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					Price Drivers for Superalloy Metals

Tony Southgate
Cobalt Trader
+44 (0) 20 3145 6087
tony.southgate@standardbank.com




                                      May 2010
 Overview of Standard Bank Group
                                                                                                                  2




  A global emerging markets bank, headquartered in South Africa
  In terms of total assets, Standard Bank is the largest bank domiciled in Africa
  Full-service bank covering:
       − Personal & Business Banking
       − Corporate & Investment Banking
       − Investment Management & Life Insurance

      Leading financial services provider in South Africa – one of the fastest growing emerging market
       banking sectors. Growing market share across all sectors and a consistent track record of increasing
       profitability and franchise value
      The largest bank in Africa with presence in 17 countries
      Global reach on the ground in 16 countries outside Africa with distribution capabilities in the world’s
       leading financial centres – New York, London and Hong Kong
      Signed strategic partnership with the Industrial and Commercial Bank of China Limited (ICBC), one of the
       largest banks in the world by market capitalisation



      Total assets approximately US$181 billion (December 2009)
      Market capitalisation of approximately US$22 billion (December 2009)
      Present in 33 countries around the world
      Employs over 50,000 people (including Liberty Life)



All results are presented on a normalised basis
                            Standard Bank Group operations
                                                                3

Locations
   Operates in 33
    countries worldwide
   17 African countries
   16 countries outside
    Africa




   Over 1000 branches
    world-wide
   Over 4000 ATMs




                           Hong Kong counted as part of China
Commodities
                                                                                                                4

Capabilities
 The Commodities team delivers solutions to clients, solving their financing and commodity price risk
    issues by delivering tailored products specific to their needs
   The Commodity Trading, Sales and Structuring teams are active in the global metals and energy markets,
    including:
       − Base Metals: Copper, Aluminium, Nickel, Zinc, Lead, Tin and Steel
       − Precious Metals: Gold, Silver, Platinum, Palladium and Rhodium
       − Energy: Crude Oil and its Products, Natural Gas, Coal and Carbon Credits
   The Finance areas specialise in delivering debt solutions to clients across the energy, mining metals and
    mineral industries.
   A strong advisory team is in place to provide guidance, advice, suggestions and solutions across the
    mining metals and mineral industries.

Products and services                                    Key strengths

Sales & Trading                                           Experienced industry professionals
 Base Metals                                             Ability to understand client needs and offer
 Energy                                                     ideas and solutions.
 Precious Metals                                           Global coverage with emerging market focus
                                                            Diversified range of products covering
Finance & Advisory                                              − Financing
 Energy Finance                                                − Trading and risk management
 Mining & Metals Finance and Advisory                          − Physical transactions
 Structured Commodity Finance                                  − Advisory
 Proprietary Equity                                            − Ability to combine products to deliver
                                                                  structured / tailored solutions
Base Metals trading
                                                                                                                  5


Overview

 Standard Bank has a long history in base metals and prides itself on its ability to work with its customers
    to design strategies best suited to solving the myriad of commodity-specific pricing, inventory
    management exposures and price risk management.
   With the flexibility to manage both commodity and currency exposures (individually or combined), 24
    hours a day, Standard Bank offers its customers the necessary products to manage price risks effectively.
   Standard Bank is a leading market maker of all LME contracts and Category two member of the London
    Metal Exchange (LME), the worlds principal metal exchange.
   LME cleared contracts are traded to their full exchange permitted maturity and OTC contracts available for
    longer maturities, by individual negotiation.
   Standard Bank is premier market maker of Futures, Forwards, Spreads and Options and operates a 24 hr
    Market Making Services from 3 worldwide centers, London, New York and Hong Kong.
   In addition a dedicated Arbitrage team operating throughout New York trading hours actively trading
    London and New York differentials.
   Base Metal expertise is also reinforced at regional level in Argentina, Brazil, China, India, Italy, Korea,
    Russia, South Africa and Turkey, providing the bank with unparalleled local knowledge
   Additionally, in 2003 Standard Bank established Standard Resources (China) Ltd. (SRC), a wholly foreign-
    owned enterprise located in the Wangaoqaio bonded free trade zone in Shanghai
   SRC is a physical base metals trading and consulting company, able to overcome local FX control
    difficulties and able to facilitate the import and export of physical metal. SRC also trades physical metal
    domestically and is active on the Shanghai Futures Exchange. SRC started trading in September 2004.
Base Metals Sales/Trading Centers
                                    6
Base Metals trading
                                                                                               7



Products and services                         Key strengths
 The team is able to draw on a vast array     Commodities part of our culture and
  of products available to our client base        expert throughout the supply chain.
  including:                                     In depth emerging market and resource
     − Arbitrage                                  banking experience.
     − Average price contracts                   Dedicated teams in multiple regions
     − Swaps                                     Full client spectrum – Producers,
     − Multi currency solutions and set the       consumers, traders and the speculative
       rand benchmark.                            community.
     − Inventory Finance                         A strong physical business and financing
     − Innovative stock finance                   business providing with a greater
                                                  understanding of the physical metal flows
     − Warrant and Physical metal location        and their possible impact on futures
       and brand swaps
                                                  pricing, it also enables us to provide off
 Clients benefit from a dedicated research       take undertakings for clients.
  team providing daily, weekly, monthly
                                                 Standard Bank is a leading market maker
  coverage across all Base Metals
                                                  in all LME contracts
 Online position statements providing
  rapid access to statements and reports.
London Metal Exchange (LME)
                                                                                 8


                                                                     Aluminium
• World’s largest non-ferrous metal exchange since 19th century.
• 6 base metals and 2 Aluminium alloys are traded in addition to 2   Copper
   plastic contracts.
• Steel contract was launched in April 2008.                         Zinc

• Minor Metals Contract (Cobalt and Molybdenum) launched in
   early 2010.                                                       Lead

• Provides daily price (official price) for physical contracts       Nickel
• Platform for trading futures and options
                                                                     Tin
• Deliverer of last resort. Approved brands can be stored in
   approved warehouses. However, most contracts are closed out
   before they become due.                                           AL Alloy

• Used by producers, consumers, speculators, merchants, funds.       NASAAC
• The exchange trades on twin trading platform: Open outcry in the
   Rings and LME Select as online platform.                          PP

                                                                     LL

                                                                     Steel
London Metal Exchange (LME)
                                                  9




 LME is located at 56 Leadenhall Street, London
LME Trading Structure
                                                                       10


The exchange is structured around the circular ring within which the
appointed ring dealing members sit and trade

Participants
 Ring Dealing Members
 Associate Broker Clearing Members
 Associate Broker Members
 Associate Trade Clearing Members
Two trading sessions
        − Four 5-minute rings per metal
            (AM, PM)
        − Morning kerb - 90 mins
        − Evening kerb - 45 mins
Official reference price is the last offered
price of the second morning ring session
              LME Select
                                                                                                             11



                        Last traded    Volumes        Best Buyer              Best Seller     Volume
Last traded               volume         Bid             (Bid)                  (Offer)       Offered
   price




                                                                                                Best 5 bid
                                                                                                and offer

                        Total daily
                      volume in LME
                          Select




              LME select is the electronic platform and is open between 1:00 to 19:00 London Time
Futures Contracts
                                                                                             12



                              Max Tenor
            Contract size                     Currencies
                            (on exchange-                           Specifications
               (MT)                         (On Exchange)
                               months)

                                                              Ingots, T Bars, Sows; Purity
Aluminium        25             123
                                                                         99.7%

                                                              Grade A; BSEN 1978:1998;
 Copper          25             123
                                                                    Purity 99.99%


  Zinc           25              63                             Ingots; Purity 99.995%

               6 of Mo
  Moly                           15                           Roasted Moly Concentrates
                 Content

  Nickel         6               63                             Primary; Purity 99.8%


 Cobalt          1               15                              99.3% plus impurities


  Lead           25              63                              Ingots; Purity 99.97%
                                            US$, Yen, Euro,
                                               Sterling
   Tin           5               15                              Ingots; Purity 99.85%
Warrants and Warehouses
                                                                                     13


   LME is a “Deliverable” Market
   Contracts not closed out will result in a requirement to deliver metal to/take
    physical metal from exchange warehouses at the contracted price on the
    maturity (prompt) date.
   Seller must deliver metal / warrant into any LME registered warehouses
     − The Seller will normally deliver to the most cost efficient location
   Buyer will be provided warrants for metal at any LME warehouse.
     − The Buyer will receive the warrants at the discretion of the LCH/ Broker
   As metal has a location premium, as in the physical market, there is an
    active switch/funding & trading market in LME warrants.
            − Standard Bank is an active participant in the warrants market
Market Information: LME
                                                                                    14

     The LME periodically releases
     several important data which helps
     making price views:
    Daily official prices and monthly
     averages
    Warehouse stocks
       - In and Out
       - Cancelled warrants
    Evening evaluation prices
       - Forward spreads
       - Option volatility
    Dominant positions
       - Warrant
       - Cash
    Open Interest for Futures and Options
    Trading volumes
    Changes in LME rules, Initial Margins



    Information can be sourced from various providers including the LME’s website
Why Hedge?
                                                                                     15


 The hedging decisions are directed by several key business criteria that
 need to mirror the actions in the physical metal flows within the company

   Revenue generation or protection
   Minimum acceptable price
   Unacceptable price levels
   Yearly or rolling Budget prices
   Tenor
   How much to hedge
   Overall risk structure and sensitivity of metal price risk to the bottom lines




Rationale for hedging should be clearly defined and accepted throughout
the organisation
What to expect from Hedging?
                                                                                  16


 Hedging enables price certainty that allows users to focus on core activities
   − Trading metals is not the primary function of hedgers
 Hedging does not provide “regret-free” decisions
   − Results of hedge programs are always clear with 20-20 hindsight.
   − There could always be lost opportunities
 Achieving the “objective” comes before achieving the “best price”
   − Timing the market is not the primary driver
 Still leaves you vulnerable to margin calls
   − A Hedging portfolio may incur losses; albeit made up by offsetting
          gains in physicals
   Still exposed to spread risk
     − Albeit a smaller risk
   Hedging objectives are best achieved when hedging is carried out under a
    well defined scale-up / scale-down programme
Setting up an account
                                            17



 Documentation formalities
     − Compliance
         ►Regulatory checks
         ►Running checks on company’s
          existence and that of directors
         ►Client classification
     − Credit
         ►Financial assessment
         ►Allotting margin limits (IM and
          VM)
     − Legal
         ►Signing Agreement (ISDA or
          FOA)
         ►Credit support, if Any
 Web access
Superalloy Metals
                                                                                  18

Price Drivers


 Believe it or not……FUNDAMENTALS
   − Changes in Supply – form of metal produced (not all Co, Mo, Ni, Cr is
        superalloy grade)
      − Inventory (consumer, producer, government stockpile)
      − New demand – new applications (e.g. batteries, catalysts)
      − Some superalloy metals are by-products of base metals (Co by-product of
        Cu or Ni, Mo by-product of Cu )
      − Geographical location of producers can be problematic and subject to
        political instability
      − Pricing mechanism – Metal Bulletin / LME / Platts Metals Week
   Currency
   Sentiment
   Fund / Investor involvement
   Trader manipulation influence
Cobalt – This analysis was published prior to LME launch
                                                                                                                    19

Overview

 The launch of the LME’s Minor Metals contract in February 2010 will be a landmark event for Cobalt and
    will have a dramatic effect on the metals price behaviour
   Price discovery will be much more transparent, and a big leap forward from the monthly/weekly price
    series found in trade journals
   The minor metals do not have the same depth of research coverage as the other base metals, leaving
    merchants and physical traders at a significant advantage in terms of market knowledge as far as the
    fundamentals are concerned
   Ring traders will likely take time to adapt to the specific factors involved in the cobalt market, and in the
    interim may use the performance of the well established nickel and copper contracts to help guide their
    decisions
       − Arguably, nickel provides a proxy in terms of demand, and to a lesser extent supply while copper
          provides a proxy for supply and a general gauge of economic strength.
       − The correlation between cobalt and nickel, and cobalt and copper, is already strong and has
          strengthened over the past year (see slides 3 & 4).
       − The correlation may continue to strengthen further, particularly while the contract establishes itself
          and while liquidity builds up.
   From a fundamental point of view, demand for cobalt is expected to rise over the next couple of years, in-
    line with the global economic recovery, with prices expected to be well supported.
       − Demand will be driven by the aerospace and battery sectors, in particular if major auto makers
          specify Li-Ion batteries in the next generation of hybrid cars, rather than Ni-Cd batteries
             ► Availability of Lithium may be the ultimate deciding factor as to the viability of Li-Ion auto
                batteries however
   The speed at which the DRC’s very large cobalt reserves are brought into production will govern supply of
    the metal and will provide the ultimate cap on prices.
Cobalt (LH axis) vs. LME 3-month Nickel (RH axis) 2005-current
                                                                                                                                       20

Jan-05
  $/lb                  Jan-06                  Jan-07                  Jan-08                  Jan-09                  Jan-10
                                                                                                                        $/mt
60                                                                                                                            60000


50                                                                                                                            50000


40                                                                                                                            40000


30                                                                                                                            30000


20                                                                                                                            20000


10                                                                                                                            10000


0                                                                                                                            0
Jan-05                  Jan-06                  Jan-07                  Jan-08                  Jan-09                  Jan-10

                              Cobalt - 998             Cobalt - 993             Nickel - LME 3mth

The correlation between 998-Co and LME 3-month Nickel since 2005 has been 0.50*, with cobalt looking like it lags the nickel
price by 10-12 months.
Since January 2009 however, the correlation has increased to 0.71*, with the cobalt market perhaps looking to the exchange
traded industrial metals for a sense of direction
* Correlations are approximate and worked out using extrapolated MB data from Bloomberg, against the corresponding LME Exchange data
Cobalt (LH axis) vs. LME 3-month Copper (RH axis) 2005-current
                                                                                                                                       21
    $/lb                                                                                                                 $/mt
  Jan-05                Jan-06                Jan-07                Jan-08                 Jan-09                Jan-10
 60                                                                                                                    10000

                                                                                                                       9000
 50
                                                                                                                       8000

                                                                                                                       7000
 40
                                                                                                                       6000

 30                                                                                                                    5000

                                                                                                                       4000
 20
                                                                                                                       3000

                                                                                                                       2000
 10
                                                                                                                       1000

  0                                                                                                                   0
  Jan-05                Jan-06                Jan-07                Jan-08                 Jan-09                Jan-10

                             Cobalt - 998           Cobalt - 993           Copper - LME 3mth

The correlation between 998-Co and LME 3-month Copper since 2005 is higher than that of nickel, coming in at 0.63* Since
January 2009, the correlation has also increased significantly to 0.74* with copper continuing to have a higher correlation with
cobalt than that of nickel.
Going forward however, the much larger size of the copper market relative to nickel and cobalt, and the much greater proportion
of speculative interest and investor flows that copper receives may see cobalt look more towards the nickel market for direction
* Correlations are approximate and worked out using extrapolated MB data from Bloomberg, against the corresponding LME Exchange data
All about the money! Example of LME Traded Metal
                                                                                                                 22


            LME Cu Inventory (RH axis) vs. LME Cu 3-month price (LH axis)

600000                                                                                                    9000
                                                                                       Chinese
                                                                                       Buying
                                                                                                          8000
500000

                                                                                                          7000
400000
                                                                       Fund Flows

                                                                                                          6000
300000
                                               Chinese Buying                                             5000

200000
                                                                                                          4000

100000
                                                                                                          3000


    0                                                                                                     2000
         Jan-08



                  Apr-08



                            Jul-08




                                               Jan-09



                                                           Apr-09



                                                                     Jul-09




                                                                                        Jan-10



                                                                                                 Apr-10
                                     Oct-08




                                                                              Oct-09
                  LME Available Cu Inventory            LME Cancelled Inventory         LME 3mth price

Fundamentals rendered largely irrelevant – Chinese buying stopped the rot, but fund flows
took over and drove prices higher. Chinese buying re-emerged at the start of 2010 but has
since dried up
Nickel Stocks (x axis) vs. LME 3mth Price (y axis)
                                                                                                                    23

    $/mt

60000




40000




20000




                                                                                   LME on-warrant stocks (mt)
    0
        0          20000    40000      60000      80000     100000      120000    140000       160000      180000

            2000     2001   2002    2003   2004   2005    2006   2007   2008     2009   2010

 Prices behaving/anticipating stock levels closer to 50kt rather than the current ~150 kt of
 on-warrant material in LME warehouse
What happens next?
                                                                                                                                                                                                24



          US Monetary Base (millions)

2500000
                                                                                                                                                          Around a trillion dollars were
                                                                                                                                                          pumped into the US financial
2000000                                                                                                                                                   system in the space of 6
                                                                                                                                                          months through quantitative
                                                                                                                                                          easing
1500000
                                                                                                                                                          When this money filters out
                                                                                                                                                          into the wider economy, there
1000000                                                                                                                                                   is a real risk that this will spark
                                                                                                                                                          inflation
                                                                                                                                                          The Fed will have to be very
 500000                                                                                                                                                   careful how it reins in this
                                                                                                                                                          money, as raising interest
                                                                                                                                                          rates to curb inflation risks
      0
                                                                                                                                                          stifling the economic recovery
          Jan-79
                   Jan-81
                            Jan-83
                                     Jan-85
                                              Jan-87
                                                       Jan-89
                                                                Jan-91
                                                                         Jan-93
                                                                                  Jan-95
                                                                                           Jan-97
                                                                                                    Jan-99
                                                                                                             Jan-01
                                                                                                                      Jan-03
                                                                                                                               Jan-05
                                                                                                                                        Jan-07
                                                                                                                                                 Jan-09
                                                                                                                                                          “Catch 22”


    Sources: Standard Bank, Bloomberg
Investors very bullish towards commodities
                                                                                                                                                           25


                 CFTC Speculative Net-Long Position* (contracts)
                                                            Contracts (Millions)
  0.8




  0.6




  0.4




  0.2




   0
                   May-05




                                              May-06




                                                                          May-07




                                                                                                     May-08




                                                                                                                                May-09
        Jan-05




                                     Jan-06




                                                                 Jan-07




                                                                                            Jan-08




                                                                                                                       Jan-09




                                                                                                                                                  Jan-10
                            Sep-05




                                                       Sep-06




                                                                                   Sep-07




                                                                                                              Sep-08




                                                                                                                                         Sep-09
    * Sum of net long position for soybean, wheat, gold, copper, silver,
    WTI, palladium, platinum futures contracts

    Sources: CFTC, Standard Bank
Price Drivers – LME Influence
                                                                                          26


Cobalt & Molybdenum now subject to outside influence


 Cr, as well as smaller markets (Ta, W, Nb, V, Ti) prices will still be influenced by
    the cyclical demand from the superalloy sector, as well as political and
    economical influences.
   Ni, already a well established tradeable item on the LME is subject to fund
    influence. Less a follower of fundamentals, and more of investor activity and
    sentiment
   Co and Mo still fall into the first category, but may increase in volatility during
    the build up of liquidity on the LME until they move into the second category
   LME looking at other metals, including Cr, Iron Ore and even Freight rates
   We will see gradual decline in influence of MB and Platt’s for Co and Mo
    contracts
   Taken to logical conclusion, all metals (No matter how small markets are) will
    eventually be traded on an exchange – could be well after we all retire!
   Potential result of investor activity – bubble in prices and subsequent collapse
Disclaimer
                                                                                                                                                       27




 This document does not constitute an offer, or the solicitation of an offer, for the sale or purchase of any investment or security. Whilst every
care has been taken in preparing this document, no representation, warranty, or undertaking (express or implied) is given and no responsibility or
liability is accepted by any member of the Standard Bank Group, or any of its employees as to the completeness or accuracy of the information
contained herein, nor that the information remains unchanged. This document does not constitute an offer to buy or sell the commodities referred
to herein or a recommendation or invitation by the Standard Bank Group to the recipient to buy or sell. In deciding whether to buy or sell, or take
or not take any other action in respect of or in connection with the commodities discussed in this report, the recipient should make its own
investigation of all the relevant parties and commodities and should not rely on anything stated herein. This document is solely for distribution to
institutional investors and must not be distributed to UK private customers. All opinions and estimates in this document may be changed after
publication at any time without notice. If you are in any doubt about the contents of this document or the investment to which this document
relates you should consult a person authorised under the Financial Services and Markets Act 2000 who specialises in advising on the acquisition
of such investments. Any member of the Standard Bank Group may have a long or a short position in the commodities mentioned in this
document and may add to or dispose of such commodities and may perform or seek to perform advisory or banking services in relation thereto.
This document has been sent to you for your information and may not be reproduced or redistributed to any other person. By accepting this
document, you agree to be bound by the foregoing limitations. Standard Bank Plc is authorised and regulated by the Financial Services Authority
(register number 124823).

                                                                   Standard Bank Plc, Cannon Bridge House, 25 Dowgate Hill, London EC4R 2SB
                                                                                             Value Added Tax identification number 625861525

				
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