31 May 2012 Fixed Income Research http://www.credit-suisse.com/researchandanalytics Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient Commodities Research Research Analysts Data Disappoint Ric Deverell Markets remained under pressure over the past week, with further evidence that +44 20 7883 2523 email@example.com the Chinese government is moving to underpin growth overshadowed by the latest developments in the ongoing European saga (the focus has now moved Joachim Azria to Spain). It was notable that while not a focus for many, economic data +1 212 325 4556 firstname.lastname@example.org released in India and Brazil were very weak, while initial jobless claims suggest that the US recovery may also be losing steam (remember that GDP only grew Cilline Bain by 1.9% in Q1…). +44 20 7888 7174 email@example.com With regard to China, last week we met with a range of senior policy makers and industrialists in Beijing. With growth still soft through May (we do not Marcus Garvey +44 207 883 4787 expect a substantial rebound in tomorrow’s PMI) it is now clear to us that the firstname.lastname@example.org focus for the government has moved to putting a floor under the economy. Although this is a positive, in our view it remains unlikely that we will see a Tom Kendall +44 20 7883 2432 stimulus of the magnitude or speed seen in 2009 – such a response would only email@example.com become likely if the economic outlook (both domestic and external) becomes far worse than is currently the case. Rather, we expect the stimulus to be Stefan Revielle +1 212 538 6802 calibrated with the aim of returning growth in H2 back above 8%. firstname.lastname@example.org Although stronger growth in H2 (look for 8%-9%) will be a positive for Andrew Shaw commodity demand, it is unlikely to be sufficient to push prices materially +65 6212 4244 higher in the near term given continued euro headwinds. email@example.com Given the ferocity of the storm enveloping Europe, the risks to industrial Jan Stuart commodity prices in the near term remain predominantly to the downside. +1 212 325 1013 Indeed, while we continue to expect a rebound in H2 (from oversold levels), firstname.lastname@example.org such a bounce remains contingent on the likelihood that the current three-speed Ivan Szpakowski global economy morphs into a more synchronized upswing. To that end, the + 65 6212 3534 downside risks appear to be building, with growth of more than 3.5% at a global email@example.com level looking unlikely until/unless the European panic subsides. Martin Yu + 44 20 7883 2150 Focus: Thermal Coal: Something’s Got To Give firstname.lastname@example.org In the absence of a fillip from demand in recent weeks, the glut of coal supply entering the seaborne market has persisted through May. Inventory cover in key markets remains comfortable and outbound flows from the “marginal” source of supply – the USA – continue to dampen prices. These remain subdued and are currently languishing just above US$90/t for the Newcastle marker. Although we do not expect US exports to fall back any time soon (gas continues to displace coal in its core use), infrastructure systems will likely limit short-term increases. The key to a swing in market dynamics is therefore in the hands of higher-cost suppliers curtailing production. This may take time to emerge but now seems inevitable, with the trigger potentially being sustained price weakness for a while longer. Similarly, the current price malaise is sowing the seeds for a delayed project expansion roll-out and eventual recovery further out. ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com. ® CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access 31 May 2012 In this Issue Macro View – Downside Risks Build 3 China – Once More into the Breach…. .......................................... 3 Europe Remains Very Dangerous – Now it’s About Spain ............ 3 United States – Cracks Beginning to Appear?............................... 4 India ............................................................................................... 5 Focus: Thermal Coal – Something’s got to give 7 Oversupply still the name of the game........................................... 7 US exports are unlikely to slow ...................................................... 7 The market faces a war of attrition ................................................ 9 Base Metals 10 Copper: Africa, China and Chile .................................................. 10 Nickel: How low is too low? ......................................................... 12 Precious Metals 15 Gold undecided ........................................................................... 15 Bulk Commodities 17 Iron Ore – Trading places ............................................................ 17 Petroleum 22 Headed for $100 Brent ................................................................ 22 Natural Gas 24 Pausing for a correction ............................................................... 24 Agriculture – Watching crop conditions 25 Commodity Investment Flows 26 Technical Analysis 28 Copper has reached 7448 61.8% retracement support target ..... 28 Trade Recommendations 29 Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 2 31 May 2012 Macro View – Downside Risks Build Markets remained under pressure over the past week, with further evidence that the Chinese government is moving to underpin growth overshadowed by the latest developments in the ongoing European saga (the focus has now moved to Spain). The data flow also disappointed, with data from India and Brazil very soft. Given the ferocity of the storm enveloping Europe, the risk to industrial commodity prices in the near term remains predominantly to the downside. Indeed, given the likely modest magnitude of the Chinese rebound, recent events suggest that the probability of a sustained rebound in H2 (still our baseline scenario) is falling. China – Once More into the Breach … Last week we met with a range of senior policy makers and industrialists in Beijing. With growth still soft through May (we do not expect a substantial rebound in tomorrow’s PMI) it is now clear to us that the focus for the government has moved to putting a floor under the economy. This past week has seen several new stimulus measures in addition to those listed in last week’s Commodities Advantage (Commodities Advantage: Take a deep breath… ): Social Housing: Over a one-week period, the Ministry of Finance announced RMB 98 billion in central government funding for social housing projects. This compares to RMB 153 billion spend by the central government over all of 2011. Bank lending, local government spending, and other channels represent the bulk of financing, though. Investment Projects: Last Friday, the NDRC approved construction of three major steel projects, two of which had been long delayed, with combined investment targets exceeding RMB 130 billion. On Monday, the NDRC approved construction of a new airport in Sichuan, joining recent approvals of three other airport projects. Housing Support: Hunan province announced a series of measures to support housing demand, including discounted mortgage rates, reduced down payment requirements, and reduced government fees. As the list of stimulus measures builds, it has become clear that despite all the talk of “rebalancing,” the stimulus will be in large part driven by increased spending on infrastructure. (We have previously argued that it was highly unlikely that there would be a substantial rebalancing of the growth drivers this year – see link to end of the super cycle note). Although the intent of the government to boost growth in H2 is a positive, as we have noted, it remains highly unlikely that we will see a stimulus of the magnitude or speed seen in 2009 – such a response would only become likely if the economic outlook (both domestic and external) becomes far worse than is currently the case. Rather, we expect the stimulus to be calibrated with the aim of boosting growth in H2 back above 8%. As is always the case with this type of intervention, calibration is difficult. While the government has no doubt of its capacity to boost growth, given the general perception that the post Lehman stimulus was too big, it remains unlikely that the initial push will see growth move above 9%. Europe Remains Very Dangerous – Now it’s About Spain Markets remain very concerned about the outlook for Europe, with the focus moving to Spain this week. This is a little disturbing as to us Greece has always been an aside (it is only 2% of Euro area GDP), with the real risk contagion to Spain and Italy. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 3 31 May 2012 Last year markets capitulated when Italian yields moved materially above 6%, with far less focus on Spain. However, notwithstanding their relatively strong fiscal position, we consider Spain to be the main vulnerability, given the disastrous state of the housing market. With 10-year yields hitting 6.7%, a similar level to that seen at the peak last year, and the ECB unceremoniously knocking back the latest bank bailout plan, markets are likely to remain on edge until yet another policy response (whatever that might be) is put in place. The risk of course is that the renewed financial panic flows over the already brittle real economy. After falling heavily in Q4, euro wide IP had begun to stabilize in Q1. However, recent surveys suggest that this improvement has now stalled, suggesting that the risk of a “triple dip” has intensified – the final PMI released tomorrow will be the last snapshot. This would of course have significant implications for the fiscal positions of many of the more stressed countries, again highlighting the counterproductive nature of the current austerity zeal. Exhibit 1: Spanish yields approaching last year’s high Percent 7.5% Italy Spain 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse United States – Cracks Beginning to Appear? Despite the slowdown in China, and the continued drama in Europe, so far this year the US recovery has continued more or less on track. Although initial jobless claims picked up in April, and payroll growth slowed, in the main the moderation looked to have been driven primarily by the spike in gasoline prices, suggesting that the fall in the price of gas at the pump would provide a boost to the labor market through May and into June. As we entered May, this broad story looked to be playing out, with the spike in initial claims in late April unwinding. More recently, however, it has become clear to us that looking through the volatility, claims are indeed beginning to trend up again. And while this move is only gradual at this stage, it has occurred against a backdrop of falling oil and gasoline prices, suggesting to us that something more insidious is at play. Given that the US only grew by 1.9% in Q1, any loss of momentum over coming weeks and months will make our current forecast of 4% global growth in H2 all the more difficult to achieve. We will be watching the payrolls print (the ADP suggested that employment growth in May remained relatively subdued) and the ISM release with great interest tomorrow. Further signs of a US slowdown would be likely to raise concerns that the US is indeed moving into another soft patch and would heighten anxiety about the near-term global economic outlook. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 4 31 May 2012 Exhibit 2: US initial jobless claims Week 1 = 100 110 Jobless Claims '11 Jobless Claims '12 108 106 104 102 100 98 96 94 92 90 1 4 7 10 13 16 19 22 25 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse India Although not normally a focus for commodity markets, the downside risks to commodity prices were amplified by the quite shocking GDP print from India for Q1. With Indian GDP growth now weaker than seen at the trough in 2009, and domestic demand around the Asian region in general still very weak, this important source of global growth has again surprised to the downside. Exhibit 3: Indian GDP Yoy change, real 11 Indian GDP, Real YoY 10 9 8 7 6 5 2004 2005 2006 2007 2008 2009 2010 2011 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Commodity Performance Commodity returns were mixed last week, with lean hogs and palladium outperforming the space. The base metals and iron ore were also mildly higher. However, US natural gas was significantly lower, followed by grains and energy commodities. In year-to-date terms, soybean remains the top performer, followed by RBOB gasoline. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 5 31 May 2012 Exhibit 4: Commodity performances (as of close of May 30, 2012) Weekly returns, active contract Year to date returns, front month Lean Hogs Soybean Palladium RBOB Gasoline Iron Ore Lean Hogs Silver Platinum Copper U.K. Natural Gas Gold Silver Soybean Wheat Thermal Coal Gold Aluminium Aluminium U.K. Natural Gas Copper RBOB Gasoline Iron Ore Platinum Brent Wheat Heating Oil Brent Palladium WTI WTI Heating Oil Corn Corn Thermal Coal U.S. Natural Gas U.S. Natural Gas -16% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 6 31 May 2012 Focus: Thermal Coal – Something’s got to give Oversupply still the name of the game As discussed in Thermal Coal – Drowning in a sea of supply, US March thermal coal exports of 4.5 Mt, 5.4 Mt after seasonal adjustment (SA), were an all-time record and further highlighted the surplus of domestic material looking for a route into the seaborne market. Gas continues to displace coal from its core domestic use. Exhibit 5: US thermal coal exports Exhibit 6: US thermal coal imports Mt, monthly, SA Mt, monthly, SA 6 3.5 3.0 5 2.5 4 2.0 3 1.5 2 1.0 1 0.5 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 On an annualized basis this equated to 64.5 Mt SA, 53.2 Mt raw, March being a seasonally weak month. Furthermore, taking the first quarter as a whole, US thermal exports have been running at a seasonally adjusted annualized rate (SAAR) of 49.8 Mt, far higher than last year’s total export figure of 34.1 Mt, and even our above-consensus forecast of 37 Mt. Based on the supply and demand model that we published in April (see – The Pause That The ongoing supply Refreshes…), absent reduced flows from other exporters, we do not think the market can glut means absorb this volume of exports until 2013, or even 2014, when we expect the US to export production cuts are 45 Mt and 50 Mt of thermal coal, respectively. With demand already proving relatively looking inevitable robust (see – Thermal Coal – Cheaply heating the boiler), supply cuts remain the most probable factor to turn the market around within this calendar year. Further ahead, it will be a case of output expansion push-backs and continued demand- side growth that will likely set the tone for the market, but demand does not look likely to hold much short-term excitement, unless there is an unusually warm northern hemisphere summer fuelled air-conditioning spree, and push-back on expansions is likely to become a more material factor if prices continue to stagnate. US exports are unlikely to slow Private ownership of much of the country’s coal export infrastructure means that accurately gauging capacity remains a difficult task, but our US equity colleagues have estimated 2011 capacity to stand at a shade below 120 Mt/y (see – US Coal Sector – Bouncing Along the Bottom). Given the fact that exports are currently running as hard as they possibly can, this assessment is supported by the fact that combined metallurgical and thermal coal exports came in at an annualized rate of 118 Mt for March. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 7 31 May 2012 Exhibit 7: Annualized US coal exports by type Exhibit 8: US coal export types by share Mt, Monthly SAAR Percent, Monthly 150 Thermal Coking Coking Thermal 100% 130 110 80% 90 60% 70 40% 50 30 20% 10 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 US exports are running near capacity and show no signs of decreasing On the one hand, some solace can therefore be taken by non-US thermal producers, as the total volume of coal coming out of the US should now only grow in line with incremental infrastructure expansion, rather than being able to flex immediately higher. Moreover, while BMA’s force majeure in Australia persists, and the coking market remains relatively tight, particularly at the premium end, there should be scope for metallurgical coal volumes to remain close to the 60% level of total US exports – these volumes are more valuable. On the other hand, with the EIA estimating that 722 Mt will be consumed in the US this year, against production of about 0.9 Bt and US power plant inventories of around 180 Mt, the level of production cuts required to reduce the volume of US thermal coal being offered into the export market are an order of magnitude different from those that have already been announced – just under 50 Mt of thermal. Other exporters are Consequently, though further production cuts in the US seem inevitable, we do not expect also likely to see this to have a material impact on the ambition of US producers to deliver their coal into the seaborne market. The volume of coal they actually can get out will be dependent on production cuts demand and price competition with other suppliers, but the mere fact that it is offered for sale is a key metric placing pressure on prices. The influence of marginal volumes has a high impact on prices The US is still a relatively small supplier of seaborne thermal coal, accounting for 4.4% of the traded market in 2011 (Exhibit 9). What the above therefore highlights is the extent to which relatively marginal changes can alter the market balance and that, if production cuts are to meaningfully change the near-term supply-demand balance, they will have to occur not only in the US but in other exporting nations too. Year-to-date performance for other major exporting countries has been mixed (Exhibit 10), with the net position that exports for these countries are running at 6 Mt/y above 2012 forecast rates. Though this sounds like a modest figure, its magnitude is increased by the fact that, in a balanced growing market, Q1 annualized run rates would be below 2012 annual forecasts as capacity additions through the year would mean latter quarters exceeded the average. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 8 31 May 2012 Exhibit 9: Major coal exporters 2011 Exhibit 10: Q1 performance of major exporters Mt Mt 400 Q1 SAAR Exports Forecast 2012 Exports RoW, 42 US, 34 350 Australia, 148 300 S.Africa, 69 250 200 Russia, 95 150 100 Colombia, 77 50 Indonesia, 319 0 Indonesia Australia S.Africa Colombia Russia US Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data The market faces a war of attrition Given current price levels, this situation is not sustainable over the long-run, with marginal producers in both Russia and the US in particular “out of the money,”’ while Australian miners are also feeling the pressure. In our minds, the most likely outcome remains a war Long-run structural of attrition with individual miners choosing to hold on to production as long as possible, demand remains with the collective result being a continued surfeit of thermal coal. For some, fixed costs in strong but the near the very short term are no doubt high. term should see The potential fall-out from a Greek euro exit – not our base-case scenario (see European high cost producers Economics: Greece: More likely in than out) – would change the picture, likely pushing gradually heading prices sharply lower. A muddle through, we expect, will translate into higher cost for the exit producers gradually being forced to curtail output and capacity expansion plans being pared back. The structural picture for thermal coal over the coming years remains one of strong demand and we expect the seaborne market to continue growing. The current dynamics should though act as a shake-out for uncompetitive sources of supply, these tonnages then being replaced by material from lower cost miners as we move further down the road. Exhibit 11: Thermal prices remain subdued US$/t, spot 140 Newc API #4 API#2 130 120 110 100 90 80 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Source: Credit Suisse, McCloskey Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 9 31 May 2012 Base Metals Copper: Africa, China and Chile Africa We published a report on African copper supply earlier today in cooperation with our equity colleagues: African Copper: The untapped resource. While often overlooked, copper production in Africa is rebounding after decades of under-investment and is expected to be the second-largest contributor to global copper growth through to 2015 (after Latin America). While Africa’s proven copper reserves account for only 6% of the world’s total, many industry sources believe that the true resource base is being widely underreported due to limited exploration work as a result of political instability and underdeveloped infrastructure. We believe that Africa’s share of world production will continue to increase in the near term, as significant growth projects take advantage of the rich ore grades available in Africa’s copper belt. However, political and infrastructure challenges will likely remain a drag on longer-term growth and hamper miners’ ability to take advantage of the continent’s rich resources fully. In particular, political instability, corruption and nationalization continue to limit foreign investment in the continent, and poor existing transportation and power infrastructure are a serious drag on the mining sector’s development. Exhibit 12: African copper production is rebounding Exhibit 13: And is projected to be the second from decades of under-investment largest contributor to incremental growth kt Share of incremental growth – 2011-2015 2,500 Mongolia ROW Europe 4% 0% 4% Indonesia 2,000 5% Chile 27% CAGR: 11.5% China CAGR: 2.7% 7% 1,500 CAGR: -5.8% North America 1,000 CAGR: 9.7% 9% 500 Peru 14% 0 Africa 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015F 21% Other L. Production (kt) America 9% Source: Wood Mackenzie, Credit Suisse Source: Credit Suisse Estimates Also, out this week related to African copper production, Zambia’s central bank reported January-April copper production of 237 kt, down -25% from the 315 kt seen over the same period in 2011. This continues the theme of underperforming global copper production. China As the destocking cycle progresses for copper in China, physical market indicators continue to improve. The import arbitrage has moved the closest to parity so far this year, and Chinese spot prices have also moved solidly above SHFE futures prices. Meanwhile, metal from bonded warehouses continues to be shipped to Korea where it is showing up in LME warehouses to the tune of 40 kt this month. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 10 31 May 2012 Exhibit 14: Chinese import arbitrage is the closest Exhibit 15: Chinese spot prices have moved firmly to parity year to date above SHFE futures prices US$/t RMB/t LME Cheap 600 400 200 400 0 200 -200 0 -400 -200 -600 LME Expensive -400 -800 -1,000 -600 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Chile For the first time this year, Chilean copper production came close to meeting expectations in April, posting a year-on-year increase and outstripping average 2004-2010 production levels. Further increases are expected over the remainder of the year and are necessary given that Chile is expected to contribute a significant portion of incremental mined supply growth this year (we estimated 40% in our April quarterly) and that year-to-date production remains down from 2011. Expected growth in Chilean production will be heavily dependent on large increases from Escondida and Los Bronces, which will thus be important to watch moving forward. Another important mine to watch is Collahuasi (445 kt/y), which has resumed operation following the third accidental worker death this year. It is likely that additional government safety inspections will be conducted at the mine, where production has plummeted this year after also suffering from lower ore grades and severe weather. Exhibit 16: Chilean copper production improved in April kt 2012 2011 2004-2010 Avg 2012 Days Adjusted 530 510 490 470 450 430 410 390 370 350 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 11 31 May 2012 This week also saw a couple of notable supply developments outside of Chile: Xstrata’s Tinataya copper mine (65 kt/y) is experiencing severe local protests, with two people killed early this week and the government declaring a state of emergency as a result. BHP will likely delay construction of the massive Olympic Dam expansion (designed to lift copper production from current 180 kt/y to an eventual 730 kt/y). BHP has stated that it will delay a decision until the end of the year, while the South Australian government has threatened to revoke permits if construction does not start by the end of the year. We believe the most likely scenario is that the project will go forward, but that construction will be delayed and permits may need to be renegotiated. Nickel: How low is too low? With LME three-month prices having fallen below US$16,500/t, the question of how low nickel prices can go is an increasingly poignant question. We believe that absent further serious macro deterioration (such as a euro breakdown), nickel prices are unlikely to be sustainable below US$16,000/t for any significant period of time. Exhibit 17: NPI has once again become expensive Exhibit 18: … And the Chinese import arbitrage has relative to refined nickel returned to positive territory US$/tonne NPI Premium (rhs) Refined Nickel NPI (10-15%) 2,000 180,000 25,000 LME Cheap 1,000 20,000 170,000 15,000 0 160,000 10,000 -1,000 5,000 150,000 0 -2,000 140,000 -5,000 -3,000 LME Expensive -10,000 130,000 -4,000 -15,000 120,000 -20,000 -5,000 Jun-2011 Aug-2011 Oct-2011 Dec-2011 Feb-2012 Apr-2012 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: SMM, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse NPI under pressure Chinese NPI production has once again become expensive relative to refined nickel and with prices at these levels, we believe that much of Chinese NPI production is cash- negative. We would therefore expect further declines in NPI production should prices remain this depressed. Moreover, the nickel import arbitrage has turned positive, as the fall in LME prices has made imported nickel cheaper than domestic refined nickel. A sustained positive arbitrage would likely lead to a rebound in Chinese refined nickel imports, which have historically responded to such price declines on a lagged basis, thereby tightening the ex-China market. NPI costs are also set to rise with the announcement of new Indonesian export restrictions. These measures were in line with our expectations, as well as those of the broader market, including a 20% tax on raw material exports, a new pro-forma export registration process, and quotas limiting exports to 2009 and 2010 levels. Although we do not expect these restrictions to have a significant impact on export volumes, they will raise costs for Chinese NPI producers, for which Indonesia is the primary source of iron ore. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 12 31 May 2012 Exhibit 19: Chinese nickel ore imports Exhibit 20: Chinese refined nickel imports tonnes Imports data through April 7,000 Indonesia Philippines Chinese Refined Imports (lhs, kt) LME 3-month (rhs) 50 $50,000 6,000 45 Imports Exaggerated $45,000 increase in by imports of 40 response to 5,000 low grade ore falling LME $40,000 for Fe content 35 prices $35,000 4,000 30 Increasing imports to support NPI growth 25 $30,000 3,000 20 $25,000 2,000 15 $20,000 10 1,000 $15,000 5 0 0 $10,000 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Refined producer margins also suffering Moreover, refined producers, both in China and in the rest of the world, are also beginning to face margin pressures as well. Exhibit 21: Not only is much of Chinese nickel Exhibit 22: But so now too is a not insignificant production cash-negative (including refined portion of ex-China producers producers) US$/t US$/t 25,000 90%: 95%: 60,000 $20,710 $20,824 Shanghai Cash Median: 50,000 Price: $19,340 $16,786 71.4% 20,000 40,000 90%: 95%: $17,905 $23,503 15,000 30,000 Median: $12,598 85.2% 20,000 US$300/t Premium 82.2% 10,000 LME Cash 10,000 Price: $16,224 5,000 0 -10,000 0 -20,000 -5,000 -30,000 Source: Brook Hunt, Credit Suisse Source: Brook Hunt, Credit Suisse But we remain cautious on fundamentals However, we remain cautious with respect to nickel fundamentals, as we believe the market is moving into increasing surplus on the back of ramp-ups of several major projects. The progress of these ramp-ups should remain crucial in determining nickel’s precise market balance, though potential disruptions at these projects – such as legal action taken by Brazilian prosecutors to halt production at Onca Puma – could result in a tighter-than-expected market. Nickel demand has also been soft year to date, with weakness in European joined by disappointing stainless steel production in China. 300-series stainless production actually fell year on year in China, as companies shifted to lower nickel content 200-series and 400-series stainless to protect already squeezed margins. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 13 31 May 2012 As a result of these weak demand conditions and supply growth from new mines, the market has seen a notable surplus year to date, resulting in building LME inventories. Exhibit 23: Chinese 300-series stainless steel Exhibit 24: Resulting in a market surplus and production has been very weak growing LME inventories kt On-warrant; kt 300 Series YoY Growth 180 2,000 60% 1,800 160 50% 1,600 140 1,400 40% 120 1,200 30% 100 1,000 20% 800 80 600 10% 60 400 0% 40 200 0 -10% 20 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 0 2007 2008 2009 2010 2011 2012 Source: China Stainless Steel Council, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 14 31 May 2012 Precious Metals Gold undecided In this week’s CS Gold Watch (CS Gold Watch: Treading water in a sea of uncertainty) we said that “We continue to think gold is more likely to print $1,600 than $1,500 in the short term but readily admit the stimulus to drive that move remains elusive.” That remains our view but the intraday action on Tuesday and Wednesday was a good illustration of why there is a fairly widespread lack of conviction amongst gold investors at present. After being swept down from $1,575 to $1,550 during the London afternoon, the market then appeared to be stabilizing at that level on Wednesday. After Comex opened, however, another sweep through the futures pushed the metal down to an intraday low of just above $1,532 – food for the bears one might have thought. Not so – five hours later the market had rallied back up to $1,570. One of the issues for investors trying to trade the metal at present is that OTC flows are thin as key physical players are largely absent – the Indian market has been rather traumatized by the collapse in the value of the rupee (which weak Indian GDP figures released today have done nothing to support), while Chinese dealers are yet to be convinced that a solid floor in the price has been established. Consequently the market is more vulnerable than usual to sharp futures-driven moves, which are in large part, we think, related to algorithmic/systematic trading models, playing for the moment within a $1,530 to $1,590 range. Longer-term investors are likely to remain largely on the sidelines until news of sufficient magnitude (either good or bad) appears to shock the market out of the range. In the meantime, given the attention paid to record low bond yields this week, in the charts that follow we look at how gold has performed for investors relative to both government bond indices and equity indices in the US, Germany and the UK. The results illustrate that despite the retreat from last year’s high, and the more recent flirtations with key downside support levels, over the time frame of the global financial crisis gold has performed well as an investment. And even since the start of this year it has, so far, held up as a defensive store-of-value /return-of-capital asset. Exhibit 25: Gold in USD, US equities and bonds Exhibit 26: Gold in USD, US equities and bonds Indexed to January 2007 Indexed to January 2012 350 iShares 7-10 year Bond Fund iShares 7-10 year Bond Fund 120 300 S&P 500 S&P 500 Gold USD 115 Gold USD 250 110 200 105 150 100 100 50 95 0 90 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 15 31 May 2012 Exhibit 27: Gold in EUR, German equities and bonds Exhibit 28: Gold in EUR, German equities and bonds Indexed to January 2007 Indexed to January 2012 300 iShares eb.rexx German Gvt bond ETF iShares eb.rexx German Gvt bond ETF 120 DAX Index DAX Index 250 Gold EUR 115 Gold EUR 200 110 150 105 100 100 50 95 0 90 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service , Credit Suisse Exhibit 29: Gold in GBP, UK equities and bonds Exhibit 30: Gold in GBP, UK equities and bonds Indexed to January 2007 Indexed to January 2012 400 FTSE Actuaries 5-15 Yr Bond Index 115 FTSE Actuaries 5-15 350 FTSE 100 Yr Bond Index FTSE 100 Gold GBP 110 300 Gold GBP 250 105 200 150 100 100 95 50 0 90 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service , Credit Suisse Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 16 31 May 2012 Bulk Commodities Iron Ore – Trading places The launching of a second iron ore trading platform in Singapore this week has slipped by almost unnoticed. GlobalOre – the twin to coal’s successful GlobalCoal platform – has followed on the heels of China’s CBMX on-screen iron ore trading system, an initiative of the China Iron & Steel Association, supported by the government. Major producers and mills have joined both vehicles. So why the fuss? What do the platforms bring? Better data on If widely embraced, which seems likely, the emergence of truly transparent pricing will trades should benefit index trading, as long as the third parties harness the data, and greater maturity in enhance the quality swaps and options markets. This could be a step improvement for investors seeking of the three indices greater market liquidity, while also opening up greater opportunities for both producers and consumers as a means of hedging price risks. The key is better and more open recording of physical transactions, and wider trust in the indices. However, we also argue that greater price visibility will work more in favor of suppliers – contrary to the belief within a highly fragmented steel industry – in an iron ore sector likely to remain dominated by a few majors. We think this holds true even in a market that shifts to abundant supply (this expanded supply will still be dominated by a small number of producers). The reason for this is simple; under the old annual benchmark system, which broke down during the financial crisis, producers were effectively encouraged to discount prices to secure volume – in a well-supplied market, this meant that suppliers achieved a lower (annual) price than if they knew what prices their rivals were receiving. Mills benefitted because the lack of discovery of these discounts then set the price for all suppliers at a lower threshold, which they wore for the year. We are likely to see details of rapidly rising numbers of transactions – these are already published on the CBMX website – and in our opinion this will likely signal the final death knell for longer duration price references in contracts and “pricing in arrears” as the spot market takes another big step forward. Exhibit 31: Although iron ore prices have fallen back in Q2, they remain well above longer-run historical levels US$/t $220 $200 $180 $160 $140 $120 $100 $80 $60 $40 2005 2006 2007 2008 2009 2010 2011 2012 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 17 31 May 2012 Iron ore prices – prone to macro fears too But the underlying signals are not bearish (yet) Despite prices falling back in line with most other major commodities in May, steel and iron ore sector indicators do yet support a very bearish prognosis. China’s steel production holding steady: CISA production data continue to point to a steady recovery from last year’s trough, with seasonally adjusted annualized crude steel production running at 717 Mt in May (see Exhibit 32). The concern remains that producers sparring for market share are overproducing into relatively soft domestic markets, but the data do not support deep gloom. Strengthening export markets for steel – mainly Asia and the Middle East – have also helped. The main risk remains macro sentiment and any longer lags in investment stimuli feeding through. Exhibit 32: China’s month-on-month crude steel production continues to edge ahead, potentially moving back to trend by Q3 2012 Mt, monthly, annualized 750 700 Raw Annualised SAAR 650 600 550 500 450 400 350 300 250 2005 2006 2007 2008 2009 2010 2011 2012 Source: Credit Suisse, China NBS Exhibit 34: Although stocks of steel at mills have Exhibit 33: Recovery in China’s steel exports has risen, within historical ranges, draw-downs are now also helped to avert any stock accumulation taking place Mt, monthly, SA Ratio, large and medium sized mills’ inventories to crude steel production, SA 8 China's net steel exports - SA Exports SA Imports SA 0 .2 8 7 0 .2 6 6 0 .2 4 5 0 .2 2 4 0 .2 0 3 0 .1 8 2 0 .1 6 1 0 .1 4 0 0 .1 2 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -1 Source: Credit Suisse, Customs Data Source: Credit Suisse, CISA Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 18 31 May 2012 Destocking – looking for “normalization”: Reported movements in finished steel inventories point to a “pass through” from production to consumers, albeit at moderated growth rates. The pace of seasonal destocking by traders has been slower than in previous years, but has now reached the point at which inventory levels are normalizing. Further destocking beyond Q2 is likely to be more limited, but the outcome will then remain in the hands of demand. While erring on the side of caution on downside risks, an H2 uptick also has potential to surprise once destocking slows. Exhibit 35: Further destocking taking place, but probably at a slower pace as levels “normalize” in Exhibit 36: Destocking rates point to slower demand H2 traction in Q1; how much further to go? Mt finished steel at traders, weekly Index: No. of weeks since inventory peak (1=100, end of Feb / start of March) 105 2007 2008 2009 18 Rebar Wire rod 16 100 2010 2011 2012 HRC Plate 14 95 12 90 10 85 8 80 6 75 4 70 2 65 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Source: Credit Suisse, MySteel Source: Credit Suisse, MySteel Iron ore supply – domestics under pressure: Run-of-mine iron ore production has also recovered since the lows of Q1 2012 but, in seasonally adjusted terms, output remains below 2011 peaks (see Exhibits 37 and 38). Although calibrating for average grades of ROM is problematical, the data continue to support our postulation that domestic iron ore in China is falling short of recent peaks. Exhibit 39 suggests that April production on a 62% Fe equivalent basis still lies 60-70 Mt/y below the peaks of 2008 and 2011. Our interpretation of this? This volume of supply is not profitable at prices of US$130-140/t and has effectively been displaced by lower cost imports. Exhibit 37: Raw run-of-mine iron ore production in Exhibit 38: Falling behind on a seasonally adjusted China – off from last year’s peaks basis Mt, monthly, annualized Mt, monthly, seasonally-adjusted annualized rate (SAAR) Chinese Iron Ore Production, Raw Annualised 1700 Chinese Iron Ore Production, SAAR 1700 1500 1500 1300 1300 1100 1100 900 900 700 700 500 500 300 300 100 2005 2006 2007 2008 2009 2010 2011 2012 100 2005 2006 2007 2008 2009 2010 2011 2012 Source: Credit Suisse, China NBS Source: Credit Suisse, China NBS Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 19 31 May 2012 Mills are even more dependent on imports: Data from MySteel’s latest 55-mill survey also indicate that imports retain a much larger share of mill sinter feed than was the case a year earlier. Exhibit 40 displays the much lower level of domestic feed in stockpiles at these mills, while Exhibit 41 illustrates that domestic feed to sinter strands remains below 20%, compared to a range of 35%-40% in May 2011. In part, this could reflect an increased switch of local concentrate to pellet plants, as mills seek to extract more value from “costly” domestic feed. However, we continue to believe that this trend exposes the marginal costs of domestic iron ore supply. Exhibit 39: Adjusted for iron content, domestic supply remains 60-70 Mt/y below recent peaks Mt, monthly, seasonally-adjusted annualized rate, 62% Fe basis 500 Chinese Iron Ore Production SA, 62% Fe equivalent 450 400 350 300 250 200 2005 2006 2007 2008 2009 2010 2011 2012 Source: Credit Suisse, China NBS Exhibit 40: Reduced stocks of domestic ore Exhibit 41: Leading to lower use in the sinter feed Thousand tonnes, survey of 55 Chinese steel mills Percent of domestic iron ore in sinter feed, survey of 55 Chinese steel mills 700 50 Imported iron ore stocks Domestic iron ore stocks Domestic iron ore in sinter feed 45 600 40 500 35 30 400 25 300 20 200 15 10 100 5 0 0 Mar-11 May-11 Jul-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Mar-11 May-11 Jul-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Source: Credit Suisse, MySteel Source: Credit Suisse, MySteel Port stocks returning to 2008-12 average levels: Finally, although port stocks remain at relatively elevated levels (~95 Mt), these tonnages too look to have normalized and continue to edge back to 2008-2012 averages in terms of ratios to steel production. Indian tonnages now represent more modest portions of remaining stocks, although inventories from non-traditional sources have grown, partly compensating for lower levels of domestic concentrate held by China’s steel mills. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 20 31 May 2012 Exhibit 42: Stock ratios to crude steel output are Exhibit 43: Iron ore stocks at port, by source – not returning to more normal levels much Indian ore left Ratio, port stocks to crude steel production Percent, weekly 100% Australia Brazil India Other 2.2 90% 2.0 80% 1.8 70% 60% 1.6 50% 1.4 40% 1.2 30% 20% 1.0 10% 0.8 0% 2006 2007 2008 2009 2010 2011 2012 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Source: Credit Suisse, MySteel Source: Credit Suisse, MySteel Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 21 31 May 2012 Petroleum Headed for $100 Brent Last week, futures Brent oil futures markets appeared to be cobbling together a floor from which to stage a long-awaited recovery. That seems like a long time ago. After the unofficial beginning of the US summer season, Monday’s Memorial Day holiday, oil markets failed to extend the bounce, which led to a fierce month-end selling frenzy that took Brent prompt month prices down another $3.50 and broke all manner of technical support. As we write, markets appear on track to deliver the desired $100/b goal. Saudi nudging and others helping Evidently the ides of May and the obvious reversal in sentiment and onset of a much dimmer outlook across almost all markets are squashing oil markets as well. Nor, we fear, does the end of the month necessarily end the selling. From our perspective too, there remains down-side risk. We will need a string of strong catalysts to turn the oil price trend. Last week we spoke of the recent arrival of aggressive sellers (Oil Sense: Sell, … sell it hard; or not?). And we said that they might shortly encounter significant resistance. Well, we believe the remaining bulls have thrown in the towel. Key words used to describe the action on oil futures screens this Wednesday, one day before the month’s end, were: “pushing,” “bullying,” and “capitulation.” Best expressing sentiment of the latter group is the phrase: “There’s no sense risking client money on lower conviction when appetite for risk has evaporated.” This shift in positioning and the arrival of data dimming the outlook for global growth as well as the inflating of downside tail-risk across Europe’s periphery all mean that an oil price rally now hinges on tail-risk at the other end (i.e., supply disruptions) and/or the much slower route of incremental data-points showing that s/d fundamentals are tightening. Exhibit 44: Brent prompt month futures Exhibit 45: Brent curve still shows some strength $/b $/b Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Evidently markets have been pushed to near the target ostensibly desired by Saudi Arabia, the world’s swing-producer of oil. Saudi Arabia began saying in January that oil prices were unjustifiably high and repeatedly promised to push them down to “fair” levels around $100/b. That much-hyped policy target was last repeated by the CEO of Saudi Aramco at its annual management talent event in New York. Having raised production and exports significantly in February, flows are about to be curtailed – seasonally and perhaps otherwise. These and other fundamental data-points should over the coming months help put a floor under oil prices and, in our view, prompt a rebound as well. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 22 31 May 2012 Recent data don’t support A change in the tenor of the oil s/d data would be nice. The latest data-points show that our expected re-acceleration of demand growth is nowhere in evidence yet. Monthly data for the US, for instance, show that back in March its oil demand actually Exhibit 46: US oil demand – March contracted YoY more than in any other month monthlies break a 4mth bullish trend since May 2009. YoY growth rates of PSM compared with WPS That was a double-whammy negative surprise, as the report also broke a four-month long string of revisions of the weekly data that on average had added 250bps to growth rates. In this report, growth rates in the weeklies that were already week were revised down by 170bps to an abysmal -6.4%. Revised up were only the rate of change for gasoline, jet fuel and fuel oil consumption. Most puzzling was one of the sharper contractions yet in diesel demand – which in the last few years has correlated best with Source: EIA, Credit Suisse consumer spending. Elsewhere, we reported last week on the divide in fortunes emerging between China and other developing economies’ oil demand trajectories, when looking at YoY growth. In terms of momentum, however, it’s not at all clear that oil use across developing economies was as yet beginning to grow much in 1Q (for which we now have a more complete picture with data for all significant economies through March, see Exhibit 47). It is also clear that in China momentum was still pointing down in April as well. China’s Industrial Production growth continues to lose momentum as well. Exhibit 47: MoM annualized change of trend SA oil Exhibit 48: MoM annualized change of trend SA oil demand across EM economies, excluding China demand in China SA, annualized MoM growth SA, annualized MoM growth 15.0% EM ex-China oil demand, ann trend mom 50% China IP, ann trend mom China oil demand, ann trend mom 40% 10.0% Oil demand falling in line 30% with weak IP growth 5.0% 20% 0.0% 10% 0% -5.0% -10% -10.0% -20% 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 Source: Credit Suisse Source: Credit Suisse Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 23 31 May 2012 Natural Gas Pausing for a correction US natural gas prices pushed lower this week, falling nearly 7% from last Friday’s close. After the ~20% rally in prices since the first of May, the US natural gas market has corrected lower due in part to continuing bearish fundamentals and record levels of excess inventories. Exhibit 49: Daily avg rate of injections into storage Exhibit 50: Net electricity generation by energy source, % (bcf/d) (% of total, all sectors) 20 50% 2012 2011 5 yr avg Coal 15 2011 sum avg 40% 34% 10 30% NG 30% 5 5 yr sum avg 20% Nuke 20% 0 10% Hydro 8% Other Renew 6% -5 0% Mar May Jul Sep Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: Credit Suisse Source: Credit Suisse Switching levels seem to be subsiding in light of higher prices and higher cooling loads. While the yoy gap in working gas inventories has shrunk by 148 Bcf from its peak on March 30, it is still 732 Bcf above year-ago levels and 496 Bcf above previous five-year The daily rate of highs. In order to shrink the yoy surplus level to zero by the end of October, we estimate injections are the industry would need to see an average daily injection rate of ~5 Bcf/d or less during increasing – has the remainder of the summer. This injection rate would be considerably lower than last switching peaked? year’s average of 11 bcf/d and the five-year average level of 10 bcf/d from June through October and seems unlikely in our view. In fact, using storage data through May 25, it appears that the average weekly rate of injections, while having lagged by 4-6 bcf/d in early May (due to coal to gas switching), are now just 2.5 bcf/d below 2011 average daily injection rates (Exhibit 49). In our view, this is an indication that switching may be subsiding due in part to higher gas prices and increased cooling loads. Meanwhile, March data for US electricity markets showed US coal consumption at record lows and gas at record highs. The EIA electric power monthly confirmed coal-to- gas switching trends we have monitored closely, showing coal consumption for the month of March in all sectors had dropped to 34% of all generation from 42% seen in March 2011 (Exhibit 50). While coal’s share fell within the overall mix, natural gas increased to 30% (up from 21% in March 2011) for the first time on record as prices for gas caused record amounts of gas to be burned in place of coal due to record low prices. Meanwhile, coal inventories continue to push to record levels. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 24 31 May 2012 Agriculture – Watching crop conditions Front month corn and wheat were 7.3% and 1.8% lower over the week following further favorable news on the new crop’s progress. The effects of the earlier and wider planting season are now reflected in the data, with both grains emerging earlier than average. At the same time, macroeconomic concerns are also weighing down on expected demand. We note that the broad commodities index has now given back most of the outperformance seen early in the year (Exhibit 51). The earlier planting season has allowed both corn and wheat planting to complete much earlier than normal. As of the May 29 crop progress report, 92% of corn planted in top 18 producing states have emerged, up from 76% (compared to the five-year average of 69%), and 96% of spring wheat planted in the top 6 producing states have emerged, up from 86% last week (compared to five-year average of 68%). With most of the crop emerged, the focus now turns on conditions. Although there were reports of warm weather in the corn belt, the percentage of crops in excellent and good condition remains above the median of the last five years (Exhibit 52). Likewise, spring wheat conditions remain significantly above the 5 year median (Exhibit 53). Exhibit 51: CSCB agriculture index beginning to trend lower as the broad commodities index continues to weaken following macroeconomic concerns Index 730 CSCB Excess Return CSCB Agriculture (rhs) 170 710 165 160 690 155 670 150 650 145 630 140 610 135 590 130 570 125 550 120 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Exhibit 52: Corn crop conditions Exhibit 53: Spring wheat crop conditions Percentage in excellent and good condition Percentage in excellent and good condition 80 90 85 Percent in excellent and good condition Percent in excellent and good condition 75 80 2012 2012 70 75 median 70 65 median 65 60 60 2011 55 55 2011 50 50 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 1 2 3 4 5 6 7 8 9 10 11 12 Source: USDA, Credit Suisse Source: USDA, Credit Suisse Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 25 31 May 2012 Commodity Investment Flows Investment flow estimates below are based on last week’s CFTC commitment of traders report and the latest set of index investment data up till Tuesday, May 22, 2012. Commodity indexes saw $1.9 billion of outflows in the week between May 16 and May 22. Total assets under management in commodity indexes fell by $4.7 billion after accounting for price changes to about $178.1 billion (Exhibit 55). Total contracts held in indexes also fell by about 56.9k contracts, continuing the sell-off from last week. Physically backed exchange traded products also saw net outflows of about $410 million and total assets under management fell to $121.1 billion (Exhibit 56). Total assets under management (including both indexes and physical ETFs) decreased to about $299.2 billion, from $302.3 billion a week earlier. Note that physically backed ETPs are now about 40.5% of total commodity AUM. Exhibit 54: Commodity index assets under management in contracts and dollars Thousands of contracts and US$ billions 3,500 AUM (Right Axis) Contracts (Left Axis) 270 3,400 250 3,300 230 '000 Contracts 3,200 bn, USD 210 3,100 190 3,000 170 2,900 2,800 150 07-Sep-10 21-Dec-10 05-Apr-11 19-Jul-11 01-Nov-11 14-Feb-12 29-May-12 Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse Exhibit 55: Commodity index assets under Exhibit 56: Physically backed commodity ETF management (in US dollars) assets under management (in US dollars) US$ billions US$ billions 10 275 3 175 Inflows (Left Axis) Index AUM (Right Axis) Inflows (Left Axis) ETF AUM (Right Axis) 250 2 5 150 225 1 0 200 0 125 -0.410 175 (1) (1.92) (5) 100 150 (2) (10) 125 (3) 75 05-Apr-11 28-Jun-11 20-Sep-11 13-Dec-11 06-Mar-12 29-May-12 05-Apr-11 28-Jun-11 20-Sep-11 13-Dec-11 06-Mar-12 29-May-12 Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 26 31 May 2012 Exhibit 57: 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% Energy 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$/oz) 2,010 1,430 1,500 1,550 1,600 1,520 1,900 2,200 2,250 2,350 2,175 2,600 2,950 3,000 3,200 3,200 -24% Minerals Zircon bulk (US$/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% Agriculture 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: Chinese Stimulus, Necessary But Not Sufficient 27 31 May 2012 Technical Analysis Copper has reached 7448 61.8% retracement support target Copper (LME 3-month) – Daily Cilline Bain +44 20 7888 7174 email@example.com Source: CQG, Credit Suisse Copper (LME 3-month) has been in a steady downward trend since the 8497 resistance high. This has brought the market down to our Q2 target set at the 61.8% Fibonacci retracement support level. We are now turning neutral as we do not believe there is enough downward momentum left to warrant a sustained break through 7448 61.8% Fibonacci retracement support. We also highlight that the 78.6% Fibonacci retracement of the 7131-8765 high/low swing lies close by at 7456. We believe the market is set for a rebound back up to challenge the key resistance zone of 7765/7816; however, we stress that the market needs to break out above here in order to confirm a base, and then allow for the market to rally up to the 200-day average, which lies at 8050. A sustained breach of the 7448 retracement support level, however, would pave the way for further downside risk lower to 7131 interim chart support. Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 28 31 May 2012 Trade Recommendations Our gold recommendation to buy June-12 gold calls with $1625 strike expired on May 24 out of the money. Likewise the June-12 puts in our Henry Hub trade have also expired. Exhibit 58: Trade recommendations scorecard – (returns at end of day, May 30, 2012) Based on end of day prices or latest available price, recommendations in dark blue have been closed out. 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 Platinum Buy Jul 12 platinum Platinum - ripe for a 26 Apr 2012 $10.3346 $0.1112 -$10.22 -98.9% 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 $0.1150 -$0.3325 -74.3% 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 $3.28 -$30.40 -90.2% Calls Refreshes Palladium Buy Sept 12 Gold: taking the 14 Mar 2012 $26.2117 $0.6532 -$25.5585 -97.5% Palladium Call short side of RV trades Iron Ore Buy Q4 2012 Iron ore Chinese Tide 01 Mar 2012 $131.50 $128.75 -$2.75 -2.1% swap Begins to Turn Aluminium Buy Q3 aluminium From Fear Flows 16 Jan 2012 $2,203.83 $2,001.50 -$202.33 -9.2% Opportunity Iron Ore Buy Cal-13 iron ore From Fear Flows 16 Jan 2012 $125.25 $124.00 -$1.25 -1.0% swaps Opportunity Gold Buy June Call, strike China – how 17 May 2012 $0.9070 $0.0000 -$0.9070 -100.0% of $1625 worried should we (24 May 2012) (expired) be? 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) Markers 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) Source: Credit Suisse Locus Commodities Advantage: Chinese Stimulus, Necessary But Not Sufficient 29 GLOBAL COMMODITIES RESEARCH Ric Deverell, Managing Director Eric Miller, Managing Director Global Head of Commodities Research Global Head of Fixed Income and Economic Research +44 20 7883 2523 +1 212 538 6480 firstname.lastname@example.org email@example.com LONDON One Cabot Square, London E14 4QJ, United Kingdom Tom Kendall, Director Marcus Garvey, Analyst Martin Yu, Analyst Head of Precious Metals Research +44 20 7883 4787 +44 20 7883 2150 +44 20 7883 2432 firstname.lastname@example.org email@example.com firstname.lastname@example.org TECHNICAL ANALYSIS Cilline Bain, Associate +44 20 7888 7174 email@example.com NEW YORK 11 Madison Avenue, New York, NY 10010 Jan Stuart, Managing Director Joachim Azria, Associate Stefan Revielle, Associate Head of Energy Research +1 212 325 4556 +1 212 538 6802 +1 212 325 1013 firstname.lastname@example.org email@example.com firstname.lastname@example.org SINGAPORE One Raffles Link, Singapore 039393 Andrew Shaw, Director Ivan Szpakowski, Associate Head of Base Metals & Bulks Research +65 6212 3534 +65 6212 4244 email@example.com firstname.lastname@example.org Disclosure Appendix Analyst Certification Ric Deverell, Joachim Azria, Cilline Bain, Marcus Garvey, Tom Kendall, Stefan Revielle, Andrew Shaw, Jan Stuart, Ivan Szpakowski and Martin Yu each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 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