rather than slipping further as many had feared, if anything, growth has picked up a
                                      little over the first couple of months of the year (noting the extreme difficulties assessing
                                      the high frequency data around Chinese New Year).
                                      • In addition to the bounce in the PMI, it now looks like housing sales stabilized over
                                        January and February. Note that while most analysts continue to highlight year-on-year
                                        changes in sales, in seasonally adjusted monthly terms, it is clear that the weakest
                                        period was actually H1 of 2011, and that over the most recent period, sales have
                                        improved rather than slumping further.
                                      • The normal seasonal fall in steel inventories has begun (Exhibit 9), providing comfort
                                        that steel production is likely to begin rebounding over coming months.
                                      • The combined monthly economic data for January and February released on 9 March
                                        should provide the next key insight into developments in China.

                                      Exhibit 6: The Chinese PMI New Orders has stabilized
                                      Level

                                       65


                                       60


                                       55


                                       50


                                       45


                                       40


                                       35
                                        2006               2007               2008                 2009            2010              2011             2012

                                      Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                           4
                                                                                                                                                        01 March 2012


Exhibit 7: Chinese Housing Sales – YOY misleading                                     Exhibit 8: In trend monthly terms getting better...
Year ended change                                                                     Trend monthly changes, seasonally adjusted
   200%                                                                                 25%

                                                                                        20%
   150%
                                                                                        15%
   100%
                                                                                        10%

    50%                                                                                   5%

                                                                                          0%
     0%
                                                                                         -5%
   -50%
                                                                                        -10%

  -100%                                                                                 -15%
        2006       2007        2008   2009        2010       2011        2012                 2006      2007        2008        2009     2010     2011       2012
Source: Soufun, NBS, Credit Suisse                                                    Source: Soufun, NBS, Credit Suisse



                                        Exhibit 9: Chinese Steel Traders’ Inventories – the seasonal fall has begun on schedule....
                                        Million tonnes
                                                               Rebar             Wire rod              HRC             Plate           Dec          First Dip
                                             18                                                                        Dec
                                             16                                                                                                    Dec
                                             14                                                      Dec
                                             12                Dec              Dec
                                             10
                                              8
                                              6
                                              4
                                              2
                                              0
                                             Mar-06             Mar-07           Mar-08               Mar-09               Mar-10       Mar-11          Mar-12
                                        Source: MySteel, Credit Suisse


                                        As we have argued for the past year, the slowdown in China remains highly policy driven.
                                        With growth now in the desired range, it remains likely that the process of incremental
                                        policy normalization will continue over coming months. However, we once again note that
                                        those looking for a significant policy stimulus are likely to remain disappointed, as the
                                        slowdown has been intentional, with slower than average growth a desired outcome.

                                        Exhibit 10: Monetary policy is in the process of normalising – with less excess
                                        liquidity than most expect
                                        M1 Log Level with Trend
                                             10.4

                                             10.2

                                             10.0

                                              9.8

                                              9.6

                                              9.4

                                              9.2

                                              9.0

                                              8.8
                                                  2003        2004        2005         2006          2007       2008          2009     2010      2011
                                        Source: the BLOOMBERG PROFESSIONAL™ service, NBS, Credit Suisse



Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                  5
                                                                                                                                 01 March 2012



                                      Focus – Oil: Tighter S&D, High Utilization
                                      We are well aware that oil markets rallied fast and, in many ways, seem quite “toppy”.
                                      Moreover, as in any rally, there will be corrections. Our contention is, however, that global
                                      s/d balances look and feel significantly tighter than most had anticipated – in part because
                                      of rising tensions with Iran. And so for us, the pertinent concern is with a more insidious
                                      tightening of balances going forward. We fear that oil prices can creep toward difficult to
                                      support levels this Spring.

                                      Background to a rally: Tightening oil s/d balances and falling inventory
                                      Exhibit 11: Days of Global Oil Demand Cover (SA, data through January)
                                      Seasonally adjusted global oil inventory (expressed in days of global oil demand)

                                       62

                                       61

                                       60

                                       59

                                       58

                                       57

                                       56

                                       55

                                       54
                                        2000                    2002             2004               2006         2008     2010     2012

                                      Source: IEA, EIA, Credit Suisse Global Commodities Research



                                      In the last two years, large surplus inventories have been whittled down to levels that in
                                      2004 and in 2007-H12008 helped support oil price rallies. And around the turn of the year
                                      a brief increase reversed, judging from preliminary December and January data. We
                                      expect inventories to fall further in February and March (see our global balance
                                      commentary in Global Oil – Notes on a Rally).
                                                            1




                                      What happened in February?
                                      New in February, when front-month Brent futures began their break-out, were a number of
                                      supply side events and the emergence of incremental buying on physical crude oil markets,
                                      some of which were related to tensions around Iran:

                                      New news and old news this month
                                      Supply side issues include:
                                      • New North Sea production disappointments, specifically shortfalls (again) in the Forties
                                        program for February and March loadings.
                                      • In early February, a labor strike in Yemen took much of that troubled country’s remaining
                                        exports off-line. Yemen’s production had fallen by more than half already to ~150kb/d. A
                                        return to pre-January 2011 exports (of some 300kb/d) suddenly seemed far off.
                                      • Similarly, the new country of South Sudan shut in its production, and strife with its
                                        northern neighbor has all but halted exports of more than 300kb/d.
                                      • Not so new, but intensifying, are the troubles in Syria. Its oil production exceeded
                                        350kb/d in early 2011. It was less than half that, reportedly, in 4Q2011. Trade has
                                        diminished further under tighter sanctions.



Commodities Advantage: Chinese Tide Begins to Turn                                                                                           6
                                                                                                                           01 March 2012


                                      Iran sanction effects include:
                                      The European Union decided nearly a month ago that it would ban imports of Iranian
                                      crude oil starting in July. The very next day Iran suggested it might cut off sales to Europe
                                      far sooner than that. Not surprisingly, we have observed that:
                                      • Customers of Iranian oil intensified their search for replacement barrels. China, for
                                        instance, had earlier cut deliveries under one of its two very large term-contracts with
                                        Iran and replaced volumes for December and January deliveries with regional and
                                        Russian barrels. After a lull in activity around the Chinese New Year holidays, new Asian
                                        buying emerged on European spot markets. Surprisingly many cargoes headed East. In
                                        part, we understand, that is replacement or “insurance” sought by Iran’s customers.
                                        − Of course, some of that buying also has to do with rising oil consumption in Asia
                                          (Exhibit 12). There is also the need to build inventory. China’s commercial crude oil
                                          inventory, for instance, declined last year and it has a new phase of its strategic
                                          storage installations that became operational early this year. In addition, both China
                                          and India have newly operational refiner capacity (China plans to add a further
                                          800kb/d of new capacity in 2012).
                                      All this helped turn around the December/January slide toward a contango at the front of
                                      the Brent Futures market (see Commodities Advantage: Waiting for Confirmation).
                                                                       1




                                      • We suspect that as new contracts for more than 20% of Iran’s normal crude oil exports
                                        (about 2.2-2.4 mb/d) need to be negotiated, significant time (months, perhaps) may go
                                        by and occasionally parts of Iran’s oil exports could go unsold. We keep a focus on
                                        floating storage in the Persian Gulf and understand that, whilst storage built fast in early
                                        February (i.e., cargoes went unsold), some of that oil “disappeared” more recently.
                                      • In addition, customers and others have intensified buying of call options (hedging event risk).
                                      Further evidence of global demand growth emerges and flies in the face of near
                                      uniform bearish expectations. Indicators and data include:
                                      • Narrow differentials between crude oil grades, backwardated forward markets and
                                        generally resilient refining margins suggest that when the demand data for the first
                                        quarter arrive, they’ll surprise to the upside, which is the more remarkable given the
                                        lower than normal demand for winter heating fuels in the North Atlantic basin markets.
                                      • Already, fourth quarter demand data (now complete with December numbers for all
                                        emerging market economies we track), show that global oil demand grew by 0.6% (YoY,
                                        unadjusted). That is a 20bps improvement on 3Q, and more importantly, the opposite of
                                        what others expected/reported.
                                      • In fact, OECD oil demand-declines moderated marginally last quarter, while emerging
                                        market oil demand growth began to re-accelerate ( Exhibit 12 ).
                                      • Indeed, latest data, once adjusted for seasonality, show that oil demand growth was
                                        building positive momentum in the fourth quarter in all our regions except Europe. Oil
                                        demand growth did lose significant momentum almost everywhere in 2Q and 3Q.
                                        (Exhibit 15 to Exhibit 22).
                                      OECD oil demand appears to be stabilizing as opposed to contracting further:
                                      • Indeed in our charts, only Europe’s oil demand is developing negative momentum. And
                                        even on this front, we project little further downside.
                                      • We have a different view from the EIA on oil consumption growth in the US. We project,
                                        conservatively, stable oil demand here. Fourth quarter data, which we think materially
                                        understate demand, suggest that it’s turned the corner already.
                                      • Perhaps most surprising to many is the sharp increase in Japan’s oil-use in power
                                        generation. December data and January reports show an increase, yoy (unadjusted) of
                                        ~400kb/d. Japan’s momentum indicator (QoQ growth, SA, Annualized) for 4Q looks
                                        much like the same indicators for key emerging markets.



Commodities Advantage: Chinese Tide Begins to Turn                                                                                     7
                                                                                                                          01 March 2012


                                      Spare capacity – apparently the oil supply chain is running at 98% utilization:
                                      • Utilization rates in the high 90s are high in any industry.
                                      • For oil, we need to rely on estimates for spare capacity, usually hotly debated.
                                      • Saudi Arabia’s oil minister, Ali al-Naimi, who should know, ‘re-assured’ markets in late
                                        January that relative to the high marks of 4Q2011 (when the Kingdom pushed out nearly
                                        10mb/d of oil, including its share of the Neutral Zone), it could add “within weeks”
                                        another 900,000 to 1 million b/d of crude oil. Though all of that would be usable (in
                                        contrast to 2008), this is only about one-third of what we would have estimated.
                                        Admittedly, Saudi oil production has come down since the November high (by about
                                        500-800 kb/d as suggested by tanker tracking reports).
                                      • At less than 2mb/d, global spare-capacity remains uncomfortably thin.

                                      Where to Next? Risks Skewed to the Upside
                                      What’s bearish
                                      • Brent oil prices rallied quite fast. It clearly looked overbought, technically, and this week
                                        began with a two-day correction that added up to -5%.
                                      • In broader equity and other markets, similar rallies seem poised for a “corrective
                                        setback” – after which, leading indicators suggest, a resumption of the rally follows.
                                      • The trough in refiner appetite for crude oil typically extends through end-March, outside
                                        the United States, and so balances may loosen somewhat.
                                      At this stage, in short, we needed a relentless progression of bullish news to extend the
                                      February Brent futures rally in a straight line. That streak was going to be broken.
                                      • Lastly, of course, the macro-economy still harbors significant risk. Not all is well in
                                        Europe or the US, despite acute worries that dominated sentiment in 4Q of last year
                                        having receded steadily.
                                      • Nor is there much agreement on the immediate prospects for China or the extent of a
                                        slowdown in other Emerging Markets.

                                      What’s bullish
                                      • In all likelihood, further extending the trends outlined above against a background of
                                        low-ish inventory and tight spare capacity. Support for this notion is that oil prices rallied
                                        as fast as they did in the face of seasonally weak heating demand.
                                      • Crude oil demand will rise seasonally, not by as much as it did last year (~4 mb/d,
                                        peak to trough); but even at half that rate it’ll remain difficult for refiners outside the US
                                        to find conventional crude oil feedstock.
                                      • On the demand side as well, a distinct upside risk rises in 2Q and 3Q. Oil use for
                                        power generation may well surprise to the upside in: India and China (coal and hydro
                                        issues, respectively); Japan (for lack of alternative thermal options); and in the Middle
                                        East (again).
                                      • More technical risks also seem skewed to the upside (after the correction):
                                        − CTA and other trend-followers now have a chart breakout to want to buy into
                                          (provided support holds).
                                        − Risk reward of selling in today’s political climate is limited.
                                        − Producer selling was the one constant in the long-dated end of the futures curve.
                                          Long-dated buying may emerge.




Commodities Advantage: Chinese Tide Begins to Turn                                                                                    8
                                                                                                                                                                                    01 March 2012


                                              • Then, of course there is the metaphorical elephant of supply risk in the room:
                                                 − Iran sanctions are key
                                                 − Instability in Iraq worries us more, in the shorter term
                                                 − As does instability in Nigeria
                                                 − Then there is the rising probability (judging from debt-markets) of regime change in
                                                   Venezuela
                                                 − More mundane, but especially significant is execution and other risk around non-
                                                   Opec performance. Once again, we appear to be optimistic this year.

                                              What Price is ‘Too High’?
                                              This is the subject of a string of upcoming research reports. We strongly suspect,
                                              however, that prices have more headroom from the perspective of ‘affordability’ in key
                                              economies. In this context, we would point at the downside price-risk of releases of
                                              strategic inventories in consuming countries, especially in the OECD.
                                              One of the few certainties this year will be the ongoing influence of politics and politicians
                                              across both the supply and the demand side of oil.

                                              Exhibit 12: Global Oil Demand (2011 and 2012E, YoY change, unadjusted)
                                                                      Base (1,000 b/d)                       by quarter (2011-12)                           by year (2010-12)       Trend
                                                                             2011        1Q11    2Q11    3Q11    4Q11    1Q12E   2Q12E     3Q12E   4Q12E    2010    2011    2012E    2003-07


                                                     Global                   89,440      2.5%   0.4%    0.4%    0.6%     1.0%      1.4%    1.8%    1.9%    3.8%    1.0%     1.5%      2.0%
                                                       OECD                   45,650     0.6%    -1.8%   -1.7%   -1.5%   -0.8%    -0.1%     0.6%    0.5%    1.3%    -1.1%    0.0%      0.6%
                                                       Emerging Markets       43,780     4.7%    2.8%    2.6%    2.9%     3.0%      3.0%    3.0%    3.4%   6.9%     3.2%     3.1%      4.1%


                                                     N America                23,510      1.3%   -1.9%   -2.4%   -1.1%   -0.9%      0.2%    1.5%    1.5%    2.0%    -1.1%    0.6%      1.1%
                                                       Canada                   2,230    4.5%    -0.7%   0.1%    -0.9%    0.8%      0.9%    0.9%    0.7%    2.7%    0.7%     0.8%      2.1%
                                                       Mexico                   2,080    -1.1%   -1.7%   2.0%    1.9%     3.8%      2.5%    2.5%    2.4%   0.1%     0.3%     2.8%      1.5%
                                                       USA                    18,900     1.2%    -2.1%   -3.3%   -1.5%   -1.7%    -0.2%     1.5%    1.5%    2.2%    -1.5%    0.3%      0.9%
                                                     S America                  6,500     2.6%   0.8%    0.6%    2.1%     2.6%      2.4%    2.6%    2.6%    5.6%    1.5%     2.6%      3.4%
                                                       Brazil                   3,010    4.8%    3.3%    2.8%    2.7%     3.0%      2.6%    2.9%    2.7%    9.7%    3.4%     2.8%      2.1%
                                                     Europe                   15,010     -0.9%   -0.9%   -1.5%   -4.4%   -2.2%    -1.5%    -1.4%   -0.6%   -0.5%    -1.9%   -1.4%      0.3%
                                                       France                   1,820    -2.4%   -1.8%   0.3%    -4.4%   -2.2%    -1.5%    -1.9%   -1.9%   -0.5%    -2.1%   -1.9%     -0.1%
                                                       Germany                  2,420    -1.9%   -2.7%   -3.6%   -3.5%   -2.2%    -1.9%    -2.1%   -0.7%   1.7%     -3.0%   -1.7%      -2.2%
                                                       Italy                    1,460    -2.6%   -2.2%   -6.7%   -6.7%   -3.2%    -2.9%    -3.0%   -3.2%   -1.0%    -4.7%   -3.1%     -1.6%
                                                       UK                       1,600    -1.2%   0.2%    -1.2%   -3.1%   -0.5%    -0.6%    -0.6%   -0.5%   -1.4%    -1.3%   -0.5%      1.7%
                                                       Oth Europe               7,710    0.3%    -0.1%   -0.2%   -4.5%   -2.3%    -1.4%    -1.0%    0.2%   -0.9%    -1.2%   -1.1%      -2.3%
                                                     FSU                        4,690     4.0%   3.7%    3.3%    0.9%     1.0%     1.0%     1.0%    1.0%    8.9%    2.9%     1.0%      1.9%
                                                     Mideast                    7,560     3.3%   1.8%    1.1%    3.5%     0.8%    -0.2%     1.9%    2.8%    5.6%    2.4%     1.3%      4.2%
                                                       Saudi Arabia             2,840    6.5%    4.1%    1.5%    8.7%     4.9%      4.8%    4.8%    4.7%    7.8%    5.0%     4.8%      5.0%
                                                       Iran                     1,840    -0.6%   -2.4%   -3.3%   -3.4%   -5.0%   -10.0%    -3.0%   -1.0%   -1.4%    -2.4%   -4.7%      5.8%
                                                     Africa                     3,470     2.8%   -1.1%   -0.6%   -0.4%    3.7%      3.7%    3.7%    3.6%    5.5%    0.1%     3.7%      3.2%
                                                     Asia-Pac                 28,700      5.0%   2.4%    3.4%    3.7%     3.6%      4.0%    3.4%    3.1%    6.1%    3.6%     3.5%      3.2%
                                                       China                    9,790    10.6%   4.5%    6.2%    3.0%     4.2%      5.9%    5.8%    6.0%   12.1%    6.0%     5.5%      7.7%
                                                       India                    3,460    4.3%    3.7%    3.7%    5.9%     3.0%      3.5%    3.8%    3.7%    1.2%    4.4%     3.5%      4.6%
                                                       Japan                    4,490    0.7%    -3.6%   -0.7%   6.1%     2.7%      3.3%    1.5%   -1.3%    1.3%    0.8%     1.5%      -1.1%
                                                       S Korea                  2,230    1.8%    -6.3%   2.5%    -2.3%    0.9%    -0.2%     2.1%    1.5%   2.9%     -1.1%    1.1%      0.8%

                                              Source: IEA, EIA, Credit Suisse Global Commodities Research




Exhibit 13: Our 2012 Oil Demand Growth vs. IEA                                                   Exhibit 14: …. And how we differ on the supply side
       1.6                   Credit Suisse              Consensus (IEA)                                  1.2
                                                                                                                                 Credit Suisse                     Consensus (IEA)

       1.2                                                                                               0.8

                                                                                                         0.4
       0.8

                                                                                                         0.0
       0.4

                                                                                                         (0.4)
       0.0
                                                                                                         (0.8)
       (0.4)                                                                                                                 Non-OPEC                      Call on OPEC Crude and
                   2012 Global               OECD                Non-OECD                                                                                           Stocks

Source: IEA, Credit Suisse                                                                       Source: IEA, Credit Suisse




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                                              9
Commodities Advantage: Chinese Tide Begins to Turn



                                                     Exhibit 15: Oil Demand in ..China Exhibit 16: … Other Asia                                                Exhibit 17: … India                                  Exhibit 18: … Middle East
                                                     (%, seasonally adjusted)                             (%, seasonally adjusted)                             (%, seasonally adjusted)                             (%, seasonally adjusted)

                                                                    QoQ Annualized         3 mo MA YoY                    QoQ Annualized         3 mo MA YoY    15%           QoQ Annualized          3 mo MA YoY    15%           QoQ Annualized          3 mo MA YoY
                                                      15%                                                  15%


                                                                                                                                                                10%                                                  10%
                                                      10%                                                  10%



                                                                                                            5%                                                   5%                                                   5%
                                                       5%



                                                       0%                                                   0%                                                   0%                                                   0%



                                                      -5%                                                  -5%                                                  -5%                                                  -5%
                                                             1Q10       3Q10        1Q11        3Q11              1Q10       3Q10        1Q11        3Q11              1Q10       3Q10        1Q11        3Q11              1Q10       3Q10        1Q11        3Q11



                                                     Source: Credit Suisse Global Commodities Research    Source: Credit Suisse Global Commodities Research    Source: Credit Suisse Global Commodities Research    Source: Credit Suisse Global Commodities Research




                                                     Exhibit 19: … South America                          Exhibit 20: … US                                     Exhibit 21: … Europe                                 Exhibit 22: … Japan
                                                     (%, seasonally adjusted)                             (%, seasonally adjusted)                             (%, seasonally adjusted)                             (%, seasonally adjusted)

                                                       8%           QoQ Annualized          3 mo MA YoY     6%           QoQ Annualized          3 mo MA YoY      4%           QoQ Annualized         3 mo MA YoY                   QoQ Annualized         3 mo MA YoY
                                                                                                                                                                                                                       5%
                                                                                                            4%                                                    2%
                                                       6%
                                                                                                                                                                  0%                                                   0%
                                                                                                            2%
                                                       4%
                                                                                                                                                                 -2%                                                  -5%
                                                                                                            0%
                                                                                                                                                                 -4%
                                                       2%
                                                                                                                                                                                                                     -10%
                                                                                                           -2%
                                                                                                                                                                 -6%
                                                       0%                                                                                                                                                            -15%
                                                                                                           -4%                                                   -8%

                                                      -2%                                                  -6%                                                  -10%                                                 -20%
                                                            1Q10        3Q10        1Q11        3Q11             1Q10        3Q10        1Q11        3Q11              1Q10        3Q10       1Q11        3Q11              1Q10        3Q10       1Q11        3Q11


                                                     Source: Credit Suisse Global Commodities Research    Source: Credit Suisse Global Commodities Research    Source: Credit Suisse Global Commodities Research    Source: Credit Suisse Global Commodities Research




                                                                                                                                                                                                                                                                         01 March 2012
10
                                                                                                                                                                            01 March 2012



                                      Natural Gas
                                      EIA 914 shows declines, but results likely temporary
                                      US natural gas prices continued to move within a range during trading this week, reacting to
                                      fluctuating weather forecasts and the EIA’s monthly production report. Ending on a negative
                                      note, the March contract expired on Monday at $2.45 per Mmbtu, extending a sixth
                                      consecutive day slide where prices shed ~8% as expectations for a warm end of winter and
                                      record storage weighed on prices. Meanwhile, conditions temporarily improved following the
                                      monthly EIA-914 data release on Wednesday, which indicated that US lower 48 gross
                                      withdrawals (including the Gulf of Mexico) fell 0.2% during the month of December. We think
                                      the December monthly declines are likely the result of short-term factors focused in a few
                                      particular regions and we expect a recovery in the coming months.
                                      Highlights from the December EIA-914 release:

                                      Exhibit 23: December EIA 914 Estimates for Natural Gas Gross Withdrawals
                                                      Bcf/d              Dec-11      Nov-11          M-o-M      Nov-10         Y-o-Y    Q4/2011          Q3/2011          Q-o-Q
                                              New Mexico                  3.57        3.63      (0.06) -1.77%    3.79    (0.22) -5.82%    3.62             3.68      (0.06) -1.72%
                                              GOM                         4.64        4.58       0.07   1.44%    5.72    (1.08) -18.90%   4.60             4.56       0.04   0.80%
                                              Oklahoma                    5.43        5.38       0.04   0.82%    4.96     0.47    9.45%   5.39             5.29       0.11   2.01%
                                              Wyoming                     6.60        6.83      (0.23) -3.37%    6.77    (0.16) -2.44%    6.71             6.37       0.34   5.36%
                                              Louisiana                  8.95        9.09       (0.14) -1.58%   7.01      1.94 27.75%     9.00             8.64       0.36   4.17%
                                              Other States               21.08       20.68       0.40   1.96%   17.19     3.89 22.62%    20.63            19.51       1.12   5.73%
                                              Texas                      22.27       22.49      (0.22) -0.97%   21.16     1.11    5.23%  22.35            21.80       0.55   2.52%
                                              Lower 48-Land              67.90       68.10      (0.21) -0.30%   60.87     7.02 11.54%    67.70            65.29       2.41   3.69%
                                              Lower 48 (Inc. GOM)        72.54       72.68      (0.14) -0.19%   66.60     5.94    8.92%  72.30            69.86       2.45   3.50%
                                              Alaska                      9.98       10.09      (0.11) -1.07%    9.53     0.45    4.67%   9.63             7.18       2.45   34.05%

                                      Source: EIA, Credit Suisse


                                      • Lower-48 (excluding GOM) gross withdrawals for the month of December declined -0.21
                                        bcf/d (0.3%) m-o-m to average 67.9 bcf/d, marking the first decrease in nine months, yet
                                        volumes are still up 7.02 bcf/d y-o-y according to EIA. Gross withdrawals, including the
                                        Gulf of Mexico, decreased 0.14 bcf/d (-0.2%) during the month to 72.54 bcf/d (Exhibit 24).
                                      • Freeze-offs, gathering system bottlenecks, cause monthly production declines. At
                                        the regional level, the largest monthly decline was seen in Wyoming due to a fire at the
                                        Falcon compressor station during December. As this compressor station is a large
                                        component to the system that moves gas from the Jonah and Pinedale fields, Wyoming
                                        gross withdrawals fell 0.23 bcf/d (3.37%) m-o-m to average 6.60 bcf/d (Exhibit 25). In
                                        addition, we note that freeze-offs within the Rockies and portions of the Mid-Continent
                                        also contributed to the monthly decline in December. Elsewhere, ‘Other States’ (which
                                        includes production within Marcellus shale) continues to outpace remaining regions,
                                        growing 0.40 bcf/d (1.96%) during December to average 21.08 bcf/d, up 3.89 bcfd y-o-y.

                                      Exhibit 24: Lower-48 vs. Rig count                                           Exhibit 25: Wyoming vs. Rig Count
                                                      Production bcf/d (lhs)      Gas Rigs (rhs )                                   Production bcf/d (lhs )   Gas Rigs (rhs )
                                         75                                                          1,700           7.5                                                          90

                                                                                                     1,500                                                                        80
                                         70
                                                                                                                     7.0
                                                                                                     1,300                                                                        70
                                         65
                                                                                                                                                                                  60
                                                                                                     1,100
                                                                                                                     6.5
                                         60                                                                                                                                       50
                                                                                                     900
                                                                                                                                                                                  40
                                         55                                                                          6.0
                                                                                                     700
                                                                                                                                                                                  30
                                         50                                                          500
                                                                                                                     5.5                                                          20
                                         Jan-08       Jan-09         Jan-10         Jan-11
                                                                                                                         Jan-08     Jan-09          Jan-10         Jan-11


                                      Source: EIA, Smith Bits STATS, Credit Suisse                                 Source: EIA, Smith Bits STATS, Credit Suisse


                                      • Q4-2011 final averages show US total production increased 2.45 bcf/d from Q3. On
                                        an average volume basis, ‘Other States’ contributed the largest quarterly increase within
                                        the lower-48 at 1.12 bcf/d (5.73%) q-o-q with Texas trailing close behind at +0.55 Bcf/d
                                        q-o-q (+2.52%). The Gulf of Mexico increased 0.04 bcf/d from Q3-2011 levels while New
                                        Mexico fell 0.06 bcf/d or -1.72% q-o-q to average 3.62 bcf/d as predominately dry gas
                                        drilling in the region battles with shrinking margins due to weak natural gas prices.


Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                                     11
                                                                                                                                            01 March 2012



                                           Bulk Commodities
                                           Iron Ore – Beware the Ides of March?
                                           Critical times but soothsayers’ gloom not reflected in the data
                                           As discussed in the macro section, contrary to much of the recent market commentary, the
                                           data emerging for January and February suggest that Chinese economic momentum has
                                           stabilized, with growth tracking in line with the 8% to 9% targeted by the authorities.
                                           When looking specifically at basic material demand, most of the anecdotal evidence
                                           continues to point to soft demand in China. China bears continue to point to fundamental
                                           financing problems in the real estate and infrastructure sectors (a consequence of
                                           Beijing’s unyielding attack on loose investment, centered on tighter controls in housing
                                           markets), as well as a major overhang of unsold inventory in the capital goods and
                                           consumer durables sectors.
                                           • In all these areas, there are signs to be concerned about, but prices suggest that both
                                             equity and commodity markets do not share the gloomiest views. Resource equity and
                                             commodity market values have held up and do not indicate the sell-offs that would
                                             surely go hand-in-hand with the most bearish prognoses. In the case of steel and iron
                                             ore, both have retained their broad, gentle upward trend, trading in recent days at the
                                             higher end of this band.

Exhibit 26: Global steel prices off their lows…                          Exhibit 27: …No stab in the back for iron ore and
                                                                         share prices
US$/t (China and EU), US$/short ton (US)                                 Rio Tinto share price and spot iron ore (Index: Jan 2009 = 100)

  900         US HRC           N.Eu HRC                                   400
                                                                                         Spot Iron Ore
                                                                                         Rio Tinto
  850         China HRC
                                                                          350

  800
                                                                          300

  750
                                                                          250
  700
                                                                          200
  650

                                                                          150
  600

  550                                                                     100


  500                                                                      50
   Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12           Jan-09     Jul-09        Jan-10   Jul-10    Jan-11     Jul-11      Jan-12

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, SBB          Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service



                                           Our own channel checks (and those of others) of manufacturers indicate that business
                                           sentiment remains fragile, but it is difficult to discern from these anecdotes whether
                                           industry captains are fretting about P&Ls, a measure of the past, or order book strength,
                                           as a signal of fundamental demand problems or rampant overcapacity. We continue to be
                                           wary of collective sentiment in this regard, with earlier exuberance in some key industry
                                           sectors as much to blame as demand growth that has disappointed. Sales prices should
                                           tell us more in the weeks ahead. In addition, while the surveys have their own unique
                                           problems, the information contained in the PMI (where hundreds of companies are
                                           represented) remains far more persuasive than anecdotal evidence based on a small
                                           numbers of companies.




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                      12
                                                                                                                        01 March 2012


                                      So what do the data say?
                                      Although we treat them with caution, the latest PMI in February came in strong again.
                                      Headline overall and new orders components both edged up to their highest levels since
                                      September. Our seasonal adjustment shows the first two months of the year having made
                                      a larger jump, with the average January and February reading of the overall component at
                                      52.4 and the new orders component at 53.8, the highest levels since April 2011 for both.
                                      Export orders also improved, consistent with the improving picture in the US and Europe.

           Buying interest in         Alongside indicators that housing sales interest is growing (Exhibit 28) – anecdotal reports
            China’s housing           of busy real estate showrooms have hit local headlines this past week – and a series of
                                      better physical market signals, these factors would explain why prices have moved
          markets appears to
                                      towards the top of their recent trading range.
                be returning
                                      Exhibit 28: China’s residential housing sales have turned a corner; further
                                      strengthening would improve steel mill sentiment
                                      MoM trend change in China’s residential housing sales
                                        25%

                                        20%

                                        15%

                                        10%

                                          5%

                                          0%

                                         -5%

                                       -10%

                                       -15%
                                              2006               2007          2008           2009   2010      2011         2012
                                      Source: Credit Suisse, Soufun


                                      Various other indicators are sowing the seeds for a more encouraging end to Q1. These,
                                      outlined below, are also supported by more positive feedback from physical traders, albeit
                                      some are still intrepid about the outlook for the next month or so:
                                      • Steel inventories: The seasonal peaking of steel product inventories appears to have
                                        taken place, exactly as expected, in late February (Exhibit 29). Steel stocks at mills are
                                        believed to be at modest levels. Watch for this pattern of seasonal destocking to
                                        intensify as we move into Q2.
                                      • Crude steel production: Mill run rates have not yet advanced convincingly, but remain
                                        above the November floor at around 620 Mt/y annualized. Latest ten-day China Iron &
                                        Steel Association (CISA) data are broadly unchanged from the first ten days of
                                        February at 1.70 Mt/d, but are higher than January’s 1.67 Mt/d. We need to see month-
                                        on-month rates accelerate to more than 3% from March to meet our forecast targets – a
                                        2% MoM climb would bring overall steel production in 2012 on par with last year’s 680
                                        Mt (i.e., no YoY growth). However, monthly run-rates would be more than 10 Mt higher
                                        by the end of Q3, even for flat YoY steel output; this would still be sufficient in our view
                                        to put sharp pressure on iron ore supplies.
                                      • Iron ore stocks: Although these are at historically high levels, the peak may have
                                        passed. Comparisons to prior years are problematical – more ports are included in the
                                        tally, and mills have shifted towards a preference for holding inventory as long as
                                        possible at port to hold back VAT payments. Watch for further draw-downs as a
                                        positive sign of demand pull-through by mills. The pattern in March will also be
                                        influenced by resumption of domestic concentrators.


Commodities Advantage: Chinese Tide Begins to Turn                                                                                 13
                                                                                                                                                            01 March 2012


Exhibit 29: Steel traders’ inventories look to have                                       Exhibit 30: …Have port stock levels peaked? An
peaked, in line with seasonal patterns…                                                   encouraging pointer if the answer is ‘yes’
Mt, Weekly                                                                                Mt, Weekly

    18         Rebar               Wire rod           HRC             Plate                105

                                                                  Dec         Dec
    16                                                                                      95
                                                      Dec
    14
                                                                                            85
    12
                                          Dec
    10           Dec        Dec                                                             75

     8                                                                                      65
     6
                                                                                            55
     4
     2                                                                                      45

     0
                                                                                            35
     Mar-06       Mar-07         Mar-08   Mar-09       Mar-10      Mar-11                     2006         2007            2008     2009      2010     2011       2012

Source: Credit Suisse, MySteel                                                            Source: Credit Suisse, MySteel



                                                Exhibit 31: Crude steel production is off its recent trough, but a firmer rebound
                                                is yet to occur
                                                Mt, Monthly, not seasonally adjusted (due to CNY holiday distortions)
                                                 65                                                                                 Using CISA estimate for Feb run
                                                                                                                                    rate (days adjusted)
                                                 60

                                                 55

                                                 50

                                                 45

                                                 40

                                                 35

                                                 30

                                                 25

                                                 20
                                                   2004           2005           2006       2007            2008             2009          2010      2011        2012
                                                Source: Credit Suisse, NBS, CISA, WSA


                                                • Iron ore and steel prices: The average price paid for IO inventory looks to have
                                                  bottomed, suggesting the end of the follow-through from lower cost tonnes purchased
                                                  in the wake of October's price plunge. Inventory cover is also in decline, and this will
                                                  place extra pressure on domestic suppliers to lift output. All things being equal, higher
                                                  margins for mills (helped by lower coke costs), coupled with rising mill run rates, should
                                                  push both steel and iron ore prices higher.
                                                • Price differentials: Under strong demand conditions, the spread between higher and
                                                  lower grade ores increases, as was evident in the period before last October’s crash.
                                                  Currently, this differential is relatively narrow as mills do not need to maximize hot metal
                                                  production, but has rebounded from its recent trough. It is unlikely that producers have
                                                  yet shifted into higher blast furnace productivity mode – traders indicate to us the
                                                  popularity of 57%-58% Fe cargoes – but increasing the proportion of higher Fe content
                                                  ores (and pellets) would be one way to lift run rates in the event of rising monthly
                                                  demand. Price premiums for higher Fe ores should be a good indicator of better
                                                  demand conditions – one to watch more closely perhaps beyond March (Exhibit 36).




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                       14
                                                                                                                                                         01 March 2012


Exhibit 32: Iron ore underperforming copper…                                            Exhibit 33: …as well as rebar futures
US$/t                                                                                   US$/t

  10500             Copper - 3 month              Iron Ore - 3 month (rhs)       190     800              Shanghai Rebar 3M               Iron Ore 3M (rhs)       185

                                                                                                                                                                  175
                                                                                 175     760
   9500
                                                                                                                                                                  165

                                                                                 160     720                                                                      155
   8500
                                                                                 145                                                                              145
                                                                                         680

                                                                                                                                                                  135
   7500
                                                                                 130     640
                                                                                                                                                                  125

   6500                                                                          115     600                                                                      115
        Jan-11        Apr-11          Jul-11       Oct-11       Jan-12                      Jan-11         Apr-11         Jul-11       Oct-11        Jan-12

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service                              Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service



Exhibit 34: Iron ore has become cheaper for mills,                                      Exhibit 35: Inventory cover may be comfortable, but
but this benefit may now be passing                                                     it is in decline
10,000 tonnes (lhs), RMB/t (rhs)                                                        Inventory days cover (lhs), percent (rhs)

                          Mills stock - domestic IO (10,000 tonnes)                                                Mills avg inventory days - domestic IO
  70                      Mills stock - imported IO (10'000 tonnes)              1500                              Mills avg inventory days - imported IO
                          Average Price Paid (RMB/t, rhs)                                60                        Import % of Iron Ore Inventory (rhs)            90
  60                                                                             1450
                                                                                         50
                                                                                 1400
  50                                                                                                                                                               80
                                                                                 1350    40
  40
                                                                                 1300    30                                                                        70
  30
                                                                                 1250
                                                                                         20
  20                                                                                                                                                               60
                                                                                 1200
                                                                                         10
  10                                                                             1150
                                                                                           0                                                                       50
   0                                                                             1100
    Mar-11       May-11      Jul-11    Aug-11     Oct-11    Dec-11    Feb-12
                                                                                            Mar-11      May-11       Jul-11   Aug-11    Oct-11   Dec-11       Feb-12

Source: Credit Suisse, MySteel                                                          Source: Credit Suisse, MySteel



                                               Watch the signposts – trade “the back”
                                               As we highlighted in Iron Ore: Q1 weakness should beget Q2 strength, it is too early to
                                                                             2




                                               postulate an imminent break-out of iron ore prices above a gradually-rising trading range,
                                               but we retain our view that spot prices will be moving higher by Q3. Even allowing for the
                                               need to wash out inventory at the goods and product level, and flat YoY growth in steel
                                               output, Q3’s iron ore supply and demand conditions are set to tighten as growth in supply
                                               lags monthly demand improvements. Given the forward curve’s backwardation, Q3 and
                                               Q4 swap prices at US$135 and US$133 represent a US$8-$10 discount to current spot
                                               prices and we believe a rising spot price means these discounts will not be borne out
                                               when such contracts settle. For example, our Q4 forecast for is for Iron Ore to average
                                               $160/t.
                                               Consequently, we recommend buying the Q4 2012 Swap. Growth in iron ore supply is
                                               unlikely to match a 2%-3% month-on-month rise in crude steel production run rates through
                                               H2 2012 leading to a break-out in iron ore spot prices above the recent trading band.
                                               Strengthening demand indicators could signal an earlier upward shift in spot prices in Q2.


Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                     15
                                                                                                                                               01 March 2012


                                            Risks to this trading recommendation come mainly from the emergence of much weaker
                                            than expected macro-economic conditions and flat monthly steel production through H2
                                            2012. This, however, is clearly not our expectation.


Exhibit 36: Grade price spread recovering from                                Exhibit 37: Q4 swap at attractive levels
recent trough
US$/t (lhs), Percent (rhs), Spot                                              US$/t

 200          Price Spread (rhs)            62% Spot         58% Spot   18%    180                        4Q12 Swap

                                                                               170
                                                                        16%
 180
                                                                               160

                                                                        14%
                                                                               150
 160

                                                                        12%    140

 140                                                                           130
                                                                        10%
                                                                               120
 120
                                                                        8%
                                                                               110


 100                                                                    6%     100
   Jan-11         Apr-11           Jul-11       Oct-11       Jan-12              Jan-10 Apr-10   Jul-10   Oct-10 Jan-11 Apr-11   Jul-11   Oct-11 Jan-12

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service                    Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                        16
                                                                                                                                       01 March 2012



                                      Thermal Coal – Poles apart
                                      The divergent performance of different coal benchmarks (see: Arbitrage This: The Relative
                                                                                                               2




                                      States of Different Coal Markers) shows little sign of abating.

                                      Exhibit 38: API #2 still lagging other markers
                                      US$/t, Spot
                                       145
                                                               Newc                  API #4                  API#2

                                       135


                                       125


                                       115


                                       105


                                        95
                                         Jan-11           Mar-11         May-11     Jul-11       Sep-11       Nov-11          Jan-12

                                      Source: Credit Suisse, McCloskey


                                      With European port stocks holding their ~7.5Mt levels and power plants well stocked after
                                      the warm northern hemisphere winter, the ARA market looks to be stuck in its relatively
                                      depressed range. Prices did move off their lows when cargoes were offered comfortably
                                      below $100/t but upward momentum remains muted and the availability of plentiful supply,
                                      particularly heavily discounted low-spec material from the US, leaves little room to run.
                                      In contrast, Newcastle continues to look comparatively well supported due to the low
                                      availability of high-spec material, particularly against the relative abundance of sub-
                                      bituminous tonnes. This point is well illustrated by the move in the price spread between
                                      Newcastle and Indonesian sub-bituminous material since the recent low of early December.

                                      Exhibit 39: Wide spread between spot Newc and spot Indo coal
                                      US$/t, Newcastle 6,000Kc FOB less Indonesia 4,900Kc FOB
                                          50
                                          45
                                          40
                                          35
                                          30
                                          25
                                          20
                                          15
                                          10
                                             5
                                             0
                                             -5
                                             Jan-09           Jul-09       Jan-10       Jul-10      Jan-11           Jul-11      Jan-12
                                      Source: Credit Suisse, McCloskey


                                      In terms of immediate price moves from here, the weather is again proving the coal
                                      market’s x-factor as rains threaten to disrupt Australian production in the Illawarra and
                                      Hunter Valley – some coking production but predominantly thermal mines serving the port
                                      of Newcastle. The Australian BOM’s forecast (Exhibit 40) indicates there will be mining
                                      disruptions but we are very much in a wait and see position as to the overall impact – the
                                      rains are currently centered to the south of major mining areas. If mines do, however,
                                      become flooded, this can cause longer outages, or if there is damage to rail infrastructure,
                                      that could further tighten the Newc market and push prices higher. In contrast, a lesser
                                      interruption would clearly have a markedly reduced impact on pricing.

Commodities Advantage: Chinese Tide Begins to Turn                                                                                               17
                                                                                                                                      01 March 2012



                                        Exhibit 40: Bureau of Meteorology forecasting heavy rain in New South Wales
                                        Cumulative four-day rainfall forecast




                                        Source: Credit Suisse, BOM



                                        Looking beyond the price action, coal demand remains reasonably robust outside of the
                                        US, with Japanese nukes off-line, European clean dark spreads dramatically
                                        outperforming spark spreads and Chinese major power plants still getting through the best
                                        part of 4Mt per day. High stockpiles built up in preparation for the winter have not been
                                        worked down and, while this remains the case, it will be very difficult for prices to break
                                        materially higher – buyers feeling little need to bid up prices.
                                        Drivers of change, outside of Europe at least, are potentially, however, on the horizon.
                                        Chinese port stocks at Guangzhou (Exhibit 41) have come off their recent highs despite
                                        continued imports (Exhibit 42) – suggesting draw-downs. The catalyst for this appears to
                                        be the upcoming March maintenance to the Daqin line and consequent impetus to pre-
                                        stock before this disruption to domestic flows. This should put some pressure on domestic
                                        prices for coal flowing out of Qinhuangdao and provide additional support for the arb with
                                        seaborne material (Exhibit 43).


Exhibit 41: Guangzhou port stocks off their highs                                 Exhibit 42: … despite continued inflows
Mt                                                                                Day-on-day percentage change in port stocks.

  4.0                                                                Subsequent     5.0%
                                                Post                 draw dow n
                             Dips for           CNY                  in stocks
                             New Year
  3.5
                             and CNY             Record Nov                         2.5%
                                                 & Dec
                                                 Imports
  3.0

                                                                                    0.0%

  2.5


                                                                                   -2.5%
  2.0



  1.5                                                                              -5.0%
     Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12                     Nov-11            Dec-11          Jan-12   Feb-12

Source: Credit Suisse, CCR                                                        Source: Credit Suisse




Commodities Advantage: Chinese Tide Begins to Turn                                                                                              18
                                                                                                                                              01 March 2012


                                         Exhibit 43: The China arb remains wide open
                                         US$/t (lhs), Percent (rhs)
                                          145                Imported Coal (South China CIF + VAT)         Domestic Coal (QHD FOB + Freight)         10%

                                          140                Imported Coal Discount (rhs)
                                                                                                                                                     8%
                                          135

                                          130
                                                                                                                                                     6%

                                          125

                                                                                                                                                     4%
                                          120

                                          115
                                                                                                                                                     2%
                                          110

                                          105                                                                                                        0%
                                             Jun-11       Jul-11       Aug-11   Sep-11      Oct-11       Nov-11     Dec-11    Jan-12   Feb-12
                                         Source: Credit Suisse, McCloskey


                                         The key to this demand is the IPPs’ desire to maintain high stocks through to summer,
                                         giving tem a strong hand if hot weather and consequent air con induced electricity demand
                                         lead to burn rates moving towards 4.5Mt per day.
                                         As of February 10, major power plants held a combined 77Mt of coal stocks, which
                                         equated to 22 days of inventory cover (Exhibit 44), on a backward looking basis. This
                                         represents a near 6% fall in absolute inventories from December highs but a four-day
                                         increase in inventory days cover, as the relatively mild end to January saw burn rates then
                                         fall towards 3.5Mt per day. The next print for coal inventories should show they have come
                                         down somewhat in the wake of February’s cold snap and consequent higher burn rates
                                         should also see inventory days move lower. To put these figures in context of a potential
                                         4.5Mt per day coal burn during peak summer demand, inventories need to be maintained
                                         above 75Mt to provide the 17 days burn cover that IPPs have tried to enter the summer
                                         with in recent years (Exhibit 44).
                                         Consequently, while current high inventories enable IPPs to act as opportunistic buyers,
                                         picking up cargoes that would have found a European home in a normal Atlantic market,
                                         they do not have an option to completely step back from the market – as underlined by
                                         January’s strong seasonally adjusted import figure of 15Mt (Exhibit 45).

Exhibit 44: IPP inventories still high                                           Exhibit 45:… but it’s not stopping them from buying
Inventory days cover for major Chinese power plants                              Mt, Monthly SA

  30                                                                              18

                                                                                  16
  25
                                                                                  14
  20                                                                              12
                                                                                  10
  15
                                                                                    8
  10                                                                                6
                                                                                    4
   5
                                                                                    2
   0                                                                                0
  Jun-07          Jun-08      Jun-09        Jun-10          Jun-11                   2007           2008          2009       2010      2011         2012
Source: Credit Suisse                                                            Source: Credit Suisse




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                        19
                                                                                                                         01 March 2012



                                      Precious metals: USD rally pulls the rug out
                                      ECB LTRO outweighed by Bernanke
                                      The gold and silver markets had anticipated the second round of three-year unlimited
                                      financing offered by the ECB by continuing to rally. However, the actual result of the offer
                                      on Wednesday – uptake of €529.5 billion from 800 banks (versus €489 billion / 523 banks)
                                      – was pretty much in the middle of market expectations. And after a first few minutes of
                                      whipping about, gold and EURUSD were initially pretty much unmoved by the outcome.
                                      Subsequently, however, comments by Fed Chairman Bernanke to Congress during his
                                      semi-annual testimony were interpreted as bullish for the dollar (and importantly for gold
                                      appeared to reduce the prospects of further QE from the Fed). That provided those who
                                      felt the precious metals had over-run the opportunity to sell aggressively as the dollar
                                      staged a rally against the euro. The result was a characteristic spike in intra-day volatility
                                      and sharp plunge in price as gold slid through stops from around $1,786 to below $1,705
                                      in the space of a few hours. Silver and the PGMs reacted in similar fashion, though the
                                      selling in platinum was a little more muted.

                                      Size alone doesn’t matter
                                      After collateral haircuts and roll-overs of shorter-term funding, our economists estimate the
                                      net injection of liquidity by the ECB to be around €313bn (see ECB – It’s raining €uros!).
                                                                                                         2




                                      That, together with the previous net injection of €193bn, has boosted the ECB’s balance
                                      sheet by more than €500bn since December.
                                      But what is frequently missed in discussions of gold and silver in the context of central
                                      bank easing and the provision of liquidity is that large and expanding balance sheets at the
                                      Fed and ECB are not in and of themselves bullish for gold. The transmission mechanisms
                                      – how and at what pace that cash flows into the real economy, and where it is put to work
                                      – are (or at least should be) more important points to consider. At present, there is little
                                      evidence that excess liquidity is causing an increase in either velocity of money or price
                                      pressures.
                                      The more concerning aspect for gold bulls should be:
                                      1) Vague, indirect comments (or even a lack of comment) from official sources about likely
                                         future Fed policy can have far more impact on the gold price than ECB or other central
                                         bank actions,
                                      2) Data from the US economy currently suggest the probability of further QE in the US is
                                         diminishing, and
                                      3) There are hints that the expansion of the Fed balance sheet to date and rates at the
                                         zero bound are no longer sufficient reasons for the gold price to move higher – more
                                         QE is wanted.
                                      On balance though, we think a majority of investors in the gold market are still of the
                                      opinion that expanded central bank balance sheets come with a material risk of currency
                                      debasement and/or a breakout in inflation expectations at some point down the line. And
                                      while that situation persists, then the outcome over the medium term is likely to be positive
                                      for the gold price, and by association, silver. It is unlikely to be an easy ride, however, and
                                      we note that our colleagues in FX strategy are still bearish EURUSD over the medium
                                      term.




Commodities Advantage: Chinese Tide Begins to Turn                                                                                 20
                                                                                                                           01 March 2012



                                      Base Metals: Buy the dip in lead
                                      The entire LME metals complex sold off yesterday following testimony by Fed Chairman
                                      Ben Bernanke. However, the sell-off was far more pronounced in lead (Exhibit 46), which
                                      now appears quite attractive on a variety of valuation metrics (see Lead: This is the Dip –
                                                                                                              2




                                      Buy It).
                                      • US$100/tonne below its average trading price of the past three years (US$2,160/tonne
                                        vs. US$2,269/tonne), despite a tightening market balance

           Lead looks cheap           • US$164.50/tonne below the local peak seen in January (US$2,325/tonne) in contrast to
        following the sell-off          continued gains in broader commodities and equities over the same period.
                                      • Lead/LMEX index ratio closed at 0.58, near the bottom of its range in recent years,
                                        implying undervaluation compared to other LME metals(Exhibit 47).
                                      • Lead-zinc spread at US$48.50/tonne, down from US$133.00/tonne the day before and
                                        US$50-120/tonne broad trading range since October (which has trended upwards).
                                      • Lead was not only the worst performing LME metal yesterday, but as a result, is now the
                                        second-worst performing year-to-date despite a stronger S&D outlook.

                                      Exhibit 46: Yesterday’s sell-off was much larger in lead than other LME metals
                                      February 29, 2012; LME 3-month (intraday prices)

                                                        Lead            Copper             Aluminium   Zinc       Nickel      Tin
                                       103

                                       102

                                       101

                                       100

                                        99

                                        98

                                        97

                                        96

                                        95

                                      Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse



         Refined market may           In contrast, the fundamental picture for lead is quite strong. In January, we forecast a
              be moving into          near-balanced refined market for 2012 after four years of notable surpluses. However,
                      deficit         recent developments suggest that the lead market may well move into deficit this year.
                                      On the demand side, the global auto industry has been one of the strongest demand
                                      stories of late, a theme we expect to continue throughout the year. US and Japanese
                                      sales continue to rebound strongly from the disruption caused by the Japanese
                                      earthquake last year (Exhibit 48). Motor vehicle sales (including motorcycles and three-
                                      wheelers) in India have also risen strongly and were up 12.0% YoY in January. And in the
                                      most important market, Chinese auto production has returned to rapid long-term trend
                                      growth.




Commodities Advantage: Chinese Tide Begins to Turn                                                                                   21
                                                                                                                                              01 March 2012



Exhibit 47: The lead/LMEX ratio is now also near the                     Exhibit 48: US & Japanese auto sales continue to
lowest it has been in years                                              rebound strongly from 2011 earthquake impact
LME 3-month Lead/LMEX index                                              SAAR, millions

 0.85                                                                                              US (lhs)               Japan (rhs)
                                                                          18                                                      Expiration of          6.5
                                                                                                                                  Subsidies
 0.80                                                                     17                                                                             6.0
                                                                                                                     Cash for
                                                                          16
                                                                                                                     Clunkers                            5.5
 0.75
                                                                          15
                                                                                                                                                         5.0
 0.70                                                                     14
                                                                                                                                                         4.5
                                                                          13
 0.65                                                                                                                                                    4.0
                                                                          12
                                                                                                                                                         3.5
                                                                          11
 0.60
                                                                          10                                                                             3.0
                                                                                                                                      Japan Earthquake
 0.55                                                                      9                                                                           2.5
    2009                 2010                  2011           2012         2006          2007    2008         2009         2010          2011       2012

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service               Source: Credit Suisse



                                         Chinese battery production also continues to recover from last year’s environmental
                                         inspections and should increase strongly as plants return to full production. While the
                                         announcement that Johnson Controls’ Shanghai battery plant will remain closed (likely
                                         permanently) has garnered attention, the loss should be easily replaced by other
                                         manufacturers.
                                         On the supply side, Chinese lead production has been impacted significantly by a
                                         cadmium spill and by lead poisoning cases in three separate provinces:

            Large disruption to          • The January cadmium spill in Hechi, Guangxi has resulted in the temporary closure of
               Chinese supply              the Hechi Tianbao (80 kt/y) smelter and several smaller lead mines and smelters in the
                                           region. In Chehe township, within Hechi city, over a hundred children were found to
           from environmental
                                           have lead poisoning. Three small smelters are located in the vicinity and are likely to
                     problems              face more extended closures.
                                         • In Guangdong, lead poisoning cases have also been confirmed near the Shaoguang
                                           smelter (42 kt/y) and government environmental inspectors have been dispatched.
                                           There is a high probability the smelter will be shut, at least temporarily.
                                         • Hundreds of children have been confirmed with lead poisoning in Lingbao, Henan.
                                           Production has been suspended at three smelters: Henan Lingye (70 kt/y), Lingbao
                                           Zhicheng (60 kt/y), and Lingbao Xinhua (25 kt/y).
                                         Not factoring in the impact on smaller smelters, the five above named smelters total 277
                                         kt/y of refined lead production. This compares to 6Mt of expected global refined production
                                         in 2012, or nearly 5%. While we do not expect all of these smelters to remain offline for the
                                         full year, removing such a significant portion of supply for even a portion of the year will
                                         have a significant impact.
                                         Further, Doe Run’s announcement that it will restart the La Oroya smelter in Peru has
                                         been the other notable supply-side development. While the restart could occur as early as
                                         May, it is contingent on the Peruvian Congress passing a law granting another extension
                                         of the environmental cleanup deadline. Doe Run is also engaged in a lawsuit with the
                                         government over credit issues. If all goes according to plan, the restart could add around
                                         30 kt of production this year.




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                        22
                                                                                                                          01 March 2012


                                      Trade Recommendation
                                      Long Jun-12 Lead (US$2,169.50 as of yesterday’s close). The strong sell-off presents a
                                      good buying opportunity, in our view, to position both for a correction and an improving
                                      fundamental outlook, and to benefit from continued macro improvement. The primary risk
                                      to the trade is a general downturn in global demand.
                                      In addition, there are several attractive alternative trades for investors to consider:
                                      • Relative Value: Investors interested in relative value trades should consider buying
                                        lead on the long end against other metals such as aluminium, zinc, and copper. Note,
                                        we have an active Long Dec-12 Lead & Short Dec-12 Zinc trading recommendation
                                        (see page 10 of Commodities Forecast Update: From Fear Flows Opportunity for
                                                             2




                                        further details).
                                      • Long-Term: For investors with a long time horizon, long-dated lead futures (such as
                                        Dec-13, which closed yesterday at US$2,273.50) present a very attractive opportunity
                                        given the expected shift from comfortable surplus into sizeable deficit over the next few
                                        years. The primary risk to such a trade is a prolonged downturn in global demand.
                                      Options: With implied volatility relatively high and prices having retreated, selling puts
                                      may be attractive to investors with higher risk tolerance (or willing to take physical delivery).




Commodities Advantage: Chinese Tide Begins to Turn                                                                                  23
                                                                                                                                                        01 March 2012



                                           Agriculture – Month end gains
                                           Agriculture grains and soybeans were higher over the week, with wheat and corn up by
                                           3.5% and 2.6%, respectively, and soybeans up by 3.2%. Interestingly, most of the gains
                                           occurred late towards the end of the month.
                                           While month-end rebalancings are typically small (especially intra-commodity), we believe
                                           they may have aided in pushing prices marginally higher. As seen in Exhibit 49, the
                                           agriculture component of the Credit Suisse Commodities Benchmark had the weakest
                                           performance when compared to other commodities for the month of February.

                                           Exhibit 49: CSCB Index component returns for February 2012
                                           Returns for month of February

                                            14.0%

                                            12.0%

                                            10.0%

                                             8.0%

                                             6.0%

                                             4.0%

                                             2.0%

                                             0.0%
                                                        CSCB Excess        CSCB Energy           CSCB          CSCB Industrial CSCB Precious CSCB Livestock
                                                          Return              ER             Agriculture ER      Metals ER       Metals ER        ER

                                           Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse



                                           Further, as noted previously (see agriculture section of Greek default concerns trump
                                                                                                                              2




                                           selective easing), Chinese crushing margins have improved dramatically since the end of
                                           last year. As a result, we expect Chinese imports to increase healthily. Although there was
                                           a weak start to exports from the US late last year, recent data suggest that exports are
                                           accelerating once again (supported by the recent largest daily sale to China on record of
                                           2.9MT on Feb 17, 2012 – larger than the peaks reached in 2011 and 2008).

Exhibit 50: Better Chinese crushing margins have                                    Exhibit 51: and weekly US soybean exports
led to a recovery in Chinese orders (and prices)                                    continue higher (despite a weak start last year)
RMB per metric ton (LHS), and US cents per pound (RHS)                              Thousands of metric tons with trend

  700                  Chinese soybean crushing margins (LHS)              1600      2500
                                                                                                        US soybean exports tend to slow after
                       CBoT Soybean front month (RHS)
                                                                           1500                          January or first week of February..
  500
                                                                                     2000                                                        ...however in 2012,
                                                                           1400                                                                  exports are continuing
  300                                                                                                                                            even into mid-Feb
                                                                           1300
                                                                                     1500

  100                                                                      1200

                                                                           1100      1000
 -100
                                                                           1000
 -300                                                                                 500
                                                                           900

 -500                                                                      800
                                                                                         0
    Jan-09    Jul-09    Jan-10    Jul-10    Jan-11      Jul-11   Jan-12                  Oct-09          Apr-10          Oct-10         Apr-11       Oct-11

Source: the BLOOMBERG PROFESSIONAL™ service, Shanghai JCI, Credit Suisse            Source: the BLOOMBERG PROFESSIONAL™ service, Shanghai JCI, Credit Suisse




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                    24
                                                                                                                                                                                01 March 2012



                                          Commodity Investment Flows
                                          Investment flow estimates below are based on last week’s CFTC commitment of traders
                                          report and the latest set of index investment data up till Tuesday, 21 February, 2012.
                                          Index-linked commodity assets under management saw $3.0 billion of inflows, and total
                                          index-linked assets under management increased by $13.6 billion to about $221.2 billion
                                          (Exhibit 53) largely driven by the increase in oil prices. Total contracts held in indices
                                          increased by a further 67.8k contracts, led by increases in crude oil, oil products, as well
                                          as the grain contracts held. This was partially offset by sales of natural gas and Comex
                                          copper contracts. Notably, the number of contracts has now recovered to near the peak
                                          seen in H1 last year.
                                          Physically backed exchange traded products also saw net inflows of about $215 million
                                          and total assets under management rose to $137.7 billion (Exhibit 54). Total assets under
                                          management (including both indices and ETFs) increased to about $358.8 billion, from
                                          $342.0 billion a week earlier.

                                          Exhibit 52: Commodity index assets under management in contracts & dollars
                                          Thousands of contracts and US$ billions

                                                            3,500                                   AUM (Right Axis)                Contracts (Left Axis)                             280

                                                            3,400                                                                                                                     260

                                                            3,300
                                                                                                                                                                                      240
                                                            3,200
                                                                                                                                                                                      220
                                           '000 Contracts




                                                                                                                                                                                            bn, USD
                                                            3,100
                                                                                                                                                                                      200
                                                            3,000
                                                                                                                                                                                      180
                                                            2,900
                                                                                                                                                                                      160
                                                            2,800

                                                            2,700                                                                                                                     140

                                                            2,600                                                                                                                     120
                                                                 08-Jun-10           21-Sep-10      04-Jan-11           19-Apr-11          02-Aug-11          15-Nov-11         28-Feb-12

                                          Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse




Exhibit 53: Commodity index assets under                                                             Exhibit 54: Physically backed commodity ETF
management (in US dollars)                                                                           assets under management (in US dollars)
US$ billions                                                                                         US$ billions

  10                                                                                          275       3                                                                                   175
                    Inflows (Left Axis)                     Index AUM (Right Axis)                                          Inflows (Left Axis)             ETF AUM (Right Axis)

                                                                                              250       2
   5                                                                                                                                                                                        150
                                                                                       3.01
                                                                                              225       1
                                                                                                                                                                                    0.215
   0                                                                                          200       0                                                                                   125


                                                                                              175      (1)
  (5)                                                                                                                                                                                       100
                                                                                              150      (2)


 (10)                                                                                         125      (3)                                                                                  75
  04-Jan-11    29-Mar-11    21-Jun-11     13-Sep-11                  06-Dec-11        28-Feb-12       04-Jan-11        29-Mar-11      21-Jun-11       13-Sep-11     06-Dec-11      28-Feb-12

Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse                                     Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                                                              25
Commodities Advantage: Chinese Tide Begins to Turn



                                                     Exhibit 55: Commodities Forecast Table
                                                     Units as indicated below
                                                                                                                    2011                                2012                                                2013                              2014         2015         LT
                                                                                                  2010
                                                                                                              Q3        Q4   Yr Avg   Q1 (f)   Q2 (f)     Q3 (f)    Q4 (f) Yr Avg (f)    Q1 (f)    Q2 (f)     Q3 (f)    Q4 (f)   Yr Avg (f) Yr Avg (f)   Yr Avg (f)   (real)
                                                     Energy
                                                     Brent (US$/bbl)                              83.13    112.09   109.54   109.97   100.00   100.00   110.00     110.00     105.00    105.00    115.00    120.00     120.00      115.00      120.00       125.00      90.00
                                                     WTI (US$/bbl)                                79.61     89.54    92.18    90.70    90.00    92.00   106.00     108.00      99.00    103.00    113.00    118.00     118.00      113.00      117.75       119.00      84.00
                                                     U.S. Natural Gas (US$/MMBtu)                  4.38      4.05     3.61     4.07     3.20     3.30     3.60       3.90       3.50      4.60      4.50      4.80       4.90        4.70        5.10         5.50       5.50
                                                     Iron Ore
                                                     Iron ore fines - 62% (China CFR) US$/t        147       177       141     168      140      150        160      160         153       160       160        155       155         158         135           120         90
                                                     Iron ore fines - (China CFR) US¢/dmtu         237       285       228     271      226      242        258      258         246       258       258        250       250         254         218           194        145
                                                     Iron ore fines - 62% (Pilbara FOB) US$/t      136       169       132     160      131      140        150      150         143       150       150        145       145         147         126           112         82
                                                     Iron ore fines - (Pilbara FOB) US¢/dmtu       220       273       213     258      211      226        241      241         230       241       241        234       234         238         204           181        132
                                                     Iron ore lump - 64% (Pilbara FOB) US$/t       162       194       155     186      154      165        176      176         168       176       176        171       171         174         149           132        100
                                                     Iron ore lump - (Pilbara FOB) US¢/dmtu        253       303       243     291      241      258        276      276         263       276       276        267       267         272         233           207        157
                                                     Iron ore pellets - 66% (Tubarao FOB) US$/t    188       212       168     205      167      178        190      190         181       190       190        184       184         187         161           143        108
                                                     Iron ore pellets - (Tubarao FOB) US¢/dmtu     285       321       255     310      252      270        288      288         275       288       288        279       279         284         244           217        164
                                                     Coking Coal
                                                     Hard coking coal (US$/t)                      190       315       285     289      235      220        235      245         234       245       240        235       235         239         235           235        170
                                                     Semi hard coal (US$/t)                        180       299       271     274      223      209        223      233         222       233       228        223       223         227         223           223        160
                                                     Semi soft coal (US$/t)                        140       212       191     212      157      147        157      164         156       164       161        157       157         160         157           157        132
                                                     PCI coal (US$/t)                              146       230       205     223      169      158        169      176         168       176       173        169       169         172         169           169        134
                                                     Thermal Coal
                                                     Thermal Coal (Newcastle FOB) US$/t            99        122       116     123      115      125        130      135         126       138       138        138       138         138         140           140        120
                                                     Thermal Coal (API#2 CIF) US$/t                93        124       115     122      113      123        128      133         124       136       136        136       136         136         138           138        120
                                                     Thermal Coal (API#4 FOB) US$/t                92        117       107     116      110      120        125      130         121       134       134        135       135         135         138           138        120
                                                     Base Metals
                                                     Copper (US$/MT)                              7,594     9,245    7,518    8,887    8,200    8,900    9,200      9,500      8,950     9,300     9,000     8,800      8,500       8,900       8,500        7,000      5,500
                                                     Aluminium (US$/MT)                           2,233     2,440    2,101    2,424    2,200    2,400    2,500      2,600      2,425     2,700     2,700     2,700      2,700       2,700       2,550        2,650      2,400
                                                     Alumina spot (US$/MT)                         332        378      380      389      310      330      350        370        340       370       380       380        390         380         400          415        400
                                                     Nickel (US$/MT)                              21,901   22,567   18,382   23,015   20,500   21,500   22,000     22,000     21,500    23,000    23,000    23,500     24,000      23,375      24,000       24,000     20,000
                                                     Lead (US$/MT)                                2,187     2,524    1,994    2,405    2,050    2,150    2,250      2,400      2,213     2,500     2,600     2,700      2,800       2,650       3,100        3,300      2,000
                                                     Zinc (US$/MT)                                2,207     2,280    1,910    2,220    2,000    2,050    2,100      2,150      2,075     2,250     2,300     2,400      2,500       2,363       2,800        3,000      1,900
                                                     Tin (US$/MT)                                 20,441   25,355   20,885   26,191   22,000   23,000   24,000     25,000     23,500    26,000    26,000    26,000     26,000      26,000      26,000       26,000     20,000
                                                     Precious Metals
                                                     Gold (US$/oz)                                1,227     1,705    1,682    1,571    1,650    1,720     1,810     1,840      1,755     1,920     1,860      1,740     1,660       1,795        1,450        1,350     1,300
                                                     Silver (US$/oz)                              20.28     38.87    31.81    35.20    30.00    31.60     34.30     35.40      32.80     36.20     32.60      29.00     26.80       31.20        23.80        22.50     21.70
                                                     Palladium (US$/oz)                            530        752      629      730      675      735       785       825        755       850       890        930       950         905          980        1,010       900
                                                     Platinum(US$/oz)                             1,611     1,770    1,535    1,720    1,510    1,540     1,590     1,640      1,570     1,780     1,820      1,840     1,900       1,835        1,900        1,925     1,900
                                                     Rhodium (US$/oz)                             2,495     1,893    1,588    2,010    1,350    1,500     1,550     1,600      1,500     1,900     2,200      2,250     2,350       2,175        3,000        3,200     3,200
                                                     Minerals
                                                     Zircon bulk (US$/t)                           875      2200      2420    1,880    2500     2550      2625      2725       2,600     2850      2975       3075      3200        3,025        3,200        2,225     1,500
                                                     Rutile bulk (US$/t)                           550      1325      1355    1,055    2450     2450      2700      2700       2,575     2800      2800       2900      2900        2,850        2,700        1,650     1,000
                                                     Synthetic Rutile (US$/t)                      438      1100      1050      858    2000     2000      2175      2175       2,088     2275      2275       2400      2400        2,338        2,188        1,375       830
                                                     Ilmentite - sulphate 54% (US$/t)              84        250       265      209     250      250       275       275         263      300       300        350       350          325          300          250       200
                                                     Titanium Slag - SA Chlor 86% (US$/t)          431      1075      1075      798    1450     1450      1600      1600       1,525     1700      1700       1800      1800        1,750        1,625        1,094       675
                                                     Uranium spot (US$/t)                          47         52        54       57      52       54        56        58          55       60        65         65        70           65           75           75        65
                                                     Agriculture
                                                     Wheat-CBOT (US¢/bu)                           647        691      618      710      600      600       650       650        625       660       680        680       650         670          650          650       600
                                                     Corn-CBOT (US¢/bu)                            459        698      623      680      600      600       575       575        590       550       550        550       550         550          500          500       500
                                                     Soybeans-CBOT (US¢/bu)                       1,048     1,358    1,183    1,320    1,175    1,200     1,250     1,300      1,231     1,260     1,280      1,280     1,220       1,260        1,200        1,200     1,100
                                                     Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse




                                                                                                                                                                                                                                                                                 01 March 2012
26
                                                                                                                              01 March 2012




                                              Technical Analysis
                                              Brent Crude Oil approaches the $127 2011 high
                              Cilline Bain
                      +44 20 7888 7174        Brent Crude Oil (ICE continuation) – Weekly
             cilline.bain@credit-suisse.com




                                              Source: CQG, Credit Suisse


                                              Brent Crude Oil (ICE continuation) remains well supported within its long-term upward
                                              trend and we are now seeing the market approach the $127 resistance high from 2011.
                                              We are not ruling out a near-term phase-on consolidation, which may see the market
                                              revert back towards the $116.60 pivot support level. But with weekly momentum indicators
                                              continuing to trend steadily higher, we believe the broader bias is for an upside break
                                              through the 2011 high and for Brent to extend up to interim chart resistance located at
                                              $133.75, and potentially then retest the euphoric 2008 peak of $147.50.
                                              A sustained violation below the pivot support level of $116.60 would suggest a top is in
                                              place, with risk then lower – back to interim chart support placed at $108.91. Subsequently,
                                              below the latter, would pave the way for further downside risk to $102.37 support.




Commodities Advantage: Chinese Tide Begins to Turn                                                                                      27
                                                                                                                                                      01 March 2012




                                              Trade Recommendations
                                              We have added a long June-12 lead and long Q4 2012 iron ore trade recommendation as
                                              noted above in the base metals section and iron section, respectively.
                                              Further, we have closed out our heating oil structure with a profit of $2.32, equivalent to a
                                              93.9% gain to the initial net exposure. We have also closed our sell implied freight coal
                                              trade for a profit of $0.45, a gain of 8.4%.


Exhibit 56: Trade recommendations scorecard – (returns at end of day, February 29, 2012)
Based on end of day prices or latest available price, recommendations in dark blue have been closed out, recommendations in green are initiated today
Returns column: green means positive returns, and red means negative returns, black when zero.
                                                                                                Date Initiated    Opening     Current or
     Commodity                   Position                            Publication                    (Closed)        Price    Close Price   Profit/(loss)   Return
  Iron Ore             Buy Q4 2012 Iron ore swap        Chinese Tide Begins to Turn             01 Mar 2012       $132.50
  Lead                 Buy June 12 LME lead             Lead: This is the Dip – Buy it
                                                        2                                        29 Feb 2012     $2,169.50
  RBOB Gasoline        Buy the June 12 330/340 call     Selective Easing Offset by Greek
                                                        2                                        15 Feb 2012      $0.7804       $0.9300          $0.15     19.2%
                       spread and sell the June 12      Default Risk
                       340/350 call spread
  RBOB Gasoline        Buy the June 12 340 call         Selective Easing Offset by Greek
                                                        2                                        15 Feb 2012      $8.2662      $10.4652          $2.20     26.6%
                                                        Default Risk
  Copper               Buy Dec-12 copper                From Fear Flows Opportunity
                                                        2                                        16 Jan 2012     $8,110.00    $8,520.00       $410.00       5.1%
  Aluminium            Buy Q3 aluminium                 From Fear Flows Opportunity
                                                        3                                        16 Jan 2012     $2,203.83    $2,358.50       $154.67       7.0%
  Lead and zinc        Buy Dec-12 lead, sell Dec-12     From Fear Flows Opportunity
                                                        3                                        16 Jan 2012       $71.50        $65.50         -$6.00     (8.4%)
                       zinc
  Iron Ore             Buy Cal-13 iron ore swaps        From Fear Flows Opportunity
                                                        3                                        16 Jan 2012      $125.25       $128.00          $2.75      2.2%
  ICE Gasoil           Buy Jun-12, sell Apr-12 gasoil   Mixed Blessings
                                                        3                                        09 Jan 2012        -$5.75       -$1.25          $4.50     78.3%
  Thermal Coal         Buy CAL13 swaps on dips          A Dangerous New Phase
                                                        3                                         4 Oct 2011      $119.20       $112.93         -$6.27     (5.3%)
                       below $120 for Newcastle coal
  Thermal coal         Buy API4 Coal, Sell API2 Coal    The Relative States of Different Coal
                                                        3                                         15 Feb 2012       -$5.37       -$4.92          $0.45      8.4%
                                                        Markers                                 (29 Feb 2012)
  Heating Oil          Buy Jun-12, sell Apr-12          Mixed Blessings
                                                        3                                         05 Jan 2012       -$2.47       -$0.15          $2.32     93.9%
                       heating oil                                                              (29 Feb 2012)
  WTI Crude Oil        Buy Dec-13 WTI calls             Oil fundamentals: Supply-side worries
                                                        3                                         10 Nov 2011     $3.6481       $4.2233       $0.5752      15.8%
                                                                                                (01 Feb 2012)
  Nat Gas (US)         Buy puts on Mar-12 Henry         From Fear Flows Opportunity
                                                        3                                         17 Jan 2012     $0.1543       $0.0769     ($0.0774)      (50.2%
                       Hub                                                                      (25 Jan 2012)                                                    )
  Gold                 Buy 1650/1850 call spread        What’s up (down) with gold?
                                                        3                                         15 Dec 2011    $38.8786      $49.2867      $10.4081       26.8%
                                                                                                (12 Jan 2011)
  Gold                 Buy March 12 call spread with    A Dangerous New Phase
                                                        4                                          3 Oct 2011    $58.1063      $73.8803      $15.7740      27.1%
                       strikes at $1,700/$1,900                                                 (07 Dec 2011)
  Gold                 Buy Dec 11 futures on dips       Autumn Resolutions
                                                        4                                         30 Aug 2011    $1,800.00    $1,740.90       ($59.10)     (3.3%)
                       under $1800                                                              (07 Dec 2011)
  Iron Ore             Buy CAL-12 iron ore swaps        Iron Ore: Looking for a Bounce
                                                        4                                         27 Oct 2011     $118.50       $127.25          $8.75      7.4%
                                                                                                (21 Nov 2011)
  Lead and Zinc        Buy Jan-12 LME lead, sell        Relative Value Opportunity in Lead-
                                                        4                                         09 Nov 2011      $44.00       $109.00         $65.00     147.7%
                       Jan-12 LME zinc                  Zinc Spread                             (14 Nov 2011)
  Iron ore             Buy Q2 2012 futures on dips      A Dangerous New Phase
                                                        4                                         17 Oct 2011     $133.50       $136.00          $2.50      1.9%
                       to $135                                                                  (09 Nov 2011)
Source: Credit Suisse Locus




Commodities Advantage: Chinese Tide Begins to Turn                                                                                                               28
                                        GLOBAL COMMODITIES RESEARCH

                   Ric Deverell, Managing Director                                        Eric Miller, Managing Director
                Global Head of Commodities Research                            Global Head of Fixed Income and Economic Research
                           +44 20 7883 2523                                                       +1 212 538 6480
                    ric.deverell@credit-suisse.com                                        eric.miller.3@credit-suisse.com




LONDON                                                                                       One Cabot Square, London E14 4QJ, United Kingdom


Tom Kendall, Director                        Marcus Garvey, Analyst                          Martin Yu, Analyst
Head of Precious Metals Research             +44 20 7883 4787                                +44 20 7883 2150
+44 20 7883 2432                             marcus.garvey@credit-suisse.com                 martin.yu@credit-suisse.com
tom.kendall@credit-suisse.com




TECHNICAL ANALYSIS
Cilline Bain, Associate
+44 20 7888 7174
cilline.bain@credit-suisse.com




NEW YORK                                                                                               11 Madison Avenue, New York, NY 10010


Jan Stuart, Managing Director                Joachim Azria, Associate                        Stefan Revielle, Associate
Head of Energy Research                      +1 212 325 4556                                 +1 212 538 6802
+1 212 325 1013                              joachim.azria@credit-suisse.com                 stefan.revielle@credit-suisse.com
jan.stuart@credit-suisse.com




SINGAPORE                                                                                                One Raffles Link, Singapore 039393

Andrew Shaw, Director                        Ivan Szpakowski, Associate
Head of Base Metals & Bulks Research         +65 6212 3534
+65 6212 4244                                ivan.szpakowski@credit-suisse.com
andrew.shaw@credit-suisse.com
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services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the
municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect
compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or
retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment
advisory services to or on behalf of the municipality.
Copyright © 2012 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which
investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate
bonds) from CS as a seller, you will be requested to pay purchase price only.

				
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