Commodities Research 10 May 2013 Commodities Weekly Muted moves Overview 3 Energy Market Outlook 6 Oil: Tight oil drilling – full throttle until the speed bumps 10 Metals Market Outlook 14 Precious metals: Platinum Week - PGMs set to remain in deficit 19 Commodity Price Forecasts 22 • Monday marks the start of Platinum Week. We retain positive views on platinum and palladium and expect both markets to return deficits this year. We believe Commodity Price Comparisons 23 platinum offers the most upside potential in the near term given auto demand in Europe is expected to decline at a slower pace in H2 13; but, more important, Trade Recommendations 24 biennial wage negotiations are set to take place over the coming weeks. Key Data Releases 26 • The rally in base metals has mainly been in copper, and to a lesser extent aluminium, reflecting the size of short positioning in those markets as well as the FX Forecasts 27 more encouraging fundamental signals in the case of copper. We think there is further upside for copper with market positioning still short and positive demand signals from China, and we would look for prices to rise to the mid-to-high $7,000s before restabilising shorts. • Preliminary China commodity trade data showed China’s imports were mixed in April, with energy imports trending modestly higher but base metals imports grinding lower. With fuel stocks smaller by the end of April, and oil demand getting an uplift from the beginning of the driving season, China’s oil demand is Editors: Suki Cooper likely to resume a steady, though gradual, pickup in the coming months. firstname.lastname@example.org Energy Sudakshina Unnikrishnan Tight oil drilling – full throttle until the speed bumps 10 email@example.com While the improvement in drilling efficiency gains across some key tight oil plays is meritorious and contributes directly to the current surge in tight oil production, there www.barclays.com are growing risks of this momentum approaching inflection points in the future (depending on rig availability) at which steep decline rates start to offset these efficiency gains. Metals Platinum Week: PGMs set to remain in deficit 19 We expect South Africa’s mine supply-side challenges, auto-catalyst recycling and European demand weakness to be the dominant themes of Platinum Week, but we continue to forecast both platinum and palladium markets to be in deficit this year. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 28 Barclays | Commodities Weekly OVERVIEW Muted moves Sudakshina Unnikrishnan Commodity prices posted muted, albeit broad-based, gains this week on positive sentiment +44 (0)20 7773 3797 spurred by supportive macro-data flow in the form of a stronger-than-expected US sudakshina.unnikrishnan employment report and higher-than-expected German factory orders and industrial @barclays.com production. Brent prices firmed but we maintain our view that there is not yet enough momentum in the benchmark to power a complete retracement to the familiar range around $111/bbl with positive macro-data likely to only support prices at current levels at best, rather than propel a complete upward retracement with demand for prompt cargoes of light grade crudes continuing to be muted on the physical market. The rally in base metals has mainly been in copper, and to a lesser extent aluminium, reflecting the size of short positioning in those markets as well as the more encouraging fundamental signals in the case of copper. Nickel, lead and zinc have largely missed out of the move with shorts feeling little need to cover in some cases and in others like lead, a lack of positioning and fundamental signals playing a part. We think there is further upside for copper with market positioning still short and positive demand signals from China, and we would look for prices to rise to the mid-to-high $7,000s before restabilising shorts. Precious metals prices have stabilised and slowly edged higher. The physical market has greeted the lower gold price environment with enthusiasm. Bar premiums across Asia remain high while gold imports into China from Hong Kong reached a record 223.5 tonnes in March, more than doubling m/m and almost doubling the previous record set in December last year. In contrast, ETP outflows show little signs of slowing. Gold holdings are down 37 tonnes month-to-date, following a record outflow of 182 tonnes in April and total holdings are at their lowest since October 2011. ETP outflows remain the key downside risk to gold prices in the near term, in our view. Platinum Week’s dominant Monday marks the start of Platinum Week. We expect platinum and palladium to deliver themes are likely to be South deficits in 2013 and to remain in deficit in 2014 as the challenging mine supply backdrop Africa’s mine supply overshadows the modest recovery in demand anticipated for later in the year. Although we challenges, auto-catalyst do not expect production losses of the magnitude suffered last year, the third-largest recycling and European platinum producer, Lonmin, has highlighted that the workforce representation of the more demand weakness radical union, the AMCU, has risen to 70% from less than 10% at the start of last year. Further, Lonmin has suffered furnace outages. Although the largest platinum producer, Anglo American Platinum, has scaled back its restructuring proposal, strong investment demand growth has almost surpassed our original estimate of production to be removed this year of 217koz. The newly launched physically backed ETF in South Africa has recorded fresh demand exceeding 190koz. Collectively, platinum ETP holdings are at a fresh record high, surpassing 2Moz. Yet, the platinum price has yet to meaningfully break above $1500/oz, suggesting that underlying fabrication demand remains weak or stock levels are healthy. We retain positive views on platinum and palladium and expect both markets to return deficits this year. We believe platinum offers the most upside potential in the near term given auto demand in Europe is expected to decline at a slower pace in H2 13; but, more important, biennial wage negotiations are set to take place over the coming weeks. Improved drilling efficiency Much of the growth in US tight oil production has come from geological formations in North across key tight oil plays; but Dakota and Texas – oil from these formations does not rise to the top cheaply or easily as where does the inflection point we detail in depth in our oil focus piece this week. These are unconventional barrels, and the lie at which steep decline rates associated plays are indeed unconventional in an oil-drilling context. While advances have start to offset efficiency gains? been made in understanding the underlying geology, it remains inherently difficult and varies markedly from play to play, meaning generalised assumptions on drilling wells in 10 May 2013 2 Barclays | Commodities Weekly these fields cannot be made. Because of this, standardising technology becomes much less straightforward as the optimal requirements may differ for each different play. Much of the technology, though used already for natural gas extraction, remains expensive, complex and in need of adaptation for liquids exploration and production. A measure of how well understood a certain field’s geology may be is the 30-day initial production (IP) rate for a new well. As the understanding increases, on average, so does this rate. As an example, a prominent company in the unconventional space has increased IP rates more than 135% since 2009. By building a deeper and richer knowledge of the geology, the most fertile spots can be tackled with the most appropriate technology. Drilling efficiency is also experiencing welcome improvements. A measure of this is the average number of days in which a rig completes a well to the total agreed depth from initial well drilling. Time to well completion has been decreasing yearly for the past half decade; in some instances, total drilling times have been cut in half. Production can thus increase via the same number of, or often even fewer, rigs. Gains in efficiency are due primarily to recently improved technology and extraction methodologies. Drilling mobility has increased by the development of so-called walking rigs, which have 360 degrees of mobility, while traditional rigs can only move in straight lines. This mobility is of great use in another sizeable technological development – multi-well pad drilling – which means more than one horizontal well is drilled at a single location (pad), maximising the below-the-surface reach, while reducing the above-ground footprint. Combined with improved seismic imaging and computation modelling of decline rates and underlying geology, these technological advances allow for more intensive drilling programmes to be carried out more efficiently and at lower average cost per well. While we can probably expect more productivity gains, we feel the rate at which they will come through will likely see diminishing returns as the largest leaps in advancement are likely to fade. Combined with this, the fact that producers are focusing on the most fertile fields and easy-to-access regions first implies that the remaining terrains already pose the challenge of diminished productivity. Overall, we expect the highest growth momentum in tight oil production to likely fade over the next two years with growth expected to decelerate beyond 2015. A mixed set of preliminary Finally, this week marked the release of the preliminary China commodity trade data. China’s China commodity April trade commodity imports were mixed in April, with energy imports trending modestly higher but data base metals imports grinding lower. Crude oil imports rose 4% y/y to 5.63 mb/d in April, reversing two months of y/y declines. Import growth has softened from the levels seen last year, as refiners have built large product stocks and refineries entered turnaround in April and May. Product imports jumped to 910 kb/d, up 24% m/m and 28% y/y, likely due to higher teapot utilisation rates in the month that pushed up fuel oil imports. Exports were higher at 660 kb/d, resulting in net imports of 250 kb/d. Robust exports likely indicate continued gasoline and diesel exports in April, as refiners cut inventory. With fuel stocks smaller by the end of April, and oil demand getting an uplift from the beginning of the driving season, China’s oil demand is likely to resume a steady, though gradual, pickup in the coming months. In metals, China’s unwrought copper and semi imports fell 7% m/m and 21% y/y to 296Kt in April, continuing the grind down from last year’s highs. Contracted tonnages for 2013 have fallen by an estimated 10-20%, while spot material may have been diverted to a number of LME warehouses offering incentives for depositing the metal. While spot import arb opened in late February, imports have not yet shown a commensurate increase, and spot premiums have more than doubled in three months. Copper scrap imports fell 3% y/y to 340kt, below five- year lows for the month of April. Tight scrap supply due to lower copper prices and tougher customs inspections has prompted some smelters to cut output in late April. 10 May 2013 3 Barclays | Commodities Weekly WEEK IN REVIEW Commodities publications released this week: Cross Commodities China key commodities trade: Soft expansion China's commodity imports were mixed in April, with energy imports trending modestly higher but base metals imports grinding lower. Soft expansion of economic activities continued. Metals Gold Delta: Gold ETP outflows continue after hitting a monthly record in April Gold prices fluctuated around the $1460/oz level last week as April gold ETP net outflows reached a monthly record. While prices rose after the ECB rate cut, they ended the week roughly flat after Friday's US employment report. Although ETP outflows continued to put pressure on prices, coin sales remained strong in April. In our view, the vulnerability of further ETP outflows subsides should prices recover to above $1500/oz; however, we continue to believe ETP outflows remain a key downside risk in the near term. 10 May 2013 4 Barclays | Commodities Weekly Energy 10 May 2013 5 Barclays | Commodities Weekly ENERGY MARKET OUTLOOK No full retracement just yet for crude oil; Gas in the midst of shoulder season lull • We expect a short-term decline in crude appetite as NW Europe and Med refineries gear towards cutting runs temporarily, though an improvement is expected as the tail-end of Q2 approaches. • Natural gas prices dipped below $4/MMBtu last week and remained close to that level over the past few days, as the shoulder season lull is in full swing. Crude oil: price retracement in sight, but not just yet Miswin Mahesh Brent remained above $104/bbl this week with a slight pick-up in intraday volatility. We +44 (0)20 7773 4291 maintain our view that there is not yet enough momentum in the benchmark to power a firstname.lastname@example.org complete retracement to the familiar range around $111/bbl. While the macro-environment has turned positive with upside surprises in data seen this week from Germany, Australia Afonso Campos and the US, this is likely to only support prices at current levels at best, rather than propel a +44 (0)20 3555 4444 complete upward retracement. This is because, on the physical markets, demand for email@example.com prompt cargoes of light grade crudes continues to be muted. Refinery margins remain under pressure with European refineries that emerge from turnaround season widely expected to reduce utilisation rates. Simple refineries in North Pressurised margins in NWE West Europe (especially in the UK) have already started cutting runs. Margins in the and Med lead to temporary run Mediterranean are worse and run cuts are expected there as well. Although margins have cuts bounced back slightly over the last three days, the return of refineries in Asia over June is something that is looked out for in the direction of margins. Although refineries in the Pacific are largely still under maintenance, there is also a likelihood that they could possibly delay their return or come online and operate at lower utilisation rates. FIGURE 1 Europe/Africa refinery outages: return from maintenance but vulnerable to run cuts, mb/d 5.5 Average (2009-2012) 2012 2013 5.0 Imminent run cuts on poor margins? 4.5 4.0 3.5 3.0 2.5 2.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg, Barclays Research Large reductions in refinery Until then, while run cuts, especially in northwest Europe and the Mediterranean, are utilisation unlikely to follow imminent and expected to limit the appetite for prompt crude (eg. three unsold Angolan through globally in late Q2 cargoes in June( , we do not expect a large volume of run cuts to follow through globally given that: 10 May 2013 6 Barclays | Commodities Weekly 1. There is still some flexibility with regards to adjusting crude slates and processing sour grades to produce more fuel oil. This remains an attractive option to exercise given relatively attractive margins for producing residuals, compared with processing light sweet crude and producing distillates, where margins remain depressed. 2. Refineries must fulfil term obligations for refined products delivery, especially given that seasonal summer requirements are only about to begin. Healthy naphtha demand Looking forward, however, there are some positive indications for demand to look out for expected to come from Asia over the tail end of Q2, as naphtha demand picks up in Asia. In this context, we highlight the activity of China’s biggest independent petrochemical producer (Dragon Aromatics). The new complex consists of an 800 kt/year paraxylene (PX) facility and 4 mt/year condensate splitter. Recent statements from the company suggest the plant is expected to reach a commercial operational level by end-June (the plant was originally supposed to start mid- 2012). The complex is expected to secure feedstock from the spot market over Q3 (Reuters) and this could coincide with a pickup in activity across the region, helping light grades in general. Brent price retracement Beyond the short-term weakness in crude until the tail end of Q2, we continue to expect a expected towards end of Q2 as retracement for prices going into the tail end of Q2 only, with Brent expected to resume global demand picks up pace range-bound trading at about $111/bbl. This will coincide with global oil demand surpassing 90 mb/d for the first time in history, with non-OECD demand exceeding OECD demand. In terms of demand growth, we expect upside surprises in the Atlantic (Latin America) and the Pacific (smaller non-OECD Asia Pacific countries), while China is expected to grow a moderate 5%. This positive turnaround is already largely reflected in this week’s OPEC Monthly Oil Market Report with the organisation lifting the call on its own crude by 100 thousand b/d to 29.8 mb/d, in line with our expectations: OPEC production expected to rebound in late Q2 FIGURE 2 FIGURE 3 Ultra low Sulfur Diesel crack spread, $/bbl 3.5% Fuel Oil Rotterdam –Brent crack spread, $/bbl 41 -9 39 -10 37 -11 35 -12 33 -13 31 -14 29 -15 27 25 -16 23 -17 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research 10 May 2013 7 Barclays | Commodities Weekly Natural gas: Shoulder season lull Shiyang Wang Natural gas prices dipped below $4/MMBtu last week and remained close to that level in +1 212 526 7464 the past few days, as the shoulder season lull is in full swing. Indeed, heating and cooling firstname.lastname@example.org demand will be very low for the next couple of weeks. Furthermore, the storage injection for the week ending on 3 May came in at a healthy 88 Bcf, 2 Bcf/d higher than consensus expectations. With that, the deficit to last year’s storage level fell by 58 Bcf to stand at 737 Bcf. This narrowing is partially due to very mild weather for the week in reference. However, the accelerated pace of injections also suggests that fundamentals have become looser on a weather-adjusted basis in the past two weeks, likely reflecting a drop in gas-fired generation as the displacement of coal wanes at current gas prices. As the front of the curve has come off on the week, a slight contango was reintroduced to the shape of the forward curve. While the upside risks to the back end of the curve could be limited in the short term due to producer hedging, we believe there are several upside demand factors that the market has not yet priced in. In the near term, the market should await the DOE’s decision to approve more LNG export licenses to non-FTA countries in the next few months. Although the outcome remains difficult to predict, President Obama recently stated that the US is likely to be a net gas exporter by 2020 (Financial Times). Our balances suggest that current prices will be sufficient to dampen coal-to-gas displacement significantly and allow for inventories to rebuild to 3.9 Tcf by the end of October. Meanwhile, nuclear generation has underperformed our projections, and hydro generation indicators for the summer remain weak. We had expected the spring maintenance season to not be as deep as last year’s, leaving significantly more capacity running. In contrast, nuclear generation has been only about 100 MW higher y/y since March, nearly flat to last year’s levels. This is largely due to unplanned outages and longer- than-expected maintenance outages. For hydro generation, water supply at the Dalles Dam on the Columbia River is forecast to be 94% of normal for the April-to-September period, much lower than the 134% of normal in 2012. 10 May 2013 8 Barclays | Commodities Weekly Key price charts FIGURE 3 FIGURE 4 Oil: Front-month Brent and WTI ($/bbl) Oil: Brent forward curve ($/bbl) 130 130 WTI Brent 125 Range in 2012 119 120 Two months ago 115 One month ago 108 110 09-May-13 105 97 100 95 86 90 85 Years to expiry 80 75 1 2 3 4 6 7 8 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Source: Reuters, Barclays Research Source: Barclays Research FIGURE 5 FIGURE 6 Oil: Front-month Brent (€/bbl) and ICE Gasoil (€/ton) Oil: Front-month ICE Gasoil crack ($/bbl) Brent (LHS) Gasoil (RHS) 23 97 800 94 21 91 750 88 19 85 700 17 82 79 15 76 650 13 73 70 600 11 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Source: Reuters, Barclays Research Source: Bloomberg, Barclays Research FIGURE 7 FIGURE 8 US natural gas: Henry hub ($/MMbtu) US natural gas: Forward curve ($/MMbtu) 4.50 4.70 4.25 4.50 4.00 3.75 4.30 3.50 4.10 3.25 5/8/2013 5/2/2012 Prompt Cash 3.00 3.90 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Source: Reuters, Barclays Research Source: Reuters, Barclays Research 10 May 2013 9 Barclays | Commodities Weekly FOCUS: OIL Tight oil drilling – full throttle until the speed bumps Miswin Mahesh While the improvement in drilling efficiency gains across some key tight oil plays is +44 (0)20 7773 4291 meritorious and contributes directly to the current surge in tight oil production, there are email@example.com growing risks of this momentum approaching inflection points in the future (depending on rig availability) at which steep decline rates start to offset these efficiency gains. Afonso Campos The surge in US tight oil production has reached 2 mb/d; we expect it to reach 2.8 mb/d by +44 (0)20 3555 4444 2015 and 3.1 mb/d by 2020. This is noteworthy given that just five years ago 500 thousand firstname.lastname@example.org b/d had barely been breached. Much of this growth has come from geological formations in North Dakota and Texas. Unconventional drilling still Oil from these formations does not rise to the top cheaply or easily. These are unconventional faces some technological barrels, and the associated plays are indeed gearing up for unconventional experiments for challenges efficiency in an oil-drilling context. While advances have been made in understanding the underlying geology, it remains inherently difficult and varies markedly from play to play, meaning generalised assumptions on drilling wells in these fields cannot be made. Because of this, standardising technology becomes much less straightforward as the optimal requirements may differ for each different play (from drilling vertically through various stacked tight formations in the Permian Basin, to more horizontal wells in the Williston Basin). Technology is paramount in Much of the technology, though used already for natural gas extraction, remains expensive, rendering some tight oil plays complex and in need of adaptation for liquids exploration and production. These tight oil economic formations are especially dependent on emerging technology and advances to achieve economies of scale that can make or break the economics of a play. In other words, these technology improvements although involving significant upfront financial and research commitments, are in a sense contributing to the much needed improvement in volumes that eventually bring economies of scale to these plays. As a result, this follows through the order that, these developments are helping to access portions of reserves that would have been inaccessible otherwise at a cost that is reasonable and compatible with official selling prices for different crudes, and keeping with a company’s mandate to return value to shareholders. FIGURE 1 FIGURE 2 30 Day IP rate for an Eagle Ford producer, b/d Days from spud to well completion for Eagle Ford producer 1,200 25 2009 2010 2011 2012 2013 1,100 1,000 20 900 15 800 700 10 600 500 5 400 2009 2010 2011 2012 2013 0 Source: Company reports, Barclays Research Source: Company reports, Barclays Research 10 May 2013 10 Barclays | Commodities Weekly Much of the difficulty in extracting oil from these unconventional plays is that the resource lies between nearly impermeable and closely packed formations of shale and other minerals – hence the term “tight”. Over the past four or five years, producers’ knowledge of the geology in their core plays has advanced immensely, yet, broadly speaking, it is still far from the level of knowledge acquired over decades of conventional drilling, and thus remains expensive and uncertain. Richer insights Investments into tight oil have The time, monetary and R&D investment flows into unconventional drilling methods and yielded positive results survey methodologies have certainly yielded results. A measure of how well understood a certain field’s geology may be is the 30-day initial production (IP) rate for a new well. As the understanding increases, on average, so does this rate. Over time, IP in a majority of tight oil plays greatly improves. As an example, a prominent company in the unconventional space has increased IP rates more than 135% since 2009 (Figure 1). While this is in the Eagle Ford region, the trend reflects what is being experienced in other plays and basins, though the absolute numbers will understandably differ. By building a deeper and richer knowledge of the geology, the most fertile spots can be tackled with the most appropriate technology. Efficiency gains Significant increases in drilling Drilling efficiency is also experiencing welcome improvements. A measure of this is the average efficiency witnessed recently number of days in which a rig completes a well to the total agreed depth from initial spudding (a spud is the very first stage of drilling a well). Time to well completion has been decreasing yearly for the past half decade; in some instances, total drilling times have been cut in half (Figure 2). Production can thus increase via the same number of, or often even fewer, rigs. In North Dakota, the previously linear relationship between average rig count and number of spuds started in a particular month has broken down. This has been especially noticeable since the summer of 2011, from when the number of spuds and average daily production kept increasing but the number of rigs stalled or even decreased on occasion. Year-on-year to February, there has been a 38% increase in the number of spuds, a 39% increase in production, but a 9.4% decrease in the number of active rigs operating in the state (Figure 3). This relationship and the gains in drilling efficiency in North Dakota are mirrored across the other basins. Though spudding data are less widely available, a look at the total number of rigs in the US and daily production renders similar results. In fact, since July 2012, US crude production has increased about 12% to 7.2 mb/d, while the total number of oil rigs in operation has decreased 9% (Figure 4). FIGURE 3 FIGURE 4 North Dakota spuds, rig count and oil production US crude production and total oil rigs in operation 350 800 7.2 1600 Spuds, number (LHS) US crude production, mb/d (LHS) 300 Average rig count, number (LHS) 700 1400 ND Production, thousand b/d (RHS) 6.7 Total oil rigs, number (RHS) 1200 250 600 1000 200 500 6.2 800 150 400 600 100 300 5.7 400 50 200 200 0 100 5.2 0 07 08 09 10 11 12 13 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Source: North Dakota Department of Mineral Resources, Barclays Research Source: DOE, Smith Bits, Barclays Research 10 May 2013 11 Barclays | Commodities Weekly These gains in efficiency are due primarily to recently improved technology and extraction methodologies. Climbing the steep learning curve in geology has led to the development of technologies and infrastructure they are more suited for the formations producers are targeting. For instance, tight oil formations that rely more on horizontal wells have been able to increase the length of the lateral, allowing for a large cross-section of the area to be exposed to production. Development of new Drilling mobility has increased by the development of so-called walking rigs, which have 360 technologies is ongoing and degrees of mobility, while traditional rigs can only move in straight lines. Walking rigs can crucial now be moved at the rather swift pace of 30 feet/hour, which is a sharp reduction not only in moving time, because rigs no longer need to be disassembled and then re-rigged in the new location, but also in cost. This mobility is of great use in another sizeable technological development – multi-well pad drilling. Simply, this means that more than one horizontal well is drilled at a single location (pad), maximising the below-the-surface reach while reducing the above-ground footprint. Given that several wells are being drilled on one site, permitting issues become less of a concern: each well needs independent approval based on geology and location, so given their proximity, the likelihood of acceptance increases. The added mobility also means that pad-to-pad movements are simpler and incur less environmental and capital expense. Advances in tight oil extraction Combined with improved seismic imaging and computation modelling of decline rates and have led to lower average underlying geology, these technological advances allow for more intensive drilling costs of production programmes to be carried out more efficiently and at lower average cost per well. These are just some of the improvements taking place on the efficiency front, with gains also coming from producers consolidating their acreage in a specific contiguous geography, as opposed to a dispersed set of smaller-sized leases. The consolidation helps gain economies of scale on equipment used, as well as in the mobility of production crews. While we can probably expect more productivity gains, we feel the rate at which they will come through will likely see diminishing returns as the largest leaps in advancement are likely to fade. Combined with this, the fact that producers are focusing on the most fertile fields and easy-to- access regions first implies that the remaining terrains already pose the challenge of diminished productivity. Overall, we expect the highest growth momentum in tight oil production to likely fade over the next two years with growth expected to decelerate beyond 2015. FIGURE 5 FIGURE 6 Sample type curves for tight oil plays in ND and TX, b/d Current well yields for a prominent unconventional producer show focus is currently on oil-rich plays 500 100% Oil Gas NGLs Eagle Ford Bakken 400 80% 300 60% 200 40% 100 20% month 0 0% 1 4 7 10 13 16 19 22 Bakken / Threeforks Eagle Ford Source: Company reports, Barclays Research Source: Company reports, Barclays Research 10 May 2013 12 Barclays | Commodities Weekly Metals 10 May 2013 13 Barclays | Commodities Weekly METALS MARKET OUTLOOK Supply challenges dominate PGMs, short- covering copper rally likely still has legs • We think there is further upside to the short-covering rally in base metals with market positioning still short and positive demand signals from China. We would look for copper prices to rise above $7,500s before restabilising shorts. • While gold prices face slowing physical demand and persistent ETP outflows, the market focus is now shifting to PGMs ahead of Platinum Week, where supply challenges continue to dominate. Base metals: Short-covering copper rally likely still has legs Gayle Berry Across the base metals complex this week, short-covering has dominated price dynamics. +44 (0)20 3134 1596 In the context of extreme CTA short positioning, a stronger-than-expected US employment email@example.com report alongside a surge in German factory orders for March combined to act as catalysts to fuel the move in prices. For copper, this supported a move higher by as much as 10% Nicholas Snowdon from last week’s lows, putting it firmly back above $7,000/t. We think there is further +1 212 526 7279 upside to this move with market positioning still short and positive demand signals from firstname.lastname@example.org China. We would look for prices to rise above $7,500 before restabilising shorts. From a fundamental perspective, stock trends have been turning more positive. LME stocks have levelled out, as we had expected, SHFE and Chinese bonded stocks are falling. SHFE stocks fell a chunky 18.7Kt today and bonded stocks are around 650Kt, down from 800Kt at the beginning of the year. Other indicators of Chinese demand are also positive, physical premiums are high, SHFE time spreads are in backwardation, the import arb is still open and data on end-use activity in some sectors have continued to improve. Interestingly, this rally has mainly been in copper, and to a lesser extent aluminium, reflecting the size of short positioning in those markets and also the more encouraging fundamental signals in the case of copper. Nickel, lead and zinc have largely missed out on the move, with shorts felling little need to cover in some cases and in others, like lead a lack FIGURE 1 FIGURE 2 April data showed Chinese copper imports falling to their … despite ongoing signals of tightening in the Chinese lowest levels since June 2011… market in Q2 so far and support for higher imports Kt Unwrought copper import $/t Shanghai import copper premium 600 140 5yr range 2012 2013 130 500 120 110 400 100 90 300 80 70 200 months 60 100 50 12 1 2 3 4 5 6 7 8 9 10 11 12 40 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Source: China Customs, Barclays Research Source: Bloomberg, Barclays Research 10 May 2013 14 Barclays | Commodities Weekly of positioning and fundamental signals playing a part. Preliminary Chinese trade data for April were soft with base effects exacerbating the y/y falls. Copper unwrought and semis imports fell 7% m/m and 21% y/y, respectively, to 296Kt in April, continuing the grind down from last year’s highs. Contracted tonnages for 2013 have fallen an estimated 10-20%, while spot material may have been diverted to a number of LME warehouses offering incentives for depositing the metal. Copper scrap imports fell 3% y/y to 340kt, below five-year lows for the month of April. Tight scrap supply due to lower copper prices and tougher customs inspections prompted some smelters to cut output in late April. On the copper mine supply side, there were several developments of note over the past week. First, Rio Tinto stated that it expects final approvals from the Mongolian government to start shipments from its Oyu Tolgoi copper mine in the next few weeks. This follows protracted negotiations between the two parties that had raised concerns about the project timeline. The mine is expected to produce 70Kt this year before ramping up to close to 200Kt by 2015. Second, union workers in Chile announced that early negotiations have begun regarding the labour contract at Collahuasi mine (275Kt output in 2012), which expires in January 2014. The mine’s production is expected to recover this year to potentially as high as 400Kt. Finally, Barrick Gold and Antofagasta announced they have given up on their Reko Diq copper-gold project in Pakistan, citing the fractious political environment in Baluchistan as the key reason for cancelling the project; $200mn had already been spent on the project development, and at one point, it had been estimated the mine could produce as much as 200Kty copper concentrate. In terms of other metals, perhaps the most interesting developments have been in the nickel market. First, the pressure from lower LME prices has led to some mine closures. Norilsk Nickel announced that it closed its 9Kty Lake Johnston mine in Australia due to lower prices. Xstrata also announced that it is closing its 7Kty Sinclair mine in Australia, though it cited ore depletion as the key factor. Second, pressure from lower prices appears less telling in China in the nickel pig iron sector. There has been little evidence of any large-scale cutbacks in the NPI sector, which is keeping the Chinese nickel market firmly in surplus. We believe there are a couple of factors at play there. In some provinces, most prominently Inner Mongolia, power subsidies have been provided to the sector through at least the end of June. In addition, given the lower ore prices and increasing role of lower-cost RKEF NPI capacity, average production costs in the sector have continued to decline. Average RKEF NPI costs are now less than $14,000/t. Despite reasonable domestic stainless demand in Q2 so far, stocks have continued to build right along the supply chain from ore to stainless products. Precious metals: Gold stabilises, but PGMs edge higher ahead of Platinum Week Suki Cooper After the heightened volatility, prices have stabilised across the complex and have slowly +1 212 526 7896 edged higher. The stability bodes well for gold amid a weaker dollar, though equities email@example.com remained strong. The physical market has greeted the lower price environment with enthusiasm: interest has started to ease but remains elevated compared with the start of the year. In China, volume traded on the Shanghai Gold Exchange has halved over the week but is still comparable to the pre-Lunar New Year buying. Indeed, the monthly rolling average is still scaling record highs, while local premiums also remain high. Bar premiums across Asia remain high at $3/oz in Hong Kong, a level last seen in January 2011, $3/oz in Singapore, a level last seen in October 2011, and at 87.5cents/oz in Tokyo, having traded at a discount for the bulk of the past year. Gold imports into China from Hong Kong reached a record 223.5 tonnes in March, more than doubling m/m and almost doubling the previous record of 114 tonnes set in December last year. Gold exports from China to Hong Kong almost 10 May 2013 15 Barclays | Commodities Weekly trebled m/m and quadrupled y/y to 97 tonnes, but China was still a net importer to the magnitude of 126 tonnes. Though only painting part of the picture as a proxy for demand, the data continues to underscore the strength of China’s demand before the price drop. Viewed alongside the volume traded on the Shanghai Gold Exchange and local premiums, there is little sign of demand slowing in China. Appetite to buy in India still persists, but volumes have slowed. Reuters has cited local dealers as saying there would be symbolic purchases for the Akshaya Tritiya festival, but demand had slowed otherwise. In contrast, gold ETP outflows have shown little sign of slowing. Gold holdings are down 37 tonnes for the month-to-date, following a record outflow of 182 tonnes in April. Outflows have reached 379 tonnes for the year-to-date, and total holdings are at their lowest since October 2011, now at 2380 tonnes. While physical demand has shown signs of slowing, ETP flows have not – this poses downside risk in the near term, in our view. The World Gold Council Gold Demand Trends report due for release next week will cover Q1 13 and, thus, not the demand response to lower prices; however, in the past, China’s strongest quarterly demand was posted in Q1 12 at 255 tonnes, and India at 317 tonnes in Q2 07. Market focus will shift to the PGMs next week in light of Platinum Week (see this week’s focus). Much of the market attention has been on the supply side and Anglo American Platinum’s revised restructuring. The delay in implementation and the revised proposal reduces our original estimate for production removed by approximately half from 217koz for 2013. But even with the scaled back closures our platinum balance still delivers a deficit for the full year. Given the upcoming wage negotiations, the risk of supply disruptions remains high. Although we do not expect losses to the magnitude suffered last year, the presence of AMCU at the negotiation table poses the potential to tighten the market should industrial action occur. Indeed Lonmin has highlighted that the AMCU now represents 70% of its workforce (Reuters) as workers have switched from NUM, beginning at less than 10% at the start of last year. Lonmin is in the process of finalising an agreement with the unions to start negotiations. Anglo American Platinum announced today job losses would be scaled back from the initial proposal of 14,000 down to 6,000. The revised production guidance is 100koz higher at 2.2Moz - 2.4Moz, with a reduction in headline capacity now placed at 250koz in 2013, and Khuseleka 1 now set to remain operational. The demand picture continues to look weak but growth in investment demand has helped to partially offset this. FIGURE 3 FIGURE 4 Platinum ETP inflows exceed 275koz YTD Gold imports into China from Hong Kong hit record high 250 150 Gold imports to China from Hong Kong 250 Flows into physical platinum ETPs (koz) (tonnes, RHS) 200 SGE trading volume (tonnes, LHS) 125 200 150 100 150 100 50 75 100 0 50 50 -50 25 0 -100 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 May-11 Nov-11 May-12 Nov-12 May-13 Source: ETP issuers, Bloomberg, Barclays Research Source: Hong Kong Customs, Reuters, Barclays Research 10 May 2013 16 Barclays | Commodities Weekly Base metals LME cash prices FIGURE 5 FIGURE 6 Aluminium ($/t) Copper ($/t) 2,200 8,500 2,100 8,100 2,000 7,700 1,900 7,300 1,800 6,900 1,700 6,500 May-12 Aug-12 Nov-12 Feb-13 May-13 May-12 Aug-12 Nov-12 Feb-13 May-13 Source: EcoWin, Barclays Research Source: EcoWin, Barclays Research FIGURE 7 FIGURE 8 Lead ($/t) Nickel ($/t) 2,600 20,000 2,400 18,500 2,200 17,000 2,000 15,500 1,800 1,600 14,000 May-12 Aug-12 Nov-12 Feb-13 May-13 May-12 Aug-12 Nov-12 Feb-13 May-13 Source: EcoWin, Barclays Research Source: EcoWin, Barclays Research FIGURE 9 FIGURE 10 Tin ($/t) Zinc ($/t) 26,000 2,300 24,000 2,150 22,000 2,000 20,000 1,850 18,000 16,000 1,700 May-12 Aug-12 Nov-12 Feb-13 May-13 May-12 Aug-12 Nov-12 Feb-13 May-13 Source: EcoWin, Barclays Research Source: EcoWin, Barclays Research 10 May 2013 17 Barclays | Commodities Weekly Precious metals prices and ETP holdings FIGURE 11 FIGURE 12 Gold ($/oz) Silver ($/oz) 1,800 37 34 1,700 31 1,600 28 1,500 25 1,400 22 1,300 19 May-12 Aug-12 Nov-12 Feb-13 May-13 May-12 Aug-12 Nov-12 Feb-13 May-13 Source: EcoWin, Barclays Research Source: EcoWin, Barclays Research FIGURE 13 FIGURE 14 Platinum ($/oz) Palladium ($/oz) 1,800 800 1,700 725 1,600 650 1,500 575 1,400 1,300 500 May-12 Aug-12 Nov-12 Feb-13 May-13 May-12 Aug-12 Nov-12 Feb-13 May-13 Source: EcoWin, Barclays Research Source: EcoWin, Barclays Research FIGURE 15 ETP holdings (8 May 2013) Physical ETPs Weekly change Month-to-date change Year-to-date change Total holdings Gold (tonnes) -30.4 -37.4 -379.4 2,381 Open end funds -30.4 -37.4 -397.4 2,256 SPDR (GLD) -23.8 -27.1 -299.4 1,051 Silver (tonnes) -18.8 -18.8 567.6 20,042 Open end funds -18.8 -18.8 567.6 16,017 iShares US -21.1 -21.1 346.4 10,431 Platinum (ounces) 186,691 197,432 277,411 2,073,707 Open end funds 186,691 197,432 262,624 1,991,420 US ETF Securities -257 -257 47,727 548,791 Palladium (ounces) -6,958 -14,704 216,702 2,401,233 Open end funds -6,958 -14,704 176,258 2,213,289 US ETF Securities 9,442 9,442 81,579 793,942 Source: Various issuer websites, Bloomberg, Barclays Research 10 May 2013 18 Barclays | Commodities Weekly FOCUS: PRECIOUS METALS Platinum Week: PGMs set to remain in deficit We expect South Africa’s mine supply-side challenges, auto-catalyst recycling and European demand weakness to be the dominant themes of Platinum Week, but we continue to forecast both platinum and palladium markets to be in deficit this year. Suki Cooper PGM prices have stabilised recently, with platinum hovering around $1500/oz and +1 212 526 7896 palladium testing $700/oz ahead of Platinum Week. Johnson Matthey kicks off Platinum firstname.lastname@example.org Week with the release of its Platinum 2013 report, in which it will finalise its 2012 balances and provide price forecasts for the next six months. Given the pick-up in recycling toward the end of last year, we see scope for supply to be revised up from the preliminary estimates released in November. However, production lost in H2 12 as a result of the industrial unrest should more than offset this. We expect platinum and palladium to deliver deficits in 2013 and to remain in deficit in 2014 as the challenging mine supply backdrop overshadows the modest recovery in demand anticipated for later in the year. As well as the announcement of Amplat’s review, next week the market focus is likely to shift to implications of Euro VI and whether it can offset the weak underlying auto demand, and in turn whether growth in investment demand can offset this weakness and whether auto-catalyst recycling will grow unhindered (our balance currently assumes recycling growth at around 10% over the next couple of years). Although we do not expect production losses to the magnitude suffered last year, the third largest producer, Lonmin, has highlighted that the workforce representation of the more radical union, the AMCU, has risen to 70% from less than 10% at the start of last year. Furthermore, Lonmin has suffered furnace outages. Although the largest platinum producer, Anglo American Platinum, has scaled back its restructuring proposal, the strong investment demand growth has almost surpassed our original estimate of production to be removed this year of 217koz. Although the largest platinum producer, Anglo American Platinum, has delayed the announcement of its restructuring, strong investment demand growth has almost outweighed our estimate of lost production this year (217koz). The newly launched physically backed ETF in South Africa has recorded fresh demand exceeding 190koz. Collectively, platinum ETP holdings are at a fresh record high, surpassing 2Moz. Yet, the FIGURE 1 FIGURE 2 Physical platinum ETF holdings continue to grow European auto demand struggles to find a turning point 2500 1200 EU car registrations Total platinum holdings in ETPs ('000 oz) 12 per. Mov. Avg. (EU car registrations) 1100 2000 1000 1500 900 800 1000 700 600 500 500 400 0 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Apr 07 Oct 08 Apr 10 Oct 11 May 13 Source: Various ETF issuers, Bloomberg, Barclays Research Source: Datastream, Barclays Research 10 May 2013 19 Barclays | Commodities Weekly platinum price has yet to meaningfully break above $1500/oz, suggesting that underlying fabrication demand remains weak or stock levels are healthy. Indeed, Nymex platinum stocks continue to scale record highs while EU car registrations fell by 16% y/y in March. Although prices have stabilised, the issues have not gone away. We believe platinum offers the most upside potential in the near term given auto demand in Europe is expected to decline at a slower pace in H2 13; but, more important, biennial wage negotiations are set to take place over the coming weeks. 10 May 2013 20 Barclays | Commodities Weekly Forecasts and Data 10 May 2013 21 Barclays | Commodities Weekly COMMODITY PRICE FORECASTS Barclays Research quarterly average commodity price forecasts Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13F Q3 13F Q4 13F Base Metals (LME cash) Aluminium US$/t 2,176 1,975 1,921 1,996 2,003 1,950 2,000 2,100 Copper US$/t 8,310 7,869 7,706 7,909 7,931 8,100 8,000 7,650 Lead US$/t 2,093 1,974 1,975 2,199 2,301 2,300 2,400 2,450 Nickel US$/t 19,651 17,146 16,317 16,967 17,314 16,500 16,250 17,000 Tin US$/t 22,941 20,565 19,275 21,560 24,125 23,500 25,000 26,000 Zinc US$/t 2,025 1,928 1,885 1,947 2,033 2,050 1,950 2,200 Base Metal Index^ 218 201 195 203 209 207 208 210 Precious metals Gold US$/oz 1690 1611 1653 1717 1631 1350 1450 1500 Silver US$/oz 32.6 29.4 29.9 32.5 30.1 23.0 25.0 26.0 Platinum US$/oz 1604 1495 1493 1593 1628 1660 1710 1750 Palladium US$/oz 680 625 609 650 738 725 750 780 Energy WTI US$/bbl 103 94 92 88 94 95 93 99 Brent US$/bbl 118 109 109 110 113 110 111 114 US Natural Gas US$/mmbtu 2.5 2.4 2.9 3.5 3.5 4.0 4.0 4.1 Note: ^Economist Intelligence Unit weight. Base metals prices are LME cash. Precious metals spot prices. WTI: front month NYMEX close. Brent: front month IPE close. US natural gas: NYMEX front month close. Source: Barclays Research Barclays Research annual average commodity price forecasts 2008 2009 2010 2011 2012 2013F 2014F 2015F Base Metals Aluminium US$/t 2,573 1,664 2,172 2,398 2,017 2,013 2,100 2,250 Copper US$/t 6,961 5,148 7,533 8,813 7,948 7,920 7,500 9,500 Lead US$/t 2,093 1,721 2,146 2,399 2,060 2,363 2,450 2,600 Nickel US$/t 21,115 14,604 21,809 22,853 17,520 16,766 18,000 20,000 Tin US$/t 18,500 13,579 20,407 26,063 21,085 24,656 26,000 26,000 Zinc US$/t 1,876 1,654 2,158 2,191 1,946 2,058 2,700 2,800 Base Metal Index^ 204.3 146.2 210 240 204 209 212 243 Precious Metals Gold US$/oz 872 972 1,226 1,571 1,668 1,483 1,450 1,375 Silver US$/oz 15.0 14.6 20.2 35.2 31.1 26.0 24.0 21 Platinum US$/oz 1,569 1,205 1,610 1,716 1,547 1,687 1,750 1,875 Palladium US$/oz 348 262 526 729 641 748 795 900 Energy WTI US$/bbl 99.7 62 80 95 94 95 117 120 Brent US$/bbl 98.4 63 80 111 112 112 130 135 US Natural Gas US$/mmbtu 8.90 4.16 4.39 4.03 2.82 3.90 4.10 N/A Note: ^Economist Intelligence Unit weight. Base metals prices are LME cash. Precious metals spot prices. WTI: front month NYMEX close. Brent: front month IPE close. US natural gas: NYMEX front month close. Source: Thomson Datastream, Barclays Research 10 May 2013 22 Barclays | Commodities Weekly Price forecast comparisons Price Change Week Ago Price Change Month Ago Price Change Year Ago Commodity 9-May-13 (%,Thurs/Thurs) Price (%, M/M) Price (%, Y/Y) Price Carbon EUA ECX Euro/tonne 23.0% 3.74 3.04 -20.4% 4.7 -44.2% 6.7 Rubber TOCOM Y/kg 7.6% 265.3 246.50 0.8% 263.1 -4.2% 277.0 Copper LME $/tonne 7.4% 7,354 6,848 -3.6% 7,630 -8.7% 8,054 Tin LME $/tonne 5.3% 20,725 19,675 -9.8% 22,970 0.6% 20,605 Coffee ICE $/lb 4.9% 1.46 1.39 7.7% 1.35 -16.8% 1.75 Cotton ICE $/lb 4.9% 0.88 0.84 3.9% 0.85 2.4% 0.86 Aluminium LME $/tonne 4.2% 1,881 1,804 -1.9% 1,918 -7.8% 2,040 Nickel LME $/tonne 4.1% 15,268 14,667 -5.7% 16,188 -11.1% 17,180 Gasoline NYMEX $/gallon 3.9% 2.89 2.78 -2.0% 2.94 -4.6% 3.02 Lead LME $/tonne 3.8% 2,012 1,939 -3.6% 2,087 -2.8% 2,069 Soybeans CBOT $/bushel 3.5% 14.91 14.41 6.9% 13.96 4.4% 14.28 Palladium NYMEX $/oz 3.1% 715.0 693.3 -2.4% 732.5 16.6% 613.4 Zinc LME $/tonne 2.9% 1,872 1,819 -2.5% 1,921 -3.7% 1,943 Heating Oil NYMEX $/gallon 2.9% 2.94 2.85 -0.7% 2.96 -2.0% 3.00 Gas Oil ICE $/tonne 2.8% 871.3 847.9 -2.0% 888.8 -9.6% 963.5 Crude Oil NYMEX $/barrel 2.6% 96.41 94.00 2.4% 94.18 -0.4% 96.84 Aluminium Alloy LME $/tonne 2.5% 1,790 1,746 -0.9% 1,806 -8.0% 1,945 Rough Rice CBOT $/bushel 1.7% 15.29 15.03 -2.7% 15.7 0.8% 15.2 Crude Oil ICE $/barrel 1.5% 104.46 102.87 -1.5% 106.04 -7.7% 113.15 Platinum NYMEX $/oz 1.1% 1,516 1,500 -2.3% 1,552 1.2% 1,498 Lean Hogs CME $/lb 0.8% 0.92 0.91 14.0% 0.81 14.9% 0.80 Coal API4 ICE $/tonne 0.6% 81.70 81.25 -1.7% 83.1 -15.8% 97.0 Silver OTC $/oz 0.4% 23.95 23.87 -14.3% 27.95 -18.1% 29.25 UK Natural Gas ICE £/therm 0.3% 0.76 0.75 -5.1% 0.8 6.2% 0.7 Coal API2 ICE $/tonne 0.2% 83.80 83.60 1.5% 82.6 -6.6% 89.8 Gold OTC $/oz 0.1% 1,469.7 1,468.4 -7.4% 1,587.1 -7.8% 1,594.1 Barley WCE C$/tonne 0.0% 273.50 273.50 0.0% 273.5 13.0% 242.0 Freight Capesize OTC $/tonne 0.0% 6.75 6.75 -1.2% 6.8 -32.5% 10.0 Azuki Beans TGE JPY/30kg 0.0% 12,290 12,290 0.3% 12,250 -7.3% 13,260 Carbon CER ECX Euro/tonne 0.0% 0.01 0.01 -95.5% 0.2 -99.7% 3.7 Wheat CBOT $/bushel -0.3% 7.16 7.19 1.1% 7.09 21.1% 5.91 Corn CBOT $/bushel -0.4% 6.95 6.98 7.8% 6.44 8.3% 6.41 UK Power APX Euro/MWh -0.4% 47.53 47.74 -6.4% 50.8 7.3% 44.3 Sugar ICE $/lb -0.7% 0.17 0.18 -1.4% 0.18 -14.3% 0.20 Oats CBOT $/bushel -0.8% 4.13 4.16 12.4% 3.7 24.4% 3.3 German Power EEX Euro/MWh -1.0% 32.45 32.77 -6.6% 34.8 -20.3% 40.7 US Natural Gas NYMEX $/mmbtu -1.2% 3.98 4.03 -0.7% 4.01 61.8% 2.46 Wheat KBOT $/bushel -1.3% 7.92 8.02 6.1% 7.47 30.3% 6.08 Live Cattle CME $/lb -2.5% 1.21 1.24 35.4% 0.89 3.4% 1.17 Lumber CME $/1000 ft -2.6% 328.50 337.20 -12.5% 375.4 11.8% 293.8 Cocoa ICE $/tonne -3.2% 2,336 2,414 5.3% 2,219 -1.2% 2,364 Feeder Cattle CME $/lb -3.4% 1.36 1.41 -4.8% 1.43 -9.9% 1.51 Source: Thomson Datastream, Barclays Research 10 May 2013 23 Barclays | Commodities Weekly TRADE RECOMMENDATIONS FIGURE 1 Key recommendations Current price Gain/Loss Contract Entry Date Entry price Unit (8-May-2013) $ % Open trades Long NYMEX platinum Jan-14 30/04/2013 1511.40 1485.50 $/oz -25.90 -1.7% Rationale: We continue to forecast the platinum market to remain in deficit this year and the rising workforce representation of AMCU is likely to lead to greater scope for industrial unrest during the biennial wage negotiations. Short 3.5% fuel oil Rotterdam-Brent crack May-13 30/04/2013 -10.79 -11.18 $/bbl -0.39 3.6% spread Rationale: We recommend shorting high sulphur fuel oil in the OTC market on persistent oversupply meeting waning demand, as the world moves to burn less fuel oil for power generation and where bunker sales remain low amid relatively high inventories. Long NYMEX palladium Dec-13 18/01/2013 724.80 683.80 $/oz -41.00 -5.7% Rationale: We see much better prospects in PGM markets, predicated on a rebound in Chinese palladium imports against the backdrop of a second successive year in deficit for the palladium market. Long Brent crude oil Dec-15 27/01/2011 98.15 94.74 $/bbl -3.41 -3.5% Rationale: We see the medium-term crude oil price risks as being to the upside mainly due to strong EM demand growth, lack of spare capacity and constraints on non-OPEC supply. We expect far-forward prices to benefit, with our 2015 price forecast for Brent pegged at $135/bbl. Note: From January 2013, a stop loss of -7.5% and a profit target of 15% will be applied to all trades. Trades will automatically be shut if either of these thresholds is breached, unless there are exceptional circumstances that suggest the trade should be kept open. Source: Reuters, Barclays Research 10 May 2013 24 Barclays | Commodities Weekly FIGURE 2 Closed trades Gain/Loss Closed Trades Contract Entry Date Exit Date Entry price Exit price Unit $ % Directional trades Short LME nickel May-13 15/02/2013 21/03/2013 18380.00 16872.00 $/t 1508.00 8.2% Short LME aluminium Mar-13 01/10/2012 18/03/2013 2144.3 1893.5 $/oz 250.8 11.7% Long COMEX gold Feb-13 01/10/2012 22/01/2013 1785.5 1693.2 $/oz -92.3 -5.2% Long NYMEX palladium Dec-12 29/02/2012 31/12/2012 710 703 $/oz -7 -0.9% Long LME copper Dec-12 17/05/2012 24/08/2012 7639 7642 $/t -1373 -14.3% Long LME aluminium Dec-15 29/03/2011 20/07/2012 2884 2193 $/t -690.8 -24.0% Short US nat gas Henry Hub Oct-13 21/11/2011 20/12/2011 4.4 4.1 $/mmbtu 0.3 6.6% Long COMEX gold** Dec-12 21/11/2011 20/12/2011 1694 1628 $/oz -66 29.3% Long Carbon EUA Dec-11 24/02/2011 30/06/2011 15.4 13.5 €/t -1.9 -12.1% Long UK natural gas Q3-11 29/03/2011 26/05/2011 63.9 58.5 p/therm -5.4 -8.5% Long LME nickel Jun-11 24/02/2011 26/05/2011 27501 22821 $/t -4680 -17.0% Long European delivered coal (API2)** Apr-11 27/01/2011 29/03/2011 114.5 125.7 $/t 16 14.4% Short Comex silver Dec-11 27/01/2011 24/02/2011 27.1 33.1 $/oz -6 -22.4% Long LME copper Jun-11 22/09/2010 24/02/2011 7833.0 9505 $/t 1672 21.3% Short UK natural gas Summer 2011 19/10/2010 27/01/2011 47.2 52.5 p/therm -5 -11.3% Long NYMEX crude oil** Dec-11 19/10/2010 27/01/2011 84.8 99.3 c/bbl 12.1 14.2% Short US natural gas Dec-11 13/08/2010 26/11/2010 5.54 5.12 $/mmbtu 0.43 7.7% Long LME lead Dec-10 21/06/2010 13/08/2010 1851 2065 $/t 214 11.6% Long LME copper** Sep-10 10/12/2009 13/08/2010 7062 7143 $/t 345 5.0% Long NYMEX palladium Jun-10 22/02/2010 11/05/2010 444 532 $/oz 88 19.8% Long LME nickel Jun-10 10/12/2009 18/03/2010 16331 22760 $/t 6429 39.4% Long NYMEX crude oil May-10 10/12/2009 18/02/2010 75.4 79.1 $/b 3.7 4.9% Spread trades US natural gas spread widening 21/03/2013 26/03/2013 0.095 0.086 $/mmbtu -0.01 - Short front month Brent time spread 15/02/2013 08/03/2013 90.0 76.0 c/b 14.0 - Short US gasoline crack spread 18/01/2013 24/01/2013 27.8 30.0 $/b -2.2 - UK nat gas spread widening 24/08/2012 29/11/2012 0.01 0.58 p/therm 0.57 - Fuel oil versus gasoil differentials 29/02/2012 01/10/2012 -30.54 -30.01 $/b 0.54 - Short European gasoil crack spreads 25/06/2012 20/07/2012 0.50 -0.41 $/b 0.91 - US gasoline (RBOB) spread tightening 20/12/2011 17/05/2012 3.0 3.8 $/b 0.9 - Copper spreads tightening 21/11/2011 21/03/2012 -17.3 14.5 $/t 14.0 - WTI contango widening 19/07/2011 29/02/2012 0.38 0.41 $/b 0.03 - Natural gas spread widening 15/12/2010 30/06/2011 0.63 0.41 $/mmbtu -0.22 - Crude oil spread tightening** 20/04/2011 26/05/2011 -0.36 -0.37 $/b 0.34 - Gasoil spread tightening 22/09/2010 19/10/2010 -16.8 -15.3 $/t 1.50 - US Henry Hub nat gas 21/06/2010 13/08/2010 0.66 0.65 $/mmbtu 0.01 - Note: Entry and exit prices reference closing prices on the day of publication;**these trades include gains/losses from previous trades. Source: Reuters, Barclays Research 10 May 2013 25 Barclays | Commodities Weekly KEY DATA RELEASES • In China, the State Council executive meeting held on 6 May unveiled details of the government’s reform agenda in 2013. Nine priorities were highlighted, including public sector, fiscal, financial, railway/private capital, resource pricing, social welfare system, quality urbanisation, agriculture modernisation, and innovation. Our economists think the carefully chosen content, wording, and ordering of the reforms suggest the new government is fully aware of public discontent, that it understands the urgency and priority of needed reforms, and that it plans to push forward in a pragmatic manner. Our economists note that in many cases, operational details are still being worked out (for more details, see China unveils its 2013 reform agenda - a step forward). • Our economists lowered their full-year CPI inflation forecast to 3.0% from the 3.2% projected since December, in view of lower-than-expected food inflation and subdued non-food inflation YTD. April CPI inflation was 2.4% y/y, largely in line with consensus and up from 2.1% in March. Meanwhile, PPI deflation worsened to -2.6% y/y from -1.9% in March given a weak recovery, over-capacity and falling global commodity prices. • German industrial production rose by 1.2% in March, which was better than our economists’ above-consensus forecast (Barclays: +0.5%, BB consensus: -0.1%). Better activity in February/March more than compensated for the disappointing January figures. Monday Tuesday Wednesday Thursday Friday 06 May 07 May 08 May 09 May 10 May UK Public Holiday EIA Short-Term Enerrgy Preliminary (April) China EIA Weekly Natural Gas CFTC Data China PMI Composite Outlook Commodity Data Storage SHFE Aluminium, Copper (National Bureau of and Zinc Inventory Data Statistics) OPEC Monthly Oil Market Dept of Energy Weekly Oil Report Data USDA WASDE Report German IP 13 May 14 May 15 May 16 May 17 May OECD Main Economic Dept of Energy Weekly Oil EIA Weekly Natural Gas CFTC Data Indicators Data Storage SHFE Aluminium, Copper German ZEW survey US PPI US IP and Zinc Inventory Data US Empire State Mfg Index US CPI US Consumer Sentiment US IP US Philly Fed Mfg Index US Leading Indicators Euro Area GDP Flash Euro Area HICP 20 May 21 May 22 May 23 May 24 May Detailed (April) China Dept of Energy Weekly Oil EIA Weekly Natural Gas CFTC Data Commodity Data out this Data Storage SHFE Aluminium, Copper week (National Bureau of US Existing Home Sales US New Home Sales and Zinc Inventory Data Statistics) US FOMC Minutes US Durable Goods Orders 27 May 28 May 29 May 30 May 31 May UK & US Public Holiday Dept of Energy Weekly Oil EIA Weekly Natural Gas CFTC Data Data Storage SHFE Aluminium, Copper US GDP and Zinc Inventory Data US Chicago PMI US Consumer Sentiment Euro Area HICP Flash 10 May 2013 26 Barclays | Commodities Weekly FX FORECASTS FX forecasts Forecast vs outright forward Spot 1m 3m 6m 1y 1m 3m 6m 1y Emerging Asia USD/CNY 6.13 6.18 6.16 6.14 6.08 -0.1% -0.4% -0.8% -2.0% USD/HKD 7.76 7.76 7.76 7.76 7.76 0.0% 0.1% 0.1% 0.1% USD/INR 54.25 53.50 53.50 54.00 55.00 -1.9% -2.7% -3.3% -4.2% USD/IDR 9,718 9,750 9,850 9,900 10,000 0.2% 0.7% 0.0% -1.5% USD/KRW 1,091 1,105 1,095 1,090 1,080 1.1% -0.1% -0.9% -2.2% USD/LKR 125.90 126.50 127.00 128.00 128.00 -0.4% -1.2% -2.3% 1.5% USD/MYR 2.97 2.98 2.96 2.94 2.90 0.2% -0.8% -2.0% -4.2% USD/PHP 40.83 40.50 40.00 39.50 39.00 -0.8% -1.9% -3.1% -4.3% USD/SGD 1.230 1.250 1.250 1.240 1.230 1.7% 1.7% 0.9% 0.1% USD/THB 29.45 29.50 29.25 29.00 29.00 0.0% -1.2% -2.5% -3.3% USD/TWD 29.42 29.60 29.40 29.00 28.75 -1.6% 0.4% -1.9% -1.2% USD/VND 20,945 20,950 20,950 20,900 20,900 -0.3% -1.1% -2.6% -4.9% Latin America USD/ARS 5.22 5.26 5.41 5.63 6.28 -2.4% -7.1% -14.7% -24.6% USD/BRL 2.00 1.95 1.95 2.00 2.00 -2.8% -3.7% -2.7% -5.4% USD/CLP 472 472 473 473 475 -0.5% -1.1% -2.2% -3.7% USD/MXN 11.95 12.08 11.98 11.77 11.50 0.8% -0.5% -2.9% -6.5% USD/COP 1,830 1,840 1,833 1,817 1,800 0.2% -0.4% -2.5% -4.9% USD/PEN 2.61 2.59 2.58 2.57 2.55 -0.7% -1.3% -2.0% -3.2% EEMEA EUR/CZK 25.79 25.85 26.00 26.25 26.25 0.2% 0.8% 1.8% 1.8% EUR/HUF 293 305 307 315 320 3.7% 3.8% 5.8% 6.3% EUR/PLN 4.12 4.13 4.13 4.13 4.13 -0.1% -0.5% -1.0% -2.0% EUR/RON 4.33 4.33 4.32 4.30 4.25 -0.2% -1.5% -2.0% -5.0% USD/RUB 31.14 31.00 31.00 31.00 31.00 -1.1% -2.0% -3.5% -6.0% BSK/RUB 35.50 35.05 34.91 34.49 34.21 -1.9% -3.2% -5.8% -9.1% USD/TRY 1.79 1.82 1.85 1.85 1.85 1.2% 2.3% 1.4% -0.6% USD/ZAR 8.98 9.20 9.60 9.50 9.20 2.0% 5.6% 3.3% -2.2% USD/ILS 3.55 3.65 3.65 3.60 3.55 2.8% 2.6% 0.9% -0.9% USD/EGP 6.96 6.94 7.00 7.30 7.60 -2.2% -4.8% -6.1% -10.2% USD/UAH 8.11 8.20 8.20 9.60 9.60 0.5% -0.8% 12.1% 3.4% Source: Barclays Research 10 May 2013 27 Barclays | Commodities Weekly COMMODITIES RESEARCH ANALYSTS Barclays 5 The North Colonnade London E14 4BB Gayle Berry Afonso Campos Sijin Cheng Suki Cooper Commodities Research Commodities Research Commodities Research Commodities Research +44 (0)20 3134 1596 +44 (0)20 3555 4444 +65 6308 6320 +1 212 526 7896 email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org Helima Croft Christopher Louney Sha Luo Miswin Mahesh Commodities Research Commodities Research Commodities Research Commodities Research +1 212 526 0764 +1 212 526 6721 +44 (0)20 7773 3994 +44 (0)20 7773 4291 email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org Kevin Norrish Biliana Pehlivanova Nicholas Snowdon Kate Tang Commodities Research Commodities Research Commodities Research Commodities Research +44 (0)20 7773 0369 +1 212 526 2492 +1 212 526 7279 +44 (0)20 7773 0930 email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org Sudakshina Unnikrishnan Shiyang Wang Commodities Research Commodities Research +44 (0)20 7773 3797 +1 212 526 7464 email@example.com firstname.lastname@example.org 10 May 2013 28 Analyst Certification The views expressed in this report accurately reflect the personal views of XXXX XXXX, the primary analyst responsible for this report, about the subject securities or issuers referred to herein, and no part of such analyst's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed herein. 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