29 March 2012 Fixed Income Research http://www.credit-suisse.com/researchandanalytics Commodities Advantage: Pausing for Breath Com modities Research Research Analysts Don’t Over-Analyze the PMIs ... Ric Dev erell Over the past week or so the market has been disappointed by the modest dips +44 20 7883 2523 email@example.com seen in the Chinese and European preliminary PMIs, along with several of the regional surveys in the US. The more bearish commentators have suggested Joachim Azria that the global rebound is running out of steam, with some even talking of a +1 212 325 4556 firstname.lastname@example.org further dip into global recession. Although it is possible that the PMI data are foreshadowing a significant slowdown, our assessment is that the numbers are Cilline Bain far less scary than many have suggested. +44 20 7888 7174 email@example.com We think that such negative commentary is overstating the statistical signal in Marcus Garv ey such small monthly movements in the PMI series. As we discuss in detail +44 207 883 4787 below, there is a tendency to significantly “over-interpret this data.” To the firstname.lastname@example.org extent that there is a signal, we believe that the data are reflecting the likelihood Tom Kendall that global IP growth is in the process of stabilizing at a still healthy pace as +44 20 7883 2432 normally occurs at this stage of the business cycle (the absence of a big dip last email@example.com year means a 2009-style rebound is unlikely). Stef an Rev ielle Generally when this happens, the macro data stop surprising to the upside +1 212 538 6802 firstname.lastname@example.org (expectations have adjusted) and markets pause for thought (Exhibit 2). Andrew Shaw The further fall in US weekly initial jobless claims was the most significant +65 6212 4244 economic signal of the week, we think, providing reassurance that the US labor email@example.com market recovery remains on track. The data over coming weeks will be very Jan Stuart important in fine tuning our assessment of the outlook. However to date the +1 212 325 1013 information at hand remains in line with slightly above average global IP growth firstname.lastname@example.org over Q2. Iv an Szpakowski + 65 6212 3534 email@example.com Focus – Petroleum: What Drives US Gasoline? Martin Y u The short answer is that the Brent crude oil price remains the principal driver + 44 20 7883 2150 (~70%) of what the US consumer is charged at the pump. Benchmark US WTI firstname.lastname@example.org prices are still disconnected from global markets and still trade at a wide (~ 15% discount). And other inland refiner feedstock is much cheaper still. But those juicy cost advantages do not accrue to US motorists. Next, refining margins are a distant second in what makes up the retail price of gasoline (currently nearly $4 per gallon) in the US. Refining margins on average account for about 15%, but they can blow out when utilization rates are high and/or refiners trip off line, in summer especially. US gasoline consumers have unusually low gasoline tax burdens (11%). In this way, US motorists are more exposed than drivers in most other countries to the forces of oil supply and demand, i.e., the ultimate drivers of Brent price. AN ALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com. 29 March 2012 In this Issue Macro View: Peering Through the Statistical Fog 3 Recent PMI Volatility - Is the rebound stalling? 3 The PMIs – Useful, but prone to over-interpretation 3 Commodity Returns in Q1 2012 8 Focus – Petroleum: US Gasoline Prices 9 Retail price = Crude oil + refining margins + taxes 9 Natural Gas 12 Northwest hydro outlook improving, mixed bag out west 12 Bulk Commodities 13 Iron Ore – Signposts pointing the way? 13 Thermal Coal – Chinese buying still not enough 15 Industrial Metals – In Limbo 16 Precious Metals 17 Gold – from short-term bearish to neutral 17 Agriculture: Waiting on Data 18 Commodity Investment Flows 19 Technical Analysis 21 Gold bases out and begins next upward phase for $1800 21 Trade Recommendations 22 Commodity performance In another mixed week for commodities, US Natural Gas retraced gains from last week, leading the space lower. Palladium and corn followed closely behind, while iron ore and RBOB gasoline outperformed. RBOB gasoline remains the top performer year to date. Exhibit 1: Commodity performances (as of close of 28 March 2012) Weekly returns, activ e contract Y ear to date returns, f ront month Iron Ore RBOB Gasoline RBOB Gasoline Silver U.K. Natural Gas Platinium Copper Brent Soybean Heating Oil Gold Soybean Lean Hogs U.K. Natural Gas Brent Copper Thermal Coal Aluminium Heating Oil Gold Platinium WTI Aluminium Palladium Wheat Lean Hogs Silver Iron Ore WTI Corn Corn Thermal Coal Palladium Wheat U.S. Natural Gas U.S. Natural Gas -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% -30% -20% -10% 0% 10% 20% 30% Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Commodities Advantage: Pausing f or Breath 2 29 March 2012 Macro View: Peering Through the Statistical Fog Recent PMI volatility – Is the rebound stalling? Over the past week or so the market has been disappointed by the modest dips seen in the Chinese and European preliminary PMIs, along with several of the regional surveys in the US. The more bearish commentators have suggested that the global rebound is running out of steam, with some even talking of a further dip into global recession. Although it is possible that the PMI data are foreshadowing a significant slowdown, our assessment is that the numbers are far less scary than many have suggested. We think that such negative commentary is overstating the statistical signal in such small monthly movements in the PMI series. As we discuss in detail below, there is a tendency to significantly “over-interpret this data.” To the extent that there is a signal, we believe that the data are reflecting the likelihood that global IP growth is in the process of stabilizing at a still healthy pace as normally occurs at this stage of the business cycle (the absence of a big dip last year means a 2009-style rebound is unlikely). Generally when this happens, the macro data stop surprising to the upside (expectations have adjusted) and markets pause for thought (Exhibit 2). The further fall in US weekly initial jobless claims was the most significant economic signal of the week, we think, providing reassurance that the US labor market recovery remains on track. The data over coming weeks will be very important in fine tuning our assessment of the outlook. However to date the information at hand remains in line with slightly above average global IP growth over the next quarter. Exhibit 2: Global macro surprise indicator – normalization, not crash Index lev el 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 2005 2006 2007 2008 2009 2010 2011 2012 Source: the BLOOMBERG PROFESSIONAL™ service The PMIs – Useful, but prone to over-interpretation Although the PMIs are a key early indicator of underlying momentum in global growth, in our view there is a tendency among the analytical community to over-interpret monthly changes. To us there are several key factors that should be kept in mind when assessing these data: Monthly series are by nature volatile. In part this is because of measurement error. But more generally economic growth, even when properly measured, is not as smooth month to month as many think. Commodities Advantage: Pausing f or Breath 3 29 March 2012 Related to the first point, it is clear that not all surveys are created equal, with some providing a much more consistent read than others month to month. The best example of this phenomenon in the past month was the “divergence” between the German PMI new orders and the IFO survey. As Exhibit 3 shows, the IFO has provided a far more stable read on momentum over recent years than the PMI. Exhibit 3: IFO provides far fewer false signals than the PMI New Orders Lev el 120 German PMI New Orders German IFO Expectations(rhs) 65 60 110 55 100 50 45 90 40 35 80 2000 2002 2004 2006 2008 2010 2012 Source: the BLOOMBERG PROFESSIONAL™ service, Markit Economics Another good example is the Chinese preliminary PMI. Although the survey has value, it should be noted that its composition is very different than the official NBS survey, with the latter in our view more representative. Note that they do not always move together. Note that there is nothing special about the level of 50 in the Chinese PMI – it correlates with around 8% IP growth – and DOES NOT indicate contraction. Exhibit 4: Chinese IP Growth and PMI New Orders – bottoming out? Percent (LHS), and Lev el (RHS) IP QoQ sa PMI New Orders 7% 65 6% 60 5% Bottoming out? 4% 55 3% 2% 50 1% 45 0% -1% 40 2005 2006 2007 2008 2009 2010 2011 2012 Source: the BLOOMBERG PROFESSIONAL™ service A third point is that there is little evidence that the PMIs are genuine lead indicators. Indeed, when compared with a centered trend (used to avoid phase shift issues associated with yoy or even 3m/3m comparisons) the PMIs actually lag movements in industrial production, while the new orders component is coincident at best. Commodities Advantage: Pausing f or Breath 4 29 March 2012 This does not mean that PMIs are not useful, as they are published in near real time, giving a significant timeliness advantage against the actual real economy data. But they do not actually provide any real information about future activity above the benefits of current momentum. The graph below also demonstrates how the PMIs can often significantly misrepresent underlying momentum in industrial production growth. In the most recent period the ISM new orders have completely diverged from trend IP growth. Exhibit 5: Trend Monthly IP, ISM New Orders – do monthly movements have any real information? Monthly annualized trend 10% US IP ann trend mom US Manf ISM New Orders (RHS) 75 8% 70 6% 65 4% 60 2% 55 0% 50 -2% 45 -4% 40 -6% 35 -8% 30 2000 2002 2004 2006 2008 2010 2012 Source: the BLOOMBERG PROFESSIONAL™ service When assessing momentum it is also necessary to consider underlying struc tural movements in the economy. For example, in the US very warm weather has seen electricity production (a key component of IP) acting as a drag on overall IP. In contrast, manufacturing production has been very strong. Of course the PMI in the US in part reflects the depressing impact of the warm weather. Exhibit 6: Large divergence between IP and Manufacturing Monthly trend annualized 15% US IP ann trend mom US IP (Manf Sector) ann trend mom 10% 5% 0% Divergence between headline -5% IP and IP in manufacturing sector -10% 2000 2002 2004 2006 2008 2010 2012 Source: the BLOOMBERG PROFESSIONAL™ service, Bureau of Labor Statistics Commodities Advantage: Pausing f or Breath 5 29 March 2012 Remaining on the US, the dip seen in the regional PMIs in March actually occurred in the nationwide survey in February (which makes sense as the national survey occurs later in the month). Although forecasting the PMI is difficult (and falls into the over- analyzing camp mentioned above), our econometric analysis suggests the new orders component for March may actually move sideways, as it has already seen the dip that occurred in the March regional surveys. Exhibit 7: Regressing the regional surveys (New Orders) – pointing sideways? Lev el 70 Regression of regional surveys (New Orders) ISM New Orders (rhs) Average (1980-present) 65 60 55 50 45 40 2005 2006 2007 2008 2009 2010 2011 2012 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse It should also be noted that given that we didn’t have a big fall in IP last year, it is unlikely that we get the rapid rebound seen in 2009 or even in 2010. Indeed, given that at a global level IP is now back at trend, our focus when assessing the level of the surveys should be against the long-run average (is IP growing faster or slower than average?) rather than against the rapid rebound levels rarely achieved. Exhibit 8: ISM still tracking the normal recovery range ... US PMI New Orders (t=trough) US new orders ISM (t=trough) 70 60 50 40 30 2008 recession Avg previous recessions ex '80s recession 20 t-12 t-8 t-4 t t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+32 t+36 t+40 t+44 t+48 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Commodities Advantage: Pausing f or Breath 6 29 March 2012 Finally, at a global level, IP growth is currently being highly distorted by developments in Japan, where IP again dipped last year as the Thailand floods disrupted the supply chains, but which has rebounded rapidly in recent months. Although Japan is expected to continue to grow at a good clip, much of the “loss of momentum” globally is currently being driven by the normalization of Japanese growth following the catch-up surge. Exhibit 9: Global IP trend and PMI New Orders Annualized monthly change and lev el Global IP ann trend mom Global IP (average) 15% Global Manf PMI New Orders (RHS) Global Manf PMI NO Ave (RHS) 65 10% 60 5% 55 50 0% 45 -5% IP much 40 stronger than PMI -10% 35 2000 2002 2004 2006 2008 2010 2012 Source: the BLOOMBERG PROFESSIONAL™ service, Markit Economics, Credit Suisse Commodities Advantage: Pausing f or Breath 7 29 March 2012 Commodity Returns in Q1 2012 Strong performance into the end of the quarter As the quarter draws to a close, we note that commodities outperformed the majority of asset classes, with most commodity indexes just behind equities (outperforming bonds, hedge funds, and corporates – see Exhibit 10). Among the commodity groups, precious metals and energy commodities outperformed, while agriculture and livestock lagged (Exhibit 11). This broadly agrees with the individual commodity performances that show RBOB gasoline, silver, platinum and Brent leading as top performers year to date. Given the strong performance of commodities so far this year, and the strong inflow into commodity indexes, it is likely that we get some outflow in fund flows as investors rebalance into the next quarter. Exhibit 10: Comparative asset returns Exhibit 11: Returns among commodity groups Data as of close of 28 March 2012 (based on Total Return) Data as of close of 28 March 2012 (based on CSCB Excess Return) EM Equity$ 8.0% Developed Equity$ 6.0% Commods (SPGSCI) Commodities (CSCB) 4.0% EM Corporates$ EU Corporates 2.0% Hedge Funds EM Bond$ 0.0% G3 Index-Linked Bond -2.0% US Corporates Commods (DJUBS) -4.0% G3+ Bond CSCB CSCB CSCB CSCB CSCB CSCB Excess Precious Energy ER Industrial Agriculture Livestock ER -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% Return Metals ER Metals ER ER Source: the BLOOMBERG PROFESSIONAL™ service, Thomson Reuters DataStream, Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Credit Suisse Commodities Advantage: Pausing f or Breath 8 29 March 2012 Focus – Petroleum: US Gasoline Prices Retail price = Crude oil + refining margins + taxes What’s in the price of gasoline in the US? The authority here is the Energy Information Agency of the Department of Energy: Exhibit 12: What do we pay for in a gallon of gasoline? Crude oil: the major feedstock oil refiners manufacture gasoline. This portion of the gasoline price (~70%) is represented by the cost of crude oil purchased by refiners. Refining margin: The refining portion of the gasoline price is the spread between the cost of crude oil purchased by refiners and the wholesale price of gasoline. This spread represents both the costs and profits associated with the refining process. Distribution and marketing margin: the part of the supply chain from the refiner gate (wholesale or “rack” markets) to the gasoline station (forecourt) and the consumer’s gas tank. This margin is the retail price minus the other three price components. Proportionally it’s the smallest and has shrunk over time. Taxes: The federal government levies a flat tax of 18.4 cents on each gallon of gasoline, and each of the 50 states levies on average another 22 cts/g tax. State tax regimes vary considerably (current range is 7.5 to 37.5 cts/g). Source: EIA If the principal component is crude oil, question is which one? The short answer is that the Brent crude oil price remains the principal driver (~70% ) of what the US consumer is charged at the pump. Brent prices correlate very closely with US retail gasoline prices (see Exhibit 13). US refiners and importers manufacture and deliver gasoline across the US. Internally, the American market is fully connected, despite literally hundreds of gasoline quality differences. And critically, the marginal supply of gasoline still comes from coastal refiners and importers, who process crude oil priced in a global market (i.e., Brent linked). This globally priced crude oil from which most of the US gasoline is manufactured is the floor under its retail price. Sidebar: the benefit of much lower feedstock costs in the American hinterland accrues almost entirely to refiners in the mid-continent who have access to cheaper WTI and other inland crude oil grades (including Canada’s export streams). But, because gasoline prices are set at the refining centers (along the East, Gulf and West Coasts of the US) and because the mid-continent is still a net importer of gasoline (and price), it’s the global crude oil feedstock price that sets the floor under gasoline prices in all of t he US. In short, consumers in the mid-continent do not get the benefit of cheap inland feedstock, refiners do. And WTI prices have disconnected from retail gasoline prices (the r-square between them is only about half of that of Brent and US gasoline, see Exhibit 13). Commodities Advantage: Pausing f or Breath 9 29 March 2012 Exhibit 13: US retail gasoline prices have disconnected from WTI Jan-2011 = 100 150 Brent WTI Gasoline Retail Price Gasoline retail price has tracked 140 Brent, until refining margins spiked 130 Brent/Gasoline: R² = 83% 120 110 100 90 WTI/Gasoline: R² = 48% 80 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: EIA Seasonality of gasoline – it is all about summer driving Gasoline is the most used petroleum product in the United States. The United States produces about 19 gallons of gasoline from every 42-gallon barrel of crude oil that is refined. According to the EIA, Americans used about 378 million gallons per day of gasoline in 2010 (latest annual data). Gasoline is mostly used in cars, SUVs and light trucks. Although produced year-round, gasoline is a very seasonal product, as US drivers hit the road more often in the summer, thus demand for gasoline tends to peak in summer months. In addition, it is more difficult to make summer-grade gasoline, which can exacerbate the price effect of the demand peaks. Summer versus winter specifications: Gasoline blending differs in summertime and in wintertime. Driven by concerns about pollution (smog), authorities have put ever stricter limits on the proportion of volatile organic components allowed in the extremely complex blend ingredients that make up modern gasolines. Pollution is most difficult to control in summer when much higher ambient temperatures allow for easier evaporation of harmful ingredients. Winter grade US gasoline is allowed a higher Reid vapor pressure value (rvp). The biggest difference is that in summer grade gasolines refiners are allowed much more limited use of Butanes (of which there are high and rising surpluses across much of North America). The greatest shortage in summer is typically that of octane- boosting alcalytes. What else can “shock” gasoline prices significantly: Refining margins Secondary drivers of retail prices in the US are refining margins (~15%). These can blow out when utilization rates are high and/or refiners trip off line, in summer especially. The risk of some such blow-out of refining margins has risen significantly, as five refiners that supply the East Coast have shut down or will shut down soon (see Exhibit 14). But that is the subject of another story. Commodities Advantage: Pausing f or Breath 10 29 March 2012 Exhibit 14: US East Coast refineries’ operating capacity Source: US Energy Information Administration. What can governments do to mitigate gasoline price rallies? SPR release Regulatory levers to pull: o Include Jones Act Waivers to get gasoline from the Gulf Coast to the Northeast (federal level) o Relaxation of summer specs (state level) Tax relief (limited) Ultimately reduce demand (e.g., as in the 1970 petrol crises, limiting access to roads on certain days for certain license plates, etc.) Commodities Advantage: Pausing f or Breath 11 29 March 2012 Natural Gas Northwest hydro outlook improving, mixed bag out west Despite a slow start to the water year, current accumulations suggest that normal hydro output is expected in the Pacific Northwest this summer, creating a situation where gas may regain losses in demand seen last summer. Earlier this winter, the outlook was largely uncertain, with accumulated precipitation in the region reaching lows of 75% of normal at the start of the year, despite another La Nina winter. However, the most recent accumulated precipitation readings show water levels at 92.8% of normal, while major dams, the Dalles, Grande Coulee, and Lower Granite sit at 109%, 112%, and 101% of normal (but a far cry from 125% normal levels seen last year). What’s more, many of the British Columbia snow basins are above normal levels, with historical maximum levels seen in much of northern BC. Normal hydro All told, near normal water levels exist for the Pacific NW with risks further to the upside in output is expected the coming forecasts due to positive precipitation outlooks for early spring. We forecast the more normal water year in the region to send summer gas consumption to average levels this year compared to last year’s record hydro year (assuming normal summer/winter). Average hydro production during the April-Aug peak hydro months should normalize closer to 4.3 bcf/d in the west (compared to 5.6 bcf/d seen in 2011), increasing gas generation by 1.3 bcf/d yoy, assuming 100% replacement. Exhibit 15: NW water supply, % of average – mostly Exhibit 16: April-Aug average hydro output by normal to above normal Pacific NW water supply total @ beginning of Q2 (100 = normal water lev el) Percentage of normal water supply against av erage hy dro output 125 2011 115 % of normal water supply @ Q2 Beg 2008 105 2006 2009 2007 95 2002 2004 2012 forecast 2003 implies 1.3 bcfd 85 2010 of more gas 2005 demand y-o-y 75 65 2001 55 45 3 3.5 4 4.5 5 5.5 6 Average April-Aug Hydro Output (Bcf/d) Source: Northwest River Forecast Center Source: the BLOOMBERG PROFESSIONAL™ service, EIA, Credit Suisse But storage surplus However, will it be enough to reduce the growing year-over-year storage surplus in the west? As it stands through 16 March, working gas in storage in the West region is 124 may make hydro a bcf above year-ago levels and 107 bcf above the previous five-year average. Inventory non-event this scrapes indicate that Northern California may be worse off than the SoCal market, summer currently 87.5% compared to 72% for the southern tier. Luckily, significantly below normal water conditions throughout California (less than 50% of normal in some areas) may help to start chipping away at regional storage supply surplus. We worry that despite a slightly less intense hydro year in 2012, the impact on basis prices may be slightly mixed. Although we do expect AECO prices to continue to struggle for a number of reasons (ample storage, plentiful hydro, declining US export market), lower California hydro and offline nuclear capacity on Southern California may help the market regain balance. Furthermore, much of this outlook depends on summer weather, the pace of snow melt as well as environmental restrictions with nearby salmon spawning. Needless to say, current market signals are slightly mixed but overall, west gas demand should improve compared to 2011 levels, in our view. Commodities Advantage: Pausing f or Breath 12 29 March 2012 Bulk Commodities Iron Ore – Signposts pointing the way? Prices continue to edge higher Three weeks ago, in Iron Ore – Waiting for signposts, we highlighted the frustrating data distortions emanating from the Chinese New Year and the difficulty this created in assessing the market’s underlying state. At the time, we expected the upcoming data to show gradual improvements in steel production run rates and be broadly supportive of iron ore prices. So far, this scenario has been borne out, with iron ore prices moving cautiously higher (Exhibit 17), against a backdrop of better global steel production figures (Exhibit 18) and an indication from CISA that Chinese mills picked up their output to 1.9 Mt/d in early March (World Steel Production – Back above 1.5 Bt/y). Exhibit 17: Iron ore prices looking firm Exhibit 18: On an improving steel backdrop TSI 62% Iron Ore, US$/t, Spot World Crude Steel Production, Mt, Monthly , SA 130 $190 120 $170 110 $150 100 $130 90 $110 80 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 2005 2007 2009 2011 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, WSA We remain positive in our view of iron ore prices into Q2 2012 and beyond, believing that other indicators are also pointing to gradual price improvement. Chinese steel traders’ inventories have, for example, registered a fifth consecutive week of decline in typical seasonal pattern, albeit at a more modest rate than that seen in recent years (Exhibit 19). In line with our forecast for continued, but slowing, steel demand growth, t he cumulative destock since the February peak equates to a 5% fall, whereas the respective figures for 2010 and 2011 were 13% and 11%. In those two years China’s crude steel output grew by more than 9%, whereas this year we expect an increase of less than 7%. Exhibit 19: Chinese traders’ finished steel inventories – gradual destocking Mt, Weekly 18 Rebar Wire rod HRC Plate Dec 16 Dec Dec 14 12 Dec Dec Dec 10 8 6 4 2 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Source: Credit Suisse, MySteel Commodities Advantage: Pausing f or Breath 13 29 March 2012 Turning to iron ore inventories, iron ore stocks at port remain high at 98.4Mt, but have fallen more notably in relation to steel production given its recent uptick. Interestingly, material captured in the strong recent import figures (Exhibit 22) does not appear to account for much of these port inventories, as it has effectively been flowing straight through to mills, with much of the material at port still being tonnes purchased at prices above $160/t, which people are trying to avoid releasing until spot is trading back around similar levels. This again supports our view that prices will need to move higher over the course of the year in order to bring sufficient iron ore supply to market. At the same time we observe that the spread between 62% and 58% iron ore (Exhibit 23), though increasing, remains low as mills continue to focus on cost minimization at current run rates. This spread should gradually widen as steel production picks up and, we note, with the market tighter for higher-than-lower-grade ore, if mills’ focus turns to output maximization, then we could see this move occur at a faster pace than many have assumed. Exhibit 20: Iron ore stocks at port still high Exhibit 21: But falling in relation to steel production Mt, Weekly Ratio (lhs), US$/t (rhs) 105 2.0 Ratio of Port Stocks to Crude Steel Production 190 Iron Ore spot (rhs) 95 1.9 180 1.8 85 170 1.7 75 160 1.6 65 150 1.5 55 140 1.4 45 1.3 130 35 1.2 120 2006 2007 2008 2009 2010 2011 2012 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Credit Suisse Source: Credit Suisse Exhibit 22: Chinese iron ore imports Exhibit 23: Fe grade spreads still tight Mt, Monthly , SA US$/t (lhs), price dif f erential (rhs) 70 200 Price Spread (rhs) 62% Spot 58% Spot 18% 60 16% 180 50 14% 160 40 12% 30 140 10% 20 120 10 8% 0 100 6% 2005 2006 2007 2008 2009 2010 2011 2012 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Credit Suisse, Customs Data Source: Credit Suisse Commodities Advantage: Pausing f or Breath 14 29 March 2012 Thermal Coal – Chinese buying still not enough API #4 looking exposed? Chinese thermal coal imports for February continued their strong start to the year with a raw figure of 12.4Mt, which equated to 14Mt after seasonal adjustment (SA). In month-on- month terms this was essentially flat – Exhibit 24. Chinese imports have now been tracking above 160Mtpa (SA) since September and continue to be the demand driver for seaborne coal. Despite this, the current spillover from a weak Atlantic market persists in weighing down global coal prices, as we detailed in Thermal Coal – Stuck in a rut. Exhibit 24: Chinese thermal coal imports Mt, Monthly , SA 18 15 12 9 6 3 0 2005 2006 2007 2008 2009 2010 2011 2012 Source: Credit Suisse, Customs Data This is a story we expect to continue, particularly with power plants enjoying better margins on lower coal costs and higher tariffs following last year’s increase in the on-grid power price (Chinese Coal and Electricity Policy Changes). With inflation now below 3.5% there is further scope for power prices to be revised higher, and this should continue to support Chinese demand for seaborne material. The combination of this, and the recovery in Indian imports, has been supportive of API #4, with South Africa exporting significant tonnage into the two growing consumers (Exhibit 25). Now though, South African material is facing greater competition from other Atlantic suppliers looking to move material into the Pacific, Colombia being the prime example. Looking at the near $14/t spread between the two markers (Exhibit 26), though off its high, API #4’s relative strength is currently hard to justify. With freight accounting for less than $10/t of the price difference, API #4 could find itself under pressure if current market dynamics continue. Exhibit 25: South African exports to China and India Exhibit 26: API #4 – Colombia premium Mt, Monthly , SA API #4 – Colombia FOB, Spot, US$/t 4 40 API#4 - Colombia 3 30 2 20 1 10 0 0 2008 2009 2010 2011 2012 Jan-10 Jan-11 Jan-12 Source: Credit Suisse, Customs Data Source: Credit Suisse, McCloskey Commodities Advantage: Pausing f or Breath 15 29 March 2012 Industrial Metals – In Limbo At the tail end of Q1, macro concerns in the US and China have again affected the base metals complex. Aluminium has slipped to levels that will keep pressure on smelter margins, while copper has continued trading sideways in a diminishing range below US$8,500/t in March. Here, a steady creeping up of bonded warehouse stocks above an estimated 600,000 t has once again raised questions about the metal’s vulnerability to a more severe retreat. The negative SHFE/LME arbitrage has prompted press speculation about imminent flows of Chinese stocks into LME warehouses. With lead and zinc also in limbo, nickel stands out as having lost the most ground, ceding most of the gains made at the start of the year. Further falls towards US$17,000/t should illicit a response in curtailments of higher cost nickel pig iron production in China and place a floor under prices, but there is scope for a little more lost ground yet. Paradoxically, signs that China’s housing markets are stabilizing have largely been ignored by investors, outweighed by the headline PMI figures and worries about broader manufacturing activity as we head into Q2. Although seasonal effects have to be taken into account, news that property sales have rebounded in the country’s tier 1 cities have not translated into meaningful price support. Trading volumes for new homes in Beijing rose month on month in February, and sales of low- to mid-cost housing in Shanghai surged compared to last month. Further, Beijing’s city government is hopeful that it will be able to reach 100,000 social housing units completed this year, signific antly above the 70, 000 unit target set by the central government. Beijing City has also revised its housing inventory data, with estimates of available housing for sale revised down from 124,000 units to 91,000 units. Moreover, only 24,000 of these units are completed units for sale, while 67,000 are units still under construction. Better news for demand down the road, but not for the immediate market mood. Exhibit 27: A negative SHFE/LME copper arb is Exhibit 28: LME copper prices – moving sideways weighing on copper market sentiment Arb, cash, daily (US$) LME 3 Months, US$/tonne LME Cheap 400 11,000 200 10,000 Sideways 0 since 2012 9,000 -200 8,000 -400 7,000 -600 LME Expensive 6,000 -800 -1,000 5,000 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service Commodities Advantage: Pausing f or Breath 16 29 March 2012 Precious Metals Gold – from short-term bearish to neutral We have been bearish gold since early March (see Gold – what now?, 6 March) when the metal was trading around $1,700. Since then there have been a couple of occasions when it has looked like the price would break down through key support levels (it traded down to $1,628 on the 22nd for example). But on balance we think that the price has held up very well in the face of a considerable amount of “bad” news: A jump in US Treasury yields Falling credit spreads The absence of new Federal Reserve easing Falling emerging market inflation Increases in Indian gold import duties A reduction in Comex net non-commercial positions of ~4 million oz And in the last few days liquidation of around 650k oz of ETF positions Positioning in paper markets now appears to be very light. Albeit cliched, it appears that an old trading adage may be appropriat e at this juncture: a market that does not respond to bearish news must be a bullish market. Although we retain our relative value preference for other metals (see Gold: taking the short side of RV trades) we are now neutral on the short-term outlook for gold and are looking for signals to turn outright bullish. April could be a key month Fed President Bernanke this week highlighted that generating further substantial improvement in t he US employment situation may require further accommodative policy. The trend in the weekly initial jobless claims remains encouraging, but our economists and strategists still think additional easing from the Fed is likely, noting after the last FOMC meeting on 13 March that: “We still believe that the next move from the FOMC will be in the direction of more accommodative policy, and we suspect it will tak e the form of unsterilized Treasury and MBS purchases [i.e., outright QE3]. But it is our sense that policy is on hold until we get the next slowdown scare in the economic data (FOMC Meeting Review: A Break in the Action). That, in our opinion, would undoubtedly be positive for gold. The two-day FOMC meetings in April (24/25h) and June (19/20) are likely to be critical - if there is going to be furt her easing, it will likely be announced at either of those t wo meetings, prior to the scheduled conclusion of Operation Twist at the end of June. The one caveat that prevents us turning outright bullish is that for the moment physical flows are still pretty thin. We will want to see those flows pick up as Q2 gets going and as the Indian jewelry market returns to some kind of normalcy. Commodities Advantage: Pausing f or Breath 17 29 March 2012 Agriculture: Waiting on Data Chinese prices to support corn and soybeans Grain prices fell over the week following reports of improving conditions for planting in the United States. On the other hand, soybeans remained supported. As recently highlighted in the North American Fertilizer team’s note (see Previewing datapoints in the week ahead...), the market is focusing its attention on key upcoming reports (Prospective Plantings report and Grain Stocks report), which are scheduled to publish at the end of the quarter. We believe that given current planting economics (ratio between corn and soybean prices), corn acreage will increase even further than already revealed during the February Ag Outlook Forum. Further, with the continuation of favorable weather conditions and reports that La Nina has faded, an earlier and wider planting season could mean better corn planting for the upcoming crop. Overall, this would be bearish corn prices. However, despite this, Chinese prices in corn and soybean indicate that further Chinese purchases from the seaborne market are over in coming months. Following the recent fall in US corn prices, Chinese corn prices have risen above imported corn prices even after accounting for taxes. On previous occasions, the cross between those prices were followed by large Chinese purchases in the grain. At the same time, Chinese soybean crushing margins continue to improve as well, now rising decisively above break even. That, together with lowered production estimates from South America, should continue to support prices at these levels. Exhibit 29: Domestic Chinese corn is now above Exhibit 30: Soybean margins continue to return to imported corn positive, adding further support to US soybean CNY per metric ton CNY per metric ton (LHS) and US cents per bushel (RHS) Corn spot price (Dalian) 700 Chinese soybean crushing margins (LHS) 1600 3,200 Chinese corn import price (incl taxes) CBoT Soybean front month (RHS) 3,000 1500 500 2,800 1400 2,600 300 1300 2,400 100 1200 2,200 2,000 1100 -100 1,800 1000 1,600 -300 900 1,400 1,200 -500 800 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Source: the BLOOMBERG PROFESSIONAL™ service, Shanghai JCI, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Shanghai JCI, Credit Suisse Commodities Advantage: Pausing f or Breath 18 29 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, 20 March 2012. Index-linked commodity assets under management saw $460 million of outflows, and total index-linked assets under management fell by $4.2 billion to about $237.3 billion (Exhibit 32), pausing the streak of rising commodity investments. Total contracts held in indexes also fell by about 10.7k contracts, led by decreases in contracts held in crude oil and oil products. This was partially offset by an increase in contracts held in corn. Physically backed exchange-traded products also saw net outflows of about $128 million and total assets under management fell to $130.7 billion (Exhibit 33). Total assets under management (including both indexes and ETFs) decreased to about $368.1 billion, from $374.8 billion a week earlier. Exhibit 31: Commodity index assets under management in contracts and dollars Thousands of contracts and US$ billions 3,800 AUM (Right Axis) Contracts (Left Axis) 280 260 3,600 240 3,400 '000 Contracts 220 bn, USD 3,200 200 180 3,000 160 2,800 140 2,600 120 06-Jul-10 19-Oct-10 01-Feb-11 17-May-11 30-Aug-11 13-Dec-11 27-Mar-12 Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse Exhibit 32: Commodity index assets under Exhibit 33: Physically backed commodity ETF management (in US dollars) assets under management (in US dollars) US$ billions US$ billions 10 275 150 Change in Contracts (Left Axis) 3,800 Inflows (Left Axis) Index AUM (Right Axis) Contracts (Right Axis) 3,600 250 100 68.46 3,400 5 225 50 3,200 1.35 3,000 0 200 0 2,800 175 (50) 2,600 (5) 2,400 150 (100) 2,200 (10) 125 (150) 2,000 25-Jan-11 19-Apr-11 12-Jul-11 4-Oct-11 27-Dec-11 20-Mar-12 Apr-11 Oct-11 Mar-12 Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Commodities Advantage: Pausing f or Breath 19 Commodities Advantage: Pausing for Breath Exhibit 34: 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 29 March 2012 20 29 March 2012 Technical Analysis Gold bases out and begins next upward phase for $1800 Cilline Bain +44 20 7888 7174 Gold (Spot) – Daily email@example.com Source: CQG, Credit Suisse Gold (Spot) has gained traction at 1628, ahead of our recent retracement target support zone of 1625/0. We believe the market is basing out here at current levels, with the recent rally higher to 1697 so far marking the beginning of the next upward phase. We highlight the next hurdle lies at the topping trendline of 1702, with the more meaningful chart resistance zone located marginally above here at 1717/26. We anticipate an eventual upside break through these resistance hurdles and for Gold to retest the key neckline resistance zone of 1791/1803. Looking out longer term we highlight that through this neckline resistance zone would complete a long-term inverted head and shoulders, allowing for a move back to retest the 1921 high, and then our longer-term target placed at 2000 Only a breakdown through the 1628/5/0 support zone allows for risk lower to 1576, and possibly then the 1522 low. Trade Update (Spot): Currently long from 1675, targeting 1800, stop at 1615. Commodities Adv antage: Pausing f or Breath 21 29 March 2012 Trade Recommendations Exhibit 35: Trade recommendations scorecard – (returns at end of day, 28 March 2012) Based on end of day prices or latest av ailable price, recommendations in dark blue hav e been closed out, recommendations in green are initiated today Returns column: green means positiv e returns, and red means negativ e returns, black when zero. Date Initiated Opening Current or Commodity Position Publication (Closed) Price Close Price Profit/(loss) Return Gold and Sell Q2 Gold call, Buy Sept Gold: taking the short side of RV trades 14 March 2012 -$0.55 -$13.21 ($12.66) (2301.76%) Palladium 12 Palladium Call Iron Ore Buy Q4 2012 Iron ore sw ap Chinese Tide Begins to Turn 01 Mar 2012 $131.50 $133.50 $2.00 1.52% Lead Buy June 12 LME lead Lead: This is the Dip – Buy it 29 Feb 2012 $2,169.50 $1,990.00 ($179.50) (8.27%) Copper Buy Dec-12 copper From Fear Flows Opportunity 16 Jan 2012 $8,110.00 $8,359.00 $249.00 3.07% Aluminium Buy Q3 aluminium From Fear Flows Opportunity 16 Jan 2012 $2,203.83 $2,188.67 ($15.16) (0.69%) Lead and Zinc Buy Dec-12 lead, sell Dec- From Fear Flows Opportunity 16 Jan 2012 $71.50 -$10.00 ($81.50) (113.99%) 12 zinc Iron Ore Buy Cal-13 iron ore swaps From Fear Flows Opportunity 16 Jan 2012 $125.25 $127.50 $2.25 1.80% Thermal Coal Buy CAL13 swaps on dips A Dangerous New Phase 4 Oct 2011 $119.20 $114.24 -$5.75 (4.82%) below $120 for Newcastle coal (15 March 2012) RBOB Gasoline Buy the June 12 330/340 Selective Easing Offset by Greek 15 Feb 2012 $0.7804 $1.106 $0.326 41.72% call spread and sell the June Default Risk (08 March 2012) 12 340/350 call spread RBOB Gasoline Buy the June 12 340 call Selective Easing Offset by Greek 15 Feb 2012 $8.2662 $11.4219 $3.16 38.18% Default Risk (08 March 2012) ICE Gasoil Buy Jun-12, sell Apr-12 gasoil Mixed Blessings 09 Jan 2012 -$5.75 -$2.00 $3.75 65.22% (08 March 2012) Thermal coal Buy API4 Coal, Sell API2 The Relative States of Different Coal 15 Feb 2012 -$5.37 -$4.92 $0.45 8.4% Coal Markers (29 Feb 2012) Heating Oil Buy Jun-12, sell Apr-12 Mixed Blessings 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 10 Nov 2011 $3.6481 $4.2233 $0.5752 15.8% worries (01 Feb 2012) Nat Gas (US) Buy puts on Mar-12 Henry Hub From Fear Flows Opportunity 17 Jan 2012 $0.1543 $0.0769 ($0.0774) (50.2%) (25 Jan 2012) Gold Buy 1650/1850 call spread What’s up (down) with gold? 15 Dec 2011 $38.8786 $49.2867 $10.4081 26.8% (12 Jan 2011) Gold Buy March 12 call spread A Dangerous New Phase 3 Oct 2011 $58.1063 $73.8803 $15.7740 27.1% w ith strikes at $1,700/$1,900 (07 Dec 2011) Gold Buy Dec 11 futures on dips Autumn Resolutions 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 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- 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 17 Oct 2011 $133.50 $136.00 $2.50 1.9% to $135 (09 Nov 2011) Source: Credit Suisse Locus Commodities Adv antage: Pausing f or Breath 22 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 firstname.lastname@example.org email@example.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 firstname.lastname@example.org email@example.com firstname.lastname@example.org TECHNICAL ANALYSIS Cilline Bain, Associate +44 20 7888 7174 email@example.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 firstname.lastname@example.org email@example.com firstname.lastname@example.org SINGAPORE One Raffles Link, Singapore 039393 Andrew Shaw, Director Ivan Szpakowski, Associate Head of Base Metals & Bulks Research +65 6212 3534 +65 6212 4244 email@example.com firstname.lastname@example.org Disclosure Appendix Analyst Certification Ric Deverell, Joachim Azria, Cilline Bain, Marcus Garvey, Tom Kendall, Stefan Revielle, Andrew Shaw, Jan Stuart, Ivan Szpakowski and Martin Yu each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Important Disclosures Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions. Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and- analytics.csfb.com/docpopup. asp?ctbdocid=330703_1_en. Credit Suisse clients with access to the Locus website may refer to http://www.credit- suisse.com/locus. For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis. Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate. Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue. Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is factual or a reasonable, non-material deduction based on an analysis of publicly available information. Corporate Bond Risk Category Definitions In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively. Credit Suisse Credit Rating Definitions Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meet its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the rating agencies. Structured Securities, Derivatives, and Options Disclaimer Structured securities, derivatives, and options (including OTC derivatives and options) are complex instruments that are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. OTC derivative transactions are not highly liquid investments; before entering into any such transaction you should ensure that you fully understand its potential risks and rewards and independently determine that it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such tax, accounting, legal or other advisors as you deem necessary to assist you in making these determinations. In discussions of OTC options and other strategies, the results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether OTC options or option-related products, as well as the products or strategies discussed herein, are suitable to their needs. CS does not offer tax or accounting advice or act as a financial advisor or fiduciary (unless it has agreed specifically in writing to do so). Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions. Use the following link to read the Options Clearing Corporation's disclosure document: http://www.theocc.com/publications/risks/riskstoc.pdf Transaction costs may be significant in option strategies calling for multiple purchases and sales of options, such as spreads and straddles. Commissions and transaction costs may be a factor in actual returns realized by the investor and should be taken into consideration. References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse AG operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/. This report is not directed to, or intended for distribution to or use by, any person or entity who is a ci tizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suis se AG or its affiliates (“CS” ) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is unde r copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks , service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are sui table for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about su ch investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or a ppropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that th is exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, serve d as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments sol ely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securi ties and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securitie s such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factor s (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience su dden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of ini tial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from inve stments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refer s to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS’s own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS’s website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated i n the United Kingdom by The Financial Services Authority (“FSA” ). This report is being distributed in Germany by Credit Suisse Secu rities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-Generalof Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securi ties produced by Credit Suisse AG, Taipei Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to w hom they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordanc e with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non -U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Recipients who are not market professional or institutional investor clients of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as “advice” within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm’s length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such 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 p rovided 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 inves tment 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.