Credit Suisse - Commodities Advantage China

Document Sample
Credit Suisse  -  Commodities Advantage China Powered By Docstoc
					                                                                                                                      17 May 2012
                                                                                                               Economics Research

                                                  Commodities Advantage: China
                                                  – How Worried Should We Be?
                                                  Commodities Research

                       Research Analysts          Navigating the Three Speed Global Economy
                                Ric Deverell
                         +44 20 7883 2523         The flow of economic data over the past week was on balance more positive
                                                  than many feared, with US IP for April and European and Japanese Q1 GDP all
                            Joachim Azria         surprising to the upside. Indeed, if one were to just look at the economic data,
                          +1 212 325 4556         and not focus on the large and ever present risks emanating from Greece, it is
                                                  clear that growth in the G7 has continued to rebound from last year‟s swoon.
                                  Cilline Bain    Unfortunately, life post Lehman is never that simple, with the Chinese data
                          +44 20 7888 7174        release last week raising fears of a hard landing in the Middle Kingdom, while
                                                  events in Europe remind us that the economic data is backward looking – we
                           Marcus Garvey          note that growth in Europe was a relatively strong 0.7% in Q1 last year, but
                        +44 207 883 4787          gave way to a 0.3% Q4 contraction as the “panic” took hold.
                                                  Given that events in Europe remain by their nature hard to predict, in this
                              Tom Kendall
                                                  week‟s note we do a deep dive into the current state of the Chinese
                        +44 20 7883 2432
           economy. While the risks have clearly risen, we find that after a period where
                                                  final demand was weaker than industrial production in H2 last year (resulting in
                              Stefan Revielle
                                                  an inventory build), over recent months this situation has reversed, with demand
                            +1 212 538 6802
       stronger than production (inventories have been falling). This suggests that IP
                                                  growth should bottom soon, and that unless demand takes another down leg
                           Andrew Shaw
                                                  (Europe remains the big risk), Chinese growth should improve in H2.
                          +65 6212 4244
                                                  All in all, this suggests to us that while the risks in the next month or two remain
                                  Jan Stuart      to the downside, the most likely outcome (absent a European
                           +1 212 325 1013        catastrophe…) is that the current three-speed economy transforms into a
                                                  synchronized recovery in H2. While it‟s hard to see it now, we believe this
                          Ivan Szpakowski         would most likely result in a rebound in most commodity prices with the likely
                           + 65 6212 3534         falls in the next few weeks providing an attractive entry point.

                                  Martin Yu
                        + 44 20 7883 2150
                                                  Focus – The Land Down Under
             Last week we met with a wide range of investors in Australia. Notably, despite
                                                  the ongoing “mining boom” most of the focus in that producing nation is
                                                  currently on supply side issues, whether they be taxation (resource
                                                  nationalism), cost escalation (both currency, labor and capital) or the continued
                                                  struggle to get qualified labor. The key message was that the risks to the wall of
                                                  supply that many have been expecting have increased further, with Australian
                                                  production of base metals in particular likely to have peaked unless prices move
                                                  materially higher over coming years.
                                                   It also suggests that while commodity prices are likely to remain relatively
                                                    high, equity margins will likely remain under pressure.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS                                                            BEYOND INFORMATION®
                                                                                        Client-Driven Solutions, Insights, and Access
                                                                                                                                      17 May 2012

                                      In this Issue
                                      Macro View – A Three Way Tug of War….                                                                     3
                                          China: Lies, Damn Lies, and Statistics – Recovery Still In Sight ................. 3
                                          Thank God For America – The US Stands Alone ...................................... 10
                                          Europe: Backward Looking Data Improving, But The Great Tail Risk
                                          Remains Front and Centre ........................................................................ 11
                                          Japan on the Improve ................................................................................ 12

                                      Focus – The Land Down Under                                                                             14
                                          Cost Escalation is the Word…. .................................................................. 14
                                          Storm clouds gathering…or just a temporary hiccup? ............................... 14
                                          Peak Aus Metal Production? ..................................................................... 17

                                      Gold – Multi Year Opportunity? Or the Beginning of the End?                                             20
                                          Trade Recommendation ............................................................................ 20

                                      Bulk Commodities                                                                                        21
                                          Thermal Coal – Drowning in a sea of supply ............................................. 21
                                          Iron Ore – Macro Fears Again Infect Physical Markets ............................ 24

                                      Petroleum                                                                                               25

                                      Natural Gas                                                                                             26
                                          US supply moving in the right direction ..................................................... 26

                                      Agriculture – Bearish bias continues                                                                    27

                                      Technical Analysis                                                                                      29
                                          WTI Crude Oil‟s correction set to persist lower to $83.34 .......................... 29

                                      Trade Recommendations                                                                                   30

Commodities Advantage: China – How Worried Should We Be?                                                                                         2
                                                                                                                                            17 May 2012

                                      Macro View – A Three-Way Tug of War….
                                      The flow of economic data over the past week was on balance more positive than many
                                      feared, with US IP for April and European and Japanese Q1 GDP both surprising to the
                                      upside. Indeed, if one were to just look at the economic data, and not focus on the large
                                      and ever present risks emanating from Greece, it is clear that growth in the North Atlantic
                                      and Japan is continuing to rebound from last year‟s swoon. Unfortunately, life post
                                      Lehman is never that simple, with the Chinese data release last week raising fears of a
                                      Chinese hard landing, while events in Europe remind us that the economic data is
                                      backward looking – we note that growth in Europe was a relatively strong 0.7% in Q1 last
                                      year, but that that momentum quickly gave way to a 0.3% Q4 contraction as the “panic”
                                      took hold.
                                      While the risks have clearly risen, we continue to think that the most likely scenario is a
                                      more synchronized rebound in H2 this year (see a detailed analysis below). Of course the
                                      fly in the ointment remains developments in Europe, with the risk that another bout of
                                      panic results in another dip in activity – with the risk of full blown crisis in Europe („serious
                                      people‟ are now actively discussing the possibility that Greece may leave the eurozone)
                                      remaining uncomfortably high.
                                      In this world, while we continue to expect a rebound in many industrial commodity prices in
                                      H2, the near-term risk remain clearly to the downside. We would not recommend
                                      establishing a long side bias until the European panic begins to subside, which looks
                                      unlikely until at least late June, assuming new Greek elections help clarify the situation.

                                      China: Recovery Still In Sight
                                      The weakness in the Chinese IP growth and monetary aggregates in the month of April
                                      was a genuine surprise last week, with the dip in IP suggesting that the strong March data
                                      may have been a head fake, and that underlying momentum remains soft.
                                       It was notable that the weakness in April IP was in line with that observed in the NBS
                                        PMI (as seasonally adjusted by Credit Suisse) the week before (see Chinese Growth
                                        Disappoints), as well as the moderation in growth of monetary aggregates.

                                      Exhibit 1: Chinese IP Remains Soft
                                      Mom trend sa change in Chinese IP, Average of HSBC and NBS PMI New Orders (NBS sa by Credit Suisse)

                                             65.0                  Average PMI New Orders      Chinese IP ann mom trend sa, rhs        30%





                                             40.0                                                                                      -5%
                                                Jan-06       Jan-07      Jan-08       Jan-09       Jan-10       Jan-11        Jan-12

                                      Source: the BLOOMBERG PROFESSIONAL™ service

                                      While the initial print was a shock to the market, over the past week we have been digging
                                      through the a range of Chinese data in an effort to get a better feel for where we stand,
                                      and for what happens next.

Commodities Advantage: China – How Worried Should We Be?                                                                                              3
                                                                                                                                                        17 May 2012

                                            Somewhat surprisingly (at least to us), our broad conclusion remains that growth
                                             troughed in Q1 and is likely to rebound modestly in H2. The primary modification to
                                             our view is that the recovery out of the Q1 trough may be slower than expected,
                                             with Q2 only modestly stronger than the low point in Q1.
                                           As we have often stated, basic material demand in China is driven primarily by a
                                           combination of fixed asset investment and industrial production, with industrial production
                                           ultimately driven by final demand, which in broad terms can be captured by data for retail
                                           sales, fixed asset investment and exports.
                                            In large part, we feel that part of the weak consensus view has been driven by observing
                                             the economy in nominal terms (FAI, retail sales and exports are all released as nominal
                                             yoy changes by the NBS). However, it is very clear that the rate of inflation has
                                             moderated substantially over the past year, with this disinflation providing a substantial
                                             drag on nominal variables.
                                            When the nominal series are adjusted for inflation, the supposed weakness appears far
                                             less scary.

                                           Fixed Asset Investment
                                           As we have noted on numerous occasions, when viewed in real level terms, aggregate
                                           fixed asset investment has been far steadier than suggested by much of the market
                                            Most of the variation in recent years has been nominal effects and monthly volatility. In
                                             level terms, FAI jumped on the back of the stimulus in late 2008 and 2009, and since
                                             has seen relatively stable growth of 17%, down from the pre-crisis 25% growth rate.
                                            Taken literally, the pace of growth in FAI dipped a little in Q4 last year (but really it was
                                             just a weak December, which to us is more about statistical volatility than signal), but
                                             growth has rebounded so far this year, with the level back on trend.

Exhibit 2: Fixed asset investment remains robust                           Exhibit 3: If anything, growth has rebounded in 2012
Level of real FAI, deflated by PPI, logs (RMB Billions)                    Real trend mom, seasonally adjusted

                                                                                              Chinese fixed asset investment, real ann trend mom sa
                                                                            80.0%                                                                              30.0%
                                                                                              Chinese IP ann mom trend sa, rhs

                                                                            40.0%                                                                              15.0%

                                                                            30.0%                                                                              10.0%


                                                                            -10.0%                                                                             -5.0%
                                                                                 Jan-06    Jan-07       Jan-08   Jan-09      Jan-10     Jan-11        Jan-12
Source: NBS, Credit Suisse                                                 Source: NBS, Credit Suisse

                                            We also note that despite falling prices, and weakness in sales and new starts, total
                                             construction in the housing sector (as measured by FAI housing – again we deflate the
                                             series to iron out pricing effects) has remained resilient, with developers continuing to
                                             work through the backlog of orders, as we had anticipated in Chinese Housing and
                                             Commodity Demand: Healthy Growth Despite Private Dip, with the link between sales
                                             and actual construction much weaker than many had feared. Some of our China
                                             analysts have also noted that developers are not moving to rapidly deplete inventories,
                                             but are rather moving new starts in line with sales.

Commodities Advantage: China – How Worried Should We Be?                                                                                                              4
                                                                                                                                           17 May 2012

                                            It also worth noting that the government‟s housing policy is targeted at controlling prices
                                             in response to social pressures in major cities, but that commodity demand is related to
                                             actual construction activity and not prices or even sales volumes.

Exhibit 4: Real estate construction (FAI) remains                          Exhibit 5: Again, if anything, growth has picked up
strong                                                                     this year
Level of real FAI, deflated by PPI, logs                                   Real trend mom change in FAI Real Estate Construction, seasonally adjusted

Source: NBS, Credit Suisse                                                 Source: NBS, Credit Suisse

                                            Finally, after slow growth in 2011, there is early evidence that infrastructure spending
                                             has begun to rebound in recent months, as the government moves to ensure that growth
                                             does not slump further.
                                            Note that despite all the talk of the rebalancing of growth, infrastructure spending is an
                                             area where the government can quickly and directly stimulate activity in the face of
                                             weakness in other sectors, and as such tends to reflect the Government‟s policy stance
                                             of the day.

Exhibit 6: Infrastructure spending – Rebound?                              Exhibit 7: Has the new stimulus started?
Level of real FAI, deflated by PPI, logs                                   Real trend mom, seasonally adjusted

Source: NBS, Credit Suisse                                                 Source: NBS, Credit Suisse

                                           Retail Sales
                                            Despite the clear objective to rebalance the economy, real retail sales growth has
                                             remained remarkably stable, with the average pace since early 2010 around the same
                                             10% as seen pre crisis. In broad terms this suggests that much of the observed
                                             weakness has been driven by falling prices and base effects.

Commodities Advantage: China – How Worried Should We Be?                                                                                                5
                                                                                                                                                                    17 May 2012

                                                Notably, while sales growth dipped late last year, it has since rebounded, with activity
                                                 back on the trend apparent over recent years.

Exhibit 8: Chinese underlying real retail sales                                       Exhibit 9: With the dip late last year being unwound
growth has returned to pre stimulus 10ish%
Level and real trend mom, seasonally adjusted                                         Real trend mom, seasonally adjusted

 7.3                                                                                                           China retail sales, real ann trend mom SA
                                                            annualized                30.0%                                                                              30.0%
                                                                                                               Chinese IP ann mom trend sa, rhs
                                                            growth = 9.8%
                                                                                      25.0%                                                                              25.0%
                                  annualized                          growth
 6.9                              growth =
                                  17.2%                                               20.0%                                                                              20.0%
              annualized                         stimulus
              growth =                                                                15.0%                                                                              15.0%
 6.5          10.0%

                                                                                      10.0%                                                                              10.0%

 6.1                                                                                   5.0%                                                                              5.0%
    2005     2006       2007       2008        2009     2010         2011     2012        Jan-06      Jan-07    Jan-08      Jan-09      Jan-10      Jan-11     Jan-12

Source: Markit Economics, NBS, Credit Suisse                                          Source: Credit Suisse

                                               While neither FAI nor retail sales growth has seen any significant shifts in real terms, it has
                                               become increasingly clear that weak growth in the North Atlantic economies has
                                               resulted in a marked slowdown in the underlying pace of export growth.
                                                After growing at around 20% per year pre-crisis, export growth since mid-2008 has
                                                 slowed to an average 6%, with growth of only a little above 3% annualized since late
                                                However, as with both FAI and retail sales, the dip in activity seen at the turn of the year
                                                 has now been effectively unwound, with growth momentum bouncing back so far this
                                                 year in line with the modest recovery in the US, and to a lesser extent Europe.

Exhibit 10: Structural export growth has slowed,                                      Exhibit 11: …Or to a very weak 3ish%?
but is it to 6ish%...
Level and real trend mom, seasonally adjusted                                         Real trend mom, seasonally adjusted

 14.2                                                                                 14.2

 14.0                                                                                 14.0

                                                                                                                                                             slow annualized
 13.8                                                                annualized       13.8                                                                   growth = 3.3%
                                                                     growth = 6.3%

 13.6                                                                                 13.6

                                                                                                                                      Global recession &
                                                  Global recession
 13.4                                                                                 13.4                                            rebound with 43%
                    annualized                                                                            annualized
                                                                                                                                      annualized growth
                    growth = 20.1%                                                                        growth = 20.1%

 13.2                                                                                 13.2

 13.0                                                                                 13.0
     2005                2007                  2009                  2011                 2005                 2007                  2009                    2011
Source: Markit Economics, NBS, Credit Suisse                                          Source: Credit Suisse

Commodities Advantage: China – How Worried Should We Be?                                                                                                                        6
                                                                                                                                                             17 May 2012

                                         Exhibit 12: Short-term momentum has recovered, but structural growth likely to
                                         remain subdued … Europe remains a big concern
                                         Index and trend mom change, seasonally adjusted

                                             63                                 US & Euro Manf PMI New Orders average                                             6.0%
                                                                                Chinese real exports, trend mom sa, rhs
                                             61                                                                                                                   5.0%


                                             47                                                                                                                   -1.0%

                                             45                                                                                                                   -2.0%
                                               Jul-05       Jul-06          Jul-07           Jul-08          Jul-09            Jul-10       Jul-11
                                         Source: the BLOOMBERG PROFESSIONAL™ service

                                         Proxy For Chinese Demand
                                         Combining the three measures (FAI, retail sales and exports) as a simple proxy for
                                         Chinese demand, it is notable that despite all the talk of weakness, Chinese demand in
                                         real terms remains consistent with the longer run trend.
                                          Nevertheless, it is also clear that the impact of the post-crisis stimulus has faded, with
                                           growth since early 2010 modestly weaker (14.6% annualized) than the roughly 18%
                                           growth seen pre crisis. In large part, this is due to weaker structural export growth
                                           (external demand) rather than any change in the domestic economy.

Exhibit 13: Our demand proxy is back on long-run                                     Exhibit 14: But the pace of growth looks to have
trend                                                                                slowed a little, with exports the key drag
Average of real FAI, Retail Sales and Exports Log Level                              Average of real FAI, Retail Sales and Exports Log Level

  5.9                                                                                  5.9

  5.7                                                                                  5.7

  5.5                                                                                  5.5
                                                                                                                                                          growth = 14.6%
  5.3                                                                                  5.3

  5.1                                                                                  5.1                                               growth = 28.2%

  4.9                                                                                  4.9
                                                                                                             growth = 18.5%
  4.7                                                                                  4.7

  4.5                                                                                  4.5
     2006      2007       2008       2009         2010    2011       2012                 2006        2007       2008          2009      2010        2011        2012

Source: the BLOOMBERG PROFESSIONAL™ service                                          Source: Credit Suisse

                                         From a cyclical perspective, after a period where demand had slowed more than IP last
                                         year (a period of inventory build), IP growth has continued to slow so far this year, while
                                         final demand has substantially recovered from the weakness in late 2011.
                                          This suggests to us that after a period of building inventory in late 2011, manufacturers
                                           have been running down inventories so far this year.

Commodities Advantage: China – How Worried Should We Be?                                                                                                                   7
                                                                                                                                                  17 May 2012

                                       If final demand remains solid (Europe is an obvious concern), this suggests that
                                        production is most likely to begin to recover over coming months, although continued
                                        weak exports suggests that a return to the 15% average growth seen pre crisis is

                                      Exhibit 15: Rebound in final demand suggests that IP also set to recover
                                      Chinese IP growth mom sa trend versus average of real FAI, real retail sales and real export growth mom sa trend

                                                                       Average of Retail Sales, FAI, Exports, real ann trend mom
                                       35.0%                                                                                                        30.0%
                                                                       Chinese IP ann mom trend sa, rhs

                                       30.0%                                                                                                        25.0%

                                       25.0%                                                                                                        20.0%

                                       20.0%                                                                                                        15.0%

                                       15.0%                                                                                                        10.0%

                                       10.0%                                                                                                        5.0%

                                        5.0%                                                                                                        0.0%

                                        0.0%                                                                                                        -5.0%
                                           Jan-06             Jan-07       Jan-08         Jan-09           Jan-10          Jan-11        Jan-12

                                      Source: NBS, Credit Suisse

                                      Monetary Data & Policy
                                      Outside of industrial production, the lack of indications of monetary stimulus represented
                                      our biggest disappointment in China‟s April macroeconomic data release.
                                      The PBoC‟s Q1 monetary policy statement released at the end of March announced a shift
                                      from “selective adjustment” to “appropriate increase” of money and credit supply, and
                                      March monetary data seemed to confirm a shift to more full-fledged easing. However, this
                                      momentum did not carry over into April, with the PBoC reacting by cutting the RRR.
                                       New RMB bank loans failed to maintain the strong pace set in March, dropping back into
                                        line with volumes seen in 2010 & 2011.
                                       The PBoC‟s social financing data (the central bank‟s most comprehensive measure of
                                        credit throughout the entire economy) was even more disappointing. Most notably,
                                        growth in bank acceptances/letters of credit was soft (RMB 28 billion) following the
                                        strong increase in March (RMB 277 billion). This sector had been under pressure since
                                        last August when banks were instructed to begin holding reserves against money
                                        pledged for such financing, but had appeared to be recovering following the full
                                        implementation of this regulation in February. The normalization of such credit would be
                                        a huge boon, particularly to beleaguered industrial and trading firms.
                                       While the flow of credit remains a risk, we continue to expect lending to pick up in
                                        coming months, as we would need to see lending 6%-20% higher than 2011 levels for
                                        the remainder of the year to hit the government-implicit target of RMB 8-8.5 billion for the
                                        year as a whole.

Commodities Advantage: China – How Worried Should We Be?                                                                                                    8
                                                                                                                                                         17 May 2012

Exhibit 16: Bank lending did not maintain March
momentum, but should be stronger over coming                                           Exhibit 17: Recovery of letters of credit (green in
months                                                                                 chart) would provide an important stimulus
RMB billions                                                                           RMB billions
                                                                                       1,750                                                            Other

                                                                                       1,500                                                            Corporate
                                                                   2012                                                                                 Bonds
                                                                   2011                                                                                 Bank
                                                                                       1,250                                                            Acceptances
                                                                                                                                                        Trust Loans
                                                                   2009                1,000
                                                                   2003-2007 average                                                                    Entrusted
                                                                                         750                                                            Loans
                                                                                         500                                                            Currency Loans
                                                                                                                                                        RMB Loans
  500                                                                                    250


    0                                                                                          Jan-   Feb-   Mar-    Apr-   Jan-   Feb-   Mar-   Apr-
         Jan   Feb   Mar   Apr      May   Jun    Jul   Aug   Sep    Oct   Nov    Dec           2011   2011   2011    2011   2012   2012   2012   2012

Source: CEIC, PBoC, Credit Suisse                                                      Source: PBoC, Credit Suisse

                                                Policy Outlook
                                                We expect a renewed focus from policymakers to ensure that growth does not slow further
                                                – GDP growth in Q1 was 7.4% saar, at the lower end of the authorities‟ likely tolerance.
                                                While we do not expect a 2009-style aggressive policy response, we expect modest
                                                additional stimulatory measures. However, as is often the case in China, it is unlikely that
                                                there will be any major announcement; rather, identifying China‟s policy stance will remain
                                                a case of watch what I do rather than what I say.
                                                We expect a combination of:
                                                 Renewed efforts from the party to ensure that banks (which are fundamentally agents of
                                                  the government‟s fiscal policy) achieve RMB 8-8.5 trillion in new loans for the year. Note
                                                  that while there may well be additional RRR cuts, they are only effective at directly
                                                  stimulating credit if banks are constrained with respect to funds available for lending –
                                                  something for which there is not currently a clear case. Interest rate cuts would also be
                                                  difficult given the weakness in deposits, leaving quantitative rationing as the primary
                                                  monetary policy tool.
                                                 Further moderate fiscal expansion. The apparent rebound in infrastructure spending is
                                                  encouraging, with further emphasis on the social housing rollout likely over coming
                                                  months. China‟s State Council also unveiled RMB 36 billion in consumer subsidies this
                                                  week (principally for energy efficient appliances), representing the most substantial new
                                                  subsidies yet this year. While not as large as those rolled out in the wake of the financial
                                                  crisis, they reflect the government‟s willingness to provide support via fiscal measures.
                                                  The Commerce Ministry has also been aggressively pushing to support for exporters,
                                                  and while keeping the RMB from appreciating has been the only major concession it has
                                                  won so far, additional supportive policies are likely.
                                                 Selective easing of restrictions on home purchases in individual cities, as well as
                                                  improved mortgage availability, pricing, and relaxation of down payment requirements
                                                  for first home buyers.

Commodities Advantage: China – How Worried Should We Be?                                                                                                              9
                                                                                                                                                        17 May 2012

                                           Thanks For America – The US Stands Alone
                                           Somewhat remarkably, despite the weakness elsewhere, the gradual recovery in the US
                                           continues to build, with the slowdown scare in the process of being relegated to history.
                                           This week industrial production growth for the month of April printed at 1.1%, well above
                                           the consensus expectation of 0.5%, while US housing starts also continued to improve.

                                           Exhibit 18: USIP continues to recover
                                           Percent and index

                                            17%                       US IP ann 3mma           US Manf IP ann 3mma           ISM Manf New Orders                75






                                             -8%                                                                                                                35
                                                2005           2006           2007            2008          2009            2010          2011          2012

                                           Source: the BLOOMBERG PROFESSIONAL™ service

                                           To us the excellent work undertaken by our US equity housing research team (Housing
                                           Starts and Permits - Single-Family Activity Improving Through Selling Season as
                                           Buyers Gain Confidence) provides quite compelling evidence that the major blockage to
                                           the US recovery (the housing sector) is gradually beginning to thaw, suggesting
                                           considerable upside to growth and commodity demand over the remainder of the year.

Exhibit 19: Buyer traffic and home sales                                               Exhibit 20: Home prices and price index
Index against trend monthly changes (existing and new home sales)                      Index and monthly changes, seasonally adjusted

 70.0                        Buyer Traffic Index                            6%         80.0                     Home Price Index                               2.0%
                             Total Home Sales Trend MoM, rhs
                                                                                                                Case-Shiller Home Price MoM SA, rhs
                                                                                       70.0                                                                    1.5%
                                                                            2%                                                                                 0.5%
 40.0                                                                                                                                                          0.0%
                                                                            0%         40.0
 30.0                                                                                                                                                          -0.5%
                                                                            -2%                                                                                -1.0%
 10.0                                                                                  10.0                                                                    -2.0%

  0.0                                                                       -6%         0.0                                                                    -2.5%
     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, Credit Suisse

Commodities Advantage: China – How Worried Should We Be?                                                                                                         10
                                                                                                                                                               17 May 2012

                                                     Europe: Backward Looking Data Improving, But The
                                                     Great Tail Risk Remains Front and Centre
                                                     Over the past week Europe has continued to dominate market pricing. Perversely, while
                                                     all of the focus remains on the Greece related risks, the actual economic data continues to
                                                     suggest that after slumping heavily late last year, economic activity began to stabiles in
                                                     early 2012, with GDP flat (after falling 0.3% in Q4), while in trend terms euro area IP
                                                     growth has returned to around zero, following a substantial contraction in Q4.

           Exhibit 21: The European recovery has commenced:                              Exhibit 22: And IP Momentum is turning positive,
           GDP has stopped contracting                                                   with the PMI once again a poor guide…
           Real quarterly change                                                         Percent

            1.5%                                                                                          Euro PMI New Orders
                                                                                         65.0                                                                         15%

                                                                                                          Euro IP Ex Construction MoM SA,ann trend mom rhs

                                                                                         60.0                                                                         10%

                                                                                         55.0                                                                         5%


                                                                                         50.0                                                                         0%

                                                                                         45.0                                                                         -5%

           -1.5%                                                                         40.0                                                                         -10%
                2005     2006      2007      2008     2009      2010      2011    2012      Jan-04         Jan-06         Jan-08          Jan-10             Jan-12

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

                                                     Of course, this economic data is backward looking, with the real issue in Europe related to
                                                     the size of the Greek exit tail risk, and in derivative form, the degree to which the renewed
                                                     panic will see economic growth dip again.
                                                      We note that as the panic commenced in Q2 last year growth had substantially more
                                                       momentum than at present. In Q1 2012 GDP grew by 0.7%, much more than the flat
                                                       outcome in Q1 this year. It is also notable that the disparities in growth have also increased
                                                       with Germany growing in Q1, while the rate of contraction in the periphery has increased.
                                                     In terms of the assessment of the probability of a Greek exit, or a related major growth
                                                     shock, any assessment is by nature subjective.
                                                      We suspect the Greek government is looking at the Argentinian experience very closely.
                                                       They would currently be weighing the certainty of a long lasting depression, with the very
                                                       large cost of leaving the euro, which nonetheless holds the possibility of some recovery.
                                                      We note that the real difference, however, is that when Argentina defaulted and broke
                                                       the hard peg, it did so in isolation (although the bond holders wouldn‟t agree with this
                                                       analysis). The challenge for Europe is to contain such an event to Greece – it‟s always
                                                       really been about the other peripheral countries.
                                                     So what might be in Greece‟s interest may not be great for others….
                                                     Even given this, however, it is clear that „serious people‟ think that a break is inevitable.
                                                     The choice for the core (and for the US China etc) is between the likelihood of a market
                                                     panic every six months or so, or the possibility of a sharp (and hopefully relatively short)
                                                     shock. At the moment they on balance continue to think that living with the volatility is the
                                                     best outcome. But they are also aware that the pesky thing about these situations is that
                                                     the people (they are democracies after all) often have other ideas. It‟s not great secret
                                                     that government officials in Berlin etc are doing the math on whether they can contain the
                                                     fallout of a Greek departure.

     Commodities Advantage: China – How Worried Should We Be?                                                                                                               11
                                                                                                                                   17 May 2012

                                      This all suggests to us that the probability of a departure is greater than many think. And
                                      that while the very large cost of Greece leaving the euro suggests that it remains in both
                                      Greece‟s and the core‟s interest to push on with the current plan, it would be risky indeed
                                      to establish substantial long positions in risk assets until the current panic in Europe

                                      Exhibit 23: But the great risk is that the renewed financial panic results in a
                                      further dip in activity – with the risk of a Greek exit too large for comfort


                                                              Spain                 Italy





                                          Jan-11            Apr-11           Jul-11            Oct-11      Jan-12           Apr-12
                                      Source: the BLOOMBERG PROFESSIONAL™ service

                                      Japan on the Improve
                                      Mostly ignored in the rush to focus on downside risks in Europe, the Japanese national
                                      accounts for Q1 confirmed that after a rugged year that begin with the tragic tsunami, the
                                      Japanese economy is finally beginning to climb off the mat. While it is unlikely that the
                                      rebound pace of growth in Q1 (GDP increased by 4% saar) will be sustained, it does
                                      highlight the fact that Japanese commodity consumption, as the reconstruction
                                      commences, will be a positive this year, whereas last year it was a large drag, particularly
                                      on basic materials.

                                      Exhibit 24: Japanese GDP on the move….
                                                    8                                                               Rebounding?




                                                     2005       2006       2007         2008    2009    2010    2011        2012

                                      Source: the BLOOMBERG PROFESSIONAL™ service

Commodities Advantage: China – How Worried Should We Be?                                                                                   12
                                                                                                                          17 May 2012

                                         Commodity Performance
                                         Commodities continued to fall with other risk assets over the past week, with palladium,
                                         WTI crude oil and corn the biggest losers. Only US natural gas ended the week higher as
                                         injections remained below average for this time of the year. In year-to-date terms, soybean
                                         remained the top performer, followed by RBOB gasoline.

Exhibit 25: Commodity Performances (as of close of May 10, 2012)
Weekly returns, active contract                                         Year to date returns, front month

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Commodities Advantage: China – How Worried Should We Be?                                                                          13
                                                                                                                          17 May 2012

                                      Focus – The Land Down Under
                                      Cost Escalation is the Word….
                                      “Can‟t you hear, can‟t you hear the thunder? You better run, you better
                                      take cover” – Men at Work, „Down Under‟
                                      Any trip to Australia brings a certain amount of bellicose about everything from the
                                      government to „Aussie Rules‟ football or cricket. The latter is usually considered far more
                                      important to the people on the street than the price of copper, but public interest in taxation
                                      policies affecting the mining industry, environmental impact, and even the behavior of
                                      prominent mining magnates, as examples, have attracted a high degree of public attention.
                                      Coming in the midst of the government‟s budget roll-out, last week‟s travels by Credit
                                      Suisse‟s commodities team to see producers and investors in all corners of the vast
                                      continent revealed a heightened degree of anxiety about the path forward, not just in
                                      2012, but for many years to come.

                                      Storm clouds gathering…or just a temporary hiccup?
                                      On this visit, there was a much deeper feeling that storm clouds were gathering on the
                                      horizon, although there was a wider belief that emerging market demand patterns
                                      would remain relatively strong, in contrast to the more pessimistic perception of
                                      China in Europe and, especially, the USA.
                                      With miners and energy companies chasing plans to develop projects sometimes of
                                      Titanic proportions (literally), statements from a number of major players about investment
                                      prudence and tightened portfolio management are a clear indicator that some industry
                                      captains are preparing thoroughly for more uncertain times.
                                       This is exemplified by BHP Billiton‟s CEO, Marius Kloppers, who commented at an
                                        investment conference this week:
                                        "Clearly what we've seen over the last 12 months or so is that our projected rate of cash
                                        generation has changed. So, on balance, while we still want to invest throughout the
                                        cycle, it just means that our ability to do those projects will change as the cash-flow
                                        generation has changed." When he was asked whether the company would still spend a
                                        planned US$80 billion over the next five years the answer was a very simple, “no”.
                                      This does not mean growth in Australia‟s commodity supply is at an end, but it is
                                      illustrative of a more refreshed understanding of the opportunity cost of capital by
                                      major miners, predominantly dictated by a riskier global macro and commodity
                                      price environment. The question is where else does the money flow? The answer for
                                      some of the investors we addressed was emerging markets to Australia‟s north.

                                      There are two things certain in life…one of them is taxes
                                      Of course, more broadly, producers have not shied away from beating their own drum, but
                                      many complain more about the loss of investor confidence in decisions that change. For
                                      example, whatever the merit, the poor handling of the Henry Tax initiative by the government
                                      continues to be the source of prickly debate. The most recent bout of price weakness has
                                      accentuated fears that Australia‟s long boom has moved into a distinctly different,
                                      and more challenging, phase and that the easiest fruits have been plucked without
                                      optimum distribution of „economic rent‟. Naturally, a question of perspective.
                                       On the one hand is a government worried about balancing the books for years to come,
                                        and increasingly aware that the opportunity to cash in on windfall years may have largely
                                       On the other, investors are becoming much more risk averse in the sector,
                                        especially in the face of rising capital intensity, and mine developers/promoters keen
                                        to retain rewards subject to fiercer claims by other stakeholders.
Commodities Advantage: China – How Worried Should We Be?                                                                          14
                                                                                                                              17 May 2012

                                      Tension between resources companies and other key stakeholders – not least the state –
                                      is nothing new.      However, the establishment of consistent and transparent
                                      frameworks agreed by all interest groups appears to be a long way off. Very recent
                                      examples of this include the decision by BHP Billiton to close its marginal Norwich Park
                                      metallurgical coal mine, on the grounds of weak profitability, but almost certainly
                                      influenced by protracted labor disputes afflicting the group‟s met coal mines. Similarly, Rio
                                      Tinto and the Queensland and federal governments have been embroiled in debate about
                                      plans to develop a new bauxite mine, with the sticking point being different interpretations
                                      of the environmental assessment. The result is project delay, with cost consequences.
                                      We take the view that an extended era of relatively strong demand growth for
                                      industrial and energy commodities lies ahead, but that general cost escalation and,
                                      in some cases, the sapping effects of resource depletion, are likely to chip away at
                                      margins, at least for those operators not blessed with very low-cost production bases. In
                                      essence, this is how we regard the second half of the so-called „long boom‟.
                                      This is a view shared by a number of Australia‟s major resource companies which have
                                      signaled reining back ambitious investment spending over the next few years. This is a
                                      clear signal of the shifting return dynamics. There is a clear trend among investors of a
                                      firmer re-orientation towards selective emerging market exposure and re-balancing
                                      of Australian positioning.

                                      Cost escalation – causing a rethink?
                                      Virtually all producers we met expressed serious concerns about cost inflation, both capital
                                      and operating, and problems in controlling this. For the major producers this is mirrored in
                                      statements that demonstrate a renewed strategic focus on cost control, and operational
                                      performance improvement, as well as disciplined development, where the general industry
                                      track record is one of under-performance on meeting both budget targets and schedules.
                                      For example:
                                       Today‟s gold prices are putting a strain on marginal sources of supply. Base metals
                                        producers too complain about a growing squeeze on margins. Both sectors face
                                        constraints on lifting production; our quarterly forecasts reflect this, with gold, silver, zinc,
                                        lead and nickel close to peak levels in 2012-13; current market conditions are likely to
                                        bring forward, rather than defer, this „peaking‟.
                                       In thermal coal too, we have heard protestations that current prices, should they persist,
                                        would undo the attractiveness of expanding output. Likewise, we have seen a squeeze
                                        on marginal suppliers of coking coal in the recent price downturn.
                                      In contrast, expansion is the name of the game in iron ore and LNG, but, even here,
                                      rising capital intensity and an uncertain price outlook are stacking the risks towards
                                      under-delivery. At the time of our latest quarterly forecast, we re-iterated a view that iron
                                      ore supply might take longer to overwhelm demand than many forecasters had expected.
                                      This remains a prominent risk to these forecasts in the face of current price retreats.
                                      The same is true of LNG, but the risks here for Australia‟s suppliers lies with a steady shift
                                      in emphasis to shale gas (noticeable in some producer presentations), and the likelihood,
                                      eventually, that cheaper US gas will find its way into seaborne markets, as well as the
                                      potential impact of opening up shale gas opportunities elsewhere over time.

                                      Cost dynamics about to change again
                                      In a booming market, with prices rising, costs always rise too – the „inputs‟ are markets
                                      too, subject to the laws of supply and demand. This week‟s slide in the Australian dollar to
                                      fractionally less than parity with the US dollar for the first time in almost five months,
                                      emphasizes the “risk-off” effects of the current commodity market gyrations. Currency
                                      appreciation has been a major factor behind Australia‟s outpacing many other regions in
                                      terms of cost escalation, but these movements are not permanently in one direction.

Commodities Advantage: China – How Worried Should We Be?                                                                              15
                                                                                                                                        17 May 2012

                                       Here we should remind readers that when markets slip, they often slide – much
                                        further than expected. This is not our central assumption, but cost curves provide
                                        little material support if sentiment is in the wrong direction (mines often do not shut
                                        down quickly as, in the very short run, many of their costs are fixed). Prices typically
                                        overshoot, both on the way up, and on the way down.
                                       A sharper plunge in key commodity prices in the next few weeks or months would
                                        almost certainly be accompanied by a similar slide in the Australian dollar – this in
                                        turn chases costs down, and triggers further falls. Remember, US$3,000/t copper in late
                                        2008/early 2009 went hand-in-hand with 63 cents to the US dollar.

                                      Exhibit 26: Copper prices and the Australian dollar in late 2008 and early 2009
                                      US$/t, AU$/US$

                                         $10,000                                                                                             $1.10
                                                                               LME Copper 3M                   AUD/USD (rhs)
                                                                                        Fell hand-in-hand

                                              $6,000                                                                                         $0.80


                                              $2,000                                                                                         $0.50
                                                   Jul-08          Aug-08   Sep-08        Oct-08      Nov-08       Dec-08      Jan-09
                                      Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Exhibit 27: Long term Australian dollar trend                                  Exhibit 28: Australian terms of trade
A$/US$                                                                         Index

 $1.60                                                                          140

 $1.20                                                                          110


 $0.60                                                                            70


 $0.20                                                                            40
      1975   1980    1985     1990    1995       2000       2005    2010            1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: the BLOOMBERG PROFESSIONAL™ service                                    Source: the BLOOMBERG PROFESSIONAL™ service

                                      Rising labor charges are a major element behind this pattern of increasing costs,
                                      across the board. The Australian National Resources Sector Employment Taskforce
                                      estimated a shortage of 36,000 trades workers by 2015. So too, delays and costs of
                                      sourcing capital equipment and inflated costs of consumables have adversely impacted
                                      mining and project development.

Commodities Advantage: China – How Worried Should We Be?                                                                                        16
                                                                                                                                              17 May 2012

                                      Presentations by Rio Tinto and Xstrata highlight that lead times for procuring heavy
                                      equipment (draglines, locomotives, large haul trucks, re-claimers etc.) still stand at two
                                      years or more (the same as in 2007), double „normal‟ lead times. These same
                                      presentations point to the impact of changing regulations, community issues and
                                      environmentalist opposition as being the major causes in project deferrals and delays.
                                      Xstrata more broadly highlights the cost dilemma. The Australian-based miner estimates
                                      that capital intensity of copper mines potentially to be developed in the next eight years is
                                      generally more than double the US$7,700/t average (in real 2011 US dollar terms) for
                                      projects brought on line in 1985-2011. Operators and developers indicated to us that
                                      cost escalation in Australia has been more onerous than in many other

                                      Peak Australia Metal Production?
                                      Australia‟s base metals and gold miners are facing high rates of depletion – resulting in
                                      grade declines and pressure on fundamental costs of unit extraction. This is in contrast to
                                      iron ore where mine production has grown by an order of magnitude since the 1990s:

                                      Exhibit 29: Australia’s mined production of industrial commodities
                                      Metal content in „000t or raw iron ore in Mt

                                                            1995          2000         2005          2010         2011       2012   2013   2014     2015
                                      Copper                 402           830          914           861          947        989   1014   1016      995
                                      Zinc                   910          1386         1346          1481         1490       1516   1634   1643     1294
                                      Lead                   440           661          733           648          576        613    717    708      675
                                      Nickel                 101           168          200           181          192        205    206    205      202
                                      Iron Ore               130           157          239           402          439        479    558    650      733
                                      Source: Credit Suisse forecast, Brook Hunt (Wood Mackenzie), World Steel Association

                                       Australia went into the 2000s at a copper mine production rate of 830 kt/y, but output in
                                        2012 is expected to still fall short of the 1 Mt/y mark. With the exception of Olympic
                                        Dam, which is some years away from adding to Australia‟s copper supply substantially,
                                        new projects will likely struggle to compensate the effects of depletion, with
                                        copper mine supply expected to peak at about 1 Mt/y, relying on Olympic Dam‟s
                                        expansion to counter this trend. BHP Billiton has stated it will make a decision on this
                                        South Australian mega-project this year, but many analysts consider initial designs may
                                        be more modest.
                                       Zinc mine production stood at 1.4 Mt/y in 200, but was just 100 kt/y higher by 2011.
                                        The closure of Century in Queensland in 2014 and a number of other mines will see zinc
                                        mine production likely peak at little more than 1.6 Mt/y in the next 2-3 years.
                                       Lead mine output has already slipped back from a peak 727 kt/y in 2001 to less than
                                        600 kt/y. Expansions at Magellan and Rasp are expected to temporarily stem this
                                        decline, but lead mining in Australia too will have likely passed a peak by 2013-14.
                                       The restart at Ravensthorpe in Western Australia (to an eventual 40 kt/y Ni) – which
                                        appears to be on track – will potentially bring Australia‟s nickel mine production back up
                                        to the 200 kt/y mark, a level reached in the second half of the 2000s. Once again,
                                        though, the effects of depletion in WA‟s sulphide resources, slowed by successful
                                        additions by smaller companies, will begin to show up in more dramatic fashion beyond
                                       The scope for further growth in bauxite and alumina production exists, with rises
                                        beyond 2012‟s expected 20.8 Mt achievable over the next few years. However,
                                        regulatory approval will play a big hand in this outcome. A moot point.

Commodities Advantage: China – How Worried Should We Be?                                                                                              17
                                                                                                                         17 May 2012

                                      Exhibit 30: Australia’s copper, zinc, lead and nickel mine supply in 1995-2015
                                      Index: 1995=100

                                      Source: Credit Suisse, Brook Hunt (Wood Mackenzie), World Steel Association

                                      Some explorers and developers have opted to shift their primary focus offshore, especially
                                      in light of perceived higher exploration success, and lower risk of „deal breakers‟.
                                      However, going offshore is no panacea for success either, with myriad factors – many
                                      common to Australian operators – from infrastructure costs, to skills shortages, securing
                                      quality contractors, capital equipment lead times, to locational and community risks,
                                      making guarantee of high returns a major challenge. Not to mention political risks.
                                      In summary:
                                       The ingredients for an eventual acceleration of capital outflows in the resources space
                                        are building. How rapidly this pattern evolves will be down not only to the serendipity of
                                        commodity markets, but also to the vision, or otherwise, of policymakers. The scorecard
                                        here is still lacking. There is general dissatisfaction at government stewardship of
                                        Australia‟s resources industry; equally, industrial relations and public sentiment towards
                                        resources companies show plenty of room for improvement.
                                       Australia remains an important contributor to growth for a number of major industrial and
                                        energy commodities, but the forces of depletion and cost escalation mean that windfall
                                        profitability for many operators outside of iron ore may be a thing of the past.
                                       For base metals and gold, supply is likely to be at, or close to, a peak – deeper-than-
                                        expected cyclical price weakness would serve to bring forward and accentuate this
                                        peaking, potentially sowing the seeds for a subsequently sharper price upswing.
                                       Iron ore supply looks set to continue its growth, but the long-awaited „wall‟ of new supply
                                        may be pushed back in time. However, if new projects at an advanced stage do meet
                                        their targets, the prospects of fiercer supply competition point to potential for price
                                        corrections in years to come.
                                       The coal industry faces challenges in timely supply growth at economic value, both on
                                        the basis of costs and in the face of generally poor industrial relations.
                                       In the longer run, growth in supply of gas from unconventional sources points to the
                                        gradual emergence of coalescing globally-priced gas markets. This may take many
                                        years to come, but risks impacting the economics of LNG projects may be growing,
                                        although the massive investment stream looks assured for the next few years given the
                                        large lags in the projects.

Commodities Advantage: China – How Worried Should We Be?                                                                         18
                                                                                                                                          17 May 2012

                                            Investors and producers retain a belief that demand prospects in emerging markets will
                                             remain relatively strong, but that this does not guarantee easy returns. All round, the
                                             easy pickings for Australia‟s resources industry would appear to have gone, something
                                             that both investors and the federal government appear to be recognizing. Meanwhile,
                                             participants with strong existing asset positions may have the opportunity to reap a
                                             harvest for many years to come.

Exhibit 31: Spot iron ore in Australian dollars                              Exhibit 32: LME copper in Australian dollars
Spot, A$/t                                                                   Three month contract, A$/t

   $210                                                                      $12,000


   $130                                                                       $7,000


    $50                                                                       $2,000
       2009                  2010             2011                 2012             2005        2006   2007   2008   2009   2010   2011     2012
Source: the BLOOMBERG PROFESSIONAL™ service                                  Source: Credit Suisse

Exhibit 33: LME Aluminum in Australian dollars                               Exhibit 34: Comex gold in Australian dollars
Three month contract, A$/t                                                   Front month, A$/t

 $4,500                                                                      $2,000


 $3,000                                                                      $1,200


 $1,500                                                                        $400
       2005    2006     2007        2008   2009      2010   2011      2012         2005       2006     2007   2008   2009   2010   2011     2012
Source: the BLOOMBERG PROFESSIONAL™ service                                  Source: Credit Suisse

Commodities Advantage: China – How Worried Should We Be?                                                                                           19
                                                                                                                         17 May 2012

                                      Gold – Multi-Year Opportunity? Or the
                                      Beginning of the End?
                                      Gold has moved into dangerous territory over the past week, with the long-term trend now
                                      under threat. Notwithstanding the volatility of most asset prices over recent years, gold has
                                      moved in a really tight trend for the past decade, increasing at a consistent 16% per year.
                                       Every time the price has moved three standard deviations above the trend it has
                                        corrected, while every time it has fallen three standard deviations below it has resumed
                                        the upward trend.
                                       Indeed, every time it has moved to the top of the range it has then in the subsequent
                                        year moved to the bottom of the range, before resuming the up trend
                                       At the current price of $1546 we are well below the trend, with the lower three standard
                                        deviation band at $1518.
                                       The last time gold had a correction of this magnitude was between March and October
                                        2008 – the bottom was 23 October (hopefully there are no parallels with forthcoming
                                        events in other markets…).
                                      History suggests that we either bounce from here, or that the correction accelerates, with
                                      the chances of an outright route a possibility.
                                       While we expect gold to peak sometime next year, on balance we expect the uptrend to
                                        resume over coming weeks, with the current level providing a rare entry opportunity.
                                       We note that we are yet to break the 3 standard deviation band that held in 2008.
                                      For a more detailed discussion see - Gold Watch

                                      Exhibit 35: Breaking out or bouncing back?

                                        $2,000                  Gold Price

                                        $1,750                  Expected Value
                                                                Upper 3 Std Dev.
                                                                Low er 3 Std Dev.




                                               2006            2007            2008           2009   2010   2011      2012

                                      Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

                                      Trade Recommendation
                                      Given that on balance we expect the decade long up trend to resume, we recommend
                                      increasing exposures to gold at current levels through the purchase of a short-dated
                                      (2week to 1 month) call with strike of $1625. The risk is the premium paid.

Commodities Advantage: China – How Worried Should We Be?                                                                         20
                                                                                                                                                     17 May 2012

                                                Bulk Commodities
                                                Thermal Coal – Drowning in a sea of supply
                                                With many of the world‟s coal market participants gathering in Nice earlier this week, it
                                                provided a good opportunity to test people‟s current sentiment. Given the continuing slide
                                                in thermal coal prices (Exhibit 36), the mood was decidedly bearish with the million dollar
                                                questions being “how long will this last” and “how low can we go”?

Exhibit 36: Thermal prices continue to slide                                   Exhibit 37: Short positioning has clearly paid off
US$/t, spot                                                                    US$/t, front calendar contract

  150                                                                           135
                      Newc                     API #4           API#2
  140                                                                           130


   90                                                                           110

   80                                                                           105

   70                                                                           100
      Jan-10          Jul-10          Jan-11        Jul-11     Jan-12             Jan-11        Apr-11       Jul-11         Oct-11   Jan-12     Apr-12

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

                                                In the near term, short positioning means the paper market (Exhibit 37) could be
                                                susceptible to a short-covering rally but the current physical market dynamics mean any
                                                paper rally would likely meet good selling and be more flash in the pan than full-blown
                                                recovery. As illustrated by the below (Exhibits 38 39), the well documented net change in
                                                US exports has been dramatic and the shift in domestic energy markets engendered by
                                                shale gas means we expect this to remain a structural rather than cyclical dynamic (as
                                                outlined in The Pause That Refreshes).

Exhibit 38: US thermal coal exports                                            Exhibit 39: US thermal coal imports
Mt, SA                                                                         Mt, SA

  6                                                                             3.5


  0                                                                             0.0
  2005         2006     2007       2008        2009     2010   2011     2012       2005       2006       2007        2008     2009   2010     2011      2012

Source: Credit Suisse, Customs Data                                            Source: Credit Suisse, Customs Data

Commodities Advantage: China – How Worried Should We Be?                                                                                                       21
                                                                                                                             17 May 2012

                                      Further out, with our forecast for China and India to import more than 200Mt and 150Mt
                                      respectively in 2014, we see this US glut as much less of a dampener on the market but
                                      that provides little solace for those selling coal in the coming months. The current situation
                                      thus remains one of robust demand overwhelmed by more than ample supply.

                                      Exhibit 40: Seaborne arb for Chinese thermal coal imports
                                      US$/t (lhs), Percent (rhs)

                                                               Impo rted Co al (So uth China CIF + VA T)
                                       145                     Do mestic Co al (QHD FOB + Freight)                               10%
                                                               Impo rted Co al Disco unt (rhs)
                                       130                                                                                       6%
                                       120                                                                                       4%

                                       105                                                                                       0%
                                          Jun-11                          Sep-11                           Dec-11   Mar-12

                                      Source: Credit Suisse, McCloskey

                                      In terms of what can then turn things around, the marginal cost of production is clearly not
                                      a base for spot market prices as trades below $90/t already put most Russian production
                                      and many US suppliers out of the money on a DES ARA basis (see – Thermal Coal – In
                                      limbo; how low can it go?). Despite this, production cutbacks will take time to come as
                                      some of this material is still priced into the Pacific market (Exhibit 40) and because the
                                      combination of fixed costs and cash flow requirements will still see producers offering coal
                                      on which they are making a loss – particularly for tonnes that have already been mined.
                                      Consequently, a price recovery led by production cut backs would take some time to
                                      materialse, with price dynamics in the aftermath of this being heavily influenced by
                                      whether or not these tonnes return to the market or are replaced by new sources of
                                      production – at least one of which will be needed to meet ongoing Asian demand growth.
                                      A key issue to watch is thus any pushback or cancellation of capacity additions, as
                                      demonstrated by Rio Tinto‟s Mount Pleasant project in Australia. At current prices, many
                                      producers will be reassessing planned expansions and, we believe, coal demand in future
                                      years will mean prices at considerably higher levels as, without this, supply growth will be
                                      insufficient. In the meantime however, the focus is very much on cutbacks to current
                                      production rather than push backs of existing expansion plans

Commodities Advantage: China – How Worried Should We Be?                                                                              22
                                                                                                                                                17 May 2012

                                             Turning to the demand side, whether or not an upside surprise from already high levels
                                             could clean up the market‟s surplus is something we see as relatively unlikely. The key
                                             reasons is that, while Chinese and Indian demand has been and, we believe, will continue
                                             to be strong, there are clear obstacles to their moving dramatically higher in the short term.

Exhibit 41: Chinese thermal coal imports                                     Exhibit 42: Indian thermal coal imports
Mt, SA                                                                       Mt, SA
  18                                                                          10



   3                                                                            2

   0                                                                            0
    2005      2006       2007         2008   2009   2010     2011    2012        2005       2006      2007         2008     2009     2010   2011      2012
Source: Credit Suisse, Customs Data                                          Source: Credit Suisse, Customs Data

                                             For Indian buyers, though they have been back in the market since November‟s decline on
                                             the back of a weakening rupee, the recent fall in the rupee again highlights the divergence
                                             between API #4 coal priced in USD versus INR. Given the much discussed political issues
                                             around domestic coal and electricity prices, Indian buyers remain extremely price sensitive
                                             and the recent move in USDINR – to record weakness above 54 – means import volumes
                                             now being negotiated could well come under pressure.

Exhibit 43: Soft Chinese electricity generation                              Exhibit 44: Weak rupee threatens Indian imports
TWh, SA                                                                      API #4, spot, US$/t (lhs), INR/t (rhs)

  430                                                                         200                                                                      9000
                                                                                                                    USD            INR
                                                                              180                                                                      8000
  370                                                                                                                                                  7000

  340                                                                                                                                                  6000
  310                                                                                                                                                  5000

  280                                                                                                                                                  4000

  250                                                                          60                                                                      3000
    Jan-08           Jan-09             Jan-10      Jan-11          Jan-12      Jan-08           Jan-09            Jan-10      Jan-11        Jan-12
Source: Credit Suisse, China NBS                                             Source: Credit Suisse, , the BLOOMBERG PROFESSIONAL™ service

                                             On the Chinese side, April‟s macro data represented a clear slowdown with electricity
                                             production, falling 5.1% month on month SA (Exhibit 43). From here we expect the
                                             economic backdrop to improve as the government provides some degree of stimulus but
                                             not for a rapid rebound as witnessed after the 2008/09 fall. In line with this and the price
                                             attractiveness of imported coal, we see import levels picking back up through the peak
                                             demand months of the summer and Q4 but not moving to highs capable of tightening the
                                             market dramatically this year (Exhibit 41). Moreover, the price sensitivity of Chinese
                                             buyers means any rally which closed the arb would likely see them step back from the
Commodities Advantage: China – How Worried Should We Be?                                                                                                 23
                                                                                                                           17 May 2012

                                      Outside of a European „blow up‟ taking everything down (not our base case scenario),
                                      prices are likely to remain subdued with the speed of any recovery dependent on how far
                                      we fall. The further we fall the faster producers will feel the pain that forces production
                                      closures – leading to a faster recovery in a tighter market and greater vulnerability to
                                      weather induced disruptions. If however prices continue to slowly slide lower, then the
                                      market faces more of a war of attrition – people will try to hold on in the hope of an
                                      improvement, giving us a longer period of depressed prices.

                                      Iron Ore – Macro fears again infect physical markets
                                      Spot iron ore prices continue to ease back, falling to US135/t on the TSI 62% Fe marker
                                      yesterday. Latest results from tenders suggest a further slip is likely to take place in the
                                      next day or so. Traders indicate that the mood continues to be one of distinct caution, with
                                      resistance in placing prompt cargoes as mills hold back. Moreover, the recent price retreat
                                      has left traders with uncomfortable positions to manage on their books. Beyond unsettling
                                      macro data, mills generally remain spooked by news-flow from Europe and broader moves
                                      in commodity prices.

                                      Exhibit 45: Iron Ore prices falling with macro fears

                                                                                                        Spot    Front Month Swap






                                         Jan-10                 Jul-10                Jan-11       Jul-11      Jan-12

                                      Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

Commodities Advantage: China – How Worried Should We Be?                                                                           24
                                                                                                                             17 May 2012

                                         The slide in Brent oil prices looked in April like a „mini-correction‟, then became in early
                                         May a bout of „spring doldrums‟ and now has graduated to a fully fledged rout. Of course,
                                         Brent is losing ground as part of a much broader risk off move. Nearby fundamentals
                                         continue to support (in a relative way). And our base case still has things improving
                                         materially in 2H.
                                         Nevertheless, on the month, prompt Brent futures are down 8.4%, the qtd average is
                                         $117/b and falling, and for the year we‟re at $118 and falling as well. Our average price
                                         target for 2012 of $125 Brent looks decidedly challenged. And as we said in the macro
                                         section “this is not yet the itme to scale into long positions” either. Near-term downside risk
                                         weigh heaviest. And aside from the worries around Euro-land other political clouds are
                                         drifting across the oil landscape as well:
                                          One, apparently there is a renewed push by consuming countries to agree to release
                                           strategic inventories. The effort is reportedly now on the G8 agenda on May 20-21 in
                                          Two, the meeting in Baghdad on May 23 of the P5+1 and Iran negotiators has taken on
                                           added significance. European leaders apparently are considering to postpone full
                                           implementation of their sanctions on imports of Iranian oil – which is scheduled for July 1.

Exhibit 46: LLS versus Brent Crude                                       Exhibit 47: Brent Oil futures
($/bbl)                                                                  (month1 vs month 6, $/bbl)

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

                                         Who‟s sitting pretty? US Gulf Coast refiners looking good
                                         A combination of factors has pulled the rug out from underneath crude oil prices on the US
                                         Gulf Coast. Local inventory has been built up to record highs – Breaking News: DOE-EIA
                                         Petroleum Statistics - 2012 Week 19. Extremely low natural gas prices mean processing
                                         costs are that much lower. Most refiners there are among the most complex (and thus
                                         flexible in terms of input and product slates) as well. They have thriving export markets
                                         from Latin America to West Africa and including Europe as well. And of late they‟ve been
                                         given an added source of supply with the coming on stream of the recently reversed
                                         Seaway pipeline, which can deliver cheap feedstock from the US Midcontinent to the Gulf.
                                         In the above chart, it‟s clear that import benchmark LLS has collapsed relative to global
                                         benchmark Brent. For a while at least, the US won‟t be importing much light-sweet
                                         feedstock. Put different, the surplus of US onshore crude that had been land-locked for
                                         more than two years already, is finally and literally making its way into the Atlantic Basin.
                                         Going forward, recent crude oil weakness on US the Gulf Coast would be exacerbated
                                         meaningfully with an SPR releaser. Without that, all markets will remain in the thralls of a
                                         macro environment that‟ll dictate whether our base-case trends play out constructively for
                                         the second half of 2012, or whether in the remainder of the year Brent markets will once
                                         again chop around inside a boring range around $110/b +/-$10.
Commodities Advantage: China – How Worried Should We Be?                                                                             25
                                                                                                                                                              17 May 2012

                                                    Natural Gas
                                                    US supply moving in the right direction
                                                    US natural gas prices for June delivery continued to gain this week, adding another ~3.5%
                                                    to the already ~30% price increase since troughing mid April. As noted in Commodities
                                                    Advantage: Chinese Growth Disappoints, we think much of the perceived recent
                                                    tightness in the market stems from a series of lower-than-normal storage injections,
                                                    undercut from record gas power burn in much of the US. While we think these gains in
                                                    power demand are near a tipping point, it is worth noting the shrinking gap in y-o-y dry gas
                                                    production volumes.

Exhibit 48: US natural gas futures curve                                           Exhibit 49: US total dry gas production
($/Mmbtu)                                                                          (Bcf/d)











                                                                                              Jan       Mar        May              Jul          Sep    Nov

                                                                                                                      2012                2011

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

Exhibit 50: SE-TX production (interstate only)                                     Exhibit 51: NW-ROX production (interstate only)
(Bcf/d vs 5 year range)                                                            (Bcf/d vs 5-year range)
       26                                                                                14.5

       24                                                                                    14

       22                                                                                13.5

       20                                                                                    13

       18                                                                                12.5

       16                                                                                    12

       14                                                                                11.5

       12                                                                                    11
            Jan     Mar         May           Jul        Sep     Nov                              Jan    Mar       May              Jul          Sep    Nov
                                       2012               2011                                                               2012                2011

Source: Bentek Energy, Credit Suisse                                               Source: Bentek Energy, Credit Suisse

                                                    Moving in the right direction, but not there yet. As noted in Exhibits Exhibit 49- 51, total
                                                    US dry gas production is currently 2 Bcf/d above year-ago levels (down from 6 bcf/d y-o-y
                                                    in Jan 2012) but still remains 4.3 Bcf/d above on YTD comparisons. Regional intrastate
                                                    deliveries indicate much of the stagnation in production is resulting from below year-ago
                                                    trends in the Southeast-Texas area as well as the Northwest-Rockies producing areas.
                                                    Based on analysis published in US Natural Gas Reservoir - When will gas supply
                                                    turn?, we expect production declines from January 2012 levels of 1.5 bcf/d by year
                                                    end. This expectation captures announced producer curtailments, gains in associated
                                                    production and recent trends in key producing gas basins. While promising, a likely
                                                    normalization of coal to gas switching levels, loss of PRB switching at ~2.70 levels,
                                                    coupled with still above year ago levels in supply place near term risks to the downside in
                                                    our view.
Commodities Advantage: China – How Worried Should We Be?                                                                                                              26
                                                                                                                                                          17 May 2012

                                            Agriculture – Bearish bias continues
                                            Planting remains ahead of schedule
                                            Agriculture grain prices retreated this week with corn, wheat and soybean prices falling by
                                            4.4%, 2.3% and 1.2% respectively. Although it is likely that the pullback in risk assets
                                            affected the agricultural market, we believe fundamentals continues to play a strong role in
                                            keeping prices on a downward trend.
                                            The bearish supply picture continues to dominate prices, even as reports continue to
                                            indicate robust demand from China. Earlier in the week, the China National Grain and Oil
                                            Information Center indicated that Chinese corn imports for 2011/12 will likely increase
                                            even further to 6 million tons (revising their previous estimate of 5.5 million tons). Further,
                                            Chinese soybean imports remain supported despite the moderation seen in other
                                            commodities (see China Commodity Trade Report – April 2012).
                                            The latest crop progress report released on May 14 indicated that the corn crop was 87%
                                            planted (compared to the five-year average of 66%), and the soybean crop was 46%
                                            planted (compared to the five-year average of 24%).
                                            We note that Dec-12 corn and Nov-12 soybean prices have reacted quite strongly to this
                                            data. Prices of both fell significantly following each report that showed that the level of
                                            planting in this year was remained higher or at a high level relative to the five-year average.
                                            Exhibits 52 and 53 below show the Dec-12 corn and Nov-12 soybean price moves
                                            following each report and the difference of the current planting progress relative to the five-
                                            year average.

Exhibit 52: US corn against planting reports                                          Exhibit 53: US soybean against planting reports
Dec-12 corn in cents per bushel (lhs), difference in 2012 plantings relative to 5     Nov-12 soybeans in cents per bushel (lhs), difference in 2012 plantings relative
year average in percentage (rhs)                                                      to 5 year average in percentage (rhs)

   560                                 Planting progress significantly          30%    1410                                 Planting progress significantly         25%
                                       higher than average push prices                                                      higher than average push prices
                                       lower..                                         1390                                 lower..
   550                                                                          25%
   540                                                                          20%

   530                                                                          15%    1330

   520                                                                          10%
   510                                                                          5%

   500                                                                          0%     1250                                                                         0%
    02/04/2012           16/04/2012           30/04/2012           14/05/2012            02/04/2012           16/04/2012           30/04/2012          14/05/2012

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

Commodities Advantage: China – How Worried Should We Be?                                                                                                             27
                                                                                                                                                                                                                17 May 2012

Exhibit 54: Commodities Forecast Table
Units as indicated below, updated on April 13, 2012 (see The Pause That Refreshes)
                                            2011                          2012                                               2013                                              2014         2015         LT       Avg '12 vs
                                           Yr Avg          Q1    Q2 (f)    Q3 (f)    Q4 (f)   Yr Avg (f)   Q1 (f)   Q2 (f)    Q3 (f)   Q4 (f)   Yr Avg (f)   Q1 (f)   Q2 (f) Yr Avg (f)   Yr Avg (f)   (real)       '11%
Brent (US$/bbl)                            109.97      118.50   124.00    128.00    130.00      125.00     130.00   132.00   133.00    135.00     132.50     133.00   135.00    135.00       130.00      90.00       14%
WTI (US$/bbl)                               90.70      103.03   109.50    118.00    118.00      112.00     122.00   128.00   130.00    132.00     128.00     130.00   132.00    132.00       125.00      84.00       23%
U.S. Natural Gas (US$/MMBtu)                 4.07        2.77     2.20      2.50      3.10        2.64       3.60     3.40     3.80      4.00       3.70       4.40     4.20      4.29         4.50       4.50      -35%
U.K. NBP (GBp/Therm)                        56.40       57.45    62.00     62.00     72.00       63.40      72.00    62.00    62.00     72.00      67.00      73.00    63.00     68.00        66.00      50.60       12%
Iron Ore
Iron ore fines - 62% (China CFR) US$/t      168           142      150       160       160          153      160      160       155      155          158      135      135         135          120         90      -9%
Iron ore fines - (China CFR) US¢/dmtu       271           229      242       258       258          247      258      258       250      250          254      218      218         218          194        145      -9%
Iron ore lump - 63% (China CFR) US$/t       177           149      159       172       172          163      172      172       167      167          170      150      150         150          134        101      -8%
Iron ore pellets - 66% (China CFR) US$/t    205           184      195       205       205          197      205      205       200      200          203      179      179         179          163        131      -4%
Coking Coal
Hard coking coal (US$/t)                    289           235      210       225       235          226      245      240       235      235          239      235      235         235          235        170     -22%
Semi hard coal (US$/t)                      274           223      200       214       223          215      233      228       223      223          227      223      223         223          223        160     -22%
Semi soft coal (US$/t)                      212           157      141       151       157          151      164      161       157      157          160      157      157         157          157        132     -29%
PCI coal (US$/t)                            223           169      153       164       172          165      179      175       172      172          174      172      172         172          172        134     -26%
Thermal Coal
Thermal Coal (Newcastle FOB) US$/t          123           113      110       115       115          113      120      125       125      130          125      130      130         130          135        120      -8%
Thermal Coal (API#2 CIF) US$/t              122           100      105       110       110          106      115      120       120      125          120      125      125         125          130        120     -13%
Thermal Coal (API#4 FOB) US$/t              116           105      105       110       110          108      115      120       120      125          120      125      125         125          130        120      -7%
Base Metals
Copper (US$/MT)                             8,887       8,329    8,900     9,200     9,500       8,980      9,300    9,000    8,800     8,500      8,900      8,500    8,500     8,500        7,000      5,500        1%
Aluminium (US$/MT)                          2,424       2,188    2,300     2,500     2,600       2,395      2,700    2,700    2,700     2,700      2,700      2,600    2,550     2,550        2,650      2,400       -1%
Alumina spot (US$/MT)                        389          317      330       350       370         342        370      380      380       390        380        400      400       400          415        400      -12%
Nickel (US$/MT)                            23,015      19,654   19,500    20,500    21,500      20,290     21,500   21,000   20,500    20,000     20,750     20,000   20,000    20,000       21,000     20,000      -12%
Lead (US$/MT)                               2,405       2,097    2,150     2,250     2,400       2,225      2,500    2,600    2,700     2,800      2,650      2,950    3,100     3,100        3,300      2,000       -7%
Zinc (US$/MT)                               2,220       2,031    2,050     2,100     2,150       2,085      2,250    2,300    2,400     2,500      2,363      2,650    2,800     2,800        3,000      1,900       -6%
Tin (US$/MT)                               26,191      22,937   23,000    24,000    25,000      23,735     26,000   26,000   26,000    26,000     26,000     26,000   26,000    26,000       26,000     20,000       -9%
Precious Metals
Gold (US$/oz)                              1,571        1,690    1,720     1,810     1,840        1,765     1,920    1,860    1,740     1,660       1,795     1,500    1,450      1,450        1,350     1,300       12%
Silver (US$/oz)                            35.20        32.60    31.60     34.30     35.40        33.50     36.20    32.60    29.00     26.80       31.15     25.00    24.00      23.80        22.50     21.70       -5%
Palladium (US$/oz)                          730           685      735       785       825          760       850      890      930       950         905       965      980        980        1,010       900        4%
Platinum(US$/oz)                           1,720        1,610    1,680     1,700     1,750        1,685     1,800    1,820    1,840     1,900       1,840     1,900    1,900      1,900        1,925     1,900       -2%
Rhodium (US$/oz)                           2,010        1,430    1,500     1,550     1,600        1,520     1,900    2,200    2,250     2,350       2,175     2,600    2,950      3,000        3,200     3,200      -24%
Zircon bulk (US$/t)                        1,880         2500     2550     2625      2725         2,600     2850     2975     3075      3200        3,025     3,300      300      3,200        2,225     1,500       38%
Rutile bulk (US$/t)                        1,055         2400     2400     2700      2700         2,550     2800     2800     2900      2900        2,850     2,800    2,800      2,700        1,650     1,000      142%
Synthetic Rutile (US$/t)                    858          2050     2050     2350      2350         2,200     2450     2450     2550      2550        2,500     2,450    2,450      2,375        1,463       890      156%
Ilmentite - sulphate 54% (US$/t)            209           325      325      350       350           338      350      350      350       350          350       325      325        300          250       200       62%
Titanium Slag - SA Chlor 86% (US$/t)        798          1750     1750     2000      2000         1,875     2050     2050     2150      2150        2,100     2,050    2,050      1,988        1,256       760      135%
Uranium spot (US$/t)                         57            52       54       56        58            55       60       65       65        70           65        70       75         75           75        65       -4%
Wheat-CBOT (US¢/bu)                         710           643      650       575       600          617       630      660      680       650         660       650      650        650          600       600      -13%
Corn-CBOT (US¢/bu)                          680           641      650       575       550          600       550      550      550       550         550       500      500        500          500       500      -12%
Soybeans-CBOT (US¢/bu)                     1,320        1,273    1,400     1,350     1,300        1,331     1,260    1,280    1,280     1,220       1,260     1,200    1,200      1,200        1,200     1,100       1%
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

                                                    Commodities Advantage: China – How Worried Should We Be?                                                                                                               28
                                                                                                                             17 May 2012

                                              Technical Analysis
                                              WTI Crude Oil‟s correction set to persist lower to $83.34
                              Cilline Bain
                      +44 20 7888 7174        WTI Crude Oil (NYMEX Continuaiton) – Weekly

                                              Source: CQG, Credit Suisse

                                              WTI Crude Oil (NYMEX Continuation) continues its downtrend lower, after breaking
                                              through its 200-day average at 96.51. This now acts as resistance to the upside and is
                                              expected to cap along with chart resistance located at 98.24/97.69. The recent prod below
                                              the 92.52 interim chart support level suggests further weakness lower to the 61.8%
                                              Fibonacci retracement support level placed at 88.55.
                                              With weekly slow stochastics steadily trending lower and showing no signs of reversal as
                                              well as having plenty of scope before they become oversold, the likelihood is for this
                                              decline to persist lower through 88.55 to the next major cluster of Fibonacci retracement
                                              support at 83.34/82.57. Here, at the latter support cluster, we envisage the downtrend to
                                              end and for a base to unfold – culminating in the beginning of WTI‟s next upward phase
                                              commencing for back to the 110.55/114.83 high. As an aside, it is important to note that
                                              the market‟s long-term upward trend off the 32.40 is still very much intact for now, and
                                              hence this current downward phase has to be treated as corrective in nature.
                                              Only above 96.51 and then 98.24 resistance hurdles signals an end to the current decline,
                                              with recovery risk then higher once again for back to 110.55/114.83 long term resistance.

Commodities Advantage: China – How Worried Should We Be?                                                                             29
                                                                                                                                                                                     17 May 2012

 Trade Recommendations
Exhibit 55: Trade recommendations scorecard – (returns at end of day, May 16, 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.
   Commodity                      Position                       Publication               Date Initiated            Opening            Current or           Profit/(loss)          Return
                                                                                             (Closed)                 Price             Close Price
  Gold                  Buy June Call, strike              China – how                      17 May 2012
                        of $1625                           worried should we
  Platinum              Buy Jul 12 platinum                Platinum - ripe for a              26 Apr 2012             $10.3346               $0.7104                -$9.62              -93.1%
                        1650 / 1725 call                   bounce?
                        spread at 2:3 ratio
  Henry Hub             Buy Jun-12 $2.10 put,              The Pause That                     12 Apr 2012               $0.4475              $0.0261            -$0.3614                -93.3%
  Natural Gas           and buy Jan-13 $4.00               Refreshes
                        call in 2:1 ratio
  Aluminium             Buy September 2,400                The Pause That                     12 Apr 2012                 $33.68              $10.32              -$23.36               -69.4%
                        Calls                              Refreshes
  Palladium             Buy Sept 12                        Gold: taking the                  14 Mar 2012              $26.2117            $1.0457               -$25.116                  -96%
                        Palladium Call                     short side of RV
  Iron Ore              Buy Q4 2012 Iron ore               Chinese Tide                      01 Mar 2012                $131.50              $125.00                  -$6.5              -4.9%
                        swap                               Begins to Turn
  Aluminium             Buy Q3 aluminium                   From Fear Flows                   16 Jan 2012             $2,203.83            $2,035.33               -$168.5                -7.6%
  Iron Ore              Buy Cal-13 iron ore                From Fear Flows                   16 Jan 2012                $125.25              $121.00                -$4.25               -3.5%
                        swaps                              Opportunity
  Brent crude           Buy Dec 15 Brent,                  The Pause That                   12 Apr 2012                   $98.05              $94.71                -$3.34               -3.4%
                        stop loss at $94.50                Refreshes                      (16 May 2012)
  Lead                  Buy June 12 LME                    Lead: This is the                29 Feb 2012              $2,169.50            $2,073.00               -$96.50                -4.5%
                        lead                               Dip – Buy it                   (11 May 2012)
  Copper                Buy Dec-12 copper                  From Fear Flows                  16 Jan 2012              $8,110.00            $7,998.00             -$112.00                 -1.4%
                                                           Opportunity                    (11 May 2012)
  Copper                Sell Sep 12 7250 put               2012 is NOT a                    19 Apr 2012                   -$6.15         $100.4388            $106.5888             1,732.9%
                        and buy Sep 12 8400                Rerun of 2011                  (03 May 2012)
                        / 9500 call spread
  Lead and              Buy Dec-12 lead, sell              From Fear Flows                   16 Jan 2012                  $71.50             $102.50               $31.00                43.4%
  Zinc                  Dec-12 zinc                        Opportunity                    (03 May 2012)
  Thermal Coal          Buy Newc Cal14 Sell                The Pause That                   12 April 2012                  $2.81                $2.46                $0.35             12.46%
                        API #2 Cal14                       Refreshes                       (19 Apr 2012)
  Thermal Coal          Buy CAL13 swaps on                 A Dangerous New                    4 Oct 2011                $119.20              $114.24                -$5.75              -4.82%
                        dips below $120 for                Phase                           (15 Mar 2012)
                        Newcastle coal
  RBOB                  Buy the June 12                    Selective Easing                  15 Feb 2012                $0.7804               $1.106               $0.326              41.72%
  Gasoline              330/340 call spread                Offset by Greek                 (08 Mar 2012)
                        and sell the June 12               Default Risk
                        340/350 call spread
  RBOB                  Buy the June 12 340                Selective Easing                  15 Feb 2012                $8.2662            $11.4219                  $3.16             38.18%
  Gasoline              call                               Offset by Greek                 (08 Mar 2012)
                                                           Default Risk
  ICE Gasoil            Buy Jun-12, sell Apr-              Mixed Blessings                   09 Jan 2012                  -$5.75               -$2.00                $3.75             65.22%
                        12 gasoil                                                          (08 Mar 2012)
  Thermal coal          Buy API4 Coal, Sell                The Relative States               15 Feb 2012                  -$5.37               -$4.92                $0.45                8.4%
                        API2 Coal                          of Different Coal               (29 Feb 2012)
  Heating Oil           Buy Jun-12, sell Apr-              Mixed Blessings                   05 Jan 2012                  -$2.47               -$0.15                $2.32               93.9%
                        12 heating oil                                                     (29 Feb 2012)
  WTI Crude             Buy Dec-13 WTI calls               Oil fundamentals:                 10 Nov 2011                $3.6481              $4.2233             $0.5752                 15.8%
  Oil                                                      Supply-side worries             (01 Feb 2012)
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 judgment at the 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 securities and financial instruments may be subject to exchange rate fluctuation
that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest
charges, or other applicable expenses.
Source: Credit Suisse Locus

Commodities Advantage: China – How Worried Should We Be?                                                                                                                                         30
                                        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

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                          

Cilline Bain, Associate
+44 20 7888 7174

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                           

SINGAPORE                                                                                                One Raffles Link, Singapore 039393

Andrew Shaw, Director                        Ivan Szpakowski, Associate
Head of Base Metals & Bulks Research         +65 6212 3534
+65 6212 4244                      
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.

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:
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen 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 Suisse 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 under 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 suitable 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 such 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 appropriate 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 this 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, served 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 solely 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 securities 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 securities 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 factors (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 sudden 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 initial investment and, in such circumstances, you
may be required to pay more money to support those losses. Income yields from investments 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 refers 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 in the United
Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in Germany by Credit Suisse Securities (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-General of 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 securities 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 whom 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 accordance 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 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 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.

Shared By:
Tags: Credit, Suisse