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					ABN AMRO Metals Monthly
Investment Research by VM Group September 2011



      Precious metals
      Base metals
      Steel




Price forecasts
                                                 12 Sept 2011        1-month    2-month          3-month                12-month
                               Gold       $/oz         1,834      1,760-1,870     1,834             1,871                   1,964
                              Silver      $/oz         40.81      37.50-42.50     46.05             46.05                   52.12
                          Platinum        $/oz         1,810      1,760-1,850     1,780             1,750                   2,100
                         Palladium        $/oz           723          700-745       800               790                     926
            Aluminium (3-month)        $/tonne         2,356      2,300-2,400     2,300             2,150                   2.325
               Copper (3-month)        $/tonne         8,670      8,450-8,700     8,200             7,500                   7,500
                   Lead (3-month)      $/tonne         2,405      2,300-2,400     2,300             2,150                   2.325
                Nickel (3-month)       $/tonne        20,880    19,500-20,750    19,000            19,000                  21.000
                     Tin (3-month)     $/tonne        23,100    21,500-23,500    21,000            20,000                  20.000
                    Zinc (3-month)     $/tonne         2,160      2,100-2,250     2,050             1,950                   2.300
            Steel: (3-month) Med       $/tonne           585          570-585       560               550                     595
                                                      2011 av         2012 av    2013 av           2014 av                 2015 av
                               Gold       $/oz         1,616           1,981      2,160             2,219                   2,253
                              Silver      $/oz         39.90           51.15      54.56             60.79                   66.44
                          Platinum        $/oz         1,776           2,009      2,058             1,994                   1,900
                         Palladium        $/oz           781             907      1,069             1,195                   1,323
            Aluminium (3-month)        $/tonne         2,437           2,385      2,404             2,777                   2,921
               Copper (3-month)        $/tonne         8,870           7,300      8,246             7,900                   7,092
                   Lead (3-month)      $/tonne         2,443           2,240      2,245             2,477                   2,723
                Nickel (3-month)       $/tonne        22,761          20,867     24,917            29,417                  24,333
                     Tin (3-month)     $/tonne        26,031          19,708     20,896            19,038                  16,492
                    Zinc (3-month)     $/tonne         2,227           2,127      2,265             2,846                   2,840
            Steel: (3-month) Med       $/tonne           595             646        708               720                     750
Source: VM Group                                                                      italics denote revision from previous month
    The Metals Monthly is produced as part of a joint venture
    between ABN AMRO Bank N.V. and VM Group




Analysts:


•   Carl Firman
    E-mail: carl@vmgroup.co.uk
•   Marina Loterijman
    E-mail: marina@vmgroup.co.uk
•   Sierra Highcloud
    E-mail: sierra@virtualmetals.co.uk
•   Gary Mead
    E-mail: garymeadgary@gmail.com
Contents
Prices and stocks ....................................................................................... 2
Copper: between a rock and a hard place .................................................. 3
Gold .......................................................................................................... 11
Silver ........................................................................................................ 13
Platinum and palladium ............................................................................ 15
Aluminium................................................................................................. 17
Copper...................................................................................................... 19
Nickel........................................................................................................ 21
Zinc .......................................................................................................... 23
Lead ......................................................................................................... 25
Tin .......................................................................................................... 27
Steel ......................................................................................................... 29
Fund activity ............................................................................................. 31
About VM Group ....................................................................................... 32
VM Group disclaimer and copyright.......................................................... 33
ABN AMRO disclaimer and copyright ....................................................... 34
   Prices and stocks
Historical prices & base metal stocks
                                                      Past 12 months                                   12
          Prices             12 Sept                                     1 week      WoW 1 month MoM months               YoY
                               2011 Average           High           Low ago          (%)  ago    (%) ago                 (%)      Av. 2010 Av. 2009
          Gold        $/oz      1,834    1,468         1,895        1,244    1,895   (3.2%)    1,772     3.5%     1,244 47.5%         1,225        973
         Silver       $/oz      40.81    33.12         48.70        19.93     41.9   (2.5%)     38.3     6.5%      19.9 104.8%        2,021       14.7
     Platinum         $/oz      1,810    1,757         1,887        1,545    1,866   (3.0%)    1,754     3.2%     1,545 17.2%         1,611      1,205
    Palladium         $/oz        723      738           858          522      761   (5.0%)      741   (2.4%)       522 38.5%           528        264

   Aluminium       $/tonne     2,356     2,484         2,774        2,135    2,385   (1.2%)    2,436   (3.3%)     2,147     9.7%      2,201      1,703
      Copper       $/tonne     8,670     9,101        10,124        7,541    8,945   (3.1%)    8,865   (2.2%)     7,631   13.6%       7,567      5,186
        Lead       $/tonne     2,405     2,496         2,853        2,156    2,408   (0.1%)    2,354     2.2%     2,227     8.0%      2,173      1,738
       Nickel      $/tonne    20,880    24,382        29,075       20,625   20,625     1.2%   22,075   (5.4%)    23,075   (9.5%)     21,914     14,762
          Tin      $/tonne    23,100    27,455        33,210       22,050   23,950   (3.5%)   23,850   (3.1%)    22,050     4.8%     20,479     13,382
         Zinc      $/tonne     2,160     2,324         2,585        2,089    2,176   (0.7%)    2,171   (0.5%)     2,166   (0.3%)      2,188      1,687

  Steel (Med) $/tonne            585        549            610        435     590 (0.8%)         580     0.9%      520    12.5%         488         364

                                                       Past 12 months                                               12
  LME Stocks                 12 Sept                                        1 week WoW 1 month MoM              months       YoY
                               2011 Average           High           Low       ago  (%)    ago  (%)                ago       (%) Av. 2010 Av. 2009
   Aluminium       Tonnes 4,601,225 4,485,343      4,711,875 4,252,125 4,614,775 (0.3%) 4,572,575   0.6% 4,401,525  4.5% 4,452,376 4,037,328
      Copper       Tonnes 466,000     420,687        477,925   348,625   465,250 0.2% 463,150       0.6% 390,525 19.3% 446,165 388,201
        Lead       Tonnes 323,775     268,755        323,825   189,825   321,450 0.7% 309,150       4.7% 190,150 70.3% 184,932        94,440
       Nickel      Tonnes    99,048   120,639        137,766    99,048   100,458 (1.4%) 103,500 (4.3%) 119,034 (16.8%) 137,511 111,852
          Tin      Tonnes    21,465    18,311         23,425    12,150    21,755 (1.3%)    22,615 (5.1%)    13,870 54.8%    18,921    17,440
         Zinc      Tonnes 840,200     751,580        894,825   605,775   847,825 (0.9%) 881,525 (4.7%) 619,050 35.7% 590,675 379,530




  London PM fix precious metal prices, over past month: re-                  LME 3-month base metal and steel prices, over past
  based to 100                                                               month: re-based to 100
   120                                                                         125
                                                      Gold                                    Aluminum           Copper               Lead
                                                      Silver                   120
   115                                                                                        Nickel             Steel Med            Tin
                                                      Platinum                 115
                                                      Palladium                               Zinc
   110                                                                         110
                                                                               105
   105
                                                                               100
   100                                                                          95
                                                                                90
     95
                                                                                85
     90                                                                         80
       15 Aug          22 Aug      29 Aug         05 Sep         12 Sep           15 Aug       22 Aug       29 Aug        05 Sep       12 Sep


  Source: VM Group




                                                                                                                                                2
Copper: between a rock and a hard place
There has been an improvement in China’s underlying copper consumption over
the past few months. Stocks have trended lower, refined copper exports have
slowed and premiums are high. Coupled with this has been a rise in China’s
refined copper and copper semis output; in August imports of unwrought copper
and copper products reached their highest since January, at 0.34 Mt, which
implies a third monthly increase in refined copper import volumes. This
strengthening of China’s apparent demand for copper could not come at a better
time for the sluggish global economic recovery. Prolonged mine supply disruption
and expectations that Chinese copper imports will continue to improve on the
back of months’ worth of destocking should underpin the copper price over the
next few months. Further out, however, copper’s fundamentals are weakening
and we do not see any potential in 2012 for the LME three-month price to
challenge February’s record nominal high of $10,160/t. Indeed, we anticipate
substantial downside risk to the copper price in 2012, as global demand softens
and mine supply – encouraged by the high price – finally responds.


Copper mine supply has been a major cause of concern, a key basis for the
relative strength of the metal’s price in 2011. Repeated mine disruption resulted in
an 18% year-on-year fall in Chilean copper production in July (a drop of 81,000t).
Its output during the first seven months declined by 4%, to 2.95 Mt – around
130,000t less than during the same period in 2010. Add this the disruption caused
by the strike at Freeport McMoRan’s Grasberg gold-copper mine in Indonesia,
and strike action now taking place at the Cerro Verde mine in Peru, and the
International Copper Study Group’s estimated 1.6% growth in copper mine supply
in the first five months of 2011 looks unlikely to be repeated over the rest of the
year. Compounding this tightness in supply has been steady state copper
demand growth in the US and some parts of Asia (excluding China) during H1
2011. US copper consumption over the first five months of 2011 grew by more
than 2% on the year, to 0.8 Mt, while that of the rest of Asia has grown by almost
6%, to 1.9 Mt.


Offsetting these price supports has been the disappointing growth in Chinese
apparent demand over H1 2011, with refined copper imports over the first eight
months of 2011 declining by 27% year-on-year, to an estimated 1.49 Mt. Implied
copper consumption (refined production plus refined imports minus refined
exports, and adjusted for visible stock changes) has weakened from an annual
rolling high of 7.70 Mt in January 2011 to an estimated 7.51 Mt in August; a
decline of 2.5%. This may be changing however – August’s copper demand level
is the third successive month where China’s implied demand has increased from
May’s low of 7.34 Mt. But on a global calendar year basis, this overall softening in
Chinese demand has helped ease 2011 deficit projections and may have even
pushed the market into surplus in some months. This is evidenced by the 15%
rise in visible exchange stocks since the start of the year, to 0.66 Mt (as of early
September). The global market balance however discounts China’s destocking
cycle and drawdowns of off-market copper stocks; we know there were builds in
bonded warehouse inventories early this year and outflows in the past few
months. This suggests that, without China’s large volume of copper inventory and
hand-to-mouth buying by copper consumers, refined copper imports would be
higher and the market that much tighter.


Rolling annual monthly change in Chinese imports of unwrought copper and copper
products and scrap copper, Jan 2008-Aug 2011, %
 12%
                Unwrought copper and
 10%            copper products
   8%           Scrap copper
   6%
   4%
   2%
   0%
  -2%
                                              Copper imports rise, while price
  -4%                                         sensitive scrap imports fall

  -6%
         Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul
         08 08 08 08 09 09 09 09 10 10 10 10 11 11 11
Source: VM Group

Chinese implied copper demand on rolling monthly (000 tonnes, LHS) and yearly
(Mt, RHS) basis, Jan 08 – Aug 11

 800                                                                                8


 700                                                                                7


 600                                                                                6


 500                                              Month          Year               5


 400                                                                                4


 300                                                                                3
       Jan 08      Jul 08   Jan 09   Jul 09   Jan 10    Jul 10   Jan 11    Jul 11
Source: VM Group




                                                                                        4
Who is in the driving seat?
Forecasts made at the start of 2011 expected the copper market to be in constant
and deep deficit throughout this year, with obvious consequences for the price.
The reality has been very different yet the price has remained fairly firm although
volatile, trading in the $8,550/t-$9,850/t range since April. Why has there been
such volatility so far this year? There is one simple answer – uncertainty. More
specifically this deep uncertainty has manifested itself in:


    •   Cyclic risk-on and risk-off trading based on EU and US macroeconomic
        issues (price positive/negative)
    •   Continued mine supply disruption (price positive)
    •   Chinese monetary tightening and the resultant hand-to-mouth approach
        and destocking by copper consumers (price negative)
    •   Price sensitive buying by Chinese copper consumers (price positive on
        lows)
    •   Expectations that Chinese refined copper imports must improve on the
        depletion of domestic stocks and easing of monetary tightening as
        inflation rates subside (price positive)


These dynamics have – until now – played against one another, providing a cap
and floor to the copper price for the past five months. But market conditions are
rapidly changing, and for the worse. This poses the immediate question, the one
most critical to the copper price: will Chinese refined copper imports pick up
enough in the short-term to stem a possible price correction based on ailing
Western demand? A subsidiary question is: how will the copper market look in
2012 in the face of continued economic woes in the US and EU – China’s biggest
export markets? And on the back of that possibility, might China therefore decide
to wait before buying, expecting prices to decline from where they are today?


These questions are interlinked. If China’s copper demand improves from
August’s implied level – a 1% decline in apparent demand year-on-year, which
discounts off market copper stock movements – over the rest of the year, then
that would mean a further tightening in Chinese copper stocks. That would in turn
mean that Chinese copper consumers are forced back into the market, regardless
of the prevailing copper price. This, however, is simplistic, as it ignores:


    •    The impact to Chinese copper demand from declining exports to the
         advanced economies, as evidenced recently by the slowdown in
         utilisation rates of production lines focused on the export market
    •    The increasing probability of a third round of quantitative easing in the
         US, and the inflationary pressures this may exert on China and other
         emerging markets.
     •   The yuan has appreciated and thus increased Chinese buying power vis-
         à-vis the falling dollar-denominated copper price
     •   The unknown size of China’s copper stock inventories, including those of
         the secretive State Reserves Bureau (SRB)
     •   Further downside price risk if a Western downturn coincides with the
         large increase in copper mine supply now expected in 2012-2013


Putting all this together, it’s clear that Chinese copper consumers are in the
driving seat. Including SHFE copper stocks of ~>0.1 Mt and reports that bonded
warehouses hold as much as ~0.4 Mt (from 0.8 Mt just a few months ago),
Chinese copper consumers can afford to sit out the current economic turmoil.
Stocks held by the SHFE have risen slightly in September, implying that some of
the tightness from destocking may have eased.


The great unknown is the SRB, and whether it might release some of its copper
stocks to domestic consumers in order to prolong China’s absence from the
market. It’s estimated that the SRB holds as much as 1 Mt of copper, and we
should not forget that ~0.5 Mt held in SHFE and bonded warehouses. All this
‘available’ copper means that Chinese refined copper imports might not grow
further from August’s levels. It is after all in China’s best interests to wait for the
copper price to fall; it may not have long to wait.


The Chinese gambit
Judging by the parlous state of the US and EU economies, we may have to
assume that any second downturn would have much more serious repercussions
than the last. Most countries, advanced and emerging, are economically much
weaker than they were three years ago.


The two factors that would keep the Chinese from becoming a major copper
importer in the near future, let alone restocking on 2009-2010 levels, is first,
uncertainty over the looming economic slowdown in the US and EU and second,
Beijing’s gradual loosening of the yuan’s exchange rate. It’s to China’s advantage
to wait; the longer it remains out of the market the clearer the global outlook will
become. Allowing time for greater yuan appreciation will translate into cheaper
international prices. However, the degree to which China is shielded and
decoupled from the West will play a defining role in the overall level of its copper
imports – and the price of copper. Measuring the comparative contributions of
exports and internal consumption to China’s GDP is becoming increasingly
complex. This clearly makes the knock-on effects of a Western slowdown on
Chinese growth difficult to assess.




                                                                                          6
It has long been held that China’s growth success has been largely due to its
export machine, with internal consumption playing a minor role. Yet China’s ability
to weather the previous downturn, its ‘isolation’ from the economic problems of
the West, suggests otherwise. Over much of the past decade China’s exports
contributed to upwards of 40% of GDP. However, recent studies conducted post-
crisis place that figure potentially as low as 10%. If that lower figure is correct, not
only does it bode well for China’s growth outlook in the face of a second global
slowdown, but so too does the fact that China’s trade with Asia and the Middle
East now represents about 40% of its export growth in recent years. Our view is
that the Chinese economy will again prove robust and that scaled-down physical
buying will ensue if copper prices begin to buckle against the oncoming
headwinds.


Chinese net trade and GDP, 1995-2011


  20
                          Net trade volume     Gross domestic product
  15


  10


   5


   0


   -5


 -10


 -15
        1995       1997    1999     2001     2003    2005     2007      2009     2011

Source: VM Group



Currently, Chinese buying interest appears to improve when copper breaks below
$8,800/t. But how much better will its buying get, if the economic issues in the US
and EU deteriorate further? The only historical example is in 2008-2009, since in
prior recessions Chinese copper demand played little part.


We know that when the copper price fell off a cliff between June 2008-December
2008, Chinese imports of refined copper picked up and then surged to record
levels, as copper bottomed at around $3,000/t. Chinese copper consumers
showed then that they had a ‘wait and see’ attitude towards how far the copper
price would fall, before buying finally surged. But those Chinese copper imports
were not driven simply by real demand growth. They were also driven by
opportunistic investment and long-term strategic stock building, in part because of
the huge stimulus programmes Beijing announced in early in 2009.


Chinese refined copper and scrap imports (LHS, Mt) vs end of period monthly three-
month copper price (RHS, $/t), Jan 2007-Aug 2011

0.7                                                                         12,000
                                   Refined copper imports
0.6                                Scrap copper imports
                                                                            10,000
                                   End of month copper price
0.5
                                                                            8,000
0.4
              Price fall =                                                  6,000
0.3           falling scrap
              imports                                                       4,000
0.2
                                      Price fall =
0.1                                                                         2,000
                                      refined copper
                                      imports rise
  0                                                                      0
   Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11

Source: VM Group



The fact that mine supply growth could coincide with a slump in Western demand
in 2012-2013 will not be lost on the Chinese. Around the world several mine
expansions and project start-ups are scheduled to commence in the next 12
months, which will boost copper supply considerably. BHP Billiton will
commission a major expansion at Escondida, the world’s largest copper mine, in
Q2 2012 in order to improve flagging output rates due to low ore grade. This
could see another 0.15 Mt/year of copper supply reach the market that year.
There are also two further expansions planned for large existing Chilean copper
mines, Los Bronces and Esperanza, and a further eight major projects we have
identified that are due to start-up from Q1 2012 through to Q3 2012.


All in all, we estimate, and assuming no delays, that as much as 0.9 Mt/year of
copper production from the ten largest capacity additions could come online in
2012. That translates into mine supply growth of about 5%. Net of attrition and
closures, a possible further 0.8 Mt/year of copper production capacity could also
come online, meaning that as much as 1.7 Mt/year of new supply could come to
market in 2012, or more than 10% above current mine supply. Allowing for supply
disruptions, we expect mine supply could in reality grow by 6% in 2012 and 5% in
2013. Not all this would be apparent in absolute copper supply volumes, since if


                                                                                    8
we assume that the US and EU do enter a second downturn, the lower market
copper price will see scrap volumes decline rapidly. This will put pressure on
refined output should Chinese buying then improve.


Forecast global copper mine supply, 2011-2020, separated by actual (including
attrition/closure), definite new capacity, probable and other (uncertain), Mt

 35
             Other projects (no timeline)
             Probable projects
 30
             Certain projects
 25          Mine supply base, less disruption

        Forecast 6% growth in
 20     mine supply in 2012 and
        5% in 2013
 15

 10

   5

   0
        2011       2012   2013   2014   2015     2016   2017   2018   2019   2020
Source: VM Group



The balance of uncertainty
Many variables will come to bear on the copper market and, for that matter, the
rest of the base metals in the short/medium term. Chinese buying has proved – at
least in the past recession – that its metals’ imports rise as prices tumble. But the
degree of price correction over the coming months is hard to predict. Much
depends on timing and policy actions. US and EU political leaders have proved
themselves ineffectual at promoting the needed recovery. In the August issue of
Metals Monthly we gave our argument as to why a recession in the West could be
that much worse than the last downturn, but we are now less pessimistic in
regards to the effect of a recession on the fortunes of the Chinese economy.


A third round of quantitative easing in the US – however that is shaped – must
now be a consideration, although should the US Fed decide on that route it
merely pushes the US structural problems further out. QE3 would stoke further
inflationary pressures by weakening the dollar while also inflating commodity
prices. This in turn would present Beijing with the pressing problem of tackling
inflation while maintaining economic growth. Chinese copper consumers, after
depleting working stocks and existing available domestic stocks – notwithstanding
SRB sales – might then be forced to come to market regardless of the prevalent
copper price. In effect QE3 would preserve the status quo that has been in place
in the copper market since April, but Chinese copper consumers would be in a
weaker position.


The danger is that the US and EU are doing too little too late to avert a sharp
slump in the markets that will inevitably lead to lower commodity prices. The main
concern is the inability of the EU to deal with the debt issues in the peripheral
PIIGS member states. The ruling by the German constitutional court in early
September that dismissed claims against the legality of Germany's participation in
the EU financial support package also ruled that the government must from now
on seek consent from parliament before granting any aid. This will slow down, or
even prevent any EU-wide rescue package negotiations in future and place in
jeopardy the possible issuance of Eurobonds.


Without Eurobonds there appears to be little that will prevent debt default, which
places the entire Eurozone at risk, with serious global economic consequences.
In this context there would be little the US or EU member state authorities could
individually do to prevent a sharp meltdown in the markets, including commodity
markets – with perhaps gold ending up as the only beneficiary in this scenario.


China will see lower metal prices as a chance to beef up its strategic stockpiles
and working stocks, in very much the same manner as it did in the period H2
2008 through to 2010. China will not do so immediately; rather it will exercise
patience, waiting, by and large, for metals’ prices to bottom before wading in.
Ironically, however, since the precedent was set during the last downturn, metals
prices are unlikely to yield as much ground this time – copper for example fell by
two-thirds in the period July 08 to Dec 08. China therefore won’t see copper slip
below $3,000/t this time around. More likely copper will fall to lows of $6,000/t if a
second recession arrives.


VM Group copper supply/demand balance, 2006-2013


  0.6

  0.3

  0.0

 -0.3
          2006     2007     2008    2009     2010      2011     2012     2013
Source: VM Group




                                                                                    10
Gold, London PM fix, $/oz                  Gold
                                               The gold price has entered into a volatile trading phase, with swings of over
1,950                                      $150/oz being seen on a weekly basis. Prices have remained largely range bound
1,900                                      however during September. Since the record high of $1,917.90/oz on 6 September,
                                           gold has traded between $1,800/oz-$1,900/oz. As negative news gathers pace in
1,850
                                           Europe and the US, with fears that the global economy is on the precipice of
1,800
                                           another downturn, asset markets have been hit hard, triggering a higher level of
1,750                                      selling in gold to cover losses elsewhere.
1,700                                          Gold prices are so far (as of 14 September) up by a marginal 1% this month, as
1,650                                      investors have moved to the sidelines until a clearer picture emerges over the
                                           eurozone debt crisis and the likelihood of a Greek sovereign default. Yet, since
1,600
    15-Aug 25-Aug 04-Sep                   end-2010 gold prices have gained by a robust 30%, and when compared to last
                                           year, have surged by 50%. The average price for August this year ($1,755.80/0z)
Source: LBMA, VM Group
                                           rose 12% month-on-month, while year-on-year the figure jumped by an impressive
Gold price in various currencies,
                                           44%.
three months ago = 100
                                               Investor interest in gold has continued to be sustained by widening economic
130
              Dollar            Rupee      uncertainties. In the US, growth estimates continue to face downward revisions.
125           Euro
                                           The White House Office of Management and Budget cut its 2011 and 2012 GDP
120
                                           growth outlook to 1.7% and 2.6% respectively, both figures markedly down from
115
                                           the 2.7% and 3.5% respectively put out in February. The housing market, stagnant
110                                        wage growth and lack of credit for business are to blame, yet most crucial of all is
105                                        the labour market, where the rate of unemployment is expected to hover around
100                                        9% through to end-2012. President Obama has responded with a proposed jobs bill
 95                                        ($447bn American Jobs Act of 2011) that will target infrastructure projects, job
 90                                        market incentives and support the mortgage market. But he will have to get that
  13-Jun     11-Jul      08-Aug 05-Sep     through Congress and there’s no certainty he will be able to do so.

Source: LBMA, VM Group                         On the monetary front, in his 8 September speech at the Economics Club of
Shanghai Gold Exchange, lots/day           Minnesota, Fed Chairman Bernanke said: “the central bank stands ready to act and
(average past 22 days)                     the board will discuss a full range of monetary tools at its September 20-21
200,000                                    meeting”. In light of recent economic data, some form of stimulus is likely to be
180,000                                    announced. The consensus is that the Fed will unveil “Operation Twist”, in which
160,000                                    (while leaving the size of its balance sheet fixed) it will make bond purchases at the
140,000                                    long end of the curve while selling those of a shorter duration. The goal would be to
120,000
                                           pin down mortgage rates and long term borrowing costs for business, while luring
100,000
                                           foreign capital to the short end of the yield curve.
 80,000
 60,000                                        But it was the European debt crisis that grabbed centre stage in September.
 40,000                                    While pressure is building for the ECB to cut interest rates, the markets have grown
 20,000                                    increasingly nervous about a potential Greek debt default, with fears that other
      0
                                           periphery countries would follow suit. On top of which are concerns that the
      Sep-10           Mar-11     Sep-11
                                           solvency of French and other European banks may pose further problems in the
Source: VM Group, SHFE                     coming weeks and ultimately require fresh rounds of government bailouts.
                                   st
Gold forward curve (Comex), 1
                                        European banks have large exposures to the sovereign debt of member nation
position = 100, various dates
                                        governments and, as bond investors have pulled back, bank shares have tumbled
114
                                        while their short-term borrowing costs have spiralled.
                      1yr ago
112
                      1m ago                Total holdings in ETFs registered a minor outflow of 1.5 Moz (or 2%) to 9
110                   Latest
                                        September from end-August. Year-to-date, total volumes have risen by 0.6 Moz or
108
                                        1%. Investor interest in Comex futures however remained firm, with the total net
106                                     long rising by 4% or 1 Moz by the end of the first week in September. Year-to-date,
104                                     the total net long has fallen by 1% and y-o-y, off by 11%.
102
100
                                        Short-term outlook
 98
        1   13      25        37   49   We remain bullish on the long-term outlook for gold as any of the various
                                        remedies available for diminishing the debt crises and/or pulling stagnant
Source: LBMA, VM Group
                                        Western economies back to visible growth imply higher inflation and
Gold ETF offtake, tonnes
                                        depreciating currencies. Stalling growth in the US, the likelihood of further
                                        monetary stimulus, the potential for a European banking crisis, ever
 80                                     deteriorating fiscal balance sheets in advanced markets, and on-going
 60                                     turmoil in equity markets will fuel safe haven inflows into gold. Near term,
 40                                     however, gold has already seen some profit taking, as losses in equities and
 20                                     margin calls drive investors to liquidate some of their positions in gold. But
   0                                    each sell-off leaves the gold price slightly higher than it was and we expect
(20)                                    this pattern to continue for many months ahead. If Greece actually defaults
                                        and Europe sees a run on banks then gold could surge to fresh records, as it
(40)
                                        rises even nearer to the highly significant $2,000/oz threshold. Short-term
(60)
                                        London pm fix: $1,760/oz-$1,870/oz.
(80)
    10-Jun 08-Jul 05-Aug 02-Sep

Source: VM Group                         Gold supply & demand balance, tonnes
Lease rates, 1m and 12m, % per                                                      2009                     2010                     2011
annum                                                     Supply
 0.40                                                Mine supply                   2,465                    2,495                     2,523
                                                  Scrap recycling                  1,408                    1,339                     1,501
 0.30                                                    Hedging                      74                       65                        42
                                              Central Bank sales                     383                      225                        50
 0.20                                               Total supply                   4,330                    4,124                     4,116
                 Gold - 1m                               Demand
 0.10                                      Jewellery fabrication                   1,672                    1,424                     1,444
                 Gold - 12m
                                              Legal tender coins                   234.3                    296.1                       305
 0.00
                                                      Electronics                    375                      356                       370
-0.10                                            Other end uses                      297                    274.5                       281
                                                            ETFs                     576                      313                       270
-0.20                                    Central Bank purchases                      437                      215                       225
                                                      Dehedging                      321                      205                        31
-0.30                                              Total demand                    3,912                    3,084                     2,926
    15-Aug 25-Aug 04-Sep                                Residual*                    418                    1,040                     1,190
                                         Source: VM Group
Source: VM Group
                                         *The residual is difference between supply and demand and is available to investment (for a full
                                         definition see VM Group’s Yellow Book)


                                                                                                                                        12
Silver, London fix, $/oz                Silver
                                            While silver was the darling of the commodities complex earlier this year, the
44.0
                                        metal has lost much of its sheen. This is inevitable given that silver has a big
                                        industrial demand as well as acting as a safe haven asset. Although prices have
42.0                                    been buttressed and benefited from a spill over effect from gold, the negative
                                        outlook on the global recovery continues to suppress any major upside move to the
40.0                                    price. While gold has broken out to fresh record highs, silver has largely eased on
                                        the back of economic concerns, along with the rest of the metals’ suite.

38.0
                                            The silver price fell in the first half of September, dipping by 3.2% from end-
                                        August and trading was stuck between $38/oz-$44/oz. However, prices have
                                        remained near historically high levels, and since end-June have risen 14%. Year-
36.0
                                        to-date they have posted a gain of 31%. When compared to the same period last
   15-Aug     25-Aug      04-Sep
                                        year, prices have soared by a staggering 100%.
Source: LBMA, VM Group
                                            Activity within silver’s physically backed ETFs has tracked the price move, with
Lease rates, 1m and 12m, % per          changes in total holdings nearly flat, with an inflow of 1% or 3.7 Moz to 9
annum
                                        September. Year-to-date, total volumes have registered an outflow of 7% or 33.5
   1.0                                  Moz. Overall interest in Comex was strong during the first week of September, with
   0.8                                  the total net long gaining by 5% or 13.1 Moz.

   0.6

   0.4          Silver - 1m
                                        Short-term outlook
   0.2          Silver - 12m            Silver is likely to remain under the cloud of risks to economic growth in the
   0.0                                  months ahead, although that will be counter-balanced by gains in the gold
                                        price. Whereas silver vaulted ahead during the first four months of the year,
 (0.2)
                                        gaining on recovery hopes as well as ultra-accommodative monetary policy,
 (0.4)
                                        the darkening outlook on demand for silver’s industrial applications will
 (0.6)
                                        temper any upside momentum. Should equity markets experience further
     15-Aug    25-Aug     04-Sep
                                        downside pressure, then silver could see some profit taking, similar to gold,
Source: LBMA, VM Group                  again due to margin calls. Despite this, the wild card will be a potential third
Silver ETF offtake, weekly, tonnes      round of US quantitative easing, which temporarily could give a shot in the
                                        arm of stocks and commodities, with silver bound to lead the pack. Short-
  600
                                        term London fix: $37.50/oz-$42.50/oz.
  500
  400
                                        Silver supply & demand balance, tonnes
  300
                                                                                2009                2010               2011
  200
                                                              Supply
  100                                                    Mine supply           22,117              22,523             24,184
    0                                                      Recycling           12,752              11,978             11,343
                                                        Government                500                 250                350
(100)
                                                        Total supply           35,369              34,752             35,877
(200)                                                        Demand
(300)                                       Jewellery and Silverware            7,068               6,971              7,201
     03-Jun      15-Jul        26-Aug                      Industrial          12,441              12,547             12,741
                                               Investment & others              9,136               8,744              7,040
Source: VM Group, ETF providers
                                                       Total demand            28,645              28,261             26,983
                                                             Residual           6,724               6,490              8,894
                                        Source: VM Group
                                                  Gold and silver data
Gold CFTC net long position & price             Gold in current $/oz and 2009 $/oz                          Gold/oil ratio, past 3 years

 2,000                                 1,000     2,000                                                       30
 1,900                                 900       1,800
 1,800                                 800       1,600                                                       25
 1,700                                 700       1,400                                                       20
 1,600                                 600       1,200
 1,500                                 500       1,000                                                       15
 1,400                                 400         800                        July 2011$
 1,300                                 300         600                                                       10
               Tonnes
 1,200                                 200         400                                                        5
               Price, $/oz
 1,100                                 100         200         Current $
 1,000                                 0             0                                                        0
     17 Sep 17 Jan 17 May                                 85        90        95    00       05        10     Sep-08       Sep-09      Sep-10       Sep-11

Source: VM Group, CFTC                          Source: VM Group                                            Source: VM Group


Gold/silver ratio, past 3 years                 Gold dehedging, tonnes/quarter                              Central bank gold data, June 2011

 90                                               100
                                                     50                                                        Country/institution                Tonnes
 80
                                                                                                               Mexico                              (0.07)
                                                      0                                                        Others                              (0.04)
 70
                                                  (50)                                                         Total sales                         (0.11)
 60                                                                                                            Thailand                            18.66
                                                 (100)
 50                                                                                                            Russia                               5.85
                                                 (150)
                                                                                                               Others                               3.88
 40                                              (200)                                                         Total purchases                     28.39
                                                                                                               Net change                          28.27
 30                                              (250)
  Sep-08      Sep-09         Sep-10    Sep-11             01        03         05       07        09

Source: VM Group                                Source: VM Group                                            Source: IMF, International Financial Statistics &
                                                                                                            national country websites. Not all country changes
                                                                                                            shown


Silver CFTC net long position & $/oz            Silver in current $/oz and 2009 $/oz                        Silver/copper ratio, past 3 years

60                                     9,000    60                                                          180
                                       8,000                                                                160
50                                              50
                                       7,000                                                                140
40                                     6,000    40        July 2011$                                        120
                                       5,000              Current $                                         100
30                                              30
                                       4,000                                                                  80
20                                     3,000    20                                                            60
                                       2,000                                                                  40
10                                              10
                   $/oz       Tonnes   1,000                                                                  20
 0                                     0         0                                                             0
 Sep-10     Jan-11        May-11                     85        90        95        00    05       10           Sep-08       Sep-09        Sep-10        Sep-11

Source: VM Group, CFTC                          Source: VM Group                                            Source: VM Group

                                                                                                                                                   14
Platinum price, PM fix, $/oz               Platinum and palladium
                                               The rally in the PGMs since the financial crisis, where platinum has since
1,900                                      gained around 140% and palladium, 330% from October 2008, seems to have
1,880                                      peaked – not surprising, given the mainly industrial applications of these metals.
1,860                                      As the global recovery stalls, prices may again enter a same path as they did in
                                           early 2008, where the poor demand outlook led PGM prices into heavily oversold
1,840
                                           levels. Investors however still consider the PGMs a safe haven and store of
1,820
                                           wealth (albeit on a lower scale than gold), which means that prices are likely to
1,800
                                           remain intensely volatile.
1,780
                                               Platinum’s momentum evaporated in September, with prices falling by 1.6%.
1,760
                                           Year-to-date, the platinum price has largely flat-lined, up by just 3%. Palladium,
1,740                                      which has become the most speculative play in the precious metals complex, has
    12 Aug          26 Aug        09 Sep
                                           been the worst performer of late, with prices dipping near 8% in September. Since
Source: LPPM, VM Group                     end-2010, prices have posted a sizable loss of 10%.
Palladium price, PM fix, $/oz                  While platinum continues to trade comfortably above its 200-day moving
                                           average, palladium conversely has plunged below both its two-week and 200-day
 790                                       moving average, indicating that further losses are likely to mount. Should
 780                                       palladium fall below $700/oz in the coming weeks, then selling pressures are
 770                                       bound to accelerate. Investors are looking to China, the world’s leading auto
 760                                       market, to continue to drive PGMs demand, yet it is highly uncertain as to how
 750                                       much decoupling between emerging markets and advanced economies has taken
 740                                       place since the last downturn.
 730
                                               Total inflows into platinum ETFs was virtually flat to 9 September, registering
 720
                                           a rise of 2,397 oz since end-August, while year-to-date, cumulative holdings are
 710
 700                                       up by a healthy 17% or 183,000oz. Compared to last year, the increase in
 690                                       volumes has surged by an impressive 41% or 417,000oz. Activity in palladium
   12-Aug          26-Aug     09-Sep       ETFs is very different. While the outflow to 9 September was a minimal 7,580oz,
                                           year-to-date, total holdings have shed a hefty 10% or 258,000oz.
Source: LPPM, VM Group

Platinum/palladium price ratio
                                           Short-term outlook
                                           With each passing week, the likelihood of a repeat of the 2008-2010 slow
5.5
                                           down seems to be increasing. With the global economy overall in a far
5.0
                                           worse position, many argue that a second downturn would be far more
4.5                                        severe, and that the fallout from a European banking and sovereign crisis
4.0                                        could be much bigger than that of Lehman’s. It now seems a question of
                                           when, not if, PGM prices will fall from their lofty historic heights, dragged
3.5
                                           lower once again by their deteriorating supply-demand outlook. Although
3.0                                        unlikely to plummet to depths reached in 2008, PGM prices could fall
2.5                                        sharply if China and other key emerging markets begin to show signs of
2.0                                        weakness. Short-term London pm fix: platinum, $1,760/oz-$1,850/oz;
  Sep-08                 Sep-10            palladium, $700/oz-$745/oz.

Source: VM Group
                                                                     PGMs data
US & China car* monthly sales, million                  Top four European car markets sales,                 Platinum turnover on the SGE, rolling
units                                                   monthly, million units                               3m average, annualised, Moz
2.0                                                     0.50                                                  1.3
                                                                        France            Germany
1.8                                                     0.45            UK                Italy               1.2
1.6                                                     0.40
1.4                                                     0.35                                                  1.1
1.2                                                     0.30
                                                                                                              1.0
1.0                                                     0.25
0.8                                                     0.20                                                  0.9
0.6                                                     0.15                                                  0.8
0.4                                                     0.10
                            US        China             0.05                                                  0.7
0.2
0.0                                                     0.00                                                  0.6
   Jul-08         Jul-09         Jul-10       Jul-11        Jul-08      Jul-09     Jul-10     Jul-11            Sep 09          Jul 10           May 11

Source: VM Group, national data. * China includes       Source: VM Group, national data                      Source: VM Group, SGE
commercial vehicles.


Palladium ETFs weekly offtake, Koz                      Platinum ETFs weekly offtake, Koz                    South Africa PGM output, 2005=100
    40                                                    40                                                  120
                                                                     ETFS US
    20                                                    30         ZKB                                      110
     0                                                               ETFS UK
                                                          20                                                  100
  (20)                                                    10                                                   90
  (40)                                                     0                                                   80
  (60)            ETFS US
                                                        (10)                                                   70
                  ZKB
  (80)
                  ETFS UK                               (20)                                                   60
 (100)
                                                        (30)                                                   50
         10-Jun    08-Jul     05-Aug 02-Sep
                                                               10-Jun   08-Jul   05-Aug 02-Sep                   Jul 08      Jul 09       Jul 10     Jul 11

Source: VM Group, company data                          Source: VM Group, company data                       Source: VM Group, SSA


Platinum supply & demand balance, 000 oz                                         Palladium supply & demand balance, 000 oz
                               2009e                        2010         2011                                   2009       2010                       2011

                              Supply                                                                        Supply
                        Mine supply             6,052      6,141         6,575                         Mine supply         6,227         6,385        6,839
                    Scrap recycling             1,656      1,699         1,610                      Scrap recycling        1,811         1,936        1,644
                        Total supply            7,708      7,839         8,185                         Total supply        8,038         8,322        8,483
                            Demand                                                                        Demand
                      Autocatalysts             3,025      3,291         3,482                        Autocatalysts        4,284         5,211        5,302
                          Jewellery             2,184      1,797         1,703                            Jewellery          730           575          556
                    Other industrial            1,070      1,627         1,892                      Other industrial       2,421         2,568        2,670
                     Total demand               6,279      6,715         7,077                       Total demand          7,434         8,353        8,527
                             Residual           1,429      1,124         1,108                             Residual          604          (32)            (44)
                  Stock movements                                                              Stock movements
                           ETF inflows            380          489        300                           ETF inflows          502          950             350
                                                                                            Russian stock sales           (1,000)        (950)        (600)
  Unknown/implied investment                    1,049          635        808      Unknown/implied investment               1,102         (31)          206

                                                                                                                                                      16
Aluminium price, LME, $/tonne                 Aluminium
                                                  The short and medium term outlook for the aluminium market is two speed.
 2,650                                        Markets conditions in China are price supportive, while the already parlous state
 2,600                                        of the market elsewhere is worsening. The leading indicator of this is stock flows.
                                                                                            th
 2,550                                        Those held by the SHFE declined for the 26 week in the week ending 9
 2,500                                        September, to 0.11 Mt, down a sizeable 39% since the start of August and 75%
 2,450                                        since the start of 2011, while those held by the LME are up 4% over August and
 2,400                                        8% since the start of the year, to 4.6 Mt.
 2,350                                            At first glance these figures appear price negative, while the possibility that
 2,300                                        the US and EU will drag the world into another recession is becoming more likely
 2,250                3m         27m          by the day. That said, there is limited downside to the aluminium price (ex-China)
 2,200                                        in our view. Prices are and will continue to be supported by high energy and raw
     15-Aug         29-Aug         12-Sep     material costs. Alumina prices, which make up the bulk of primary aluminium
                                              input costs, have trended higher during 2011, as Chinese and, indeed, global
Source: LME, VM Group
                                              aluminium production has increased. Energy costs have also risen, with the oil
Aluminium stocks, LME, Mt                     price shock at the end of Q1 11 standing as testimony to aluminium’s status as a
                                              semi-energy hedge. If another recession happens in Western markets that had
4.80                                          previously shown signs of strong recovery, any surplus metal will simply find its
                                              way into warehouses and be locked away in financing deals, which profit from
4.70
                                              positive forward spread. With the US guaranteeing that short-term interest rates
4.60                                          would remain near zero through to mid-2013, there is little that will dissolve this
4.50                                          market dynamic.

4.40
                                                   Chinese domestic demand has been very strong. Some have argued that
                                              China’s aluminium demand would weaken on another recession in the advanced
4.30                                          economies, due to the impact on exports, but we think that domestic consumption
4.20                                          is the dominant factor and will drive China’s production rates higher in 2012. This
                                              raises the possibility that China could soon shift to being a significant net primary
4.10                                          aluminium importer – much like in 2009. The differential between the LME (inc
   Sep-10      Feb-11          Jul-11
                                              VAT) and SHFE aluminium price is widening for arbitrage trade, so it may be just
Source: LME, VM Group                         a matter of time.
Aluminium forward curve, LME,
various dates, spot price = 100               Short-term outlook
120                                           Aluminium’s long-term future is bright, with a significant deficit on the
                                              horizon regardless of current stock levels. The short to medium term
                  12/09/2011
115                                           picture however is less certain, but continued demand strength in China
                  1m ago
                                              and the financing term deals should keep prices at current levels in the
                  1yr ago
                                              event of recession. Short-term LME three-month aluminium price: $2,300/t-
110
                                              $2,400/t.
105                                           Chinese aluminium and alumina prices, yuan/t
                                                              13 September 2011  Current   YoY % chg        Last mth      YoY % chg
100                                                                  SHFE spot price    17,790        16%        18,075        -16%
                                                             SHFE three-month price     17,385        12%        17,595        -13%
                                                                SHFE six-month price    17,215         9%        17,250         -9%
 95
                                                                 SHFE stocks, tonnes   111,350       -77%       149,424        229%
      Spot   3m     15m      27m        63m     Chinese aluminium ingots (99.7%min)     16,585         4%        16,205          1%
                                                               Chalco alumina prices     2,900        -3%         2,900          3%
Source: LME, VM Group
                                                 Chinese alumina (Australian import)     2,975         2%         3,025         -3%
                                                  Aluminium data
Aluminium output by region, monthly,      SHFE/LME price differential, $/t                   Japanese domestic shipments of
Mt                                                                                           extruded products, 000t

 1.80           China                         0                                                 85
 1.60           Rest of world             (100)                                                 80
                Europe                                                                          75
 1.40                                     (200)
                Americas                                                                        70
 1.20                                     (300)                                                 65
 1.00                                     (400)                                                 60
                                                                                                55
 0.80                                     (500)
                                                                                                50
 0.60                                     (600)                                                 45
 0.40                                     (700)                                                 40
        05       07        09        11       Sep-10            Feb-11      Jul-11               Jan 08         Jan 09    Jan 10   Jan 11

Source: IAI, VM Group                     Source: SHFE, LME, VM Group                        Source: Japan Aluminium Association


Unwrought aluminium producer stocks,      Chinese imports/exports of unwrought               US output, alumina and aluminium,
Mt                                        aluminium and aluminium products,                  100=2002
                                          000t

 2.0                                         500                                     600      110
                                             400            Exports                  500      105
 1.8                                         300            Imports                  400      100
                                             200            Net                      300       95
 1.6                                         100                                     200       90
                                               0                                     100       85
 1.4                                       (100)                                     0         80
                                           (200)                                     (100)     75
 1.2                                       (300)                                     (200)     70
                                           (400)                                     (300)     65
 1.0                                       (500)                                     (400)     60
       05 06 07 08 09 10 11                        06      07   08    09   10                        06    07      08    09   09   10   11

Source: IAI, VM Group                     Source: China Customs                              Source: Federal Reserve, VM Group


Aluminium supply & demand balance, 000t
                                                   2009                          2010                      2011                             2012
                                Supply
                                 China            13,483                        16,252                    17,895                        19,750
                       North America               4,762                         4,777                     5,040                         5,075
                         Europe & CIS              8,774                         8,792                     8,854                         8,900
                         Rest of world            10,438                        11,094                    13,426                        13,675
                   Total world output             37,457                        40,916                    45,215                        47,400
                   Year-on-year % chg               (5%)                          9.2%                     10.5%                          4.8%

                              Demand
           Total world consumption                35,813                        40,020                    44,643                        46,830
                  Year-on-year % chg                (6%)                         11.8%                     11.6%                          4.9%
             Implied market balance                1,644                           895                       572                           570
                         Total stocks              8,195                         9,890                    10,560                        11,130
         Average 3-m LME price ($/t)               1,693                         2,179                     2,437                         2,267
Source: IAI, WBMS, VM Group



                                                                                                                                            18
Copper price, LME, $/tonne                   Copper
                                                  The copper price has resembled a bungee jumper in the past five months,
                                             trading in a wide range between $8,550/t-$9,850/t, but we suspect that the rope
 9,300
                                             will soon break. Copper’s previously tight fundamentals are looking jaded. Not
 9,200
                                             only has demand failed to live up to expectations, the supply-side in 2012 and
 9,100
                                             2013 could significantly improve, with a forecast 6% and 5% growth in mine
 9,000
                                             output rates. But fundamentals for some time have taken a back seat. It is hard
 8,900
 8,800                                       to envisage a sustained rally from current levels in the copper price in the
 8,700                                       foreseeable future, apart from small increases on short covering.
 8,600                                            The assumption of a price correction is not based on China’s real copper
 8,500               3m         27m          consumption or its ability, as proven in 2009 and 2010, to mop up excess
 8,400                                       inventory when the copper price falls, but on the ailing fortunes of the EU and US
 8,300                                       economies. Together these two (humbled) economic powerhouses account for
     15-Aug          29-Aug         12-Sep   about 25% of global copper demand and any recession will push the copper
                                             price much lower, although we doubt the decline will resemble that seen in H2
Source: VM Group                             2008, simply because China – which proved fairly immune to the last recession –
Copper stocks, LME, Mt                       will scale-up its buying.
                                                 This dynamic is already in progress, partly because Chinese copper
                                             consumers find themselves in a weaker position having heavily destocked earlier
0.6
                                             this year. Chinese refined copper production rose to a record of 0.52 Mt in
0.5                                          August, while imports of unwrought copper and copper products rose for the third
                                             straight month in August, to 0.34 Mt. It is no accident that the rise in imports
0.4                                          coincides with the weaker copper price, nor that refined output rates climbed
                                             over the same period. China is simply caught between needing copper now and
0.3                                          knowing that if it could wait a little longer then prices paid would almost certainly
                                             be lower.
0.2
             Text.
0.1
                                             Short-term outlook
0.0                                          The copper market will be badly hit if the current tenuous recovery in the
  Sep-10       Feb-11         Jul-11         West slips back into recession. If it were not for that threat hanging over
                                             the market then the price would be rallying to much higher levels as
Source: VM Group
                                             physical demand would be supported by investment appetite. China needs
Copper forward curve, LME, various           copper now, but it will not provide that price support in the face of a
dates, spot = 100
                                             possible imminent slowdown in Western copper demand. China’s best
110
                                             interests are to remain on the sidelines for a while, as a better (cheaper)
                                             price will soon be with us all. Short-term LME copper price: $8,450-$8,700/t.
105

100
                                             Chinese copper prices, yuan/t (unless stated otherwise)
 95
                                                                22 August 2011         Current    YoY %chg     Last mth    YoY %chg
 90
                                                                   SHFE spot price      66,710        18%        72,340         34%
 85            12/09/2011                                  SHFE three-month price       66,510        18%        72,830         35%
               1m ago                                                                   66,520        18%        73,070         36%
 80                                                           SHFE six-month price
               1yr ago
                                                              SHFE stocks, tonnes      112,014        -2%        109,461         -4%
 75                                               Chinese copper cathode (99.95%)       67,450        10%         67,450        -11%
      Spot   3m      15m      27m      63m
                                                                                       Current          Last mth         6m ago
                                                         Copper TC (cif) China ($/t)     87.5             87.5            25.0
Source: VM Group
                                                  Copper data
World mine capacity utilisation, %     Global copper concentrate output,             Apparent copper usage, monthly, 000t
                                       monthly, 000t
95.00                                   1,500                                         800.00              EU-15
                                        1,450
                                        1,400                                         700.00              United States
90.00
                                        1,350                                         600.00              China
                                        1,300
85.00                                   1,250                                         500.00
                                        1,200
80.00                                   1,150                                         400.00
                                        1,100
75.00                                   1,050                                         300.00
                                        1,000
                                          950                                         200.00
70.00                                     900                                         100.00
                                          850
65.00                                     800                                                -
        2007 2008 2009 2010 2011                07     08       09    10       11                07   08        09        10   11

Source: ICSG, VM Group                 Source: ICSG, VM Group                        Source: ICSG, VM Group


Monthly refined copper production      China implied copper demand & copper          US copper imports in million dollars
(primary and secondary), 000t          output, monthly, 000t

2,000                                  1,200                                           900
1,800                                                                                  800
1,600                                  1,000
1,400                                                                                  700
1,200                                    800                                           600
1,000                                                                                  500
  800                                    600
  600                                                                                  400
  400                                                                                  300
  200                                    400
    0                                                       Implied demand             200
     2007 2008 2009 2010 2011            200                                           100
                                                            Production Output
     Rest of World          US                                                           0
     Russian Fed            Japan
                                            0
                                            Sep 08      Sep 09       Sep 10               Sep 08      Sep 09         Sep 10
     India                  China

Source: ICSG, WBMS, VM Group           Source: China customs, NBS, VM Group          Source: US Census Bureau, VM Group


Copper supply & demand balance, 000t
                                                2009                          2010                2011                          2012
                           Supply
           Total mine production            16,023                         16,359                16,687                        17,653
           Year-on-year %change               3.7%                           2.1%                  2.0%                          5.8%
                    North America            1,634                          1,721                 1,805                         1,825
                     Latin America           3,564                          4,499                 4,612                         4,720
                    Asia (ex China)          3,952                          3,520                 3,650                         4,000
                              China          4,005                          4,725                 5,068                         5,320
                            Europe           3,522                          3,659                 3,680                         3,690
         Total refined production           18,362                         18,913                19,717                        20,545
           Year-on-year %change               0.7%                           3.0%                  4.3%                          4.2%
                         Demand
      Total refined consumption             17,721                         19,157                19,927                        20,266
          Year-on-year %change              (1.7%)                           8.1%                  4.0%                          1.7%
                 Implied balance               641                          (244)                 (210)                           279
                     Total stocks            1,263                            950                   700                         1,052
     Average 3-m LME price ($/t)             5,140                          7,556                 8,865                         7,300
Source: ICSG, WBMS, VM Group



                                                                                                                                20
Nickel price, LME, $/tonne                     Nickel
                                                   Several fairly strong headwinds are blowing in to dampen the expansion of
                                               China’s nickel pig iron (NPI) output, producing some support for the refined
22,500
                                               nickel price in the near term and raising the prospects of greater Chinese refined
22,000                                         nickel imports. Firstly, lower refined nickel prices in China have partly offset the
                                               comparative cheapness of NPI in stainless steel production, which has prompted
21,500                                         some mills, such as Baosteel, to recently cut NPI usage. With about 70% of
                                               China’s stainless steel production relying in part on integrated NPI feedstock to
21,000                                         supplement traditional nickel feeds, cuts to demand will pressure NPI producer
                                               margins and potentially lead to capacity cuts. This is compounded by the
20,500
                                               slowdown in stainless steel production rates over the past few months, and a
                      3m           27m
                                               shift by some mills towards producing greater volumes of ferritic grades that
20,000
     15-Aug          29-Aug        12-Sep      contain less or no nickel relative to austenitic grades.
                                                   This softening in demand for nickel from the world’s (especially China’s)
Source: VM Group                               stainless steel sector could last for the remainder of 2011 at least, due to
Nickel stocks, LME, Mt                         declining exports and weaker domestic demand. Although partly offsetting this
                                               have been further delays to the commissioning of the next generation, high
                                               pressure acid leach mines such as Goro (in New Caledonia) and Ambatovy
0.15
                                               (Madagascar), we estimate there is enough traditional nickel sulphide capacity
                                               coming online that will more than compensate, and put the global nickel market
                                               firmly into surplus for the rest of 2011 and 2012.
0.10
                                                   Some support could be derived in the near term should Indonesia introduce
                                               regulations on ore exports. The proposed transitional tax on all ore exports
                                               (including low-grade nickel ore) would come ahead of a complete ban scheduled
0.05                                           for 2014. Much of China’s NPI production capacity is profitable between
                                               $20,000/t-$24,000/t currently, so the additional costs of an Indonesian tax on ore
                                               exports, as well as that from higher electricity prices that we expect will be
0.00                                           imposed by Beijing over the coming years to meet its latest (2011-2015) five-year
   Sep-10      Feb-11           Jul-11         plan, should set a natural floor for the refined nickel price.
Source: VM Group

Nickel forward curve, LME, various             Short-term outlook
dates, spot = 100                              Nickel will find support around $20,000/t, as it places in jeopardy marginal
105                                            Chinese NPI production. Barring a severe downturn in the advanced
                                               economies, nickel, in our view, has less downside risk than that of the more
100                                            high-flying base metals, such as copper and tin. Short term LME three-
                                               month nickel price: $19,500/t-$20,750/t.
 95
                                               Chinese nickel and stainless steel prices, yuan/t
 90                                                            13 September 2011     Current    YoY %chg     Last mth      YoY %chg
                   12/09/2011
                   1m ago                        Nickel cathode (Jinchuan, 99.9% min)     199,500       8%       183,500         -4%
 85
                                                   Nickel cathode (Norilsk 99.9% min)     199,000       8%       182,500         -4%
                   1yr ago
                                                 Nickel cathode (Vale Inco, 99.9% min)    205,500       2%       196,000         -5%
 80
                                                                        Stainless steel
      Spot    3m             15m         27m
                                                                Hot rolled sheet (304)     23,050       7%        22,750         -6%
Source: VM Group                                                 Cold rolled coil (304)    25,650     4.1%        24,650          0%
                                                                      Nickel data
        Chinese imports of nickel ore, 000t               Chinese refined nickel output and              Chinese free market nickel cathode,
                                                          imports, 000t                                  yuan/t

            5,000                                           60                                           250,000
Thousands




            4,500                                                      Imports
            4,000                                           50                                           200,000
                                                                       Production
            3,500                                           40
            3,000                                                                                        150,000
            2,500                                           30
            2,000                                                                                        100,000
            1,500                                           20
            1,000                                           10                                            50,000
              500
                0                                            0                                                   0
                Aug 07     Nov 08    Feb 10      May 11      Sep 09              Sep 10         Sep 11            2008                    2010

        Source: China Customs                             Source: China Customs, NBS                     Source: Asian Metals, VM Group


        World stainless steel metaling rates, Mt          Chinese stainless CR Sheet (304 2b,            US stainless steel prices for flat rolled
                                                          1mm), yuan/t                                   coil, $/kg
            9.0                                           28,000                                             9
                                                                                                                                          301(7%)
            8.0                                           26,000                                             8
                                                                                                                                          304 (8%)
            7.0                                                                                              7                            316
                                                          24,000
            6.0                                                                                              6
            5.0                                           22,000                                             5
            4.0                                           20,000                                             4
            3.0                                                                                              3
                                                          18,000
            2.0                                                                                              2
            1.0                                           16,000                                             1
            0.0                                           14,000                                             0
              Q1 2008 Q1 2009 Q1 2010 Q1 2011                  Mar 09        Mar 10        Mar 11             Jan 08 Jan 09 Jan 10 Jan 11

        Source: ISSF, VM Group                            Source: Asian Metals, VM Group                 Source: Metal Prices


            Nickel supply & demand balance, 000t
                                                                   2009                       2010                     2011                          2012
                                      Supply
                       Total mine production                       1,405                      1,514                   1,672                          1,889
                                   % chg y-o-y                    (8.5%)                       7.7%                   10.5%                          13.0%
                                       Canada                        116                         90                     138                            142
                                        China                        240                        325                     425                            500
                                        Japan                        142                        165                     142                            155
                                  Russian Fed.                       244                        258                     260                            262
                                     Australia                       112                        114                     125                            128
                     Total refined production                      1,354                      1,439                   1,596                          1,698
                                   % chg y-o-y                    (1.6%)                       6.3%                   10.9%                           6.4%
                                    Demand
                  Total refined consumption                       1,279                       1,458                   1,553                          1,602
                                  % chg y-o-y                    (3.0%)                       14.0%                    6.5%                           3.2%
                             Implied balance                         75                         (19)                     43                             96
                                 Total stocks                       257                         245                     280                            366
             Average 3-month LME price ($/t)                     14,706                      21,877                  22,756                         20,867
            Source: INSG, WBMS, VM Group



                                                                                                                                                      22
Zinc price, LME, $/tonne                      Zinc
                                                   Zinc maintains it place as the runt of the base metals litter. LME warehouse
2,450                                          stocks have grown by 20% to 0.84 Mt as at 12 September, while those held by
2,400                                          the SHFE have risen by 33%, to 0.41 Mt. Total zinc stocks, including those held
2,350                                          by consumers and producers, stand at about ten weeks’ worth of global
2,300                                          consumption, the highest since the 1990s. Surprisingly the zinc price has
2,250                                          performed well since the start of August, rising by 1%, to ~$2,200/t (three-month
2,200                                          price) as at 12 September. This compares with declines in aluminium and tin and
2,150                                          more modest gains in copper and nickel. Only lead has performed better. That
2,100                                          said the zinc price did come under pressure in early August, falling to a low of
2,050               3m           27m           $2,034/t, only to rally later that month as risk-on risk-off sentiment based on EU
2,000                                          and US debt and growth concerns roiled the markets.
    15-Aug          29-Aug        12-Sep            Much of zinc’s fundamentals are already priced in and thus we expect that
                                               declines will be more muted compared with those of copper, as demand
Source: VM Group
                                               weakens in the advanced economies in the months ahead. The continuation of
Zinc stocks, LME, Mt                           near-zero short term rates in the US will also offer support as it ensures that the
                                               immediate availability of metal held in warehouses will remain tight for at least
1.0                                            another year, as financing term deals are extended on the cheap cost of capital.
0.9                                            Zinc’s forward curve is also favourable to the carry trade, with near to far dates in
0.8                                            sustained contango, indicative of a market in surplus. Indeed, the International
0.7                                            Lead and Zinc Study Group’s verdict is that the zinc market was in surplus by
0.6                                            0.22 Mt in H1 2011, with global mine supply up 3.4%, to 6.21 Mt and refined
0.5                                            supply up 3.0%, to 6.45 Mt. Refined zinc consumption rose a more modest 2.4%,
0.4                                            to 6.23 Mt.
0.3
0.2                                           Short-term outlook
0.1
                                              The premium paid for LME-grade zinc in Rotterdam remains high as some
0.0
  Sep-10      Feb-11           Jul-11
                                              of the stock held in warehouses remained locked away in financing term
                                              deals and the vast remainder is held in the exchange’s New Orleans
Source: VM Group
                                              location. As at 12 September high-grade zinc fetched a premium of $130/t,
Zinc forward curve, LME, various              some $10/t more than at the start of the year and $20/t above the lows
dates, spot = 100
                                              between February and April. These dynamics will continue to characterise
109                                           the zinc market in 2012, as trading houses and investment banks look to
107                                           profit from the carry trade, while end users will at least find solace in lower
                                              zinc prices. Short-term LME three-month zinc price: $2,100/t-$2,250/t.
105

103                                           Chinese zinc prices, yuan/t, unless otherwise stated
                                                               13 September 2011    Current    YoY %chg      Last mth    YoY %chg
101
                                                                      SHFE spot price    16,765       -6%      16,490          -1%
 99               12/09/2011
                                                             SHFE three-month price      16,925       -7%      16,710           0%
                  1m ago
 97                                                             SHFE six-month price     17,210       -8%      16,980          -1%
                  1yr ago
 95                                                 Chinese zinc ingot (99.995% min)     18,650        4%      18,500          -1%
      Spot   3m     15m      27m        63m      Chinese zinc conc (55% min) S China     11,950        0%      12,150          -2%
                                                Chinese zinc conc. (55% min) N China     11,850        1%      12,050           0%
Source: VM Group
                                               Zinc conc TC (50% min, cif) China ($/t)      125       67%         125         -36%
                                                              Zinc data
  Chinese refined zinc production, 000 t        Chinese zinc ingot and concentrate             China: imports and exports of
                                                prices, Yuan/t                                 unwrought zinc, 000t

            560                                  23,000                                            150
Thousands




                                                                                                                 Imports
            510                                  19,000                                                          Exports
                                                                                                   100
                                                                                                                 Net
            460                                  15,000
                                                                                                    50
            410                                  11,000
                                                                                                      0
            360                                    7,000
                                                       Aug 10          Feb 11         Aug 11
            310                                                                                    -50
                                                          Zinc Ingot, 99.995%min Free Market

            260                                           Zinc Conc, 55%min Ex works North        -100
               Sep 09 Mar 10 Sep 10 Mar 11                China RMB/mt                                2006 2007 2008 2009 2010

  Source: NBS, VM Group                         Source: ILZSG, CHR Metals, VM Group            Source: China Customs


  SHFE/LME price differential (inc VAT)         Zinc concentrate TC, cif China, $/t            US construction spending, y-o-y %
                                                                                               change

            250                                  250                                             5%
            200
                                                 200                                             0%
            150
            100                                                                                 -5%
                                                 150
             50
              0                                  100                                           -10%

            -50
                                                  50                                           -15%
      -100
      -150                                         0                                           -20%
         Sep 10             Mar 11                  2010             2011             2011            2007     2008    2009   2010

  Source: SHFE, LME, VM Group                   Source: Asian Metal, VM Group                  Source: USCB

   Zinc supply & demand balance, 000t
                                                           2009                        2010                   2011                    2012
                                     Supply
                      Total mine production             11,204                        11,931                 12,576                  13,105
                                  % chg y-o-y           (2.6%)                          6.5%                   5.4%                    4.2%
                                       China             4,334                         5,176                  5,731                   6,077
                               North America             1,120                         1,300                  1,516                   1,480
                               South America               450                           489                    607                     577
                                      Europe             2,001                         2,208                  2,403                   2,313
                                    Australia              500                           525                    520                     515
                    Total refined production            11,250                        12,446                 13,155                  13,727
                                  % chg y-o-y           (2.0%)                         10.6%                   5.7%                    4.4%
                                   Demand
                  Total refined consumption             10,524                        11,810                 12,637                  13,187
                                  % chg y-o-y           (4.7%)                         12.2%                   7.0%                    4.4%
                             Implied balance               725                           635                    518                     541
                                 Total stocks            1,123                         1,404                  1,615                   1,555
                    3-month LME price ($/t)              1,669                         2,188                  2,225                   2,127
   Source: CHR Metals, ILZSG, WBMS, VM Group




                                                                                                                                      24
Lead price, LME, $/tonne                   Lead
                                               The front end backwardation in lead’s forward curve is at odds with the
2,800                                      metal’s fundamentals, since no such physical tightness exists, as evidenced
                                           by high exchange warehouse stocks and sharp global supply growth this
                                           year. LME lead stocks ended August at 318,250t, just shy of June’s multi-
2,600
                                           year high of 323,400t, and those too held by the SHFE are rising, which
                                           implies that either demand is weak or supply plentiful. We think the latter
2,400                                      since global lead-acid battery demand has grown rapidly this year. The
                                           backwardation, which is more a function of a dominant position holder, could
2,200                                      thus precipitate further LME lead stock builds in the coming months, as off
                   3m        27m           market metal is sucked in.

2,000                                          The biggest threat to the lead market is the looming Euro debt crisis and its
    15-Aug         29-Aug         12-Sep   threat to global growth. It is argued that lead is fairly well insulated from
                                           economic downturns due to the recession-proof replacement battery sector, but
Source: VM Group                           in the sharp price fall during 2008/09, the three-month lead price fell by two-
Lead stocks, LME, Mt                       thirds. This somewhat disproves this argument and thus the growing threat of
                                           recession should keep prices over the short-term muted, with substantial
                                           downside risk. The beginning of the northern hemisphere winter traditionally sees
0.35
                                           replacement battery demand rise – giving the lead price a boost. But LME stock
0.30                                       drawdowns have been negligible through August and early September, and
0.25                                       cancelled warrant levels suggest little improvement in the immediate term. By
                                           implication this suggests that lead supply is more than sufficient to meet demand.
0.20
                                               In China the impact of the government crackdown on lead acid battery plants
0.15                                       has resulted in a 10% rise in prices for lead acid batteries, as unaffected plants
0.10                                       have increased their battery manufacturing utilisation rates. Chinese domestic
                                           lead acid battery production has risen month on month in both July and August
0.05
                                           on the back of rising e-bike sales, which have offset softer car sales.
0.00
   Sep-10      Feb-11       Jul-11
                                           Short-term outlook
Source: VM Group
                                           The lead price will continue to find support in the short-term relative to the
Lead forward curve, LME, various           other base metals, while further out we are less optimistic. We anticipate
dates, spot = 100
                                           that the lead market will be in surplus by 96,000t in 2011 and 123,000t in
106                                        2012, as Western demand weakens. Although a large surplus is predicted
                                           next year, assuming that US and EU leaders remain ineffective, we suspect
104
                                           that China will find lower prices as a buying opportunity, despite high and
102
                                           growing domestic refined lead production rates. Short-term LME three-
100                                        month lead price: $2,300/t-$2,400/t.
 98
 96
 94           12/09/2011
              1m ago
 92                                        Chinese lead prices, yuan/t, unless otherwise stated
              1yr ago
                                                           13 September 2011     Current    YoY %chg       Last mth        YoY %chg
 90
   Spot     3m     15m      27m      63m                   Lead ingot (>99.99%)      17,250          10%        16,900           -6%
                                                    Lead concentrate (60% min)       15,050          12%        14,650           -8%
Source: VM Group                             Lead concentrate TC (cif) China ($/t)      105         -19%           105           24%
                                                               Lead data
Lead ingot price, China, Yuan/t                Refined lead consumption, 100=Oct               Chinese lead trade, past two years, 000
                                               2008                                            tonnes

 20000                                           300                                                  8
 18000                                           250                                                                            Exports
                                                                                                      6
 16000
                                                 200                                                                            Imports
 14000                                                                                                4
 12000                                           150
                                                                                                      2
 10000                                           100
  8000                                            50                                                  0
  6000
                                                    0                                              -2
  4000
                                                     Jan-08      Jan-09        Jan-10
  2000                                                                                             -4
                                                          Germany               China
     0
                                                          US                    Japan              -6
     Sep 08                 Sep 10
                                                          South Korea                                Sep 09            Sep 10
Source: VM Group                               Source: ILZSG, VM Group                         Source: China Customs


Chinese refined lead output, 000 tonnes        Passenger cars sold or produced, 000            Lead TC, cif China, $/t
                                               units

  500                                           1,600                                           180
                                                                    Japanese
  450                                           1,400               Chinese
                                                                                                160
  400                                           1,200               US                          140
  350                                                                                           120
                                                1,000
  300                                                                                           100
  250                                             800
                                                                                                 80
  200                                             600
                                                                                                 60
  150
                                                  400                                            40
  100
   50                                             200                                            20
    0                                               0                                             0
     Sep 09             Sep 10        Sep 11            2006         2008         2010            Sep 08                  Sep 10

Source: China Customs                          Source: JAMA, NBS, BEA                          Source: VM Group



Lead supply & demand balance, 000t
                                                         2009                           2010                  2011                         2012
                            Supply
            Total mine production                        3,864                      4,258                  4,470                           4,655
                        % chg y-o-y                     (3.0%)                      10.2%                   5.0%                            4.2%
                             China                       3,605                      4,180                  4,807                           5,071
                                US                       1,276                      1,270                  1,273                           1215
                            Europe                       1,702                      1,688                  1,705                           1655
          Total refined production                       8,805                      9,382                  9,860                          10,308
                        % chg y-o-y                       3.0%                       6.6%                   5.1%                            4.5%
                           Demand
        Total refined consumption                       8,583                       9,313                  9,764                          10,185
                        % chg y-o-y                      1.2%                        8.5%                   4.9%                            4.3%
                   Implied balance                        222                          69                     96                             123
                       Total stocks                       521                         590                    686                             625
          3-month LME price ($/t)                       1,721                       2,124                  2,442                           2,240
Source: WBMS, ILZSG, VM Group




                                                                                                                                           26
Tin price, $/tonne                         Tin
                                              True to their word, Indonesian tin exports fell 8% month-on-month in August,
 25,000                                    to 8,560t. The reason given for the monthly decline was the lower tin price,
                                           although we suspect that the Ramadan fast was partly to blame. August’s tin
 24,500                                    shipments were nevertheless up 7% on the year, while over the first eight
 24,000                                    months shipments totalled 67,990t, which when annualised amount to more than
                                           100,000t – comfortably within government targets. The rise in tin supply has also
 23,500                                    been mirrored by China, with refined tin production up 7% in the first seven
 23,000                                    months of 2011, to 89,824t. The production of tin concentrate has also risen by a
                                           resounding 32% over the same period, to 50,000t.
 22,500
                   3m         27m             The supply response to the high tin price is understandable, but with demand
 22,000                                    expected to grow by a tepid 2.6% in 2011, our forecast market deficit of 6,000t
      15-Aug       29-Aug       12-Sep     may be in danger of moving closer to balance. This would have been unthinkable
                                           just nine months ago, with demand from the emerging markets and that too of
Source: VM Group
                                           the recovering advanced economies forecast to immerse the tin market in a
Tin stocks, LME, 000 tonnes                supply deficit of as much as 20,000t. Although the tin market still suffers from
                                           severe mine side tightness, with just two mines expected on line in the next 18
                                           months, and potential supply bottlenecks in the central African region, any
25
                                           downturn in Western demand will pressure prices lower, as it will inevitably have
20                                         a knock-on effect to Chinese demand. That said and assuming that a double-dip
                                           recession is avoided or short-lived, tin demand in China remains robust and
15                                         should grow by 11% on the year in 2011, to 163,000t, leaving a domestic deficit
                                           of ~10,000t. This will be filled by imports, which net of exports to July and then
10                                         annualised neatly rounds the market, standing at ~9,300t.
                                              Perhaps the biggest headwind facing the LME tin price is the prospect of
 5
                                           warehouse stock builds. Tin stocks have generally trended higher in 2011,
                                           standing at 21,610t on 9 September, up 32% from the start of the year, while the
 0
 Sep-10       Feb-11        Jul-11         LME tin price has declined by 11%, to ~$24,000/t. Chinese tin ingot prices
                                           conversely have risen 21%, to yuan 192,000/t ($30,050/t) during the same period
Source: VM Group                           – even though they are down 12% from early May highs. But if 17% VAT and 3%
Tin forward curve, LME, various            import duty are included then arbitrage opportunities have been limited.
dates, spot = 100
                                           Short-term outlook
102
                                           Changes to royalty payments in Bolivia and the mining tax in Peru will heap
101                                        more pressure on the fragile tin mining sector over the longer term, but
                                           near term the market trajectory will be determined by the softening of
100
                                           demand in the advanced economies and resultant impact to Chinese tin
 99                                        consumption. Short-term LME three-month tin price: $21,500/t-$23,500/t.

 98            12/09/2011
               1m ago                      Chinese tin prices, yuan/t, unless otherwise stated
 97            1yr ago                                        13 September 2011   Current    YoY %chg     Last mth     YoY %chg

 96                                                                                   175,000      20%       161,500          -11%
                                                          Chinese tin ingot (99.9%)
   Spot            3m                15m
                                                 Chinese tin concentrate (60% min)    147,500      14%       140,500          -10%
Source: VM Group
                                                             Tin data
China tin output and imports, 000 t          China computer production, million                  Indonesian tin exports, million$
                                             units

 20                                            35                                                    $350
                         Imports
 18
                                                                                                     $300
 16                      Output                30
 14                                                                                                  $250
 12                                            25                                                    $200
 10
  8                                            20                                                    $150
  6                                                                                                  $100
  4                                            15
                                                                                                      $50
  2
  0                                            10                                                      $0
  Sep 10                Mar 11                  Sep-09           Sep-10                                 May 09            May 10

Source: WBM, VM Group                        Source: WBMS, VM Group                              Source: China Customs, NBS


China tin concentrate and ingot prices,      Japan electronics production, billion yen           Malaysian production of tin cans and
000 yuan/t                                                                                       other tin, 000 units

  180                                        1,600                                                   270
                                                                                         Thousands
  170                                        1,500
  160                                        1,400                                                   250
  150                                        1,300                                                   230
  140                                        1,200
  130                                        1,100                                                   210
  120                                        1,000
  110                                          900                                                   190
                 Tin Ingot, 99.9%min Free
  100            Market                        800                                                   170
   90            Tin Conc, 60%min Ex works     700
   80                                          600                                                   150
    Aug 10            Feb 11        Aug 11       Sep 09               Sep 10                           May 09       Jan 10    Sep 10   May 11

Source: Asian Metal                          Source: JEITA                                       Source: NBS


Tin supply & demand balance, 000t
                                                        2009                     2010                            2011                    2012
                               Supply
              Total mine production                      306                     314                               345                    354
                          % chg y-o-y                 (2.7%)                    2.6%                              9.9%                   2.6%
                                China                   136                      140                               148                    153
                           Indonesia                     62                        58                               66                     75
                       South America                     58                        61                               60                     68
                        Rest of world                    75                        73                               78                     72
            Total refined production                    331                      332                               352                    368
                          % chg y-o-y                (1.0%)                     0.4%                              6.0%                   4.5%
                           Demand
          Total refined consumption                     311                       349                              358                    365
                          % chg y-o-y                (9.0%)                    12.3%                              2.6%                   2.0%
                     Implied balance                     20                      (17)                               (6)                     3
                         Total stocks                    52                        44                               35                     31
            3-month LME price ($/t)                  13,337                    20,152                           26,056                 19,708
Source: WBMS, VM Group



                                                                                                                                         28
Steel price, LME, Med, $/tonne              Steel
                                                US and EU steel mills are walking a fine line between weak demand, high
700                                         raw material costs and prices asked for steel products over the coming months.
                                            Demand has yet to materialise sufficiently in the US following the traditional
650                                         annual summer vacation period slowdown in July and August; conditions in the
                                            EU are even more worrying. This situation is unlikely to improve while policy
600                                         makers deliberate over how to resolve the debt and growth issues that are
                                            currently creating turmoil in the markets.
550                                             Compounding the matter has been soaring Chinese steel production, which
                                            has kept global raw material prices elevated while also keeping domestic steel
500                                         prices muted on cautious demand. Iron ore prices for Indian iron ore (62% min,
                   3m        27m
                                            fob) were $152.50/t as at 9 September, up from $139.50/t in mid-June, and
450                                         prices for Australian iron ore fines (62% min) were at $200/t, from $190/t in early
  15-Aug           29-Aug          12-Sep   July. Meanwhile, global production of crude steel in July 2011 was 127.5 Mt, up
                                            more than 11% on the year, while over the first seven months global crude steel
Source: VM Group
                                            output was up 8% to 887 Mt, according to the World Steel Association. Of this
Steel stocks, LME, Med, 000 tonnes          Chinese crude steel production climbed by 15.5% in July, bringing the total to
                                            410 Mt in the first seven months – or about 46% of total global production. When
                                            annualised this amounts to more than 700 Mt, from 624 Mt in 2010 – a rise of
90
                                            more than 12%.
80
                                                On a more promising note, US steel producers should benefit from President
70
                                            Obama’s new infrastructure spending plan, which – if it passes Congress –
60
                                            should inject some $95bn into roads and other transport projects and help boost
50                                          steel long products’ prices. However, by doing so we expect the differential
40                                          between long and flat products will widen, especially should the US move into
30                                          recession, with automobile sales likely to come under pressure as spending is
20                                          reined in.
10
 0                                          Short-term outlook
 Sep-10       Feb-11         Jul-11
                                            Chinese steel output and demand in 2011 has so far been astonishing, due
Source: VM Group                            in part to state investment in infrastructure and social housing. Whether
                                            consumption rates can be sustained in light of slowing demand in the
Steel forward curve, LME, Med,
                                            advanced economies will be key in determining final inventory levels by
various dates, spot = 100
                                            year-end. It is unlikely, based on past experiences that China’s steel
125                                         producers will rein in production levels, so we expect to see weakness in
120                12/09/2011               flat steel products’ prices in the near-term, while steel longs should remain
115                1m ago                   well supported. Our short-term outlook for the LME steel billet price is
                   1yr ago                  neutral to bearish as a consequence of wider negative sentiment sweeping
110
                                            the base metals. Short term LME steel price: $570/t-$585/t.
105
100
 95                                         Chinese steel prices, yuan/t, unless otherwise stated
                                                             13 September 2011     Current    YoY %chg   Last mth     YoY %chg
 90
 85                                                                 SHFE spot rebar     4,780      12%        4994         23%
                                                                     SHFE 3m rebar      4,852      14%        4,897        19%
 80
                                                                     SHFE 6m rebar      4,769       9%        4,784        11%
      Spot              3m            15m                                               4,837       6%        4,803         7%
                                                                    SHFE 12m rebar
                                               16mm Med plate (Q235b) China ($/t)       4,740       1%        4,560        -3%
Source: VM Group
                                             Iron ore (Indian 61%, cnf China), ($/dt)   1,205     628%          166         3%
                                                                    Steel data
Crude steel production, yoy %chg                     China export/imports, steel products,                  SHFE steel rebar price curve, 100=spot
                                                     Mt

 1.2                                                     4                                                    106
 1.0                                                     2                                                    104
 0.8
                                                         0                                                    102
 0.6
 0.4                                                    -2                                                    100
 0.2                                                                                                           98
                                                        -4
 0.0                                                                                                           96
-0.2                                                    -6                                 Imports                                            6-mths ago
                                                                                                               94
-0.4                                                                                       Exports                                            last month
                                                        -8                                                     92
-0.6                                                                                                                                          current
                                                                                           Net
-0.8                                                   -10                                                     90
       2008    2009       2010        2011                   2006         2008           2010                        1       3        7      9       11
           Russia                    Japan
           US                        China
           Germany                   S.Korea
Source: WSA, VM Group                                Source: China Customs                                  Source: SHFE, VM Group

Japan steel products trade, Mt                       Germany, new orders of first processing                US construction, consumer durable and
                                                     of steel, constant prices, euros,                      equipment steel output, 100=2002 ($)
                                                     2005=100

 5            Imports             Exports             180                                                    140
                                                      160                                                    120
 4            Net
                                                      140
                                                                                                             100
 3                                                    120
                                                      100                                                     80
 2                                                      80                                                    60
 1                                                      60
                                                                                                              40
                                                        40                                                                    Construction
 0                                                                                                            20              Durable
                                                        20
                                                                                                                              Equipment
                                                         0                                                      0
-1
                                                          2005         2007         2009                         2006 2007 2008 2009 2010
  2009                  2010
Source: Japan Customs                                Source: German Federal Statistical Office              Source: Federal Reserve


Crude steel production, Mt                  H1 10    H1 11     Q4 09     Q2 10       Q3 10        Q4 10     Q1 11    Q2 11         May        Jun             Jul
                           China            323.2    352.8     146.7     165.3      151.32       152.00    173.59   179.21         60.2      59.9           59.3
          Year-on-year %change              21.5%     9.2%     34.7%     18.7%     (1.55%)         3.6%     10.0%     8.4%           7%      11%            15%
                              US             40.9     42.7      17.6      21.3         20.0        19.7      21.2    21.41           7.1       7.2            7.5
          Year-on-year %change              67.2%     4.3%     14.2%     70.8%       22.4%        12.4%      8.5%     0.5%       (1.7%)      2.2%         10.2%
                          Russia             32.7     34.5      16.5      17.0         16.8        17.2      17.5    16.97           5.8       5.8            6.0
          Year-on-year %change              22.0%     5.5%     42.9%     21.8%        8.7%         4.1%     11.3%     0.1%       (1.6%)      6.1%           6.3%
                       Germany               22.7     23.2      10.0      11.8         10.2        10.8      11.4    11.79           4.1       3.9            3.7
          Year-on-year %change              64.3%     2.0%      4.3%     80.1%       16.0%         8.1%      4.3%   (0.2%)         1.0%      0.7%           5.7%
                            India            32.4     35.3      15.1      16.3         17.0        16.9      17.7    17.63           5.9       6.0            6.2
          Year-on-year %change              19.2%     8.9%      8.5%     17.7%       19.9%        11.8%     10.0%     7.9%         7.5%      9.1%           7.1%
                    South Korea              28.3     33.9      13.4      15.1         13.8        15.9      16.5    17.41           5.9       5.7            5.7
          Year-on-year %change              24.4%   19.7%       9.8%     22.3%        8.6%        19.0%     24.5%    15.5%       13.2%     18.4%          23.0%
                           Japan             54.6     54.1      26.6      28.1         27.4        27.7      27.7    26.37           9.0       8.9            9.1
          Year-on-year %change              48.8%   (0.9%)      0.8%     47.0%       12.9%         4.0%      4.5%   (6.1%)       (6.9%)    (5.0%)         (1.3%)
                   Rest of world            139.7    146.6      65.4      71.8         67.1        70.6      46.6    74.60         25.3      25.2           24.3
          Year-on-year %change              31.7%     5.0%     11.2%     31.4%       16.1%         7.9%   (31.3%)     3.9%         0.9%      8.4%         10.8%
Source: World Steel Association                                                                                                                            30
Hedge fund returns in metals, %                Fund activity
monthly
                                                   According to data from InvestHedge smaller funds outperformed the
 30                                            heavyweights over the first half of 2011. This marks a turnaround from prior
 25                                            industry growth patterns, for the last few years the heavyweights have
 20                                            outperformed the rest. Size it seems is no longer what matters and being a bit
 15
                                               smaller and a bit more nimble is probably going to be more of an advantage with
 10
  5                                            regulatory requirements set to tighten around bigger players.
  0                                                Assets in emerging market hedge funds increased by $1.4bn during the
 -5                                            second quarter, according to new data from Hedge Fund Research. Hedge funds
-10            Reuters-CRB precious
                                               in Asia received $300m in new money inflows and $1.1bn in performance
-15            metals
-20            Funds with >50% in              returns. Combined assets for Asian funds have now grown to $123bn. The
-25            metals                          expanding asset base of funds in the region is slightly at odds with their
  Jan-10      Jul-10      Jan-11      Jul-11   reportedly lacklustre performance. The Hedge Fund Research Emerging Market
                                               index has been flat over the first half of 2011, with a minor uptick in July of
Source: VM Group, Barclay Database
                                               0.22%.
Hedge funds AUM, $bn                               Levels of stock out on loan, (a proxy indicator for levels of short selling) in the
                                               UK, US and Germany rose as other countries moved to re-instate short-selling
1,600                                          bans. Spain, Italy, Belgium and France all imposed bans on short-selling of
1,500                                          selected financial stocks in August. Rather than stopping this activity funds have
1,400                                          merely moved around the ban to find other ways to express bearish bets on the
1,300                                          EU banking sector.
1,200
1,100                                          Summer doldrums
1,000                                          Hedge funds recorded 0.24% returns in July, a welcome reversal after two
  900
                                               months of negative returns. Assets under management climbed to $1.49
  800
                                               trillion. Funds with commodity exposure out-performed the broader sample,
  700
                                               returning 2.04%. Energy funds returned 2.14%, while Metals funds returned
  600
                                               2.53% and Softs funds returned 2.68%. Redemption rates have reportedly
     Jan-10         Sep-10         May-11
                                               remained relatively low – and even though performance ratings have not
Source: VM Group, Barclay Database
                                               been exceptional returns from funds are still better than those offered
Hedge fund returns by commodity                elsewhere. Preliminary data suggests that August was a tough month for
weighting, % monthly
                                               hedge funds, the Hennessee Hedge Fund Index fell 3.38% during the month
  5                                            as major equity and commodity indices also dropped.
  4
  3
  2
  1
  0
(1)
(2)
(3)
(4)
(5)
  Mar-10         Sep-10      Mar-11
              All Funds

              All with some commodity
              investment
              Funds with >50% AUM in
              commodities
Source: VM Group, BarclayHedge
About VM Group
VM Group is a commodities research consultancy that covers not just
conventional energy, but also renewable energy, carbon, base and precious
metals, and agricommodities. The VM Group comprises a uniquely skilled team
that is highly experienced in the analysis of the fundamentals of commodities and
their geopolitical impact and contexts.
VM Group work excels in macro-economic analysis, the generation of supply and
demand scenarios, costs analysis, derivative research and price forecasting.
Confidentiality, experience and independence are key elements in this advisory
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To see further how we can meet your research and consulting requirements,
please email: info@vmgroup.co.uk
VM Group
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Tel: +44 20 7569 5930
Fax: +44 20 7569 5931




                                                                                32
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                                                                                    34
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