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Macquarie Commodities compendium
 

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    Macquarie Commodities compendium Macquarie Commodities compendium Document Transcript

    • GLOBAL Commodities Compendium Spring shower, summer sizzle Traded commodity prices have sold off particularly sharply in May 2011, with some of the non-traded commodities, such as coking coal, also down over the same period. For the remainder of 2011 and into 2012 we have selected copper and zinc as the two most oversold base metals with the best prospects for improving fundamentals, and iron ore as the bulk commodity with the best prospects to surprise to the upside (i.e. we are neutral on the price outlook from recent record high price levels but this is substantially above consensus). We continue to recommend exposure to platinum and palladium in the precious metals space. In soft commodities, our preference is strongly towards corn and wheat, given weather risks for the 2011/12 crops and underlying tightness. Chinese tightening appears overplayed, and is almost done Most commodity end use indicators grew by 10%+ in 1Q11, with the strongest growth coming from floor space under construction – up 26% YoY – and consumer appliance output – up over 30% YoY. Other indicators that point to healthy growth in commodity end use demand in China so far in 2011 include strong power generation growth and the fact that steel inventories have been falling even in the face of higher than expected levels of crude steel production. Our China Economist Paul Cavey believes that the current tightness in credit availability and weakness in key leading indicators is enough to ensure that significant further tightening of policy is not needed, particularly as headline activity indicators and more importantly inflation start to roll over in 3Q11. Cavey expects policy will remain focused on squeezing lending in the remainder of 2Q, with slower growth promoting looser policy into 2H. Overall the recently released Chinese industrial output, inflation and new loans data for April showed that growth was a little softer, and price inflation at least wasn‟t accelerating, and that new loans were 5% lower YoY. End to QE2 and European debt issues not expected to Macquarie Capital (Europe) Limited Jim Lennon significantly disrupt commodity consumption +44 20 3037 4271 jim.lennon@macquarie.com Max Layton We would note that while a generally declining US dollar has been supportive of +44 20 3037 4273 max.layton@macquarie.com rising commodity prices in recent years, it is not a necessary condition for Colin Hamilton commodity price strength (indeed there are numerous periods historically where +44 20 3037 4061 colin.hamilton@macquarie.com Duncan Hobbs the US dollar has appreciated and commodities have gone up). However, the +44 20 3037 4497 duncan.hobbs@macquarie.com dramatic drop in exchange trade commodities in the past few weeks highlights Hayden Atkins +44 20 3037 4476 hayden.atkins@macquarie.com the vulnerability of prices to changes in sentiment towards the macroeconomic Kona Haque situation in the US/Europe. +44 20 3037 4334 kona.haque@macquarie.com Macquarie Capital Securities Limited The unpredictable nature of weather and tighter supply Bonnie Liu +86 21 2412 9008 bonnie.liu@macquarie.com chains means that the risks around our price forecasts are Graeme Train skewed to the upside +86 21 2412 9035 graeme.train@macquarie.com Macquarie First South Securities (Pty) Ltd While we aim to have evenly balanced risks in our modelling of commodity Justin Froneman demand and supply, the apparently increasingly unpredictable nature of weather +27 11 583 2293 justin.froneman@macquarie.com Macquarie Capital (USA) Inc. conditions and tighter supply chains (the latter in the face of lower credit Jan Stuart availability from banks and high commodity and input prices) mean that risks are +1 212 231 2485 jan.stuart@macquarie.com Meredith Somers actually likely to be skewed to the upside for our supply-demand balances and +1 212 231 2637 meredith.somers@macquarie.com thus price forecasts over the medium to long term. While such weather risks are clear for the softs, copper, coking coal and iron ore seem the most vulnerable 17 May 2011 hard commodities in this regard.Please refer to the important disclosures and analyst certification on inside back cover of this document, or on ourwebsite www.macquarie.com.au/disclosures.
    • Macquarie Research Commodities Compendium Table of contents Executive summary and price forecasts 3 Copper “Deficit to bite in 2H11, 2012” 7 Aluminium “Significant underperformer in the face of solid global growth” 9 Zinc “Market rebalancing, price prospects” 11 Lead “Little slack in the supply chain” 13 Tin “Market deficits support higher prices” 15 Uranium “Market looking ugly, but China caking it on the make up” 17 Stainless Steel “Ongoing strong growth supported by China” 19 Nickel “Supply growth delayed....but its coming” 21 Ferrochrome “FeCr prices falling, despite strong demand and rising costs” 23 Molybdenum “Deficits delayed by renewed Chinese exports” 24 Cobalt “No stopping the supply surge” 26 Steel “Still playing the margin lottery” 28 Iron ore “Can’t ignore cost inflation” 30 Manganese “Prices fall under weight of strong supply, high stocks” 32 Metallurgical Coal “Easing back towards normal in a post-supply shock world” 34 Thermal Coal “China holds sway into summer” 36 Oil “More upside than downside risk to our bullish 2011-13 forecasts” 38 Gold “Biggest hurdle coming closer into view” 40 Silver “Speculative swings drives volatility” 42 Platinum and Palladium “Looking for a more sprightly performance in 2H11” 43 Wheat “Corn dominates grain complex, but concerning wheat conditions” 46 Corn “Large producer reaction, but strong demand limits recovery” 48 Soybeans “Short term fundamental weakness, but 2011/12 could be tight”........... 50 Sugar “Prices under pressure as market moves into surplus”........... 52 Coffee “High prices amidst very tight markets”.......................................... 54 Cocoa “Short term price weakness followed by a tighter 2011/12 market”......... 56 Cotton “Market reacts to high prices, but weather risks prevail”...... 5817 May 2011 2
    • Macquarie Research Commodities Compendium Spring shower, summer sizzle Chinese activity has been growing strongly in the first four months of 2011 - Most commodity end use indicators grew by 10%+ in 1Q11, with the strongest growth coming from floor space under construction – up 26%YoY – and consumer appliance output – up over 30% YoY. Other indicators that point to healthy growth in commodity end use demand in China so far in 2011 include strong power generation growth and the fact that steel inventories have been falling even in the face of higher than expected levels of crude steel production. While end use indicators have generally been strong, Chinese inflation also remains relatively high and sentiment has certainly weakened after months of tightening, with surveys suggesting that obtaining credit is becoming increasingly difficult. Indeed, the PMI data are suggesting activity is also struggling, and our China economist Paul Cavey expects the PMI will print at or below 50 in June. The only evidence of a slowdown in commodity use in China so far in 2011 has been some indications of relatively poor apparent demand / semi‟s output in some commodities such as copper (with high prices and a lack of credit squeezing supply chains and forcing severe de- stocking of inputs). A normalisation of apparent demand in these markets would imply the use of such commodities should rise very strongly sequentially through 2H11. Almost finished with tightening in China - Our China Economist Paul Cavey believes that the current tightness in credit availability and weakness in key leading indicators is enough to ensure that significant further tightening of policy is not needed, particularly as headline activity indicators and more importantly inflation start to roll over in the 3Q11. As such, the second derivative of tightening is unlikely to get worse from this point. Cavey expects policy will remain focused on squeezing lending in the remainder of 2Q, with slower growth promoting looser policy into 2H. Overall the recently released Chinese industrial output, inflation and new loans data for April showed that growth was a little softer, and price inflation at least wasn‟t accelerating, and that new loans were 5% lower YoY.Fig 1 Leading indicators in US and Europe to roll offa high base Fig 2 China PMI has been weak.... Puchasing Managers Index (PMI) - Index Index 65 65 China PMI Manufacturing 60 60 60 60 55 55 55 55 50 50 50 50 Index Index 45 45 Japan 45 2010 45 40 40 2009 Eurozone Median 2005-2007 35 35 2011 40 2008 40 China 30 30 USA 35 35 25 25 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 2006 2007 2008 2009 2010 2011Source: ISM, Markit, Macquarie Research, May 2011 Source: NBS, Macquarie Research, May 2011Fig 3 ...but activity indicators in China have held firm Fig 4 Monetary conditions don‟t need to get any tighter Industrial production (LHS) YoY YoY 25% Floor space under construction (RHS) 60% 20% 40% 15% 20% 10% 5% 0% 0% -20% Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11Source: NBS, Macquarie Research, May 2011 Source: NBS, Macquarie Research, May 201117 May 2011 3
    • Macquarie Research Commodities Compendium World ex-China PMIs moderating slightly but still point to solid growth - After a strong finish to 2010, leading indicators and manufacturing activity have remained robust in the world ex-China. This surge, however, looks set to moderate. Leading indicators like the PMIs appear set to drop from their current very high levels. This is not particularly alarming given the PMIs are likely to remain in expansionary territory. Japan is the exception due to the impact of the Tohoku earthquake in March. We understand that the disruption to manufacturing shouldn‟t be too severe beyond June, with the power deficit likely to be more of an issue for residents rather than industry. Near term cyclical slowdown around strong long term trend - The near term inflection point in activity growth appears to be a normal part of the economic cycle rather than a deviation from trend. And it does appear that trend growth in industrial production remains healthy in the wake of the financial crisis (chart below). Since industrial production reclaimed its previous peak in early 2010, it has grown at around the same rate as seen prior to the financial crisis, to levels around 5% above the previous peak. Growth has been geared towards Asia and set to remain so - The growth in industrial output since the downturn has been driven largely by Asia. Indeed, industrial output in advanced economies is yet to reclaim the previous peak. This is no different to the period leading up to the pre-crisis peak, with Asian IP growing by 52% since the start of 2005 to early 2008, while advanced economy IP increased by 7% in the same period. Our forecasts assume these trends will continue over the medium term. Fig 5 Global industrial production is growing at around the same pace as pre- crisis since the previous peak in activity was reclaimed in early 2010 World industrial output in various 110 cycles Pre-crisis trend Index: At peak industrial output = 100 105 Pre-crisis peak reclaimed 100 95 Mid 1970s 90 Current Cycle 85 1 7 13 19 25 31 37 43 49 55 61 67 73 79 Months from peak 85 Source: CPL, Macquarie Research, May 2011 We assume the end to QE2 and European debt issues will not significantly disrupt commodity consumption, although they can impact sentiment - the dramatic drop in exchange trade commodities in the past few weeks highlights the vulnerability of prices to changes in sentiment towards the macroeconomic situation in the US/Europe. Our view is that the end of QE2 in the US will not be disorderly to debt or currency markets. We would note that while a generally declining US dollar has been supportive of rising commodity prices in recent years, it is not a necessary condition for commodity price strength (indeed there are numerous periods historically where the US dollar has appreciated and commodities have gone up). The unpredictable nature of weather and tighter supply chains means that the risks around our price forecasts are skewed to the upside – While we aim to have evenly balanced risks in our modelling of commodity demand and supply, the apparently increasingly unpredictable nature of weather conditions and tighter supply chains (the latter in the face of lower credit availability from banks and high commodity and input prices) mean that risks are actually likely to be skewed to the upside for our s/d balances and thus price forecasts over the medium to long term.17 May 2011 4
    • Macquarie Research Commodities Compendium Steepening cost curves mean prices higher for longer (with cash generation from low cost assets very strong and very high levels of capex) - With many high cost producers processing lower grade ore and/or utilising relatively inefficient equipment or process routes in the face of high commodity prices, the effect on higher cost producers (particularly from energy price rises) is much more notable than for low cost assets. Rising marginal costs of output (particularly in iron ore), together with RMB appreciation (for commodities where China is the marginal cost producer) are set to continue to steepen the overall cost curve in US dollar terms, supporting „stronger for longer‟ commodity prices, and resulting in particularly strong cash generation from low cost assets. Low cost miners or miners operating in particularly high margin industries (say, copper) are expected to deal with this cash flow in one or more of the following ways in 2011: 1. Capital return to shareholders, though miners have not engaged in this extensively in the past. 2. Increased M&A activity. 3. A large push in sustaining capital spending, particularly given that much was deferred from the crisis in 2009. This should provide yet another strong boost for the machinery sector. 4. A focus on the organic growth pipeline, with a potential implication an increase in the long run prices being used by miners to value projects. The upshot of 3 and 4 is likely to be a record year for capex in 2011, across a number of areas, as the need to source ever-more taxing commodity units sets miners an ongoing challenge.Fig 6 Base metals forecasts – short, medium and long term 2010 2011 2011 2011 2011 2011 2012 2013 2014 2015 Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY LT $2011Copper New c/lb 342 438 432 500 500 467 525 350 300 350 220 Old c/lb 342 420 480 550 550 500 500 350 300 350 220 %chg - 4.2% -10.0% -9.1% -9.1% -6.5% 5.0% - - - -Aluminium New c/lb 99 114 120 120 120 118 105 120 125 130 110 Old c/lb 99 120 120 120 120 120 100 120 125 130 110 %chg - -5.4% - - - -1.4% 5.0% - - - -Zinc New c/lb 98 109 103 102 108 105 111 120 115 100 85 Old c/lb 98 110 115 105 110 110 119 125 110 100 85 %chg -0.0% -1.3% -10.4% -2.9% -1.8% -4.2% -6.5% -4.0% 4.5% - -Nickel New c/lb 990 1,220 1,150 1,050 1,025 1,111 950 875 850 900 900 Old c/lb 990 1,175 1,150 1,050 1,025 1,100 950 875 850 900 900 %chg - 3.9% - - - 1.0% - - - - -Lead New c/lb 97 118 115 111 117 115 118 125 118 100 85 Old c/lb 97 115 118 110 113 114 119 120 100 90 80 %chg -0.0% 2.8% -2.1% 0.9% 4.0% 1.4% -0.9% 4.2% 18.0% 11.1% 6.3%Tin New c/lb 926 1,359 1,360 1,350 1,385 1,363 1,388 1,180 1,125 1,030 907 Old c/lb 926 1,200 1,175 1,125 1,100 1,150 1,000 800 650 700 500 %chg - 13.2% 15.7% 20.0% 25.9% 18.6% 38.8% 47.5% 73.1% 47.1% 81.4%Source: Macquarie Research, May 2011 17 May 2011 5
    • Macquarie Research Commodities CompendiumFig 7 Bulk commodity price forecasts 2010 2011 2011 2011 2011 2011 2012 2013 2014 2015 LT $2011 Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY Long termAust fines to Asia New c/mtu fob 80 183 239 278 270 255 261 270 267 245 232 110 % chge yoy 88.6% 42.4% 3.7% -1.4% -8.3% -4.9% Previous 183 183 250 250 250 250 237 224 194 181 94 % change - 30.8% 11.2% 7.9% 2.0% 4.2% 14.1% 18.9% 25.8% 28.1% 17.0%Aust lump to Asia New c/mtu fob 103 248 264 306 302 288 304 295 290 270 255 135 % chge yoy 121.1% 22.8% -2.9% -1.9% -6.8% -5.6% Previous 210 210 280 280 280 280 266 254 224 207 119 % change 18.2% 26.2% 9.3% 7.9% 2.7% 8.6% 11.2% 14.2% 20.7% 23.4%Brazil pellet to Asia New c/mtu fob 118 235 283 335 324 312 314 327 324 298 274 146 % chge yoy 112.4% 33.7% 4.3% -1.1% -8.1% -7.8% Previous 235 235 305 305 305 305 294 283 252 229 133 % change - 20.8% 9.9% 6.5% 2.5% 3.0% 11.3% 14.1% 18.2% 20.0% 9.8%Spot China cfr (62% Fe) New $/t cfr 115 147 180 176 168 187 178 178 176 163 155 80 % chge yoy 82.8% 21.1% 0.3% -1.1% -7.8% -4.6%Spot freight Aust-China New $/t 10 7 8 9 9 8 10 10 10 10 11Spot freight Brazil- China New $/t 21 19 22 22 22 21 22 23 23 24 22 2010 2011 2011 2011 2011 2011 2012 2013 2014 2015 LT $2011 Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY Long termThermal coal - Jap reference New $/t fob 98 98 130 130 130 130 120 100 95 95 80 Previous 98 98 130 130 130 130 120 92 92 95 80 % change - - - - - - - 8.7% 3.3% - -Spot thermal coal - fob RB New $/t fob 91 121 121 105 110 114 97 91 85 91 75 Previous 91 121 118 95 100 108 97 85 83 91 75 % change - - 2.5% 10.5% 10.0% 5.3% 0.5% 7.4% 2.4% - -Semi-soft coking coal New $/t fob 164 180 264 250 222 238 204 179 162 155 95 Previous 141 180 270 200 175 206 157 179 139 128 90 % change 16.9% - -2.2% 25.0% 27.0% 15.4% 30.0% - 16.8% 20.8% 5.6%LV PCI coal New $/t fob 171 180 275 262 234 250 217 194 178 173 115 Previous 149 180 275 210 185 213 168 194 154 146 110 % change 15.1% - - 24.8% 26.6% 17.6% 29.4% - 15.6% 18.3% 4.5%Hard coking coal New $/t fob 215 225 330 315 285 303 264 236 223 215 145 Previous 191 225 330 260 235 263 221 234 208 178 135 % change 12.6% - - 21.2% 21.3% 15.2% 19.2% 1.1% 7.2% 21.1% 7.4%Coke - spot fob China New $/t fob 453 473 458 442 439 481 455 435 438 423 330 Previous 453 470 485 480 460 474 433 450 415 378 300 % change - 1.6% 5.2% -3.3% 5.4% 11.9% 10.0%Manganese ore New c/mtu fob 7.3 5.8 6.5 7.0 7.0 6.3 5.5 Previous 7.2 7.7 8.0 7.0 6.5 6.5 5.5 % change 1.7% -24.9% -18.8% - 7.7% -3.8% -HC FeMn New $/t 1,382 1,300 1,250 1,250 1,300 1,275 1,400 1,450 1,450 1,300 1,100 Previous 1,382 1,300 1,450 1,550 1,550 1,463 1,450 1,350 1,300 1,300 1,100 % change - -12.8% -3.4% 7.4% 11.5% - -Steel - Average HRC New $/t 653 800 826 785 766 794 802 808 780 768 590 Previous 653 799 788 729 711 757 720 808 744 746 570 % change - 0.1% 4.9% 7.7% 7.7% 5.0% 11.4% - 4.8% 2.8% 3.5%Source: SBB, Platts, globalCOAL, Macquarie Research, May 2011Fig 8 Precious metals and uranium forecasts Unit 2010 2011 2011 2011 2011 2011 2012 2013 2014 2015 LT $2011 CY Q1 Q2 Q3 Q4 CY CY CY CY CY Long termGold New $/oz 1225 1384.3 1525 1575 1475 1490 1350 1219 1088 1050 850 Old $/oz 1225 1365 1435 1550 1475 1456 1350 1219 1088 1050 850 % change - 1.4% 6.3% 1.6% - 2.3% - - - - -Silver New $/oz 20 31.66 37 33 29 33 18 20 18 17 13 Old $/oz 20 28 28 26 24 27 17 20 18 17 13 % change - 13.1% 32.1% 26.9% 20.8% 23.3% 5.5% - - - -Platinum New $/oz 1605 1794 1825 1850 1900 1842 1850 1750 1850 1900 1650 Old $/oz 1605 1750 1800 1850 1900 1825 1850 1750 1850 1900 1650 % change - 2.5% 1.4% - - 1.0% - - - - -Palladium New $/oz 524 792 760 850 1000 851 750 744 750 750 700 Old $/oz 524 750 760 850 1000 840 750 744 750 750 700 % change - 5.6% - - - 1.3% - - - - -Uranium spot New $/lb 46 64 57 58 60 60 56 45 60 65 50 Old $/lb 46 68 75 75 70 72 70 65 65 65 50 % change - -4.9% -24.0% -22.7% -14.3% -16.8% -20.0% -30.8% -7.7% - -Source: LME, Macquarie Research, May 201117 May 2011 6
    • Macquarie Research Commodities Compendium Copper The market is tightening up and deficit will bite in 2H11, 2012 The bull market is From current spot prices, our most bullish call in base metals is copper, notwithstanding our on, with 2011 and short term copper sell call we put in place on March 7th and re-iterated on April 12th this year. 2012 likely to be the After a period of scrap and consumer de-stocking and weak Chinese semi‟s output (high peak years prices and tight credit), the fundamentals in the copper market are starting to turn and we see this continuing for the remainder of 2011 and into 2012. In particular, May has seen scrap discounts narrow, TCs fall, SHFE stocks falling sharply, LME stocks start to decline, Chinese physical premiums rise, the Chinese forward curve move into backwardation, the Chinese import arbitrage go from negative to slightly positive, and semi‟s output show signs of improving in China. Ex-China continues to recover, with consumption less than 10% below the level it was in 2007/1H08 before the financial crisis. We expect that a 350-400,000t deficit in 2011 will see total global copper inventories in terms of weeks of consumption fall to low levels (similar to those seen in the last boom period), and we continue to forecast a 200,000t deficit in 2012. While our base case is that very strong mine supply growth on a two-three year view will move the market into small surplus in 2013/14, inventories are not expected to rise much above critically low levels (about three weeks of consumption) and as such, prices are forecast to remain >US$3/lb over the period.Fig 9 Global copper supply and demand balance000 tonnes 2008 2009 2010f 2011f 2012f 2013f 2014f 2015fWorld Consumption 18108 17416 18961 19821 20650 21489 22370 23295% Change Y-o-Y 0.1 -3.8 8.9 4.5 4.2 4.1 4.1 4.1World Production 18389 18256 18815 19441 20464 21785 22710 23063% Change Y-o-Y 2.7 -0.7 3.1 3.3 5.3 6.5 4.2 1.6Balance 281 840 -146 -380 -187 296 340 -233World stocks (all) 1164 1921 1656 1276 1089 1385 1725 1492Stocks (Weeks global) 3.3 5.7 4.5 3.3 2.7 3.4 4.0 3.3---Including ETF holdings of 150kt end 2011, 200kt end 2012 -- -- 4.5 3.0 2.2-- --LME Cash Price (c/lb) 316 234 334 467 525 350 300 350LME Cash Price ($/t) 6968 5152 7361 10304 11574 7716 6614 7716Source: ICSG, WBMS, CNIA, Macquarie Research, May 2011 Our bullish 3-18 month copper view rests on three pillars: Chinese copper semi‟s output will „normalise‟. By semi‟s normalising, we mean, semi‟s output recovering from the relatively low levels seen in Jan/Feb/Mar 2011, to a level which gives 7% YoY growth for full year 2011. On this basis Chinese consumption of copper units (refined and scrap) should rise by around 10% from March levels through the remainder of 2011 (normally consumption is strongest in May/June but this may be delayed in 2011 owing to a temporary squeeze on semi- fabricators owing to tight credit and high prices). That global consumer de-stocking will slow /end, with upside from potential re- stock. Consumer stocks are very difficult to get data on. However, we do have significant anecdotal information to suggest that Chinese consumers have de-stocked from 10-14 days of stocks in mid 2009 to 2-3 days in 2H10 (voluntary de-stocking owing to higher prices), and practically nothing recently (hand to mouth stock levels owing to involuntary de-stocking following the tightening in credit conditions in 1Q11). Outside of China ,various anecdotes point to consumers consolidating their supply chains and reducing stocks, firstly in late 2008/09 (in line with lower demand) and then de-stocking further over the past six months (owing to higher prices and tight credit). On the one hand this consumer de-stocking has resulted in rising visible stocks (stock shifting, exaggerating the apparent global surplus in recent months), and on the other this de-stocking has reduced refined demand. As global de-stocking is largely thought to have finished, consumer consumption of refined copper should rise significantly over the coming months. To the extent Chinese consumers are underutilised owing to tight credit; they could raise output and restock at the same time over the coming six months, which would be particularly bullish.17 May 2011 7
    • Macquarie Research Commodities Compendium That global scrap de-stocking will slow / end. The increase in scrap availability evidenced by a sharp widening in scrap discounts globally which began in Sept/Oct 2010 and evidenced by the increased use of scrap by Chinese smelters and refiners through 2H10 is reportedly nearing an end. At the CESCO conference, we spoke with scrap market participants and heard that scrap de-stocking was well advanced in Europe, and to a lesser extent scrap de-stocking had taken place in the US. In line with this we have seen a significant narrowing of scrap discounts across the globe (particularly in China), as per Figure 11. In addition there are medium term supply risks such as unexpected weather issues (another La Nina in 2012 for example affected Chilean output from the SIC grid) or political issues (which could affect DRC output or Humala potentially winning the Peruvian election in June and nationalisation impacting future Peruvian copper supply growth). So far in 2011 we have used up over half of our 720,000t disruption allowance, and we are less than half way through the year. Although we cannot be certain, we continue to think it is more likely than not that the Blackrock (US$1bn) and JP Morgan (US$0.5bn) physically backed copper ETFs will be approved and will absorb at least the initial 150,000t of copper. In Fig 9, we show the impact on global stocks in terms of weeks of consumption if 150,000t of copper is “taken” from the market as at end-2011 and 200,000t as at end-2012.Fig 10 Treatment charges falling, set to continue Fig 11 Chinese scrap market tightening up Spot Treatment Charges Refined metal price (excl Vat) - LHS 50 70,000 No 1 Scrap copper (ex Vat) - LHS 5000 Scrap discount - RHS Scrap Discount to SHFE cash prices Rmb/t 2003 2004 2005 2006 2007 45 65,000 2008 2009 2010 2011 4000 40 60,000 Spot TC/RCs (Combined) 35 55,000 3000 30 50,000 000Rmb/t 2000 25 45,000 1000 20 40,000 15 35,000 0 10 30,000 -1000 5 25,000 0 20,000 -2000 Nov 07 Nov 08 Nov 09 Nov 10 Jul 07 Jul 08 Jul 09 Jul 10 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Jan 07 May 07 Jan 08 May 08 Jan 09 May 09 Jan 10 May 10 Jan 11 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec May 11 Month of Calendar YearSource: ICSG, WBMS, CNIA, Macquarie Research, May 2011 Source: ICSG, WBMS, Brookhunt, Macquarie Research, May 2011Fig 12 Supply forecasts look ambitious Fig 13 Ex-China recovering solidly – YoY growth Copper Mine Supply Changes 20% 1500 Post-disruption 1400 15% 1300 1200 10% 1100 1000 5% 900 % Change YoY 000 tonnes 800 0% 700 600 -5% 500 400 -10% 300 200 -15% 100 0 -20% -100 -200 -25% -300 -30% 2011f 2013f 2015f 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Jan-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11Source: ICSG, Macquarie Research, May 2011 Source: ICSG, WBMS, CNIA, Macquarie Research, May 201117 May 2011 8
    • Macquarie Research Commodities Compendium Aluminium A significant underperformer in the face of solid global growth Aluminium prices We have been „short-term‟ bullish on the prospects for aluminium from October 2010 but we will only hold up as turned neutral on aluminium last month as the price got into the high US$2600‟s/t. As at the long as LIBOR rates time of writing spot prices were trading at ~ US$2,500/t. remain low The bullish case for aluminium only lasts while interest rates remain low and bank/trader opportunity cost of capital remains low. This is because there is a vast amount of aluminium in warehouses, tied up, under financing deals that return only 0.5-2% annualised which will become available if the deals roll off (we estimate there is 3-3.5mt of off market, off LME, inventory that could fairly easily come to market). Until then, the aluminium price is likely to range trade between perceived cost support of US$2,400-2,500/t and US$2,700-2,800/t. The market balance is actually very tight ex-China, as evidenced by record high aluminium physical premiums. In China, the market has been in balance overall this year, but stocks are falling at present and this is set to continue despite a strong production rebound (following the efficiency related power cuts which disrupted industry output in 4Q10). In our view there will be a lot of noise surrounding power restrictions, rising tariffs and energy costs for Chinese aluminium smelters, however the base case is that production will continue to rise (assuming current prices) through 2H11 taking the Chinese market into small surplus by the end of the year. Our best guess is that interest rates will not rise significantly until 1H12, when we expect aluminium to trade on average at US$2,200/lb in 2012, following the release of up to 3-3.5mt of off market aluminium stock. Given rising LIBOR rates and opportunity costs of capital allocated to aluminium financing are most likely to occur in an improving global economic environment, aluminium is set to underperform in this environment (our base case). It is worth noting that we recently upgraded our 2H12 price forecast by 10% from US$2,200/t to US$2,420/t owing to our belief that a pullback is likely to be shorter and shallower than previous aluminium price corrections. The reasoning is two fold – firstly costs are rising sharply so the price doesn‟t need to fall as far for as long to lead to high cost smelter closures (in China), and secondly that Chinese smelters can shut and restart capacity more quickly than western smelters (meaning the costs of shutting are lower and there is less reluctance to hold of on shutting capacity in response to lower prices). Fig 14 Developed world physical premia point to an Fig 15 But reported stocks are still very high, and EXTREMELY tight physical market for aluminium off market stocks still very substantial 20 3200 160 Average premium, $/t (lhs) 3200 Producer - Consumer - Port LME cash Al price, c/lb (rhs) Exchange 18 Al price 3000 150 3000 2800 140 2800 16 2600 130 2600 14 Weeks of World consumption 2400 Average Premium $/t 120 2400 12 Al price $/t 2200 110 2200 $/t 10 2000 100 2000 8 1800 90 1800 6 1600 80 1600 4 1400 70 1400 2 1200 60 1200 0 1000 50 1000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: LME, CRU, Macquarie Research, May 2011 Source: LME, CRU, Macquarie Research, May 201117 May 2011 9
    • Macquarie Research Commodities Compendium When the financing saga ends, that is the entry point: The first reason is fundamental – aluminium has the best demand growth prospects of any base metal we cover over the next 3-5 years and the largest producer (China) will find it very difficult to displace its high-cost capacity with lower-cost capacity AND raise supply to meet growing demand over the same period. The second reason is that the likely presence of a physical aluminium ETF will mean that the price rebound post correction will be accelerated by speculators buying the ETF, which has the pro-cyclical effect of helping tighten the market. How low could aluminium go in the worst case scenario? In our view, anything below US$2,000/t would be a good entry point.Fig 16 Refined aluminium supply and demand balance (price collapse see‟s China cut output within 12 months)000 tonnes 2008 2009 2010e 2011f 2012f 2013f 2014f 2015fWorld Consumption 36662 34160 40984 44976 48429 51226 54140 57251% Change Y-o-Y -3.5 -6.8 20.0 9.7 7.7 5.8 5.7 5.7World Production 39737 37634 41770 44258 47375 51626 55136 58506% Change Y-o-Y 4.0 -5.3 11.0 6.0 7.0 9.0 6.8 6.1Capacity Utilisation 90.1 81.9 83.4 85.5 88.4 91.6 93.2 92.9Global Balance 3075 3474 786 -717 -1054 401 997 1256PricesLME Cash Price (c/lb) 116.8 74.9 91.9 118.4 110.0 120.0 125.0 130.0LME Cash Price ($/t) 2575 1652 2027 2610 2425 2646 2756 2866Source: IAI, CRU, CNIA, Macquarie Research, May 2011Fig 17 Longer term financing no longer profitable – Fig 18 Chinese output ramp only just keeping up withonly just working on 3 month time frame consumption, and pace of ramp up set to slow Profitability on 12 month aluminium financing deals 19 Aluminium Production (Annualised Rate) 26.5 120 Assumes 1% cost of finance 18 100 China (LHS) 26.0 17 80 World Ex-China (RHS) 16 25.5 Annualised Production (m tpa) Profit or loss on financing 60 15 40 25.0 14 20 13 24.5 0 -20 12 ` 24.0 -40 11 -60 10 23.5 -80 9 LME storage costs -100 8 23.0 Half LME storage costs -120 7 7c/day storage costs 22.5 -140 6 Apr 09 Aug 09 Apr 10 Aug 10 Apr 11 Jan 09 Feb 09 Mar 09 Jun 09 Feb 10 Jun 10 Oct 10 May 09 Jul 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 5 22.0 2004 2005 2006 2007 2008 2009 2010 2011Source: IAI, CNIA, Macquarie Research, May 2011 Source: IAI, CNIA, Macquarie Research, May 2011Fig 19 Aluminium demand by region – growth to be Fig 20 Chinese output growth, largely from selfdriven by China generated power and relatively low cost (for China) 000 tonnes 2008 2009 2010f 2011f 2012f 2013f 2014 2015 Aluminium Production Growth by Region N.America 5620 4230 5060 5465 5683 5797 5913 6031 Japan 2310 1730 2175 2284 2375 2470 2569 2672 5 W. Europe 6785 4825 6160 6468 6597 6729 6864 7001 China 12202 14269 17188 19594 21946 23701 25597 27645 4 Asia (ex China, Japan) 5204 5381 6172 6574 7002 7459 7946 8466 CIS 1000 700 800 950 998 1047 1100 1155 3 Other 3541 3025 3429 3641 3828 4022 4151 4281 Total 36662 34160 40984 44976 48429 51226 54140 57251 2 Million tonnes World Ex China 24460 19891 23796 25381 26483 27524 28542 29605 1 % Change 2008 2009 2010f 2011f 2012f 2013f 2014 2015 USA -10.3 -24.7 19.6 8.0 4.0 2.0 2.0 2.0 0 Japan -4.1 -25.1 25.7 5.0 4.0 4.0 4.0 4.0 Europe -6.2 -28.9 27.7 5.0 2.0 2.0 2.0 2.0 -1 China -0.7 16.9 20.5 14.0 12.0 8.0 8.0 8.0 China Middle East Asia -1.3 3.4 14.7 6.5 6.5 6.5 6.5 6.5 -2 India CIS Oceania NAFTA CIS -7.0 -30.0 14.3 18.8 5.0 5.0 5.0 5.0 Europe Japan/Other Asia -3 South America Africa Other 2.9 -14.6 13.3 6.2 5.1 5.1 3.2 3.1 Total Total -3.5 -6.8 20.0 9.7 7.7 5.8 5.7 5.7 -4 World Ex China -4.8 -18.7 19.6 6.7 4.3 3.9 3.7 3.7 2007 2008 2009 2010 2011f 2012f 2013f 2014f 2015fSource: ISM, AA, Macquarie Research, May 2011 Source: IAI, CNIA, Macquarie Research, May 201117 May 2011 10
    • Macquarie Research Commodities Compendium Zinc Market rebalancing, price prospects rising Recent data The zinc price has underperformed the LME market as a whole since the start of 2010, releases weighed down by high and rising visible stock levels and worries of oversupply with refined demonstrate good zinc output rising to all time record levels in recent months. However we think the zinc market zinc demand; is rebalancing as demand remains good and supply moderates, while the rise in visible stocks physical premiums represents more a transfer of existing inventories rather than the accumulation of any remain firm substantial new surplus metal. Recent data releases demonstrate good zinc demand. In China, galvanised steel production (the main first use market for zinc) continues to rise (Fig 21) and reached a new record for the first quarter of the year of 6.9mt in Q1 2011 as the country becomes an increasingly important world market for galvanised steel, now accounting for almost one quarter of global output. Elsewhere, European steel stockholders‟ shipments of hot-dipped galvanised sheet reached the third highest monthly total on record in March and we note independent analysts‟ estimates of global galvanised steel production are being revised up to catch up with better demand than has been widely appreciated. Firm demand for zinc is reflected in rising physical premiums (Fig 22).Fig 21 Galvanised steel production continues toclimb Fig 22 Physical zinc premiums firm and rising 75% 175 150 50% 125 YoY change 25% US$/tonne China 100 USA del. ROW Eur EXW 0% 75 F.East CIF 50 -25% 25 -50% 0 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 A 2009 A 2010 A 2011 J 2009 J 2009 O 2009 J 2010 J 2010 O 2010 J 2011Source: CRU, Macquarie Research, May 2011 Source: CRU, Macquarie Research, May 2011 Refined zinc At the same time, refined zinc production has recently started to roll over from previous record production rolls levels. The International Lead & Zinc Study Group‟s (ILZSG) latest data show global output over at the start of dipped to 13.1mt on a three-month moving average annualised basis in January and 2011 February 2011, from a peak of 13.4mt in November 2010. Moreover, we would highlight early signs of pressure on supply following the price falls of late April / early May in reports of Chinese zinc miners starting to withhold sales of zinc concentrates from the domestic market. As noted, high and rising visible stocks have weighed on zinc prices over the last year or so. In volume terms reported stocks are at a 15-year high of over 1.6mt and even measured as a ratio to consumption (to adjust for the increase in the size of the market over time), reported stocks are now 50% above the average of the last economic cycle (2001-2009) at 46 days of global consumption. However, these headline numbers miss two important points. Reported zinc First, much of the stock held is not easily accessible to end users due to carry trades, financed stocks high but by the contango in forward prices, and limits on withdrawals from LME-listed warehouses metal is not easily (over 80% of the build in LME zinc stocks since the start of 2009 has taken place in New accessible Orleans, which now holds almost 60% of total LME zinc stocks). Second, data comparing the to end users rate of change in China‟s apparent zinc consumption (reported production plus imports minus exports) with the rate of change in galvanised steel output strongly suggest there has been a draw down of unreported zinc stocks in the world‟s largest market in 2010, continuing into Q1 2011, in what is the world‟s largest zinc market. The SHFE zinc stock build is now slowing and the number of open warrants has recently started falling. The fact that stocks are not readily accessible to end users is reflected in firm physical premiums.17 May 2011 11
    • Macquarie Research Commodities CompendiumFig 23 Changes in world demand and mine output Fig 24 Zinc prices forecast to rise 8% 175 150 120 US¢/lb annual averages 115 6% 111 125 105 100 98 YoY changes 100 Nominal Mine supply 4% 2010 USD Consumption 75 50 2% 25 0 0% 2001 2003 2005 2007 2009 2011 2013 2015 2011 2012 2013 2014 2015Note: 2011-2015 data are forecasts Note: LME cash prices. 2011-2015 data are forecastsSource: CRU, ILZSG, Wood Mackenzie, Macquarie Research, May 2011 Source: LME, Macquarie Research, May 2011 We think zinc will The zinc price has traded in a range from early to mid US$2,000s for most of the last year or most likely continue so and we think it is most likely to keep trading within this range over the next 6-12 months. range trading over With this in mind the recent price retreat probably offers a buying opportunity. From a next 6-12 months fundamental point of view we think downside risk to the zinc price should be limited by firm demand and an improving metal market balance, as well as an emerging tightness in the market for zinc concentrates. This can be seen already in the sharp fall in benchmark treatment charges for 2011 (down by 16%-17% from 2010, reducing smelter revenues by US$85/t zinc metal produced at the basis price of US$2,500/t) while spot TCs for concentrates imported into China continue to trade at a substantial discount to benchmark. We maintain our Looking further ahead over the next two-to-three years we maintain our positive view on positive outlook on the zinc market outlook and anticipate a progressively tighter balance in the market for zinc zinc demand and concentrates as the rate of increase in mine supply falls short of rising zinc demand (Fig 23), prices over next which will limit metal output, and we expect the zinc price to rise as a result (Fig 24). A number 2-3 years of large, high profile zinc mines will close in the coming years as a result of resource depletion, starting with Xstrata‟s Brunswick mine in Canada in Q1 2013, and others will reduce output as grades decline, including Antamina, Red Dog and San Cristobal. In 2015-2016, MMR‟s Century mine, the world‟s third largest zinc mine producing over 500,000 tpa of zinc contained, will close.Fig 25 Global zinc supply and demand balance000t zinc 2009 2010 2011F 2012F 2013F 2014F 2015FMine production 11,492 12,629 12,950 13,615 14,173 14,810 14,911YoY change -1.7% 9.9% 2.5% 5.1% 4.1% 4.5% 0.7%Refined production 11,250 12,600 13,000 13,800 14,300 14,900 15,200YoY change -3.4% 12.0% 3.2% 6.2% 3.6% 4.2% 2.0%Consumption 10,627 12,176 12,965 13,874 14,318 14,783 15,122YoY change -5.7% 14.6% 6.5% 7.0% 3.2% 3.2% 2.3%Balance 623 424 35 -74 -18 117 78LME Cash Price (c/lb) 75.3 97.9 110.0 118.8 125.0 110.0 100.0LME Cash Price (US$/t) 1,659 2,159 2,425 2,618 2,756 2,425 2,205Source: ILZSG, LME, Macquarie Research, May 2011 However, while we think the zinc market will be tighter, and prices higher, our medium-term outlook is tempered by the fact that there is a sufficient number of new mine and expansion projects in prospect, and sufficient incentive in current price expectations for project development, to avoid a deep deficit in the market.17 May 2011 12
    • Macquarie Research Commodities Compendium Lead Little slack in the supply chain, risk of price spike remains Strong growth in We estimate that world lead consumption increased by almost 7% to a new record of 8.9mt in lead demand in 2010 2010 and the indications are that demand has continued increasingly in the first months of continues into 2011 2011 (Fig 26). North American lead-acid battery shipments increased by 25% YoY on an annualised basis and have been running at all-time record levels of over 125m units on a three-month moving average annualised basis for the last six months. China‟s SLI lead-acid battery exports have been rising at double-digit percentage rates for the last year, reaching a record 18m units in 2010, and increasing by 21% YoY on a three-month moving average annualised basis in February 2011. And Japan‟s lead use in storage batteries had also been rising since late 2009 but did dip after the earthquake in March. Firm demand for lead is reflected in the fact that physical premiums remain firm. Short term worries However, there have been some short term concerns over lead market conditions. Some over demand from Chinese lead-acid battery makers have reportedly been buying only minimal amounts of lead battery makers in metal given worries associated with ongoing government investigations into reports of China now waning poisonings in a number of provinces, although reports of battery makers actually reducing stocks have declined recently, suggesting the drag on apparent lead demand is waning. The steep rise in reported stocks seen in recent months has also raised some concerns. However, we think this represents more redistribution of existing stock (deliveries onto the LME prompted by the price backwardation seen since the start of this year) rather than the accumulation of any substantial new surplus, and the current ratio of reported stocks to global lead consumption at 23 days is only moderately above the average of the last economic cycle (18 days from 2001-2009).Fig 26 Data suggest strong growth in lead demand Fig 27 Lead scrap prices rise to record levels 60% 1,750 40% 1,500 US$/tonne lead contained 3MMA, YoY change N.American battery 1,250 20% shipments EU Japanese lead use in 1,000 0% USA storage batteries 750 UK -20% Chinese lead-acid battery exports 500 -40% 250 -60% 0 J 2009 J 2010 J 2011 S 2009 S 2010 M 2009 M 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: prices are for whole undrained batteries. EU – Germany and FranceSource: BCI, GTIS, METI, Macquarie Research, May 2011 Source: CRU, Macquarie Research, May 2011 Price signals from Price signals in the markets for lead making raw materials continue to suggest that there is raw materials little slack in the supply chain. Lead scrap prices continue to rise, reaching new records in markets indicate dollar terms (Fig 27), well ahead of the levels prevailing when the LME lead price spiked in little slack in supply 2008, and also as a proportion of the LME lead price. Average lead scrap prices across the chain US, EU and UK markets have been trading at upwards of 55% of the LME price for the last six months. Meanwhile, spot treatment charges for lead concentrates imported into China continue to trade at levels well below a year ago (~US$85/dmt CIF for low-silver lead concentrates in April), which suggests a tighter balance between the availability of material from lead mines and demand from lead smelters. The latter observation is of particular significance, in our opinion, since it occurs despite a very strong rise in China‟s domestic lead mine output, which increased by 36% YoY to 1.8mt lead contained in 2010. Production continued to rise strongly in the first quarter of 2011, climbing by over 30% from the corresponding period a year ago. Whether China can continue to raise its lead mine output further is uncertain.17 May 2011 13
    • Macquarie Research Commodities CompendiumFig 28 World‟s mine lead mines are flat lining… Fig 29 …and price is forecast to rise further 800 150 125 118 118 700 115 125 000 tonnes lead contained US¢/lb annual averages 100 600 97 Penasquito 100 500 Red Dog 400 McArthur River Nominal 75 SE Missouri 2010 USD 300 Cannington 50 200 100 25 0 0 2010 2011 2012 2013 2014 2015 2001 2003 2005 2007 2009 2011 2013 2015Note: 2011-2015 data are forecasts Note: LME cash prices. 2011-2015 data are forecastsSource: CRU, Wood Mackenzie, Macquarie Research, May 2011 Source: LME, Macquarie Research, May 2011 Little new mine Outside China, output from the world‟s major lead mines is flatlining. Magellan remains offline supply coming to and no net increase in production is forecast from the five largest mines – Cannington, SE market ex-China Missouri, McArthur River, Red Dog and Penasquito – after 2011 and output will probably be falling by 2015 (Fig 28). There is little new lead mine supply coming to market from other producers over the next five years and output ex-China could be falling as early as 2014. China forecast to While there is some uncertainty over future primary lead supplies, prospects for lead demand continue driving continue to point to strong growth in the coming, driven by China. In China today the number growth in lead of motor vehicles on the roads relative to population is equivalent to the level reached in the demand USA over 90 years ago (56 motor vehicles per 1,000 people in China in 2010; 60 in the USA in 1918). If China follows a similar road to that seen in the USA from a similar point it could add ~180m units to the country‟s motor vehicle fleet by 2021 – which, to put that in perspective, is equivalent to almost 70% of the entire vehicle fleet in the USA today – and it appears to be on track. In 2010 China produced ~18.5m motor vehicles. At the same time China continues to add to its fleet of electric bikes, powered by lead-acid batteries, and conditions in congested cities in a number of other highly populous Asian countries suggest that e-bikes could be an effective transport solution here too. Risk of future price Taken together the combination of prospects for strong growth in lead demand and limited spike remains real growth in lead mine supply suggest the balance in the lead market will remain quite tight in the coming years. As a result we expect the lead price to remain well bid in the short term and to rise to the high US$2,000s over the next two-to-three years (Fig 30). The risk of a spike on an upside surprise in demand and / or supply side outage remains very real.Fig 30 Global lead supply and demand balance000t lead 2009 2010 2011F 2012F 2013F 2014F 2015FMine production 3,945 4,091 4,034 4,254 4,479 4,544 4,411YoY change 9.0% 3.7% -1.4% 5.4% 5.3% 1.4% -2.9%Refined production 8,410 8,955 9,300 9,650 10,000 10,200 10,300YoY change -1.6% 6.5% 3.9% 3.8% 3.6% 2.0% 1.0%Consumption 8,327 8,900 9,343 9,703 9,985 10,192 10,333YoY change -2.0% 6.9% 5.0% 3.8% 2.9% 2.1% 1.4%Balance 83 55 -43 -53 15 8 -33LME Cash Price (c/lb) 78 97 115 118 125 118 100LME Cash Price (US$/t) 1,726 2,148 2,542 2,608 2,756 2,601 2,205Source: ILZSG, LME, Macquarie Research, May 201117 May 2011 14
    • Macquarie Research Commodities Compendium Tin Market deficit supports high prices LME tin price The tin price has outperformed all other LME base metals since the start of 2010 (Fig 31), outperforms other fairly reflecting the fact that the market for tin has run a deeper deficit than any of the other metals; reflects LME traded metals over that time frame. Strong demand for tin has been driven by rising output market deficit of solder alloys for electronics and industrial goods (this is the main end use market for tin, accounting for ~55% of total use) and record tinplate production. Cookson Group, the world‟s largest producer of solder alloys reported an 18% increase in underlying revenues (revenue at constant currency and eliminating the impact of commodity price changes) in its electronics division in 2010, which earns most of its revenue from assembly materials (i.e. solder products). Meanwhile, global tinplate output rose by 26% YoY to a record of ~20mt (excluding CIS countries) in 2010, driven by strong production growth from China and rebound from the recession in Japan and other Asian countries. Recent data Tin supply has been rising over the last year but it has been slow by comparison with the releases suggest tin rebound in consumption. Whereas world tin consumption increased by 16% YoY in 2010, supply is starting to refined metal production rose by 4.8% and mine output by only 2% on the same comparison. rise more strongly However, there are signs that supply is now starting to rise more fully in response to strong demand and the record high prices of recent months (Fig 32). In Indonesia, the world‟s second largest tin producer and leading exporter to international markets, the tonnage of tin metal checked for export ahead of shipment (as required by the Ministry of Trade regulations) increased by 23% YoY to 9,708t in April. This is the highest monthly total recorded in the last two years and is the highest figure for April since the export licensing system was first introduced in 2007. On a three-month moving average basis, which gives a better guide to the underlying trend than a single data point, the average monthly tonnage surveyed for export was up by 18% YoY to 8,313t for the period February to April 2011.Fig 31 Tin price outperforms other LME traded metals Fig 32 Indonesian tin metal cleared for export 225 100% 200 75% Indices 1 Jan 2010 = 100 3MMA, YoY change 175 Sn 50% Ni 150 Cu 25% Al 125 Pb 0% 100 Zn 75 -25% 50 -50% J 2010 J 2010 J 2011 S 2010 N 2010 M 2010 M 2010 M 2011 M 2011 J 2009 J 2009 S 2009 N 2009 J 2010 J 2010 J 2011 S 2010 N 2010 M 2009 M 2009 M 2010 M 2010 M 2011Source: LME, Macquarie Research, May 2011 Source: Ministry of Trade, Macquarie Research, May 2011 It will take time to Nonetheless it will take time to rebalance the tin market. The three major tin mining countries rebalance the tin – China, Indonesia and Peru – all produced less mine output in 2010 than in 2006. We market expect with the incentive of today‟s high prices that mine output and smelter production will increase in all three countries, contributing to strong growth in tin supplies over the next several years. Data releases for the first months of this year suggest that China‟s refined tin production is on course to rise by 11% YoY to almost 150,000t in 2011. Similarly, Indonesian output is on track to reverse most of last year‟s decline with a rise of 12% to 64,000t. Similarly strong increases are expected with supply-side momentum from high prices carrying through into 2012. Further ahead, new mine and expansion projects in South America, Africa and Australia should increase the supply of feed material for smelters in some other countries to increase refined tin production and we expect the market to rebalance by 2013.17 May 2011 15
    • Macquarie Research Commodities CompendiumFig 33 Tin production forecast to rise sharply Fig 34 Tin price forecast to rise to new records 1,750 1,388 1,363 400 1,500 1,180 1,125 US¢/lb annual averages 1,030 300 ROW 1,250 000 tonnes 928 S.America 1,000 Nominal SE Asia 200 Indonesia 2010 USD 750 China 500 100 250 0 0 2010 2011 2012 2013 2014 2015 2001 2003 2005 2007 2009 2011 2013 2015 Note: LME cash prices. 2011-2015 data are forecastsSource: CRU, ITRI, Macquarie Research, May 2011 Source: LME, Macquarie Research, May 2011 Forecasts for Rising tin supplies will be needed not only to close the existing gap to demand but also to growth in tin meet new demand. For example, Cookson, at its recent annual results release, presented demand forecasts showing growth of 8%-9% pa in global output of electronic equipment from 2011-13 are good and anticipates demand for solder alloys (and thereby tin) to rise accordingly. Tinplate production is rising as a result of expansion in Asia. Nippon Steel (5401 JP, ¥244, Neutral, TP: ¥290), one of the world‟s largest tinplate producers is adding 8% to its capacity in Japan, equal to about 150,000tpa. It is also expanding capacity at its Indonesian tinplating subsidiary, by 30,000tpa from 2012, and recently announced it is setting up a new joint venture in China with Wuhan Steel to build a new 200,000tpa tinplate line in Hubei province to start up in mid-2013. Nippon Steel has forecast that Chinas total tinplate demand will increase to between 3.3mt and 3.7mt by 2015, from less than 3mt in 2009. Tin price forecast to Concerns have been raised about risks to tin demand from substitution incentivised by high reach new record prices. However, tin use in making solder alloys is price inelastic in the short to medium term in 2011-2012 because solder alloys account for only a small fraction of the cost of consumer electronics, and there are no simple substitutes for solder alloys or for the use of tin in making solder. Moreover, major electronics manufacturers have substantial capital invested in existing production processes. Some applications in the chemicals sector may be vulnerable to some substitution but we do not expect it to happen on a scale sufficient to reduce world tin demand overall. We expect the tin market to remain in deficit and prices to reach new records in 20122011-2012 (Fig 34).Fig 35 Global tin supply and demand balance000t lead 2009 2010 2011F 2012F 2013F 2014F 2015FMine production 283.2 288.8 305.6 330.1 356.1 371.1 370.1YoY change -3.1% 2.0% 5.8% 8.0% 7.9% 4.2% -0.3%Refined production 330.6 346.5 373.0 399.0 423.0 432.5 431.0YoY change -1.8% 4.8% 7.7% 7.0% 6.0% 2.2% -0.3%US DLA stock changes -3.7 -0.1 - - - - -Consumption 318.3 369.3 382.9 401.1 414.5 419.6 422.4YoY change -10.5% 16.0% 3.7% 4.8% 3.3% 1.2% 0.7%Balance 16.0 -22.7 -9.9 -2.1 8.5 12.9 8.6LME Cash Price (c/lb) 616 928 1,363 1,388 1,180 1,125 1,030LME Cash Price (US$/t) 13,591 20,453 30,057 30,589 26,015 24,802 22,708Source: CRU, ITRI, LME, Macquarie Research, May 201117 May 2011 16
    • Macquarie Research Commodities Compendium Uranium Market looking ugly, but China caking on the make up We see spot Since our last Commodities Compendium the current and future uranium market balances uranium trading at have been significantly affected by the impact of the Fukushima nuclear disaster on both the US$60 for remainder Japanese and global nuclear market. We have significantly revised our forecast balances for of 2011 and 1H12 the uranium market. While we now expect the global market to be in significant surplus over the next five years and the industry to go through a period of pain on the back of uncertainty regarding future uranium demand, we expect China will continue to stockpile uranium (based on a continuation of strong imports from Kazakhstan) and this will keep the ex-China ex- Kazakhstan market (i.e. the spot market) in balance / small deficit in 2011 and at least 1H12. As a result of our balance / small deficit forecast for the spot market, we forecast that the post price will trade at ~ US$60/lb until China stops stockpiling (our best guess of when this is, is 2H12). In other words, the only thing stopping prices from digging deeply into the cost curve is Chinese stockpiling, and our best guess is that China will stop in late 2012. We expect the uranium spot price will average US$60/lb in 2011, US$56/lb in 2012 and fall to US$45/lb in 2013, before rising to US$65/lb in 2015-2017. Over the medium term we are looking to buy uranium at US$40-45/lb (say, in 12-24 months time). Fig 36 Uranium spot price fell on back of nuclear Fig 37 Prices are holding up owing to still strong disaster, but still trading above 90%ile of cost curve Chinese imports from Kazakhstan 70 Chinese uranium imports, monthly 3500 65 Uzbekhistan 3000 Russia Nam ibia 60 Kazakhstan 2500 Australia $/lb U308 World (3MMA) 55 2000 mt U 50 1500 45 1000 40 500 35 Nov 09 Nov 10 Jul 09 Jul 10 0 May 09 May 10 May 11 Jan 09 Jan 10 Jan 11 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Nov 08 Nov 09 Nov 10 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Sep 08 Sep 09 Sep 10 May 08 May 09 May 10 Mar 08 Mar 09 Mar 10 Mar 11 Source: LME, CRU, Macquarie Research, May 2011 Source: LME, CRU, Macquarie Research, May 2011 The Fukushima disaster has resulted in lower uranium demand from Japan and Germany in the short and long term, and the knock on effect of higher spare enrichment capacity means the impact is heightened (higher enrichment means less uranium needed to produce 1t of enriched product that is loaded into reactors). In addition, we have taken out the bulk of US reactor new build to 2020. However, we continue to believe that China will reach 33GW of nuclear capacity by 2015 and 90GW of capacity by 2020. In the modelling we assume China imports all of the growth in Kazakh output in 2011 as well as the same amount of material that was imported in 2010 from Kazakhstan (~11,500tU of imports per year in 2011 and 2012), and imports only negligible amounts of uranium from all other countries (for reference, ex-Kazakh imports by China in 2010 totalled 7,500tU). By the end of 2012, on our numbers, China will have accumulated around 36,000tU of stock between 2006 and 2012, which is equivalent to around two years of consumption at 90GW (the country‟s 2020-2025 rough target). We therefore assume no further stockpiling beyond 2012. If China stops stockpiling or does so less than we expect, the market will move into surplus and spot will fall – we expect this will occur around 2H12 / 2013 (but its very hard to say).17 May 2011 17
    • Macquarie Research Commodities Compendium Why do we have any conviction that China will continue to stockpile? Firstly, the infrastructure is in place to continue to take Kazakh material – there is a rail line that runs through Kazakhstan in Xinjiang (Urumqi) which began operating in April 2008. Secondly, the Kazakhs have been selling uranium at US$45/lb to China through 2010 and this continued in 1Q11 (China has imported 2,600tU of uranium from Kazakhstan - annualising at 10,400tU - at an average price of US$44/lb), compared to average spot prices of US$55/lb, suggesting longer term supply deals. The other factors are that there have been numerous reports of the Kazakhs paying back loans from the Chinese in the downturn with uranium, and reports that Kazatomprom has recently become far more interested in obtaining material for export to China (i.e. Chinese demand for Kazakh material still very strong). With this price profile through 2013, we expect significant project delays and cancellations over the next two years, and can see a vast amount of the 2014-2017 production growth not coming to market. In particular, there is major downside risk to our Ranger supply forecasts beyond 2013. Fig 39 China has stockpiled 23,000tU as at end Fig 38 Cumulative Chinese imports since 2006, mainly 1Q11 at ‘cheap’ prices, mainly from Kazakhstan – we coming from Kazakhstan and Uzbekistan assume this continues in 2011 and 2012 Chinese uranium imports 32500 cumulative since 2006 tU 2006 2007 2008 2009 2010 Sum 30000 Apparent demand 2523 1979 2805 5943 16405 29656 27500 Australia Kazakhstan 25000 Namibia Russia Actual demand 1152 1427 1641 2347 3004 9572 Uzbekhistan 22500 20000 Stockbuild 1371 553 1164 3596 13401 20084 Price paid ($/lbs U308) 40 66 55 47 45 46 17500 mt U Spot ($/lbs U308) 48 99 64 47 43 61 15000 12500 10000 7500 5000 2500 0 Oct 06 Oct 07 Oct 08 Oct 09 Oct 10 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Source: Trade Statistics, Macquarie Research, May 2011 Source: Trade Statistics, Macquarie Research, May 2011 Fig 40 Ex-China uranium balance is what matters for the spot market World uranium balance Tonnes U 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f 2017f ---Total Primary 50815 52199 54004 58552 61053 64826 70297 77438 82716 ----of which Kazakh 14020 17803 19600 20000 20000 21000 22000 24000 25000 ----of which Cigar Lake 0 0 0 0 385 1155 3080 5005 6930 ---Other Supply 21521 19143 17688 17534 17352 11836 11378 12354 11969 ----of which from HEU 7700 7700 7700 7700 7700 3000 3000 3000 3000 Total Supply 72336 71342 71692 76086 78404 76662 81675 89792 94685 % Change YoY 12.2% -1.4% 0.5% 6.1% 3.0% -2.2% 6.5% 9.9% 5.4% Total Requirements 64827 67212 66491 69564 73277 76596 80292 81108 89327 % Change YoY 1.1% 3.7% -1.1% 4.6% 5.3% 4.5% 4.8% 1.0% 10.1% Balance 7508 4130 5201 6522 5127 66 1383 8684 5357 Surplus/deficit (%mkt) 11.6% 6.1% 7.8% 9.4% 7.0% 0.1% 1.7% 10.7% 6.0% Imports natural uranium 5109 17136 11426 11826 6414 6653 7469 6779 11043 Chinese stock change assumption 3463 14902 7485 7641 0 0 0 0 0 Ex-China deficit / stock shifting 4046 -10772 -2284 -1119 5127 66 1383 8684 5357 Spot price forecast (new) 47 46 60 56 45 60 65 65 65 Spot price forecast (old) 47 46 72 70 65 65 65 65 65 Change 0% 0% -17% -20% -31% -8% 0% 0% 0%Source: Macquarie Research, WNA, Industry Sources, Trade Statistics, May 201117 May 2011 18
    • Macquarie Research Commodities Compendium Stainless Steel Ongoing strong growth in 2011 led by China Following strong global stainless steel growth in 2010 (with a strong first half and weaker second half), 2011 has started strongly with first-quarter growth being very strong. While we expect growth rates to ease as some destocking takes place, 2011 growth should still be Stainless around 9%. production recovering after China continues to drive global growth with a forecast growth of 17.2% YoY in 2011 2H10 correction compared to 27.5% in 2010. China is gradually becoming a significant net exporter of stainless steel despite talk of anti-dumping cases. Fig 41 World stainless rebounds after collapse – Fig 42 Quarterly world stainless apparent demand = China leads the way – annual to 2011F massive gyrations in 2009/2010 85% 36000 75% 33000 65% 30000 55% 27000 45% 24000 000t melted % change YoY 35% 21000 25% 18000 15000 15% 12000 5% 9000 -5% 6000 -15% 3000 -25% 0 -35% 2010 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 -45% Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 World World Ex-China China Ex-China Source: ISSF, CNIA, Macquarie Research, May 2011 Source: ISSF, Macquarie Research, May 2011Fig 43 Global stainless steel production by quarter (000t) 2010 2010 2010 2010 2011 2011 2011 2011 Year Year Year Year000t Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F 2009 2010 2011F 2012FUSA 621 566 541 472 666 645 555 580 1618 2201 2446 2470Japan 825 891 849 861 867 800 840 825 2606 3427 3332 3432Europe 1970 2124 1606 1782 2020 2028 1653 2035 5972 7482 7736 8164Taiwan 414 398 359 343 377 375 375 390 1468 1514 1517 1548China 3038 3098 3054 3103 3443 3606 3536 3826 9644 12292 14412 15572Other 830 816 830 813 848 907 907 928 3084 3289 3590 3826Total 8203 8393 7743 7915 8766 8901 8413 9124 26068 32254 35204 37250Total Ex-China 5165 5295 4689 4812 5323 5295 4877 5298 16424 19962 20792 21678% change yoyUSA 71.0% 67.2% 0.6% 25.0% 7.2% 13.9% 2.5% 22.8% -16.0% 36.0% 11.1% 1.0%Japan 100.0% 65.1% 4.1% 2.9% 5.0% -10.3% -1.1% -4.2% -26.9% 31.5% -2.8% 3.0%Europe 58.0% 49.0% 1.2% 4.1% 2.6% -4.5% 2.9% 14.2% -23.6% 25.3% 3.4% 5.5%Korea 66.0% 32.1% 1.3% 8.7% 7.9% 8.2% 8.6% -0.2% -3.8% 22.2% 6.0% 3.0%Taiwan 59.0% -4.5% -14.6% -7.3% -8.8% -5.7% 4.4% 13.5% 13.2% 3.2% 0.2% 2.0%China 60.7% 27.0% 11.5% 20.5% 13.3% 16.4% 15.8% 23.3% 36.8% 27.5% 17.2% 8.1%Other 24.4% 4.8% -3.4% 4.3% 2.2% 11.1% 9.3% 14.2% -3.3% 6.6% 9.1% 6.6%Total 59.5% 32.9% 3.8% 10.7% 6.9% 6.1% 8.7% 15.3% -2.0% 23.7% 9.1% 5.8%Total Ex-China 58.7% 36.5% -0.6% 5.2% 3.1% 0.0% 4.0% 10.1% -15.9% 21.5% 4.2% 4.3%Source: Macquarie Research, May 201117 May 2011 19
    • Macquarie Research Commodities Compendium Nickel price changes tend to lead to stainless steel price changes, so when nickel rises, Nickel price stainless buyers tend to over-order, while they destock in a falling nickel price environment. movements create This creates some volatility in the order and production patterns for stainless and in part volatility in the generated the substantial recovery in production in the first half of 2010 and first half of 2011. stainless production There are now signs of this being reversed as alloy surcharges on stainless steel prices are cycle anticipated to fall in May and June during the early part of 2011. This may start to ease production rates by mid-year. The volatility in nickel prices appeared to have led to large substitution away from the standard high-nickel 300-series grades (Fig 44) in recent years. We would argue that it was the lack of nickel availability that did the most harm however. Now that nickel is more available (in large part due to the surge in Chinese nickel pig iron production), we are seeing a stabilisation in the share of 300-series in total production. Indeed, the availability of cheap nickel pig iron is giving Chinese stainless steel producers a significant global competitive advantage in producing high-nickel grades, leading to rising exports. We remain positive about the outlook for global production in the 2011–15 period, with average growth in global production of close to 5–6% per year. For the stainless industry, the current and future overcapacity, mainly driven by China, will make it difficult for the industry to re-establish the strong margins seen in the bull market years.Fig 44 300-series ratio in total stainless steel Fig 45 Stainless steel prices in Europe – falling alloyproduction starting to stabilise? surcharges lead to lower orders and vice versa 3500 75% 9.0% 8.8% 3000 70% 8.6% 8.4% 2500 % of total stainless Euro/tonne % ni in austenitic 65% 8.2% 2000 8.0% 60% 7.8% 1500 7.6% 300 series share % 1000 55% 7.4% Nickel content % 7.2% 500 2007 2008 2009 2010 2011 50% 7.0% 2011f 2012f 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Alloy surcharge Base priceSource: ISSF, Macquarie Research, May 2011 Source: CRU, Macquarie Research, May 201117 May 2011 20
    • Macquarie Research Commodities Compendium Nickel Nickel supply growth delayed…but it is coming The nickel market has remained extremely tight so far in 2011 with prices holding at attractive The market is now levels in relation to costs for most of the industry. The market has benefited from strong closer to balance demand from most parts of the stainless steel industry (particularly the USA and China) in after a large deficit early 2011 with global output rising by 7% YoY in 1Q 2011. in 1H10 The other support to nickel has come from the supply side with an estimated 50kt (or 3%) of nickel production losses from plan at existing output expected in 2011 (so far). The shortfalls include around 20kt at Vale‟s Canadian and Indonesian operations, 10kt at Pacific Metals in Japan, around 10kt at BHP Billiton‟s Australian and Colombian operations, around 3kt losses at Posco‟s Korean smelter as well as smaller issues at Talvivaara, Xstrata Norway, Minara Nickel and small Chinese conventional operations. In addition, there was virtually no production from any of the major Greenfield operations currently under commissioning. We estimate a 1H deficit of around 56kt split between LME stock falls and continued non- recorded falls in Chinese stocks. Our forecasts now suggest a small overall deficit in 2011 of 25kt (implying a 2H 2011 surplus) but then surpluses in 2012-13 as new supply hits the market. Prices are likely to experience a downside correction in 2H 2011, but the downside remains limited by the rising cost of Chinese nickel pig iron, which supports prices above US$8/lb and possibly US$9/lb. We have our price forecasts virtually unchanged from our previous forecasts and are forecasting an average of US$11.11/lb this year and US$9.50/lb in 2012. Fig 46 Nickel quarterly supply/demand balance („000t Ni) 430 54 51 60 43 410 33 40 28 390 20 20 20 Balance: 000t 11 SD: 000t Ni 370 6 350 0 -5 -4 330 -20 310 -27 -29 -29 -34 -40 290 -47 270 -60 Q111E Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q211F Q311F Q411F Balance Supply Use (not demand) Source: LME, Macquarie Research, May 2011 The return to work at Vale‟s Ontario and Voisey‟s Bay operations will add around 45kt to production YoY in 2011. Supply will also rise in 2011 from the start-up of a number of Greenfield nickel productions (Vale New Caledonia (Vale, 60ktpa), Onça Puma (Vale – 52ktpa), Barro Alto (Anglo American – 42ktpa), Ramu River (32ktpa), Ambatovy (Sherritt/KORES, Sumitomo – 60ktpa) and Taguang (Myanmar – 23ktpa). In addition, First Quantum is planning to restart the 40ktpa Ravensthorpe HPAL project in 2H 2011. There are significant In addition to these projects there is also new Chinese nickel pig iron production (+60kt). risks to the large Delays in the big projects suggest now that 2012 will be a bigger growth year than 2011 pipeline of however. There remains significant project risk from the high-pressure acid leach (HPAL) production capacity projects in this list (VNC, Ramu, Ambatovy and Raventhorpe). We expect only around +20kt to come online in from these four projects in 2011. 2011/12 The large projects have mostly experienced substantial cost over-runs and technical failure of any of these projects could have a negative impact on further investment in this sector. The market could ultimately become more dependent on Chinese nickel pig iron as the swing factor in the market. There appears to have been a major rise in NPI production so far in 2011 and there is upside risk to our supply forecasts for this product.17 May 2011 21
    • Macquarie Research Commodities CompendiumFig 47 Nickel supply/demand balance (000t Ni)`000t 2009 2010 2011f 2012f 2013f 2014f 2015f 2016fTotal SS Production 26068 32254 35204 37250 39280 41495 43853 45927% Change -2.0% 23.7% 9.1% 5.8% 5.5% 5.6% 5.7% 4.7%Ni-containing SS Prod. 19012 23158 25063 26678 28122 29544 31254 32781% Change 1.2% 21.8% 8.2% 6.4% 5.4% 5.1% 5.8% 4.9%Nickel Consumption 1263 1492 1585 1689 1767 1848 1946 2037% Change -1.8% 18.1% 6.2% 6.6% 4.6% 4.6% 5.3% 4.7%Nickel Supply 1347 1431 1559 1737 1831 1847 1993 2037% Change -3.9% 6.2% 9.0% 11.4% 5.5% 0.9% 7.9% 2.2%World Market Balance 84 -61 -25 48 64 0 47 0China stock change 125 -51 -25 0 0 0 0 0Non-Chinese balance -42 -10 0 48 64 0 47 0LME/Producer stocks 247 227 201 249 313 313 360 360Weeks world demand 10.0 7.8 6.5 7.5 9.0 8.6 9.4 9.0LME Cash Price (cents/lb) 670 990 1111 950 875 850 900 950LME Cash Price ($/tonne) 14775 21824 24500 20944 19290 18739 19841 20944Source: INSG, CRU, Macquarie Research, May 2011Fig 48 Sharp rise in nickel costs supports a Fig 49 YoY changes in world production: huge 2011 andpermanently higher price 2012 growth in prospect 10 190 177 9 170 Note: After disruption allowance 8 150 134 7 128 130 $/lb nominal 6 110 95 5 90 84 Change (000t) 65 4 70 62 48 52 48 3 50 22 32 2 30 19 1 10 0 -10 0 -5 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010E -30 -50 -54 90th percentile Median -70 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Source: CRU, Macquarie Research, May 2011 Source: INSG, CRU, Macquarie Research, May 2011Fig 50 Where we see 2011 supply growth Fig 51 Many new projects coming on stream but delayed 2011 Company Project Process Capacity Start-up Contribution Vale Canada/UK 45 Greenfield projects Vale VNC (Goro) HPAL 60.0 1Q 11 9.0 Anglo American 22 Onça Puma Vale FeNi 52.0 1Q 11 17.0 First Quantum Ravensthorpe HPAL 39.0 2H11 5.0 Vale Onca Puma 17 Anglo American Barro Alto FeNi 40.0 1Q 11 18.0 000t nickel Sherrit/Kores/Sumitomo Ambatovy HPAL 60.0 3Q11 7.0 Xstrata Norway/DR 11 MMC/Highland Pacific Ramu HPAL 32.0 2H 11? 0.0 Ambatovy 7 Chinese NPI Various FeNi 70.0 Year 60.0 Taguang Taung Nickel Taguang FeNi 23.0 2H 11? 6.0 Cunico 4 Subtotal 376.0 122.0 Macedonia/Kosovo Vale New Caledonia 5 Main brownfield expansions Mirabella Santa Rita Mine Year 7.0 Eramet 4 Xstrata Falcondo restart FeNi 1Q 11 12.0 Cunico Macedonia Feni Year 4.0 0 10 20 30 40 50 Talvivarra Finland Leach Year 15.0 Subtotal 38.0Source: Company data, Macquarie Research, May 2011 Source: ICSG, Macquarie Research, May 201117 May 2011 22
    • Macquarie Research Commodities Compendium Ferrochrome FeCr prices falling, despite strong demand and rising costs Ferrochrome is Ferrochrome is used mainly in stainless steelmaking (we estimate 80%-plus of total usage). used mainly in With this in mind it should come as no surprise, of course, that the 30-year record rebound in stainless world stainless steel output in the first half of last year supported some recovery in ferrochrome steelmaking prices from the recession of 2008-09. Prices softened again for mainly seasonal reasons in Q3 2010 before beginning to rise once more, culminating in an increase in the headline contract price for charge chrome sales into Europe of 10¢/lb to 135¢/lb DDP in Q2 2011. Spot FeCr prices However, spot market ferrochrome prices have started falling once more over the last are falling two months (Fig 52) and we think that contract prices will be weaker as a result in H2 2011. The pressure on prices comes from strong supply and a slowdown in the rate of increase in stainless steel production, and despite rising costs led by power charges, notably in South Africa, where the dollar impact is amplified by the present strength of the rand.Fig 52 FeCr spot prices are now falling again Fig 53 China‟s Cr ore imports are on a rising trend 120 900 115 800 110 700 3MMA, 000 tonnes US¢/lb CIF China 600 105 500 100 400 95 300 90 200 85 100 80 0 A 2010 A 2010 A 2011 J 2010 F 2010 J 2010 J 2010 O 2010 S 2010 N 2010 D 2010 J 2011 F 2011 J 2009 J 2009 S 2009 N 2009 J 2010 J 2010 S 2010 N 2010 J 2011 M 2010 M 2010 M 2011 M 2011 M 2009 M 2009 M 2010Note: HC FeCr, 58%-60% Cr, 6%-8% C M 2010Source: SBB, Macquarie Research, May 2011 Source: GTIS, Macquarie Research, May 2011 FeCr prices forecast In the medium term we think that China will continue to import more chrome bearing to remain range raw materials from overseas (Fig 53) in order to increase its own FeCr production (Fig 54). bound Other producers are also expected to expand output, notably Kazakhstan-based ENRC, which is the industry‟s most cost competitive producer. As a result, we think the market balance is unlikely to tighten sufficiently to prompt a repeat of the price spike of 2008.Fig 54 China, Kazakhstan forecast to lead rising output Fig 55 FeCr prices forecast to remain range bound infrom to 2015 the next five years 1,200 1,100 200 175 000 tonnes gross weight 1,000 150 US¢/lb DDP Europe 800 125 600 525 500 100 400 300 275 250 75 200 100 100 50 0 25 ey pu a r s na a C co di er at R rk hi 0 um In tr EN th an Tu C Xs O ok m 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sa ut ONote: chart shows net increase in output from 2010 to 2015 Note: European charge chrome contract price, nominal termsSource: CRU, SBB, Macquarie Research, May 2011 Source: CRU, SBB, Macquarie Research, May 201117 May 2011 23
    • Macquarie Research Commodities Compendium Molybdenum Deficit delayed by renewed Chinese exports Molybdenum (moly) prices have been relatively stable over the past two years. While the China is back to market appears to have moved into deficit, China moved from being a substantial net being a small importer in 2009 back to being a small net exporter with suggestions of destocking taking exporter of moly place. There appears to be destocking of some of the speculative inventory built in 2010, leading to a non-Chinese market surplus. We expect prices to recover in late-2011 as Chinese destocking ends, Chinese exporter quotas are filled and the market moves into defict in both China and ex-China. Prices remain well above historical normals supported by high-Chinese costs. Recent changes in the market structure (mainly due to rapidly rising Chinese demand and uncertain Chinese supply) have combined to create higher and more volatile prices and a higher price floor. Much higher prices have been established, although molybdenum has not been so heavily influenced by the wave of speculative and investment interest that has swept across the exchange-traded commodity markets. This may eventually change with the new LME contract, but there is no sign of that happening in the short run as the LME contract has remained largely unused. We have left our price forecasts largely unchanged from previously due to a similar supply demand picture. Our forecasts for prices for 2011 to 2015 are based on the assessment that the market will need high-cost Chinese marginal primary capacity to meet incremental demand. This capacity needs prices in the US$13–17/lb range, and costs will most likley rise in US$ terms. It is really only in 2014 and 2015, when Freeport-McMoran‟s (FCX US, US$99.88, Not rated) Climax primary mine is fully onstream, that prices may relax as reliance on this high-cost Chinese supply eases. In the short run (next two years), prices should be stronger due to an expected market deficit and lower 2012 production from two of the larger players, Thompson Creek and Rio Tinto, due to lower Mo grades. Also extremely high copper prices will probably push the main copper by-product produers to maximise copper at the expense of molydenum grades in ore bodies. There could well be some downside supply risk. In 2013-2015, however, the expansion at Kennecott plus higher production from Climax plus a number of likely greenfield projects should push prices lower again. Freeport says that its 30m lbs/year Climax primary mine will be ready from 2012 but says the actual startup date will depend on market conditions – we are assumining a 2H2012 start, after prices are sustained above US$20/lb once again. Following a (revised) 50m lb surplus in 2009, we estimate that there was a 8m lb deficit in 2010 and a further 32m lb of deficts in 2011 and 2012 combined, followed by a relatively balanced market in 2013/14 until a larger surplus emerges in 2015. Chinese market fundamentals will play a key role in the market going forward and are the key uncertainty. We assume trend demand growth rate of 7–8% a year from 2011 to 2015. We assume mine output and capacity will continue to grow steadily but from 2011 onwards, China will be a growing net importer of molybenum. A higher Chinese growth rate and some restictions on Chinese supply growth remain a possibility, pushing the market into an even larger deficit. Mine supply in the Supply and demand outside China are still important. We estimate that demand outside world ex-China is China bounced back by 23% YoY in 2010, having fallen 25% in 2009 and 9% in 2008. We bouncing back forecast that mine production outside China will grow at a reasonably rapid rate, with byproduct output up 11% this year after disruption but then fall back to 2% in 2012.17 May 2011 24
    • Macquarie Research Commodities CompendiumFig 56 World molybdenum supply/demand balance (m lb Mo) 2007 2008 2009 2010 2011F 2012F 2013 2014 2015FDemandEurope 132 128 80 91 93 95 97 100 102USA 90 81 65 95 100 103 105 108 111Japan 54 53 35 48 48 49 50 51 52China 92 120 150 180 207 224 241 258 274Other 103 85 80 86 92 99 106 113 121Total Demand 471 466 410 500 540 569 600 630 660Change YoY 7.6% -0.9% -12.1% 22.0% 7.9% 5.4% 5.4% 5.1% 4.7%SupplyPrimary production 225 250 243 268 267 281 298 313 332By-product production 239 208 207 229 253 258 273 277 322Catalysts 11 10 10 10 11 12 12 13 13Total Supply 474 467 460 492 520 557 604 640 714Change YoY 12.5% -1.5% -1.6% 7.0% 5.8% 7.1% 8.3% 6.0% 11.5%Market Balance 4 1 50 -8 -20 -12 4 10 54Price $/lb Mo oxide 30.27 29.09 11.17 15.56 17.75 21.00 17.00 15.00 15.00Source: WBMS, CNIA, C&M, Macquarie Research, May 2011Fig 57 Molybdenum prices – waiting for the Fig 58 Chinese net trade – suspected large stock buildrebound in 2009 when prices were low 35 8 40.00 6 35.00 30 4 30.00 Net exports: lbs Mo 2 25 25.00 Price: $/lb 0 $/lb Mo 20.00 20 -2 15.00 -4 15 10.00 -6 -8 Net exports Mo 5.00 10 Price of mo oxide -10 0.00 May-07 May-08 May-09 May-10 Jul-07 Jul-08 Jul-09 Jul-10 Jan-07 Mar-07 Jan-08 Mar-08 Jan-09 Mar-09 Jan-10 Mar-10 Jan-11 Mar-11 Sep-07 Sep-08 Sep-09 Sep-10 Nov-07 Nov-08 Nov-09 Nov-10 5 Mar-08 Jan-08 Jul-08 Mar-09 Sep-08 Nov-08 Jul-09 Mar-10 Nov-10 Mar-11 May-08 Jan-09 May-09 Sep-09 Nov-09 Jan-10 Jul-10 May-10 Sep-10 Jan-11 May-11Source: Platts, Macquarie Research, May 2011 Source: WBMS, Platts, Macquarie Research, May 2011 Fig 60 Moly production by supplier – primary share ofFig 59 Chinese demand to grow faster than supply supply to decline to 50% 2009 2010 2011F 2012F 2013F 2014F 2015F 300 Freeport 54.0 72.0 78.0 82.0 77.0 66.0 66.0 Codelco 47.5 47.8 48.0 49.0 49.0 49.0 50.0 250 Grupo Mexico 41.2 45.2 45.8 46.8 54.0 60.5 65.5 China Molybdenum 34.0 35.3 36.4 38.0 40.0 45.0 50.0 200 m lbs Mo JDC (China) 30.0 30.0 30.0 30.0 30.0 30.0 30.0 Thompson Creek 25.3 32.6 30.0 27.0 26.8 29.0 29.2 150 Rio Tinto 24.9 28.4 27.0 15.0 20.0 12.0 50.0 100 Antofagasta 17.2 19.3 20.9 20.9 20.9 20.9 20.9 Teck 6.6 5.7 5.9 6.0 6.0 6.0 6.0 50 Anglo America 2.5 4.3 7.9 10.1 7.9 7.9 7.9 Other China 105.1 111.4 122.8 133.8 143.8 153.8 163.8 0 Former Soviet Union 23.1 23.2 24.3 25.3 29.3 30.3 30.3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F Other (inc catalysts) 102.32 108.59 121.24 155.38 176.07 195.73 210.34 Total 459.7 491.9 520.4 557.4 603.9 640.2 714.0 % change YoY -1.6% 7.0% 5.8% 7.1% 8.3% 6.0% 11.5% Production Consumption of w hich: Primary 246.4 271.7 279.6 300.5 318.5 334.7 354.9 Primary share % 54% 55% 54% 54% 53% 52% 50%Source:, CNIA, Clark and Marron, Macquarie Research, May 2011 Source: Company data, WBMS, Macquarie Research, May 201117 May 2011 25
    • Macquarie Research Commodities Compendium Cobalt No stopping the supply surge Little sign of In a market as heavily oversupplied as cobalt, it is difficult to find anything to get overly excitement in the enthused about. While the market is not as out of kilter as suggested by the CDI statistics for cobalt market 2010 (>10kt in a 70kt market), the balance is not favourable. After an early year push supported by rampant industrial output, the cobalt prices have remained stubbornly below the US$20/lb mark for high grade material. However, after selling off well before other metals on the back of a potential decline in Japanese demand post-disaster, early May has seen renewed buying interest. Meanwhile, after falling through the February-March period, LME stocks have almost doubled since this point, and the spectre of oversupply will continue to weigh on the market throughout our forecast period. Chinese trade As ever, Chinese trade is key to sentiment in the cobalt market. With plenty of potential reasonably static, supply available, there should be fewer impediments to, or competition for sourcing cobalt plenty of material seen in other commodities where China is the marginal buyer. However, while not falling, available Chinese imports of cobalt concentrate and intermediate products has been reasonably static, even in a rising demand environment. This suggests there is plenty of material available on the ground in China, acting as a buffer to upward price movements. That said, with concentrate prices having remained relatively robust as metal prices have fallen, the margin squeeze on Chinese processors should mitigate significant downside risk. Demand growth has The problem of supply-demand imbalance in cobalt has never come from weak demand never been the potential. Indeed, cobalt is strongly exposed to sectors with rapid growth planned in the problem coming years. We see aircraft engine demand rising at 14% CAGR in the 2011-2016 period, while the combination of ageing and heavier populations should see prosthetic demand for cobalt grow at 12% CAGR. Cobalt also has exposure to the machinery cycle through high strength steel demand while the rechargeable battery sector has always promised much with for cobalt demand – we still see this area adding the most growth in absolute terms.Fig 61 Cobalt has consistently underperformed its Fig 62 LME stocks hit another new high in May 2011, upLME listed peers since the contract inception 42% since the start of the year LME Cobalt price vs. LMEX 450 46000 5,000 4,500 400 44000 LME Stocks 4,000 42000 350 3,500 40000 300 3,000 $/tonne 38000 2,500 tonnes 250 2,000 36000 200 1,500 34000 1,000 150 32000 LME Cobalt LMEX index (RHS) 500 100 30000 - 50 02/06/10 02/07/10 02/08/10 02/09/10 02/10/10 02/11/10 02/12/10 02/01/11 02/02/11 02/03/11 02/04/11 02/05/11 0 May-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov-10 Dec-10 Feb-11 Mar-11 Apr-11Source: LME, Macquarie Research, May 2011 Source: LME, Macquarie Research, May 2011 Unlike other metals, With demand so strong, much of cobalt‟s difficulties come from the fact that, unlike many supply growth is other commodities, the supply side is performing. Part of this can be attributed to the fact that performing 40% comes from by-product operations, however other key parts of the market have been growing at or above expectation. Refined metal output in Africa has rebounded strongly after the financial crisis, with output now equivalent to over 10,000tpa, from under 5,000tpa in H1 2009. Meanwhile, H2 2010 metal production performed better than the chemicals side, however still-strong Chinese IP numbers seems to have redressed this in 2011. LME contract With the fully-traded LME cobalt contract now one year old, it does appear to be gaining volumes starting to increasing acceptance in the marketplace. Volumes have been increasing through Q2, while pick up open interest positions have remained reasonably unchanged.17 May 2011 26
    • Macquarie Research Commodities CompendiumFig 63 Cobalt supply and demand balanceCobalt Demand (t) 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016FTotal Demand 58,942 54,228 61,413 66,275 70,064 74,844 80,408 86,536 90,991% change YoY -2.4% -8.0% 13.2% 7.9% 5.7% 6.8% 7.4% 7.6% 5.1%Total Supply 55,862 57,792 71,741 74,431 80,071 87,764 93,553 100,371 104,257% change YoY -0.3% 3.5% 24.1% 3.8% 7.6% 9.6% 6.6% 7.3% 3.9%Disruption allowance 2,492 5,131 5,902 6,523 7,409 7,862Stockpile change (303) 1,550 (7,000) (400) (400) - - - -Balance -3,384 5,114 3,328 7,757 9,606 12,920 13,144 13,835 13,266Price ($/lb)99.8% free market/LME 39 17 20 18 16 15 14 15 15Source: CRU, Metal Bulletin, Macquarie Research, May 2011Fig 64 Flow of cobalt raw materials into China has Fig 65 Production of cobalt chemicals fell in H2 2010,been reasonably constant on a trend basis rebound expected this half 4,500 Orec and Concs Intermediates HoH growth in cobalt supply by type 4,000 3,500 2011 Secondary tonnes, Co contained 3,000 H1f 2,500 Chemicals Metal 2,000 H2 1,500 2010 1,000 500 H1 0 Oct Oct Nov Nov Apr Apr Jun Aug Jun Aug Jul Jul May Dec May Dec Mar Mar Mar Jan Feb Sep Jan Feb Sep Jan Feb -5% 0% 5% 10% 15% 20% 25% 2009 2010 2011Source: CRU, China Customs, Macquarie Research, May 2011 Source: CRU, Macquarie Research, May 2011Fig 66 Refined metal output from African operations Fig 67 Cobalt is exposed to a number of high growthcontinues to perform very well sectors in the coming years Gécamines Mopani Chambishi CAGR in cobalt demand by sector, 2011-2016 7,000 Kasese Katanga Mining 16.0% 6,000 14.0% 14.0% 5,000 tonnes cobalt 12.0% 12.0% 4,000 10.0% 9.5% 3,000 8.0% 7.0% 6.6% 2,000 6.0% 1,000 4.0% 0 2.0% H1 H2 H1 H2 H1f 0.0% 2009 2010 2011 Aircraft Engines Prosthetics Batteries PET processing High Strength SteelSource: CRU, Company reports, Macquarie Research, May 2011 Source: CRU, Avicenne, Macquarie Research, May 201117 May 2011 27
    • Macquarie Research Commodities Compendium Steel Still playing the margin lottery Western price party The run up in steel prices from the start of November 2010 was certainly impressive, with US petering out domestic hot rolled coil rising over 50% in a four month period and European equivalent offers up US$250/t, taking prices to the highest level since mid-2008. Much of this was undoubtedly driven by strong figures emanating from the manufacturing sector, with PMIs in highly expansionary territory allowing forward stocking of material backed by confidence in future demand. However, such periods of rapid margin expansion have historically been short lived. With PMIs, though still expansionary, now trending downwards and manufacturing preparing for slower growth rates, the desire to add to steel positions has now reversed. Furthermore, that large arbitrage that had built up between Asian and US/EU prices was undoubtedly unsustainable, particularly when the differential in utilisation rates suggested the converse should be true. In recent weeks, European HRC prices have fallen ~US$100/t (12%), with US prices down US$80/t, and we see further downside in the near future. China running Every year seems to bring around market doubts that China‟s steel industry can continue to strong, but current grow rapidly, and yet again steel output has surprised on the upside. Jan-Apr production has run rate unlikely to averaged 707.5mtpa, 2.5% above our full year forecast of 690mtpa. However, we have yet to be maintained see the full effects of monetary tightening come through in end demand, while the typical stock cycle of building inventory ahead of Chinese New Year was amplified this year by the need to make up for Q4 2010 production curtailments. With real demand set to fall sequentially and the export arbitrage closing, we expect to see production and apparent demand ease back into Q3 before reaccelerating out of it. Steel still at the At the current time, steelmakers are having to pay record high raw material prices for both mercy of raw iron ore and met coal, putting strong upward pressure on production costs. Despite the fact materials that freight rates are less than 1/5 of that seen in mid-2008, raw material costs for spot purchasers have now matched the levels seen during this period, while those for contract buyers are over US$100/t higher. The fact remains simple – with raw materials now above 70% of production costs to hot rolled product for the average steelmaker, without effectively managing risk from movements in raw materials, earnings in the sector will continue to be very much unpredictable. In this cycle, the result has been falls in „immediate‟ margins (today‟s prices for both raw materials and steel directly compared, no lag) by around US$150/t for contract buyers from the 1st of April. With prices continuing to slide as apparent steel demand moves past the peak, further margin compression is likely in the coming monthsFig 68 Falling steel prices and record high raw Fig 69 The strength in US steel prices led to a massivematerials are compressing steel margins in Q2 premium over Chinese material, we expect this to close Steel price minus raw material costs 1400 Chinese dom estic HRC 700 1200 US dom estic HRC 600 1000 500 400 800 $/tonne $/tonne 300 600 200 400 100 0 200 Nov-08 Nov-09 Nov-10 May-08 May-09 May-10 May-11 Jan-08 Mar-08 Jul-08 Sep-08 Jan-09 Mar-09 Jul-09 Sep-09 Jan-10 Mar-10 Jul-10 Sep-10 Jan-11 Mar-11 0 May-05 May-06 May-07 May-08 May-09 May-10 May-11 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Using contract raw material costs Using spot raw material costsSource: Platts, CRU, WSD, Macquarie Research, May 2011 Source: CRU, Mysteel, Macquarie Research, May 201117 May 2011 28
    • Macquarie Research Commodities Compendium Adding sufficient One of the most interesting steel market drivers in coming years is likely to be changes in steel capacity a trade flows. Rapidly developing countries – even those blessed with resources of key raw challenge for many materials such as India and Brazil – are struggling to add steel capacity to meet their needs. developing By 2016, we see India being a net importer to the tune of 13mt, Latin America 16mt, Middle countries East 27mt, Africa 24mt and Asia ex-China, Japan and India 51mt. These flows will become more important price drivers, and offer opportunities for key exporters to secure volumes. Demand growth still With strong economic growth in emerging markets, and many countries running into capacity set to be above constraints, the medium-term outlook for steel demand continues to look good. While growth trend, with OECD rates are set to decelerate as Chinese demand moves into a sub-GDP phase, we still forecast construction giving growth above the 20-year CAGR average of 3.1% through 2016. Furthermore, this is based upside on only a slow rebound in the OECD, to levels below that seen prior to the global financial crisis. Any significant rebound in OECD construction – the most notable absentee from steel demand over the past two years – provides further demand upside.Fig 70 Steel supply and demand balance (crude steel basis, million tonnes)000 tonnes 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016fWorld Consumption 1349 1201 1420 1510 1591 1653 1721 1792 1856% Change Y-o-Y -0.3% -11.0% 18.3% 6.3% 5.4% 3.9% 4.1% 4.1% 3.6%World Production 1331 1231 1426 1512 1598 1658 1721 1783 1831% Change Y-o-Y -1.8% -7.5% 15.8% 6.0% 5.7% 3.7% 3.8% 3.6% 2.7%Balance -18 30 6 2 8 5 0 -8 -25Prices 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016fGlobal average HRC ($/t) 878 528 653 794 802 808 780 768 754Source: worldsteel, Macquarie Research, May 2011Fig 71 Chinese steel output has been much higher Fig 72 Inability to build capacity on time looks set tothan expected, but we expect the next leg to be down leave India as a large net importer of steel CISA 10 day production data 725 Indian net steel exports 710 708 704 702 5 698 695 692 705 685 Crude steel production (mtpa) 662 0 654 652 665 million tonnes 631 645 624 -5 619 616 625 610 600 594 605 587 584 -10 585 570 571 565 -15 545 525 -20 1-10 Nov 11-20 Nov 21-30 Nov 1-10 Apr 11-20 Apr 21-30 Apr 1-10 Dec 11-20 Dec 21-31 Dec 1-10 Mar 11-20 Mar 20-21 Mar 1-10 Jan 11-20 Jan 21-31 Jan 1-10 Feb 11-20 Feb 21-28 Feb 1-10 Oct 11-20 Oct 21-31 Oct 2010f 2011f 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2005 2006 2007 2008 2009Source: CISA, Macquarie Research, May 2011 Source: GTIS, Macquarie Research, May 2011Fig 73 Strong leading indicators in early 2011 looksto have prompted a restock, we foresee a destock Fig 74 Global steel consumption growth looks set tointo Q3 stay above long term norms through our forecast period 40% 20% Steel Consum ption 18.3% 30% 18% YoY consumption growth Industrial Production YoY change - World 16% 20% 14% 20 year CAGR 10% 12% 0% 10% -10% 8% 6.3% 6% 5.4% -20% 3.9% 4.1% 4.1% 3.6% 4% -30% Jan-07 May-07 Jan-08 May-08 Jan-09 May-09 Jan-10 May-10 Jan-11 Sep-07 Sep-08 Sep-09 Sep-10 2% 0% 2010 2011f 2012f 2013f 2014f 2015f 2016fSource: worldsteel, GTIS, Ecowin, Macquarie Research, May 2011 Source: worldsteel, Macquarie Research, May 201117 May 2011 29
    • Macquarie Research Commodities Compendium Iron Ore Can‟t ignore the cost inflation We consider iron We believe iron ore remains undervalued as a commodity, as a combination of factors is likely ore to be strongly to cause the supply side to underperform in the medium term. The robust growth in iron ore undersupplied demand in recent years has strained seaborne supply to the limit; and, as with many other commodities, China has mobilised its own resources in order to prevent raw material availability from becoming a bottleneck to economic growth. This material is typically low grade (Fe levels which simply would not be mined anywhere else) and thus high cost. Of the 300mt (62% basis) of ore production in China at present, we estimate only 100mt would be present in an equilibrium market environment, and thus one could say that the iron ore market is undersupplied by about 200mtpa. Seaborne trade set Even in the short term, seaborne supply is stretched to the limit. In Q1 2011 Australian to be down in H1 exports were down 12% QoQ with Brazil down 16% over the same period, both hampered by 2011, limited growth heavy rains during the quarter. Furthermore, Indian exports have been down YoY for 11 in H2 consecutive months, and in Jan-Apr 2011 we have already lost 12mt of Indian supply YoY. We do see some recovery in H2, but very limited increase to seaborne capacity in this period. Steel pullback will With the importance of spot sub-market dynamics on overall pricing, the likely moderation in drag price down, but China‟s iron and steel output into mid year will be felt by the small Chinese mills, who remain inventories are the marginal buyers in the marketplace. However, any destock is likely to prove short-lived already low this time round, as inventories held by small mills are low, at around the 30 days of use mark. Therefore, we think iron ore will stabilise at a level above US$150/t CFR China, before reaccelerating into Q2. Chinese domestic With seaborne supply struggling to deliver, we think in excess of 300mtpa of Chinese cost inflation still domestic ore (62% basis) will be needed to balance the iron ore market through 2013, before crucial to the iron new projects erode this requirement. While such volumes are required, the market remains ore outlook critically tight, and iron ore is likely to trade at a level to make even the marginal tonnages viable to extract. Moving forward, two crucial factors are at play. From 2012 onward, slightly less Chinese domestic ore should be needed to balance the market each year. However, the amount that is left in the market is inflating at a very fast rate, likely to be around 6% per annum (mining inflation in China has been running close to 20% pa for the past couple of years). Therefore, we still see the spot price being well underpinned by the cost structure of Chinese domestic ore at around US$150/t in 2015 – well above market expectations. Fig 75 Seaborne trade has struggled thus far in Fig 76 With seaborne supply growth struggling, 2011, with Australian and Brazilian shipments down Chinese domestic ore is not being displaced fast enough Monthly seaborne trade in iron ore Required Chinese domestic iron ore output 100 400 To China To ex-China million tonnes per month, 3MMA 90 350 80 million tonnes, 62% basis 300 70 60 250 50 200 40 30 150 20 100 10 50 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 0 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f Source: Platts, Macquarie Research, May 2011 Source: NBS, Macquarie Research, May 2011 Ever-rising capital One of the key stories running through the iron ore sector is the surge in capital intensity, intensity pushing up which has more than doubled in the past five years and reaccelerated again into 2011. This incentive price has been highlighted in BHP‟s recent announcement that its expansion to 220mtpa in the required for new Pilbara will come in at capex of US$180 per tonne of annualised capacity. In pushing capital projects cost inflation through our incentive price calculation for a West African project funded by the Chinese, this has necessitated a 12.7% increase in our long run price to US$80/t CFR China.17 May 2011 30
    • Macquarie Research Commodities CompendiumFig 77 Iron ore supply and demand balanceIron Ore Summarymillion tonnes 2009 2010 2011f 2012f 2013f 2014f 2015f 2016fEx-China Seaborne Demand 270 376 394 404 410 414 417 423YoY change (mt) -122 107 18 10 6 4 3 6% Change y-o-y -31.2% 39.6% 4.8% 2.5% 1.5% 0.9% 0.8% 1.4%Total Chinese demand (62% basis) 895 963 1028 1088 1131 1175 1217 1261Total contestable market demand 1165 1339 1422 1493 1541 1589 1634 1685SupplyTotal Seaborne Supply 938 1042 1089 1157 1245 1334 1410 1483% Change y-o-y 10.9% 11.0% 4.6% 6.3% 7.6% 7.1% 5.7% 5.2%Required Chinese domestic ore (62% basis) 226 298 333 335 296 255 224 202Price ForecastsSpot fines CFR China (62% Fe) 143 147 178 178 176 163 155 140Source: Trade data, Macquarie Research, May 2011Fig 78 We see the iron ore price trading well above Fig 79 Indian supply continues to disappoint, downthe current forward curve into the medium term 12mt YoY in the first four months of 2011 YoY growth in Indian export volumes 200 140% 190 120% 180 100% $/tonne CFR China 170 80% 160 60% 150 140 40% 130 SGX forw ard curve 20% 120 Macquarie forecast 0% 110 -20% 100 -40% Jul-11 Oct-11 Jul-12 Oct-12 Jul-13 Oct-13 Jan-12 Jan-13 Apr-11 Apr-12 Apr-13 -60% Oct-08 Oct-09 Oct-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Apr-08 Apr-09 Apr-10 Apr-11Source: SGX, TSI, Macquarie Research, May 2011 Source: Shipping sources, Macquarie Research, May 2011Fig 80 Monthly moves in the iron ore price have Fig 81 Iron ore inventory at small Chinese mills is low inconsistently moved in the same direction as demand days of use, preventing any prolonged destock MoM % change in Chinese steel and iron ore prices Iron ore inventory (small mills) and spot prices 25% 45 200 Change in iron ore price Spot iron ore prices - 62% Fe, CFR Change in steel output 43 Iron ore inventory - days of use 20% 190 41 15% 180 39 10% 37 170 China 35 5% 160 33 0% 31 150 29 -5% Iron ore inventory 140 27 Spot iron ore prices -10% 25 130 03/09/2010 03/10/2010 03/11/2010 03/12/2010 03/01/2011 03/02/2011 03/03/2011 03/04/2011 03/05/2011 -15% May-10 Mar-10 Apr-10 Aug-10 Nov-10 Mar-11 Jan-10 Feb-10 Jun-10 Jul-10 Sep-10 Oct-10 Dec-10 Jan-11 Feb-11Source: Company reports, Macquarie Research, May 2011 Source: Macquarie Research, May 201117 May 2011 31
    • Macquarie Research Commodities Compendium Manganese Prices fall under weight of strong supply, high stocks Manganese is used mainly in the production of manganese ferroalloys for steelmaking. We estimate that ~94% of world manganese ore mine output is used to produce manganese ferroalloys (including manganese ore used in the production of electrolytic manganese metal). As a result demand for manganese is driven by steelmaking. Manganese is used Manganese has three uses in steelmaking: mainly as an alloy 1. As an alloying agent to achieve specific metallurgical properties in finished steel products. and to “fix” residual Manganese increases tensile strength, toughness, hardness, wear resistance and machinability sulphur in (although it also reduces ductility and weldability) and this is its main use in steelmaking today. steelmaking 2. To “fix” residual sulphur impurities originating from the raw materials used in steelmaking. Since hot metal desulphurisation is standard practice in steelmaking today use of manganese for this purpose has fallen from past levels. However, manganese remains essential for fixing the residual sulphur that remains in all steelmaking and there are no substitutes. 3. Historically manganese has been used to “kill” (de-oxidise) steel but has mainly been replaced in this role by aluminium and silicon today. Rising steel production has driven a recovery in demand for manganese ore and ferroalloys, which in the first half of last year was sufficient to lift prices with spot manganese ore into China trading to over US$8/dmtu CIF in Q2 2010. Since then, however, prices have come under pressure and fallen almost continually over the last 12 months (Fig 82). The initial weakness through the second half of last year can be attributed to the sharp reduction in steel output in China, which swung from an annualised rate of ~670mt in April to an annualised rate of only ~570mt in October 2010. Manganese ore China‟s crude steel production has recovered, however, and in recent months has been prices fall sharply in running at new record levels of over 700mt annualised but this has not been sufficient to 2011 arrest the fall in prices for manganese ore. Indeed, in May, BHP Billiton announced it was reducing prices for June shipments of medium-grade (43–44% Mn) lump ore by US70¢/dmtu (12%) to US$5.30/dmtu CIF China. Prices for low-grade carbonate ores (37–38% Mn) from South Africa have fallen even further by US100¢/dmtu (17%) to US$4.80/dmtu CIF China. Manganese ore prices at these levels will leave little margin for high cost producers in our opinion. The reason for the fall in prices appears to be strong supply, reflected in rising levels of reported stocks. Chinese port stocks of manganese ore increased by 3.5% MoM to 3.9mt gross weight (wet basis) in April, which was more than double the level of the corresponding month a year ago (Fig 83). The outlook over the next three to six months appears to be quite bleak with most major producers and traders expecting prices to be flat at best.Fig 82 Mn ore spot prices fall sharply… Fig 83 …as stocks continue to build at ports in China 9 4 m tonnes wet gross weight 8 US$/dmtu CIF China 3 7 2 6 1 5 0 A 2010 A 2010 A 2011 J 2010 F 2010 J 2010 J 2010 O 2010 S 2010 N 2010 D 2010 J 2011 F 2011 M 2010 M 2010 M 2011 A 2010 A 2010 A 2011 J 2010 F 2010 J 2010 J 2010 O 2010 J 2011 S 2010 N 2010 D 2010 F 2011 M 2010 M 2010 M 2011Source: CRU, May 2011 Source: IMnI, Macquarie Research, May 201117 May 2011 32
    • Macquarie Research Commodities CompendiumFig 84 China drives forecast rise in crude steel output Fig 85 Rising intensity of manganese use in steel 2,000 7.0 1,750 6.8 6.8 3YMA, kg Mn / tonne steel 1,500 ROW 1,250 m tonnes USA 6.6 1,000 Japan 750 EU-27 6.4 China 500 6.2 6.3 250 0 6.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 2011F 2012F 2013F 2014F 2015F Source: Note: excludes EMM and direct-charged Mn oreSource: worldsteel, Macquarie Research, May 2011 Source: IMnI, worldsteel, Macquarie Research, May 2011Fig 86 Manganese content of selected steel products Stainless 200 series 9.0% Extra high-strength auto sheet 2.0% High strength plate 1.5% API-grade plate 1.4% Rail 1.2% API seamless 1.0% Stainless 300 / 400 series 1.0% Engineering steels 0.9% High-strength auto sheet 0.9% Mild carbon steel long 0.7% Mild carbon steel flat products 0.5% Mild auto sheet - exposed 0.4% Mild auto sheet - non-exposed 0.4% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Average Mn contentSource: Macquarie Research, May 2011 Medium term However, the medium term outlook for manganese ore prices is more promising. Demand outlook for is forecast to rise as a function of both increasing crude steel production (Fig 84) and greater manganese ore intensity of manganese use in steelmaking on average (Fig 85 and Fig 86). However, a prices is brighter return to the double-digit price levels of 2008 appears improbable.Fig 87 Manganese ore prices fall this year before moderate recovery over the next two-to-three years 16 14 12 US$/dmtu CIF China 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Note: prices are for medium grade (43%-44% Mn) lump oreSource: CRU, Macquarie Research, May 201117 May 2011 33
    • Macquarie Research Commodities Compendium Metallurgical coal Easing back towards normal in a post-supply shock world Pricing slowly The US$330/t Q2 contract settlement was certainly a „supply shock‟ price, but even with the easing back, but tight general fundamentals, the met coal market is at a level unlikely to be sustained. As ongoing effects supplies have started to flow from flood-afflicted Queensland back into the global market so from Queensland the pressure has been eased slightly, while recent weeks have seen a pullback in interest floods still felt from key purchasers in the seaborne market. As is often the case, the effect is being felt first in the semi-soft and PCI markets, with the discount to hard coal set to widen in the near term. China’s reactivity in The supply disruptions through Q1 have stretched the coal chain to the limit, such that quite altering net trade simply there hasn‟t been enough to go around. China‟s self-sufficiency coupled with a milder- position has than-expected winter has allowed Chinese buyers to steer away from seaborne purchases to alleviated pressure a great extent, and thus yet again China has stabilised a commodity market. Moreover, when on the market the effect of rising coke exports is taken into account, China underwent a substantial shift in 1Q to a small net exporter of met coal product in March in order to take advantage of the pricing arbitrage available into the undersupplied international market. While impressive, in our view this is unsustainable (particularly with steel output at high levels), as coal/coke stocks have been drawn down and exports of primary energy are not looked upon favourably by the government. If such volumes were to be maintained, an increase in the coal export tax may swiftly follow. However, short term, price driven net trade swings from China will likely be commonplace in tightly balanced markets into the future Fig 88 The hard coking coal spot price jumped Fig 89 Even with supplies coming back, Australian post-Queensland, but is now starting to wane exports are likely to be down YoY in 2011 YoY growth in seaborne met coal supply 400 40% 35% 350 33% 35% $/tonne FOB Australia Premium HCC Spot Assessment 30% 300 25% 20% 15% 250 9% 10% 5% 5% 0% 200 - -5% -2% -4% 150 -10% 02-Aug 02-Apr 02-Apr 02-May 02-May 02-Jul 02-Jun 02-Jan 02-Oct 02-Mar 02-Nov 02-Dec 02-Sep 02-Feb Australia Canada US Russia Indonesia Other Mongolia Source: Platts, Macquarie Research, May 2011 Source: GTIS, Macquarie Research, May 2011 Key to pricing in Even with a strong response from US export volumes and China disappearing from the coming quarters is market, the 12mt drop in Queensland supply vs. expectations this far in 2011 has led to a how quickly dramatic destock at all points in the chain. A mid-year lull in steel output should allow a depleted inventories degree of replenishment, however given our expectation that blast furnace production should are replenished reaccelerate out of Q3 inventories are likely to remain below critical levels. While this situation prevails, prices for hard coking coal are likely to trade above „equilibrium‟ levels. No easy solution to Our supply/demand balance suggests that, even with the strong growth in Australian and Queensland greenfield exports, the market overall remains in small annual deficit in the coming years. The overreliance lack of strong, geographically diverse supply response is the prime reason metallurgical coal remains our favourite bulk commodity on a longer-term view. We do factor in strong growth from Mongolia, Mozambique and Indonesia in coming years, however with over 50% of future seaborne growth coming from Australia the importance of Queensland cannot be diluited. Ongoing potential In our view, the new „normal‟ through the medium term is a US$225–250/t FOB Australia for supply shocks price for hard coking coal, well above cost support, with brand sensitivity from Japanese drives security buyers driving an increasing „premium for premium‟. Meanwhile, rising capital cost for new premium projects has seen our long run price rise US$10/t to US$145/t FOB Australia for hard coking coal.17 May 2011 34
    • Macquarie Research Commodities CompendiumFig 90 Seaborne met coal demand and supply 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016FMet coal demand (mt)Europe 68 44 64 65 68 70 71 71 73China 3 37 38 30 44 50 54 55 59Asia ex-China 118 102 134 141 149 152 157 161 167Brazil 12 11 14 14 16 16 17 18 19Other 21 12 16 19 19 21 22 24 26Total Demand 223 206 266 269 295 309 321 330 344% change 3.4% -7.7% 29.3% 1.1% 10.0% 4.7% 3.6% 2.9% 4.2%Met coal supply (mt)Australia 135 131 159 153 171 179 182 190 202Canada 25 20 26 26 27 28 32 32 32USA 35 31 48 52 52 52 52 52 52Other 27 23 33 36 40 44 51 57 52Total Supply 223 206 266 268 290 304 317 331 339% change 3.4% -7.7% 29.3% 0.7% 8.5% 4.7% 4.2% 4.5% 2.4%Notional Balance - - - -1 -5 -6 -4 1 -5Price ($/t FOB Aus) 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016FHard Coking Coal 300 129 215 303 264 236 223 215 205Source: GTIS, Macquarie Research, May 2011Fig 91 Two elements of the met market in Q1 2011 Fig 92 …but it is really the swing in Chinese net tradeare likely to repeat in coming years – firstly US position which has been the big stabilising shift – lookexports have again swung to the rescue … for more price-driven shifts in future US met coal exports by quarter mt annualised Chinese seaborne met coal net mt annualised 16 exports 14 50 50 New base level 12 30 30 Quarterly exports (mt) 10 Crossover coal 10 10 8 Premium coal base level -10 -10 6 Coal in Coke exports -30 Imports -30 4 Exports -50 Net exports -50 2 - -70 -70 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 M ar 03 M ar 05 M ar 07 M ar 09 M ar 11Source: Customs data, GTIS, Macquarie Research, May 2011 Source: China Customs, Macquarie Research, May 2011Fig 93 The response from Chinese domestic coal Fig 94 A pullback in iron and steel output in keyproduction to increased demand was impressive demand regions may allow some degree of stock rebuild Chinese apparent production of coking coal Changes in blast furnace output 10% 550 536 8% 511 6% QoQ growth 492 493 493 500 482 4% 472 463 460 469 460 2% 457 Annualised mt 450 - 428 429 -2% 413 412 -4% 400 -6% 352 -8% 350 -10% Q111f Q211f Q311f Q411f 300 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Western Europe Japan WorldSource: NBS, Macquarie Research, May 2011 Source: worldsteel, Macquarie Research, May 201117 May 2011 35
    • Macquarie Research Commodities Compendium Thermal Coal China holds sway into summer There has been an incredible amount of activity in thermal coal markets over the past few months. Supply disruptions in most parts of the world in early 2011 gave way to the ructions created by the Tohoku earthquake in Japan. This had a huge impact on Japanese appetite for coal in the short term and knocked contract pricing to a lower than previously expected level, although the agreed price of US$129.85/t is still a record and a very good result for the miners in light of the recent drop to ~ US$115-116/t. And while we think it may take some time to recover lost tonnages, it‟s still clear that JPUs are still willing to pay a large premium for coal. Net impact of the The indirect impact of the Japanese disasters has also been significant, particularly in Japan disasters is Europe. Natural gas prices have tended to be a little higher than they otherwise would have bullish for coal in been given the expected pick up in Japanese LNG imports, while a change in tune on the medium term Nuclear phase out policy in German looks to have increased the burden on coal. The net affect seems to be that while there may have been some tonnes lost, coal demand should be higher than it otherwise would be in the medium term. Fig 95 Chinese domestic market heats up, Newcastle coal close to pricing into China 150 Thermal coal prices delivered Southern China 150 140 140 Price ($/t, delivered China) Price ($/t, delivered China) 130 130 120 120 110 110 100 100 90 90 QHD delivered 80 80 Guangzhou ex stock 70 Newcastle Delivered 70 60 60 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Source: sxcoal, globalCOAL, Macquarie Research, May 2011 China has come The future of the seaborne market, however, does not lie with established markets in Japan back to the market or Europe, but with emerging countries like China, India and Indonesia. This has come right as domestic back into view, with recent developments in the Chinese domestic market now having markets tighten into considerable bearing on the seaborne market. We would be relatively neutral on Newcastle summer pricing now that it has come down to ~ US$116/t in the prompt, as it is now quite close to pricing into China, where the risk to domestic prices appear to the upside. While China has been garnering all the attention, we understand that Indian imports have also been extremely strong in the last couple of months and this is providing a solid foundation to the Indonesian sub-bit market. The coming monsoon season could bring a period of subdued interest from India, particularly if last year‟s weather conditions are repeated. But nonetheless, it is encouraging to see the pillars of future demand performing strongly as supply is coming back into the market. In the longer term, the market looks to be finely balanced over the forecast horizon. While we estimate prices coming down towards the long-run price over the next five years, the market is vulnerable to even small shifts in supply from disruption or larger than expected demand. This shifts the balance of risks to the upside to our forecasts in the event of such a shock.17 May 2011 36
    • Macquarie Research Commodities Compendium Fig 96 Seaborne Thermal Coal Demand and Supply demand (mt) 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F Atlantic 225 201 180 200 207 218 224 226 China 35 80 114 109 112 112 118 125 India 36 60 75 88 109 121 130 146 Other Pacific 316 312 343 345 358 389 407 419 Total Demand 612 653 712 742 786 840 879 915 % change 0.9% 6.6% 9.1% 4.2% 5.9% 6.9% 4.6% 4.0% Supply (mt) Australia 126 139 141 147 174 193 208 225 Indonesia 200 233 284 289 302 324 342 362 China 36 18 14 14 14 14 14 14 South Africa 62 65 69 69 73 77 80 80 Russia 72 82 85 85 89 91 91 91 Colombia 69 63 70 72 85 90 92 96 Other 48 52 50 48 47 51 53 54 Total Supply 612 653 713 723 784 839 879 921 % change 0.9% 6.6% 9.2% 1.4% 8.4% 7.1% 4.8% 4.8% Notional Balance - - - -20 -3 -2 - 6 Price ($/t FOB) JPU contract 125.0 70.0 98.0 129.9 120.0 100.0 95.0 95.0 Source: GTIS, Macquarie Research, May 2011 Fig 98 Lower CV coal is starting to price moreFig 97 API#2 takes the lead competitively Month ahead forward Coal prices Energy adjusted discount for 140 140 Indonesian Sub-bit coal (4,900 25% kcal/kg) 130 130 20% 120 120 15% (USD/t) (USD/t) 110 110 10% 100 100 Delivered Europe FOB South Africa 5% 90 90 Newc FOB 80 80 0% Jun 09 Nov 09 Apr 10 Sep 10 Feb 11 Sep 10 Nov 10 Jan 11 Mar 11 May 11Source: GTIS, Macquarie Research, May 2011 Source: globalCOAL, Macquarie Research, May 2011Fig 99 Seaborne supply still stagnant Fig 100 Restocking in UK provides Europe upside 70 50% UK stocks at power stations 24 Utility stocks (mt hard coal) 65 % change yoy 40% 22 World demand 60 20 % change YoY (3MMA) 55 30% 18 Millinnes on t o 16 50 20% 14 45 12 10% 40 10 35 8 0% 6 30 Jan May Aug Apr Feb Jun Sep Dec Jul Mar Oct Nov -10% 25 20 -20% 2007 2008 2009 2005 2006 2007 2008 2009 2010 2011 2010 2011Source: sxcoal, Macquarie Research, May 2011 Source: McCloskey, globalCOAL Macquarie Research, May 201117 May 2011 37
    • Macquarie Research Commodities Compendium Oil More upside than downside risk to our bullish 2011-13 forecasts Consensus thinking about oil markets is about US$10-US$15 more bearish than us. Many expect that 2010‟s soaring oil demand growth will decelerate to below trend this year. Consensus also would have one believe that political upheaval across the Middle East and North Africa will subside and oil supplies should quickly return to normal. We fundamentally disagree with both these strands of thought. We forecast that Brent oil futures will average about US$117/b this year, as they rebound to around US$120/b in 3Q and a little higher still in 4Q 2011. We expect to see uncomfortably low spare capacity through 2013 and prices therefore sustained near US$120/b – as that level theoretically suffices to bring down oil demand growth (Fig 101). Fig 101 Macquarie‟s oil price forecasts (unchanged from March 2011) Q410A 2010A Q111A Q211E Q311E Q411E 2011E 2012E 2013E Long Run WTI US$ 85.31 79.58 94.42 112.00 118.00 114.00 110.00 115.00 117.00 90.00 Brent US$ 87.45 80.32 105.52 116.00 121.00 124.00 117.00 120.00 119.00 88.00 Futures 114.77 113.73 112.56 112.55 107.87 103.67 Tapis US$ 92.31 83.83 109.28 120.00 125.00 128.00 120.50 123.50 122.50 92.00 Dubai US$ 84.56 84.56 100.48 112.00 117.00 120.00 112.00 115.00 114.00 86.00 Source: Bloomberg, Macquarie Research, May 2011 Strong global oil demand growth Oil demand: EM We forecast more than 2% global oil demand growth this year, about 70bps more than trend. trend adds to slow, Across emerging markets we see expansion rates slowing from their „flattered‟ 6% pace in cyclical recovery in 2010 to 3.5% this year. In our forecast, tightening macro-policy decelerates growth in several OECD key economies. First quarter data show EM growth of +4.5% and suggest that once again we‟re too cautious. What‟s more, risks include potential diesel demand surges in China, Iraq and elsewhere for power-generation. And there is as yet little to no evidence of „demand destruction‟ driven by relatively high prices. Across the more mature economies of the OECD we expect to see modestly higher oil demand (+1% this year vs +1.2% in 2010). The drivers are extension of the sluggish recovery across North America and modestly higher oil demand in Japan driven by reconstruction efforts (diesel) and higher oil use in powergen (fuel and crude oil). Europe‟s recovery, meanwhile is largely oil neutral. Our forecast of modest growth in OECD oil demand is the biggest single difference between us and official forecast from the International Energy Agency, Opec and the US Dept of Energy. Supply risk, tight spare capacity and politics support high prices Supply side risk & Spare capacity for the global system is shrinking from the very generous 5mb/d (6%) cushion shrinking spare of early 2009, to barely more than 3mb/d this summer, we think. And despite our greater than capacity consensus optimism on non-Opec production growth, that spare capacity count could shrink to near zero in the next year or two, in our balances, unless demand trends get curbed. Meanwhile, the shifting political landscape across the world‟s dominant oil exporting region entails unquantifiable supply risk. We cannot pinpoint when the next significant disruption of a part of the roughly 22mb/d of oil exports that flow from the Middle East and North Africa will hit markets. We do know that conflict across Libya has taken 1.5mb/d off the market. Conflicts across Yemen and Syria, the suppressed revolt in Bahrain and the aftermath of the power shift in Egypt threaten not supplies so much as they introduce fundamental uncertainty into regional power-structures. Any further disruption is upside risk to our forecast. We see US$120 oil, One easy to see consequence has been increased government spending across the wealthy if nothing else goes exporters of the GCC – which has driven Saudi Arabia‟s government budget break even oil wrong on either side price to US$90/b Brent, reports the Institute for International Finance (30 March 2011). And that prices rises to US$105/b (real 2010) by 2015. We strongly suspect that the so-called “comfort range” of oil prices has been ratcheted up to above US$100/b and that risks are coalescing to the upside, not the downside.17 May 2011 38
    • Macquarie Research Commodities CompendiumFig 102 Global oil demand, supplies and key inventories(Million barrels daily) 2007 2008 2009 Q3-10 Q4-10 Q1-11 Q2-11E Q3-11E Q4-11E 2010 2011E 2012EGlobal demand 86.9 86.2 85.6 89.6 90.2 89.1 89.6 91.6 91.8 88.6 90.5 92.5YoY change 1.8% -0.8% -0.7% 4.4% 3.6% 2.5% 2.2% 2.2% 1.8% 3.5% 2.2% 2.2% Less non-Opec supply 50.8 50.6 51.4 52.4 53.2 53.0 53.1 53.2 54.1 52.6 53.4 54.4 Less Opec non-crude 4.3 4.3 4.7 5.4 5.3 5.2 5.5 5.6 5.6 5.2 5.5 5.7 Less Iraq 2.0 2.3 2.4 2.4 2.5 2.7 2.7 2.8 2.9 2.5 2.8 3.2 =Call on Opec11 & inventory 29.8 28.9 27.1 29.4 29.2 28.2 28.4 30.0 29.2 28.4 28.9 29.2Less actual / Est. Opec-11 28.9 29.4 26.8 27.9 27.5 27.4 28.0 28.6 28.8 27.5 28.2 29.4Implied inventory change -0.9 0.5 -0.3 -1.5 -1.7 -0.8 -0.4 -1.4 -0.3 -0.9 -0.6 0.1Reported inventory surplus to 5yr norm (mbls)* +11 +137 +74 +81 +52 +34Stocks demand cover (days) 52.1 57.5 57.6 58.6 57.5 57.8 56.2 54.3 54.1 57.5 54.1 54.0 *Includes Independent storageSource: IEA, Macquarie Research, May 2011 Fig 104 New Saudi budget a key factor in oil costFig 103 Our forecasts in context curve 160 US$/b $100 Brent US$/b 140 $80 120 Saudi budget BEP $60 US$88/b 100 80 $40 60 $20 Canada oil sands IRR 10-15% 40 mb/d $- 20 0 10 20 30 40 50 60 70 80 90 100 12/1/2003 12/1/2005 12/1/2007 12/1/2009 12/1/2011 12/1/2013 Brent mthly Macquarie fcast Global depression Scarcity by 2012 Futures futures - 1mthSource: Bloomberg, Macquarie Research, May 2011 Source: Bloomberg, Macquarie Research, May 2011Fig 105 Emerging market oil demand growth Fig 106 In volume terms, EM consumption closing indecelerates, OECD oil use recovers into 2H11 on OECD 10% 51 mb/d mb/d 94 Yo Y %chg 8% 6% 47 90 4% 2% 43 86 0% -2% 39 82 -4% -6% Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 35 78 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-1 Dec-1 Jun-1 Dec-1 0 0 1 1 OECD EM Glo bal Est OECD Est EM Est Glo bal OECD No n-OECD Est OECD Est no n-OECD Glo bal (rhs) Est Glo bal (rhs)Source: IEA, Macquarie Research, May 2011 Source: IEA, Macquarie Research, May 201117 May 2011 39
    • Macquarie Research Commodities Compendium Gold Continued strength, biggest hurdle coming closer into view Gold has continued to advance in early 2011, with its ascent in the first stages of this year in US$ terms not dissimilar to what was observed in 2010. The big difference at the start of this year is that gold‟s strength is mostly a function of dollar weakness. In 2010, the opposite was true, as the market grew increasingly concerned about the emerging sovereign debt issues in Europe. Whether gold remains locked to the current relationship with the US dollar is not clear given this relationship tends to be vulnerable to unexpected change. Although it is significant that despite headlines of concerns surrounding long term US credit ratings and tightening the Euro Area, gold‟s relationship with the dollar has been fairly consistent since QE2 first began to be priced into markets back in August last year. . A change in tack in The big hurdle to the current bull run in gold for many is the normalisation of monetary the US monetary policy US. It seems likely at this stage that first an end to quantitative measures and a gradual shift is the big challenge towards removing accommodative policy settings by the Fed is increasingly coming into view to the current notwithstanding recent market wobbles. Gold may already have passed the first test heading bull run towards this event, with the gold price remaining strong despite the fact that real yields at the longer-end of the yield curve have stopped falling and risen somewhat . Nonetheless a change in US policy will be the most important litmus test for gold. Fig 107 Gold has continued to rise despite real rates not rising and has tracked the US dollar‟s decline since QE2 Gold price (LHS) % yield US$/oz US$/oz US$ BROAD INDEX vs GOLD 1600 10-yr TIPS yield 0 1600 2000 to mid- 1500 (inverted, RHS) 05 0.5 1400 1400 Mid 05- Sep 1300 1200 08 1 Oct 08 to End 1200 1000 09 1100 1.5 800 Short Euro 1000 Long Gold 2 600 QE2 900 800 400 2.5 700 200 600 3 90 100 110 120 130 May 07 May 08 May 09 May 10 May 11 USD Broad Index Source: Bloomberg, Macquarie Research, May 2011 Expectations on the US$ and interest rates do tend to underpin most views about the Policy elsewhere in direction for gold, but we would highlight that this alone can‟t explain why gold has been so the world is also strong since the bull run began. We think this is largely thanks to the impact that the critical to global emerging world and China in particular have had on financial markets over the past decade. liquidity growth While Chinese policy makers have tightened policy significantly within China, part of this is only to soak up the huge amount of capital inflows, with Chinese forex holdings rising 6.9%QoQ in 1Q11 to an astonishing US$3.04 trillion. This suggests that global liquidity growth remains very strong, with recent coordinated interventions in foreign exchange markets to stabilise the yen also helping to boost liquidity in global markets Very strong global liquidity growth is something that has affected many financial markets, but is something that is likely to have a larger effect on a scarce asset like gold. While global monetary conditions stay loose and facilitate such strong liquidity growth at a global level, it seems likely that gold will continue to strengthen. This will be challenged by a shift in interest rates in the US and/or appreciation in the RMB to a point where it is no longer seen as undervalued, although this will only decisively change the outlook.17 May 2011 40
    • Macquarie Research Commodities Compendium Fig 108 Gold demand-supply balance (tonnes) 2007 2008 009 2010 2011F 2012F 2013F Jewellery 2,417 2,193 1,759 2,017 2,098 2,182 2,269 Industrial 462 436 368 467 485 503 522 Coins 208 257 286 295 200 150 120 Bar Hoarding 236 244 645 531 880 550 500 Net producer de-hedging 444 352 254 103 60 -10 -10 ETFs 251 321 617 338 250 255 260 Total Demand 4,032 4,314 3,870 4,100 3,692 3,641 3,728 Mine production 2,473 2,409 2,589 2,689 2,743 2,770 2,798 Central bank sales 484 235 34 -73 -80 -80 -80 Gold Scrap 982 1,316 1,695 1,645 1,275 1,225 1,100 Total supply 3,939 3,960 4,318 4,261 3,938 3,925 3,828 Implied Investment -93 -354 448 161 245 284 100 Gold price $/oz 696.3 872.6 972.3 1225.8 1455 1350 1220 Source: WGC, Macquarie Research, May 2011Fig 109 Inflation appears to have turned in the US, Fig 110 Recent strength in gold is not reflected acrossalthough remains low all currencies % chg on prev yr US inflation % chg on prev yr US$ Euro A$ Swiss Franc 3.5 3.5 145 3.0 3.0 135 2.5 2.5 2.0 2.0 125 1.5 1.5 115 1.0 Implied break even inflation 1.0 CPI ex food and energy 105 0.5 Trimmed mean PCE deflator 0.5 0.0 0.0 95 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan 10 Aug 10 Mar 11Source: Ecowin, Macquarie Research, May 2011 Source: WGC, Macquarie Research, May 2011Fig 111 The continued surge in Chinese FXreserves suggests global liquidity remains very Fig 112 ETFs inflows have returned after losses instrong early 2011 Chinese foreign % of ann 4-week rolling % of fx reserves exchange reserves US$ billion demand ETF flows 3.0 3200 6.0% Gold % in gold 2.5 2700 5.0% Foreign exchange reserves 4.0% 2200 2.0 3.0% 1700 2.0% 1.5 1200 1.0% 1.0 0.0% 700 500t of gold needed -1.0% 0.5 200 to lift holdings to 2% -2.0% 0.0 -300 -3.0% May-10 Mar-10 Mar-11 Nov-10 Jul-10 Sep-10 Jan-11 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2000 2001 2003 2004 2006 2007 2009 2010Source: WGC, Macquarie Research, May 2011 Source: Bloomberg, Macquarie Research, May 201117 May 2011 41
    • Macquarie Research Commodities Compendium Silver Massive volatility created by huge swings in speculative interest Silver has been thrust into the spotlight recently following a massive surge in prices in April and a stunning capitulation, falling 30% in the space of a few days. The silver price still remains incredibly volatile with the risks still appearing skewed to the downside. The rise in margin requirements on futures by the CME have widely been blamed as the Huge shifts in Silver reason why silver has fallen so sharply. But it is worth noting that speculative interest via ETF holdings futures has not been particularly vibrant during the big rise in prices through April. To be sure, it seems that interest via ETFs has been more important, given the huge swings in holdings of physical metal, which have swung from massive inflows to a loss the equivalent of 3.3% of demand in the space of a week. Fig 113 Significant liquidation of silver ETF holdings in recent weeks % of ann 4-week rolling Gold/Silver Ratio demand ETF flows 85 85 5.0% Silver 3.0% 65 65 1.0% -1.0% 45 45 -3.0% -5.0% 25 25 Mar 10 Jul 10 Nov 10 Mar 11 2001 2003 2005 2007 2009 2011 Source: Bloomberg, Macquarie Research, May 2011 This suggests that it is really investment interest that is driving the rapid rising in silver prices more recently rather than any physical tightness from industry. There are some promising aspects of industrial usages such as the use of silver in electronics and solar photovolatic cells. But we would note that the rate of growth of demand from these sectors are likely to slow quite significantly in the short/medium term. For example, our solar analysts expect solar installed capacity growth to stagnate over the next couple of years after the massive subsidy induced boom in 2010. Tech-growth should also slow over the next few quarters after a surge at the end of 2010 Demand from China is another factor seen as supporting the gain in the silver price, but it is not well understood that silver for industrial use prices at a discount to LBMA pricing. This is so much so that zinc/lead smelters in China do not want to process high silver concentrates because they make a loss on the payable silver. This price differential does not appear to have changed as prices have pulled back. Silver is seen as a hedge against currency risk like other precious metals, but its relative performance is probably determined by more unique aspects of the metal like its industrial usages or relative supply constraints. The gold/silver ratio has pulled back sharply very recently after a large drop through April, which hasn‟t been an unusual event in the past ten years. It still remains relatively low in the context of historical averages and the strong growth in global IP from 2005 to early 2008. We therefore remain cautious on current prices for silver, with swings in investor appetite likely to continue to create significant volatility.17 May 2011 42
    • Macquarie Research Commodities Compendium Platinum and Palladium Looking for a more sprightly performance in 2H11 The performance of platinum group metals in the early stages of 2011 has been sluggish. Palladium has pulled back after explosive gains in 2010 while platinum has failed to gain any momentum in a falling US$ environment, with the platinum/gold ratio falling from 1.25 to 1.18. Rhodium prices have also remained very weak since the start of the year. With metals pricing sluggish and the South African Rand remaining strong, the PGM basket price that the average producer receives within South Africa has been able to gain any momentum albeit for a brief period when the Rand weakened. This price still seems unsustainably low in the longer run given the rising cost of sustaining marginal supply. Fig 115 PGM Basket price is not showing anyFig 114 Platinum has continued to be the laggard momentum Index, Aug 2010 = 100 Index, Aug 2010 = 100 Rand/oz PGM Basket Price US$/oz Precious metals 12,000 Rand Basket Price (LHS) 1,650 180 180 US$ Basket Price (RHS) 1,600 170 Gold 170 11,500 Platinum 1,550 160 160 11,000 1,500 150 Palladium 150 10,500 1,450 140 140 10,000 1,400 130 130 1,350 9,500 120 120 1,300 110 110 9,000 1,250 100 100 8,500 1,200 90 90 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Aug Sep Oct Nov Dec Jan Feb Mar Apr May 10 10 10 10 10 11 11 11 11 11 10 10 10 10 10 11 11 11 11 11Source: Chinese customs, Baltic Exchange, Macquarie, May 2011 Source: Chinese Customs, Baltic Exchange, Macquarie, May 2011 Japan disasters That said, we have not yet reached the point where low pricing has tilted the demand and impact on supply balance towards providing better incentive pricing. There have been concerns about auto production demand for PGMs following the natural disasters in Japan, which has had significant impact should be on global auto production. The impact on global auto production is not yet clear, but it does temporary appear for the year as a whole, production will be around ~1½ m autos lower than it otherwise would have been with annual growth slowing to ~4%YoY after an incredible 26%YoY gain in 2010. While there will be lasting impacts on auto demand within Japan as a consequence of the natural disasters, this will not have an impact on demand for autos elsewhere, with the outlook for Chinese auto consumption remaining robust and the recovery in the US remaining on track. Europe has also tended to be stronger than expected, with the strength of the German market helping to offset weakness elsewhere following the roll off of incentive schemes. Demand for commercial vehicles, which is an import segment for platinum has also proven to be much stronger than anticipated. Production of commercial vehicles rose over 40%YoY in 2010, and monthly data from Volvo (the world‟s second largest truck producer) suggests this momentum has been maintained in early 2011. With truck production still below 2007, there still seems to be plenty of upside to demand as the capex cycle gains momentum after the huge downturn in 2008/2009.17 May 2011 43
    • Macquarie Research Commodities CompendiumFig 116 Some loss of production from Japan quake, Fig 117 Truck demand should be an ongoing source ofbut demand outside of China not affected demand into 2012 Volvo truck deliveries (annualised) million vehicles Quarterly Global Auto production: Forecast Revisions 250 2007 22 2008 21 Jan-17 Mar-17 Apr-15 200 2009 20 8.3% 2010 150 2011 Thousands 19 12.9% 18 100 17 50 16 0 15 1 2 3 4 5 6 7 8 9 10 11 12 1Q11 2Q11 3Q11 4Q11 MonthSource: OICA, Macquarie Research, May 2011 Source: ETFSecurities, Macquarie Research, May 2011 The short-term ructions in auto production appear to have sapped investor appetite via ETFs in the past few months. Palladium holdings have fallen ~105 koz, after the big run-up in late 2010, while inflows into platinum ETFs have been steady, although unspectacular compared to that seen in other precious metals like silver. While the absence of ETF interest has weighed on prices, it does mean that the current entry point does not have a large speculative element overhanging the market. Where will the On the supply side, it does appear that supply for platinum will be down in 2011 relative to supply come from? 2010. The ramp up at Vale‟s Sudbury operation (which has already happened) is the only major expansion this year. The Unki project in Zimbabwe is the only greenfield operation due this year, while a recovery/ramp up at Everest should also make a significant contribution. But there is a void of large planned expansions in 2011 and 2012. Fig 118 Not much new Pt supply, vulnerable to supply disruptions Major changes in refined production (000s oz) -75 -50 -25 0 25 50 75 100 125 Lonmin 2011E Blue Ridge 2010 Crocodile River Everest Unki Vale Elands Rustenburg Norilsk Zimplats Implats Kroondal Mogalakwena -125 -100 -75 -50 -25 0 25 50 75 100 125 Source: Company reports, Macquarie Research, May 201117 May 2011 44
    • Macquarie Research Commodities Compendium Any other gains in supply will require improved operational performance, which will be very difficult to achieve. Safety has been a huge issue in South Africa at the start of 2011, with a significant rise in Loss Time Injury Frequency Rates across the industry, coupled with a more heavy handed approach by the DMR leading to longer stoppage times affecting entire minesites rather than individual shafts. This has meant production results have been patchy across the industry, although currently within our disruption allowance used in the model. Pt and Pd in deficit All this should mean the platinum market is in deficit this year after a small surplus in 2010. in 2011 and beyond We project further deficits into 2015, with the magnitude of these deficits potentially much larger if investors stockpile metal via ETFs, which we assume to be neutral over the forecast horizon. Fig 119 Platinum demand supply balance Mine Supply 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F SAf and Zim 4,695 4,865 4,932 4,885 5,105 5,365 5,575 5,700 Russia 805 785 787 798 790 790 790 790 North America 325 260 208 364 361 363 372 375 Others 115 115 125 120 120 120 120 120 Disruption allowance 0 0 0 -178 -186 -276 -286 -293 Total Mine Supply 5,940 6,025 6,052 5,988 6,189 6,362 6,570 6,693 Recycling 1,130 830 1,095 1,122 1,303 1,352 1,348 1,421 Demand Net autocatalyst 2,525 1,355 2,078 2,555 2,598 2,712 2,853 2,918 Jewellery 1,365 2,245 1,685 1,756 1,830 1,907 1,978 2,047 Chemical 400 290 450 445 440 435 430 425 Glass 315 10 380 381 397 414 432 450 Other 1,005 825 918 947 977 983 990 996 Investment 555 660 488 150 0 0 0 0 Total Demand 6,165 5,385 5,999 6,233 6,241 6,451 6,682 6,837 Surplus/Deficit -225 640 53 -245 -51 -88 -112 -144 Price (US$/oz) 1572 1206 1610 1836 1850 1750 1850 1900 Source: Johnson Matthey, Macquarie Research, May 2011 The challenges facing Platinum supply also extend to Palladium, although this is further confused by the Russian stockpile situation. We understand there may have been some stockpile material sold at the start of 2011, although this is likely to be small and shouldn‟t have been enough to eliminate the current deficit position. ETFs also present a huge uncertainty, with the current outflows of 105koz in stark contrast to the ~1000koz of inflows in 2010. We think investor appetite should return in 2H11, with ETF demand neutral to the market balance. Fig 120 Palladium demand supply balance Mine Supply 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F SAf and Zim 2,570 2,550 2,955 2,968 3,047 3,183 3,314 3,358 Russia 2,700 2,675 2,722 2,700 2,700 2,700 2,700 2,700 North America 910 755 677 920 965 980 1,035 1,108 Others 170 160 165 150 150 150 150 150 Disruption allowance 0 0 0 -122 -126 -131 -137 -140 Total Mine Supply 6,350 6,140 6,520 6,615 6,736 6,882 7,062 7,176 Russian Stockpile sales 960 960 1,000 0 0 0 0 0 Total Supply 7,310 7,100 7,520 6,615 6,736 6,882 7,062 7,176 Recycling 1,140 965 1,308 1,350 1,423 1,477 1,514 1,550 Demand Net autocatalyst 3,325 3,085 3,937 4,137 4,474 4,736 4,956 5,196 Chemical 350 325 364 371 378 386 394 402 Dental 625 615 606 598 553 517 487 446 Electrical 1,025 875 992 982 972 962 953 943 Jewellery 855 745 577 583 589 595 601 607 Investment 495 695 1,120 173 175 176 178 180 Total Demand 6,675 6,340 7,596 6,844 7,141 7,373 7,569 7,774 Surplus/Deficit 635 760 -77 -229 -406 -491 -507 -598 Price (US$/oz) 264 527 786 851 925 744 750 750 Source: Johnson Matthey, Macquarie Research, May 201117 May 2011 45
    • Macquarie Research Commodities Compendium Wheat Corn dominates grain complex, but concerning wheat conditions Adverse weather is In the 2010/11 season all of the world‟s major wheat exporters crops bar the US were limiting the supply affected by some form of weather event. These effects caused nervousness in the market at response to high a time of rising food inflation. And despite relatively comfortable global ending stocks, the prices market maintained the strong price gains originally inspired by last year‟s Russian drought. Looking forward to 2011/12, the producer reaction to high prices is going to be limited and not to the scale that was seen in 08/09. Prospects for the forthcoming season began getting constrained by adverse weather events affecting winter planting across the FSU. As we have moved into the spring, with winter wheat crops just coming out of dormancy, significant additional concerns are being raised in northern Europe and the hard red winter region of the US. There are also major delays for hard red spring plantings in the US and the Canadian spring wheat crop due to overly wet conditions, which provide additional yield loss risks.Fig 121 Wheat prices continue to rally on weather Fig 122 Global Wheat Balance: still comfortable, butrisks supply is trending lower 300% Prod/con (mt) Stocks (mt) 250% 200 Index 1=01/01/07 650 200% 150% 600 150 100% 550 100 50% 500 50 0% May-07 May-08 May-09 May-10 May-11 Jan-07 Sep-07 Jan-08 Sep-08 Jan-09 Sep-09 Jan-10 Sep-10 Jan-11 450 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10f 10/11f 11/12f MATIF CBT Ending stocks Demand SupplySource: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011 Our projections for 2011/12 indicate global ending stocks will fall to 177,581m tonnes - Stocks held by implying a 26.5% stocks-to-use ratio. More importantly, we expect stocks held by the global major wheat exporters to also decline, leaving them with a combined stocks/use ratio of 16.1%. Against exporters will fall this backdrop, without a significant improvement in the crop outlook, higher prices will again continue to be maintained – particularly given that we are now in a weather-driven market. The upcoming US wheat crop does look relatively poor, as indicated by this season‟s USDA plant conditions reports. There is a relatively strong correlation between the average spring good/excellent rating and the eventual yield achieved. To date, this number stands at just 37%. This percentage is comparable to 2006 and 2002, when non trend adjusted yields came in at lows of 2.36 and 2.6 in 2002 and 2006, respectively. At the least, this suggests yields will underperform their trend and also points to potential for a poor total wheat crop. Looking at the global perspective we expect to see a significant improvement in FSU wheat production from last year‟s drought blighted crop. A return to normal though is being thwarted in Russia as weather issues and infrastructure problems continue to cause issue. Russia is likely to remove their export ban. But the large exports seen in 2008 and 2009, when FSU accounted for 27% of world exports, wont be possible – and will instead likely come in at 20%. High quality wheat We have far more concerns for the world‟s quality wheat crops than for the lower feed grades. supplies will be With major quality wheat export crops in the US, Canada, France and Germany suffering from tighter than feed adverse weather conditions the quality wheat spreads will be unlikely to reverse this season‟s quality trend. We expect wheat prices to remain at historically high levels through 2011 and into 2012, though current weather risk will inspire volatility as we move towards harvest. The majority of wheat price direction will be derived from the more critical conditions facing the global corn crop.17 May 2011 46
    • Macquarie Research Commodities CompendiumFig 123 Global wheat supply and demand Macquarie forecasts(1000 t) 05/06 06/07 07/08 08/09 09/10f 10/11f 11/12fGlobal production 619,054 595,912 611,019 683,670 682,612 646,406 666,288y/y % chg -1.19% -3.74% 2.54% 11.89% -0.15% -5.30% 3.08%US 57,243 49,217 55,821 68,016 60,310 60,083 56,303Argentina 13,800 16,300 18,600 10,100 9,600 14,912 15,075Australia 25,173 10,822 13,569 21,420 21,923 26,202 24,754Canada 25,748 25,265 20,054 28,611 26,848 23,167 24,529EU 132,356 124,870 120,133 151,114 138,675 136,185 139,347FSU 91,070 84,905 92,493 115,457 113,830 80,634 100,900Global consumption 616,451 618,764 613,710 641,750 651,760 663,053 669,502y/y %chg 1.76% 0.38% -0.82% 4.57% 1.56% 1.73% 0.97%Balance 2,603 -22,852 -2,691 41,920 30,852 -16,647 -3,214Ending stocks 150,313 130,646 124,417 166,590 197,442 180,795 177,581y/y % chg -1.93% -13.08% -4.77% 33.90% 18.52% -8.43% -1.78%Stocks/use ratio 24.38% 21.11% 20.27% 25.96% 30.29% 27.27% 26.52%Prices USc/bu 359 636 798 530 581 759 743Source: USDA, Macquarie Research, May 2011Fig 124 Limited producer rationing in the wheatmarket, maintaining exporters stock without Fig 125 US wheat conditions ratings for all wheats –improvement turnaround is needed in May Ending stocks Stock:use Good/Excelent 80 (mt) 25% 80.00 70 70.00 67.1 20% 58.0 60 60.00 54.1 53.7 54.9 50 47.6 15% 50.00 44.7 43.6 41.2 40 37.1 40.00 33.7 31.5 30 10% 30.00 20 20.00 5% 10 10.00 0% 0.00 05/06 06/07 07/08 08/09 09/10 10/11f 11/12f 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Stocks all majors Stocks all majors ex-FSU Stocks:use all majors Stocks:use all majors ex-FSU Ave. Spring RatingSource: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011Fig 126 The Black Sea region will resume exports Fig 127 Quality wheat spreads continue to gainagain but limited in scale compared to the recent past strength as demand stays strong mT c/bu Black Sea Exports 40 200 35 150 30 25 100 20 15 50 10 0 5 0 -50 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f 2011f Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Minneapolis/Chicago Kansas/Chicago Russia Ukraine KazakhstanSource: USDA, Macquarie Research, May 2011 Source: Reuters, Macquarie Research, May 201117 May 2011 47
    • Macquarie Research Commodities Compendium Corn Large producer reaction, but strong demand limits recovery Corn stocks are so Through 2011 the situation for corn has continued to tighten, with further reductions to global tight there is little supplies and stocks in the face of resilient demand. The situation in the US has become room for error perilously tight, as ethanol and feed demand remain strong. US corn ending stocks for 2010/11 will fall to 730m bu, which represents pipeline stocks. In the face of high prices US export demand has begun to be rationed by Asian importers switching to cheap Australian feed wheat supplies. Further downward revisions are possible for US exports if feed wheat continues to be aggressively offered. However, not even with this scenario will corn stocks return to a comfortable level. We anticipate the US will increase the planted corn area to 91.5m acres, slightly lower than earlier expected due to delayed planting progress in what is still a very rainy and soggy Midwest. Production will rise by an insufficent amount to 13.721b bu in 2011/12, leaving the US with still tight inventories, equivalent to a stocks-to-use ratio of 6.1%. Globally we see corn production rising 5% in response to higher prices, particularly in Brazil and Argentina. Together, this will allow world ending stocks to recover modestly to 128.7mt. We forecast 2011/12 at a still critically tight 15%, providing very little room for error.Fig 128 Corn trades at record high as US ending Fig 129 World corn balance is moving into surplus instocks fall to 5% as a proportion of consumption 2011/12, but stocks will remain tight Prod/Con (mt) Balance (mt) 250% 950 40 850 30 200% Index 1=01/01/07 20 750 150% 10 650 100% 550 50% -10 450 -20 0% 350 -30 May-07 May-08 May-09 May-10 May-11 Jan-07 Sep-07 Jan-08 Sep-08 Jan-09 Sep-09 Jan-10 Sep-10 Jan-11 250 -40 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10f 10/11f 11/12f Corn Balance Production ConsumptionSource: Reuters, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011 The key focus at present for the corn markets is the current planting progress in the US. We saw significant delays during the beginning of the planting window, although in recent weeks US planting delays progress has begun to catch up with the average level. If plantings continue to be delayed, give concern for however, yield expectations will be constrained, due to the shorter growing period. yields Prospects for demand rationing will be a key topic in the coming months as the large producer reaction looks to be limited by strong demand prospects. As both ethanol and feed margins remain in positive territory the main focus will be the limitations of US exports - either through importers rationing internal feed demand, or through increases in the feed wheat demand. If China successfully negotiates supply agreements with Argentina, this would provide some import demand relief to the US‟s tight supplies next season. From a macro perspective as ethanol has become an increasingly important factor for corn we have seen corn prices become intrinsically linked to the price of oil. As such, any major sell off in the price of oil would have a negative impact on corn – a bearish risk that flows though to the rest of the grains and oilseed complex. Still tight conditions We expect corn prices to reach their quarterly high in Q2 11, due to extremely tight old crop mean prices will not supplies. From Q3, harvest pressure will see them easing off gently through the rest of 2011 collapse sharply as increased production stabilises the market. We don‟t expect prices to fall back too sharply, however, due to low stocks, and prices will stay at historically elevated levels. Our forecast for CBOT corn futures for calendar year 2011 and 2012 is 673c/bu and 635c/bu, respectively.17 May 2011 48
    • Macquarie Research Commodities CompendiumFig 130 Global Corn Supply & Demand Macquarie forecasts 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12Production 699,405 713,451 793,615 797,838 812,380 812,015 856,773 -2.3% 2.0% 11.2% 0.5% 1.8% 0.0% 5.5%US 282,263 267,503 331,177 307,142 333,011 316,176 348,540China 139,365 151,600 152,300 165,900 158,000 167,417 168,771Brazil 41,700 51,000 58,600 51,000 56,000 54,288 54,560Argentina 15,800 22,500 22,017 15,000 22,500 21,700 22,000Consumption 705,963 724,352 772,242 779,169 815,660 837,119 848,783 2.7% 2.6% 6.6% 0.9% 4.7% 2.6% 1.4%Balance -6,558 -10,901 21,373 18,669 -3,280 -25,104 7,990Ending stocks 124,594 110,069 131,317 149,070 145,790 120,686 128,677Stocks/use 17.65% 15.20% 17.00% 19.13% 17.87% 14.42% 15.16%Prices US c/bu 260 373 527 374 427 673 635Source: USDA, Macquarie Research, May 2011Fig 131 Corn vs crude oil price correlation 2007-2011: Fig 132 Producer ethanol margins remain positive in 2Prior to 2007 the R was 0.0003 spite of elevated corn price 900 R2 = 0.5175 70 800 60 700 50 600 40 Corn (c/bu) 500 30 20 400 10 300 0 200 -10 100 -20 Feb/09 Apr/09 Jun/09 Aug/09 Oct/09 Dec/09 Feb/10 Apr/10 Jun/10 Aug/10 Oct/10 Dec/10 Feb/11 Apr/11 20 40 60 80 100 120 140 160 Crude oil ($/b)Source: Reuters, Macquarie Research, May 2011 Source: Reuters, Macquarie Research, May 2011Fig 133 Mid season catch up to delayed plantings, but Fig 134 US exports to date by major customer; highstill running significantly below 10 yr avg prices are slowing the export pace % Plantings 000 t US Corn exports by destination as of end Apr Complete US Corn Planting Progress 10000 100 9000 90 8000 80 7000 70 6000 60 5000 4000 50 3000 40 2000 30 1000 20 0 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 10 0 Japan Korea Egypt Taiwan Canada Mexico Selected 13 14 15 16 17 18 19 20 21 22 23 24 25 South America 10 Yr Avg 2011Source: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 201117 May 2011 49
    • Macquarie Research Commodities Compendium Soybeans Short-term fundamental weakness, but 2011/12 could be tight The dominant force in the soybean market remains Chinese demand, which over recent years has placed a strain on supplies from the US and South America. The first half of the 2010/11 season exhibited strong import demand from China, which helped support soybean prices in conjunction with bullish momentum from the grains markets. Currently, however, the soybean fundamentals have turned less constructive in comparison to the grains. This is due to a drop in the pace of China‟s soybean imports, and the higher than expected soybean harvests in Brazil and Argentina. Together, these factors will keep soybean prices fairly netural in the short term. For the forthcoming 2011/12 season, however, the global market will remain fairly tight. We anticipate limited change in global ending stocks as Chinese demand is expected to rise again, and remain strong. We forecast global ending stocks for 11/12 at 60.1m tonnes which implies a stocks-to-use ratio of 23.08%. US soybean production growth will be limited by the dominance of corn in this season‟s acreage battle, and will remain little changed from this season at 3,293b bu.Fig 135 Soybean Complex Price Evolution Fig 136 World Soybean Balance Prod/Con (mt) Stocks (mt) 300% 70 250% 250 60 Index 1=01/01/07 200% 50 200 150% 40 150 30 100% 20 50% 100 10 0% May-07 May-08 May-09 May-10 May-11 Jan-07 Sep-07 Jan-08 Sep-08 Jan-09 Sep-09 Jan-10 Sep-10 Jan-11 50 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f 2011f Soybean Soymeal Soyoil Ending stocks Supply DemandSource: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011 A key reason why Chinese imports are weak is due to the fact that China‟s soy crush margins (based upon imports of both US and Brazilian soybeans) are negative right now, following the Chinese soybean build up of surplus stocks and government caps on Chinese veg oil prices. We anticipate imports may crush margins will return to positive territory within a few months. By 2011/12 we expect surprise on the Chinese imports to increase again YoY to the level of 61mt. Continued strength in Chinese upside soybean demand will be the key fundamental support to the soybean complex. However, the influence of the South American soybean crops will continue to become more pronounced in 2011/12, and the increased export competition will provide resistance to any significant price rally. Although US production will fall slightly next season, we expect Brazilian and Argentine production to increase to 72.5mt and 50.6mt respectively. Elsewhere in the oilseed complex, we anticipate rapeseed production to increase on the back of greater planting intentions in Canada. EU-27 rapeseed area is expected to be maintained at a similar level, but the worrying weather conditions across northern Europe over recent months raise supply-side concerns. Ending stocks will In the near term US soybean futures will be restricted by movements in the corn price; any fall again in 2011/12, further delays to US corn plantings could see soybean plantings potentially expand. Only on preventing a June 30th will the USDA acreage report help shed clarity on final planted area. After this point collapse in prices the price outlook will be dominated by Chinese demand growth and competition from South America exports. We expect prices to move in tandem with the grains complex, easing over the remainder of 2011 post the US harvest. Into 2012, however, the fact that global production will not rise and ending stocks will diminish further will provide some bullish impetus to the market, preventing prices from collapsing. As always, any weather risks to the South American 2011/12 crops or greater than expected Chinese buying could cause prices to spiral higher.17 May 2011 50
    • Macquarie Research Commodities CompendiumFig 137 Global soybean supply and demand Macquarie forecasts(1000 t) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12fGlobal production 220,670 237,126 221,006 211,964 260,270 258,942 258,638% chg y/y 2.27% 7.46% -6.80% -4.09% 22.79% -0.51% -0.12%US 83,507 87,001 72,859 80,749 91,419 90,602 89,611Braz 57,000 59,000 61,000 57,800 68,704 71,647 72,588Arg 40,500 48,800 46,200 32,000 54,708 49,765 50,644Global consumption 215,231 225,118 229,619 221,130 238,550 256,037 260,327% chg y/y 5.04% 4.59% 2.00% -3.70% 7.88% 7.33% 1.68%China imports 28,317 28,726 37,816 41,098 50,338 56,500 61,000% chg y/y 9.75% 1.44% 31.64% 8.68% 22.48% 12.24% 7.96%Ending stocks 53,237 62,990 51,420 42,580 58,880 61,785 60,096% chg y/y 12.14% 18.32% -18.37% -17.19% 38.28% 4.93% -2.73%Stocks/use ratio 24.73% 27.98% 22.39% 19.26% 24.68% 24.13% 23.08%Prices USc/bu 592 862 1,234 1,030 1,048 1,320 1,288Source: USDA, Macquarie Research, May 2011Fig 138 Chinese soy crush margins remain negative Fig 139 As Chinese crush margins weaken China‟sdue to government veg oil price caps import pace takes a nose dive China crush margins CNY/t Monthly China soybean imports (1000t) 800.0 7000 600.0 6000 400.0 5000 200.0 4000 0.0 3000 -200.0 2000 -400.0 1000 -600.0 -800.0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep -1000.0 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10 Jul/10 Jan/11 5-yr range 2009/10 5-yr avg 2010/11 China crush margins - US FOB China crush margin - Brazil FOBSource: USDA, Macquarie Research, May 2011 Source: China Customs, Macquarie Research, May 2011Fig 140 Brazilian FOB basis turns negative in reaction Fig 141 Sustained growth in the South Americanto large crop soybean crops is expected to continue Brazil FOB premiums basis Chicago - prodn (mt) 80 Paranagua (US$/t) 140 3.5 70 120 60 3.0 100 50 yield (t/ha) 80 2.5 40 30 60 2.0 20 40 10 1.5 20 0 -10 1.0 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10f 10/11f 11/12f -20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010 2011 Arg prodn Brz prodn Arg Yield Brz YieldSource: Reuters, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 201117 May 2011 51
    • Macquarie Research Commodities Compendium Sugar Prices under pressure as market moves to surplus Greater Thai After peaking out at above US35c/lb in January, sugar prices have fallen steadily. High prices supplies have have encouraged importers to delay purchases, whilst waiting for the onset of the 2011/12 pushed the market Brazilian cane crop. That, along with unexpectedly higher Thai production and the much- into surplus awaited release of Indian exports, has pushed prices to 20-22c/lb. Although the Brazilian crushing has been slow to start, due to adverse weather which led to poor yields in April, the sharp increase in Thai sugar production (stemming from farmers in the Northeast switching out of cassava planting) has more than offset this. At some 3mt more than previously expected, Thailand‟s supply has tilted our 2010/11 global market balance back into a modest surplus. This will be the first in two seasons, and will be followed by a much larger surplus in 2011/12. With the market no longer facing a short term supply shortage, the futures forward curve has shifted back to contango; and short term, we expect prices to languish at US19- 21c/lb. There will be only The additional Thai supplies as well as an early start to Australia‟s harvest (following modest supply standover cane left from last season‟s flood affected crop) will go some way to help reduce growth in Brazil potential Brazilian port congestion. This will be important in the early part of the crushing season in Centre South of Brazil, when domestic mills will be producing more ethanol over sugar due to an acute domestic shortage of both hydrous and anhydrous ethanol. With India no longer an importer this year, and some port efficiency improvements (e.g. loading in wet weather), Brazil is unlikely to face as much congestion as last year. We expect the CS Brazilian cane crop this season to at best match last season‟s 565mt, due to lower yielding and ageing cane. Although timely rains in recent weeks have helped offset earlier drought concerns, production risks are skewed to the downside, unless perfect weather is achieved. Overall Brazil will produce 39mt of sugar - a modest expansion of just 2.6% - although this will require prices remain above the ethanol equivalent price, which at present stands at 20c/lb. 2011/12 global There is a risk for prices to rise from July onwards as imports pick up from refineries that need supply is expected to replenish raw inventories and as Muslim countries stock up ahead of Ramadan. But given to rebound that the import deficit will not be as severe as last season‟s, any price rally will likely be capped to the 25-26c/lb levels. From Q4, however, the market will start to anticipate northern hemisphere crops, which assuming ENSO neutral conditions, should be much larger than last season‟s. High prices, coupled with good beet sowings in Western regions and forecasts for a normal monsoon in Asia, point to a strong rebound in global production for the 2011/12 season. Even if sugar demand picks up alongside economic growth, the supply side recovery should be more than ample to cater for it. However, it is clear that longer term, we will need Brazil to invest in greater sugarcane expansion to avoid the kind of price volatility witnessed in the last two years. For this, we will need prices to stay above US19c/lb, a level we considered necessary to incentivise production growth in countries such as Brazil and India.Fig 142 NY sugar futures trending lower again as Fig 143 The 2010/11 deficit has been resolved and thesupply pressure builds up 2011/12 season will be in surplus too US c/lb Prod/Cons Market balance 40 (Mn t) (Mn t) 180 20 35 170 15 160 30 10 150 140 5 25 130 0 20 120 -5 110 15 100 -10 20 0f 20 1f 2f 20 1 20 2 20 3 20 4 20 5 20 6 20 7 20 8 9 /0 /0 /0 /0 /0 /0 /0 /0 /0 /1 /1 /1 10 00 01 02 03 04 05 06 07 08 09 10 11 20 20 04/09 06/09 08/09 10/09 12/09 02/10 04/10 06/10 08/10 10/10 12/10 02/11 04/11 Balance Production ConsumptionSource: Bloomberg, Macquarie Research, May 2011 Source: ISO, national trade sources, Macquarie Research, May 201117 May 2011 52
    • Macquarie Research Commodities CompendiumFig 144 The sugar forward curve backwardation has Fig 145 Production recovery expected at majordisappeared as short term supply constraints ease producers next season as weather “normalises” US c/lb Mn tonnes 32 45 30 40 28 35 26 30 2009/10f 2010/11f 2011/12f 24 25 22 20 20 15 18 10 16 5 14 0 na t A co nd l 27 a a S lia Pa a an 1 2 1 2 3 11 1 12 12 2 13 1 2 i az si di -1 -1 ic -1 -1 -1 -1 -1 l-1 l-1 U ra i hi n- n- EU la p- p- st ex us er ay ay In ar ar ar ov ov Br Ju Ju Se Ja Se Ja C ai st ki M M M m M M N N M R Th Au en 27-Jul-10 26-Oct-10 1-Mar-11 27-Apr-11 CSource: Bloomberg, Macquarie Research, May 2011 Source: ISO, national trade sources, Macquarie Research, May 2011Fig 146 Lack of cane renewals and adverse weather Fig 147 India‟s domestic supply/demand for sugar ismeans CS Brazilian cane production will be flat loosening, implying greater export availability Mn t cane Mn t sugar m tonnes 600 crushed in CS produced 40 35 Brazil 35 30 500 30 25 400 25 20 300 20 15 15 10 200 10 5 100 0 5 20 09e 10 f 11 f 2f 19 /96 19 /97 19 /98 19 /99 20 /00 20 /01 20 /02 20 /03 20 /04 20 /05 20 /06 20 /07 08 8 20 /10 20 /11 20 7/0 0 0 /1 95 96 97 98 99 00 01 02 03 04 05 06 / 09 0 19 2007/08 2008/09 2009/10 2010/11f 2011/12f Cane crushed Sugar prod Production ConsumptionSource: Unica, Macquarie Research, May 2011 Source: ISMA, Macquarie Research, May 2011Fig 148 Global sugar supply and demand balance(m tonnes) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12fDemandIndia 21.1 22.40 23.00 23.50 23.00 23.75 25.00China 12.0 13.83 14.50 14.82 15.21 15.82 16.25EU27 18.3 18.43 18.92 18.63 18.66 18.67 18.75World consumption 147.6 152.76 157.94 159.73 160.25 162.91 166.87 % change 1.8 3.5 3.4 1.1 0.3 1.7 2.4SupplyBrazil 27.9 30.45 31.04 32.32 35.83 38.56 39.02EU27 22.2 18.40 17.84 16.45 17.31 15.65 16.50India 20.9 30.10 28.50 14.70 18.70 25.00 27.00World production 151.9 169.24 170.26 152.56 156.22 164.78 173.48 % change 5.9 11.5 0.6 -10.4 2.4 5.5 5.3BalanceSupply less demand 4.2 16.5 12.3 -7.2 -4.0 1.9 6.6Closing stocks 42.5 48.7 52.3 42.5 38.4 40.3 46.9Stocks-to-use ratio (%) 28.8 31.9 33.1 26.6 24.0 24.7 28.1Raw sugar price (USc/lb) 14.8 10.1 12.1 17.7 22.4 25.0 21.5Note. Oct-Sep yearsSource: ISO, LMC, national trade sources, Macquarie Research, May 201117 May 2011 53
    • Macquarie Research Commodities Compendium Coffee High prices amidst very tight markets The 2010/11 export As we forecast in our last compendium, coffee prices surged higher to get past the US300c/lb pace will be front mark in early May, following extremely tight conditions. With prices hovering at 14 year highs loaded for much of the first quarter, Brazil and other origins (including Central America) have exported record high volumes to take advantage. Yet this has not been enough to rebuild global inventories of coffee, which still remain at historical lows. According to ICO, world coffee exports rose 15.4% in the first half of 2010/11 from the same period a year earlier; some of this was likely absorbed to fill gaps in the pipeline created by last year‟s deficit. This pace of exports will not continue in the second half of the season, as most of the Central Americans front loaded their exports, while Brazilians have run out of old crop coffee. Colombia‟s main harvest may have been good, but the upcoming mitaca harvest will likely come in at under 3.5m bags due to heavy rains and road blockages - taking the total Colombian 2010/11 output to an insufficient total of 9m bags. The start of the new Brazilian 2011/12 coffee harvest and the anticipation of hedging and The recent sell off selling pressure has caused speculators to take profit in the last few weeks, after having built represents good a large net long position in the preceding few past months. In our view, the sharp drop in NY buying opportunity arabica futures in the last ten days represents good buying opportunities, as many roasters still remain insufficiently forward covered. With the “off” season harvest likely to be around 10m bags smaller than last season‟s, at 47m, and Brazil‟s domestic demand ever strong at 20m, exports will fall short of the level required to meet global needs. There is still a good chance that prices could head back up above 300/lb in a few months – especially if there is a frost risk, or demand remains unfulfilled. The Brazilian real has soared about 50% against the US dollar since the start of 2009, adding pressure for producers to reap higher prices. Natural Arabicas According to our analysis, global coffee stocks will barely rise in 2010/11 due to a will be subject to combination of strong consumption growth at origin countries and hefty export demand. In most tightness consumer markets, demand remains as resilient as ever, irrespective of recent roaster price hikes, as coffee buyers change their habits towards home consumption and away from more expensive outdoors/café consumption. Roasters are still struggling to get hold of fine cup Arabica or high quality Milds. Others, however, are adjusting their blends to take advantage of the steep discount of lower grade coffees. In consumer markets we are noticing demand growth for Natural arabicas is currently outpacing that of robustas or mild washed arabicas, as roasters seek to compromise taste with costs. Given the expected decline of Brazilian arabicas this harvest, Brazil‟s Naturals will be subject to upside price risks until the 2012/13 Brazilian “on” season comes round to provide proper supply-side relief. Although the Robusta market has also benefited from a strong export pace in the season so far – thanks to aggressive supplies from Vietnam following soaring prices – the second half of 2010/11 will be much slower. Vietnam‟s sales are pretty much over now, and the Indonesian robusta supplies will be much lower than last season‟s due to rainy weather. This will provide for some tightening in the robusta market, particularly in a context of rising demand pressures.Fig 149 Both NY arabica futures and London robusta Fig 150 Cash differentials against futures contractsfutures have had a strong run are easing; but the NY-Lon arb remains very wide US c/lb 180 160 300 140 120 USc/lb 250 100 80 200 60 150 40 20 100 0 9 0 9 0 1 09 9 9 10 0 0 11 9 0 -0 -1 -0 -1 -1 -0 -1 -0 -1 l-0 l-1 n- n- n- 50 ay ay ar ar ar ep ov ep ov Ju Ju Ja Ja Ja M M M M M N N S S 04/09 06/09 08/09 10/09 12/09 02/10 04/10 06/10 08/10 10/10 12/10 02/11 04/11 Colomb Milds/Other Milds Colomb Milds/Braz Naturals Colomb Milds/NY futures Oth Milds/Robustas NY arabica futures London robusta futures Braz Naturals/Robustas NY futures/London futuresSource: Bloomberg, Macquarie Research, May 2011 Source: ICO, LMC, Macquarie Research, May 201117 May 2011 54
    • Macquarie Research Commodities CompendiumFig 151 Brazil‟s Apr/May 2011/12 “off season” will see Fig 152 … at a time when Natural arabicas area sharp fall in Natural Arabicas production… increasing their demand market share in Europe Mn bags 70 45% 60 40% 50 40 35% 30 30% 20 10 25% 0 1f 20% 2f 3 4 5 6 7 8 9 0 /0 /0 /0 /0 /0 /0 /0 /1 /1 /1 Se 6 Se 7 Se 8 Se 9 Se 0 M 6 Ja 6 07 07 M 8 Ja 8 09 Ja 9 M 0 10 02 03 04 05 06 07 08 09 -0 -0 -0 -0 -1 0 0 0 0 0 1 10 11 n- n- n- n- n- p- p- p- p- p- ay ay ay ay ay 20 20 20 20 20 20 20 20 20 20 Ja Ja M M Arabica Robusta Naturals Robusta WashedSource: Government data, Macquarie Research, May 2011 Source: NKG Stats, ICO, USDA, Macquarie Research, May 2011Fig 153 Tight arabica supply/demand to persist until Fig 154 Robusta coffee also slipping into deficit onthe 2012 Brazilian “on season” brings relief higher demand pressures S/D Robusta S/D Arabica Market Market Balance (Oct/Sep (Oct/Sep) Balance 60 4 6 84 5 3 55 2 82 4 80 3 1 2 50 0 78 1 -1 76 0 45 -1 -2 74 -2 40 -3 72 -3 -4 70 -4 35 -5 2005/06 2006/07 2007/08 2008/09 2009/10f2010/11f2011/12f 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f Balance Production Consumption Balance Production ConsumptionSource: Government data, Macquarie Research, May 2011 Source: NKG Stats, ICO, USDA, Macquarie Research, May 2011Fig 155 Coffee supply and demand balance(m 60-kg bags) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12fProductionb 116.9 125.5 132.8 127.6 134.1 132.3 140.8 Arabica 76.6 76.1 80.7 75.6 80.1 79.1 84.4 Robusta 40.3 49.4 52.1 52.0 53.4 52.8 56.4Growth 4.6% 7.3% 5.9% -3.9% 5.1% -1.3% 6.4%Consumption 118.5 121.5 124.6 130.2 133.6 136.0 137.1 Arabica 74.0 74.7 75.9 79.0 80.6 81.0 81.4 Robusta 44.5 46.8 48.8 51.2 53.0 55.0 56.0Growth 0.2% 2.5% 2.6% 4.5% 2.6% 1.8% 1.0%Balance -1.6 4.0 8.2 -2.6 0.6 -3.7 3.4 Arabica 2.6 1.4 4.9 -3.4 -0.4 -1.9 3.0 Robusta -4.2 2.6 3.3 0.8 0.4 -2.2 0.4Stocksc 49.6 41.8 39.3 32.6 33.7 30.0 33.4Stock ratio (%) 41.9 34.4 31.5 25.1 25.2 22.1 24.3Prices 2006 2007 2008 2009 2010 2011 2012NY Arabica prices (US$/lb) 107.7 117.3 121.5 125.2 163.2 272.1 206.3London Robusta price ($/tonne) 1402.3 1772.0 2109.3 1462.5 1585.7 2472.0 2162.5a Oct-Sep. b For Southern Hemisphere producers, volumes adjusted from Apr-Mar crop years to fit in with Oct-Sep.c Gross stocks in exporting countries and estimated inventories in importing countries on September 30.Source: ICO, NKG Stats, USDA, Macquarie Research, May 201117 May 2011 55
    • Macquarie Research Commodities Compendium Cocoa Short term price weakness followed by a tighter 2011/12 market Prices have held up 2010/11 was the first season in many when cocoa producers in West Africa enjoyed bumper as Ivory Coast crops. But the violence and political stand-off in Ivory Coast prevented much of this from tries to normalise reaching end markets and prices were very firm in Q1 despite a large global market surplus. operations... With Gbabgo stepping down, the Ivorian unrest finally ended in April. The export ban on cocoa has been lifted, making way for the backlog of shipments and stockpiles to leave the country. Anticipation of this had seen cocoa fall sharply in the weeks preceding this, to below US$3,000/t by late March. But major teething problems and delayed restoration of normal operations such as banks, customs and general marketing– amidst a continued lack of security – has seen very little cocoa come out of the country so far. Consequently, prices held up fairly well in view of a continued scarcity of Ivorian cocoa and pent up grinding demand. … but will ease as However, the commodity-wide sell-off is dragging cocoa prices down too now, and in the Ivorian supplies are short term we see little upside price risk given that shipments of the 500kt or so of finally mobilised warehoused cocoa are now starting to leave Ivorian ports and harvesting of the mid crop has begun (which, due to continued favourable La Niña weather, could easily exceed 300kt). There is a risk, however, that not all of this mid crop will get harvested due to the loss of migrant labour following the war, lack of security in the bushes due to loitering gunmen and still poor access to cash. That said, output flow from neighbouring Ghana continues at a fast pace, running 50% ahead of last season. Ghana is aiming for production of 1mt by 2012. Although this may be ambitious in just one year, Ghana‟s production could easily surpass Ivory Coast‟s within the next five years. Production from Indonesia, however, has suffered due to heavy rains and exports have fallen short following the government‟s cocoa export tax. The 2011/12 season In our view, the weak prices are unlikely to last too long, as our latest market balances will be much tighter suggest that this season‟s surprisingly large global cocoa surplus (of 80,000t) will be followed than this season by a much tighter season in 2011/12. Meteorologists are expecting La Niña, which tends to favour African production, to fade by June, which will mean Ivory Coast and Ghana are unlikely to reap another bumper harvest. The Ivorian unrest has led to many cocoa workers fleeing the country and President Ouattara has a huge task ahead of him to restore the country‟s operation, before it can even start thinking of boosting the ailing cocoa sector. As such, we believe Ivorian production will resume its structural downtrend. This, along with a resumption of “normal” yields elsewhere in West Africa, could wipe out this season‟s surplus. With demand expected to remain healthy, this will tilt the 2011/12 market back to balanced and much tighter conditions. Demand for cocoa powder continues to drive overall grindings growth – not just in Asia, but also in Europe and North America, as evidenced by rising powder ratios. The tentative recovery in grindings in the latter two regions will continue apace in 2011/12, necessitating production expansion outside of Ivory Coast. To incentivise this, prices by Q4 may need to bounce back to US$3,300-3,400/t.Fig 156 NY and Liffe cocoa futures prices – will fall Fig 157 Global cocoa market – this season‟s surplusbefore rising again will be wiped out again in 2011/12 US$/t UK£/t Sup/Dem Market balance 4000 2900 4,500 400 3800 300 2700 4,000 3600 2500 200 3400 3,500 3200 100 2300 3,000 3000 0 2800 2100 2,500 2600 -100 1900 2400 2,000 -200 1700 2200 1,500 -300 2000 1500 04/09 06/09 08/09 10/09 12/09 02/10 04/10 06/10 08/10 10/10 12/10 02/11 04/11 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 /10 20 11f 2f /1 / / / / / / / / / 00 01 02 03 04 05 06 07 08 09 / 10 11 20 NY ICE futures London LIFFE futures Balance Production ConsumptionSource: Bloomberg, Macquarie Research, May 2011 Source: ICCO, national trade sources, Macquarie Research, May 201117 May 2011 56
    • Macquarie Research Commodities CompendiumFig 158 Global cocoa grindings demand has Fig 159 As Ivory Coast output reverts to decliningrebounded on restocking, but margins are weak trend next season, so too will the global surplus 4500 Global market Ivory Coast Cocoa grindings 000 tonnes 500 surplus/deficit production 1,450 4000 (000t) (000t) 400 1,400 3500 300 1,350 3000 1,300 2500 200 1,250 2000 100 1,200 1500 0 1,150 1000 -100 1,100 500 -200 1,050 0 -300 1,000 1995/96 1996/97 1997/98 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f 1998/99 6 8 0 2 4 6 8 0 2f /9 /9 /0 /0 /0 /0 /0 /1 /1 95 97 99 01 03 05 07 09 11 19 19 19 20 20 20 20 20 20 EU27 US Origin Others Global market balance Ivory Coast productionSource: ICCO, LMC, Macquarie Research, May 2011 Source: ICCO, LMC, Macquarie Research, May 2011Fig 160 Global cocoa supply and demand(000 tonnes) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12fProduction 3,773 3,399 3,698 3,529 3,572 3,801 3,960% change 12.5 -9.9 8.8 -4.6 1.2 6.4 4.2Côte dIvoire 1,408 1,229 1,382 1,235 1,200 1,290 1,315Ghana 740 615 719 710 700 795 850Indonesia 585 545 485 490 535 525 560Consumption 3,512 3,663 3,775 3,547 3,659 3,795 3,890% change 4.3 4.3 3.1 -6.0 3.1 3.7 2.5EU27 1,328 1,390 1,408 1,330 1,373 1,425 1,435US 432 418 391 361 382 400 425Origin 1,278 1,382 1,425 1,412 1,490 1,500 1,545Balance 298 -230 -39 18 -50 44 100Stocks 1,890 1,615 1,574 1,592 1,542 1,586 1,686% change 13.7 -14.6 -2.5 1.1 -3.2 2.9 6.3Stocks/use ratio 53.8 44.1 41.7 44.9 42.1 41.8 43.3Price (NY ICE) US$/tonne 1,502 1,882 2,556 2,794 2,943 3,214 3,263Source: ICCO, national trade sources, Macquarie Research, May 2011Fig 161 Speculators in NY cocoa futures market – Fig 162 Output needs to be ramped up outside offairly neutral in outlook Ivory Coast to ensure global supply growth Co ntracts P rice 4,000 (000t) (000) (US$ /t) 80 4000 3,500 3500 3,000 60 3000 2,500 40 2,000 2500 20 1,500 2000 0 1,000 1500 500 -20 1000 0 -40 500 6 7 8 9 0f 1f 2f /0 /0 /0 /0 /1 /1 /1 05 06 07 08 09 10 11 -60 0 20 20 20 20 20 20 20 05/09 07/09 09/09 1 /09 01 0 03/1 05/1 07/1 09/1 1 /1 01 1 03/1 1 /1 0 0 0 0 1 0 /1 1 No n Co mmerical Lo ng No n Co mmerical Sho rt Côte dIvoire Ghana Indonesia Nigeria Net No n Co mmerical NY co co a price Cameroon Brazil EcuadorSource: CFTC, Macquarie Research, May 2011 Source: ICCO, LMC, Macquarie Research, May 201117 May 2011 57
    • Macquarie Research Commodities Compendium Cotton Market reacts to high prices, but weather risks prevail Record high prices Since peaking out in March, cotton futures have been under pressure for most of April – as cotton enters particularly for the July contract. It appears that the previous record-high cotton prices have fifth season of done their job: demand is falling and producers are responding positively. Reduced import deficit demand (especially from China and other Asia), competitive pressure from new supplies out of Southern hemisphere origins (both Brazil and Australia are seeing double digit growth due to the favourable returns in planting cotton right now) and reduced speculative interest have pushed front month futures down to under US150c/lb from a peak of US227c/lb in early March. Despite a lower than expected USDA acreage number for the 2011/12 US cotton plantings, the anticipation of strong supply responses in other cotton producing countries such as India, China, and Central Asia has spooked investors away from cotton futures. Total open interest on ICE has fallen to lows last seen in Oct 2009. Importers are The backwardated forward curve has encouraged importers to delay cotton purchases as shying away from much as they can until the new harvests arrive, whilst drawing down inventories. US export purchasing due to sales were negative for the sixth week in a row, as weaker new sales were offset by high prices cancellations. But new crop sales remain at high levels. Slowing apparel and yarn demand growth in Asia following tighter monetary policy – particularly in China - is dampening import demand. Mills are shying away from committing to large cotton orders or are switching to synthetic fibres. China accounted for 30% of global imports this season, but in 2011/12 their imports could rise by just 5-10% (against the last two years‟ 30-50% annual growth). This would be due to higher domestic production - acreage in China is set to rise 6% - and slower demand growth. Healthy production expansions are also expected in India and Pakistan, which will add to world exportable supplies next season, whilst reducing import needs. Strong production While short term demand destruction may continue to pressure the July contract, there recovery expected remain upside risks to the Dec (new crop) cotton futures. The latter are currently trading at ex-USA 116c/lb, historically a very attractive price, given the potential of lower acreage and yields. Dry weather in Texas, coupled with flooding in Missouri are providing for very unfavourable planting conditions. Latest planting progress data show the US cotton crop at 42% planted, compared with a five year average of 44%. The USDA expects virtually no growth in US production and is pencilling in huge abandonment rates. However, ending stocks will rise modestly owing to a reduction in exports as other countries ramp up output. However, once the weather risks are gone, the US, along with a strong recovery in production elsewhere, could see world production expanding by up to 8%. Assuming demand rises 2.8% next season, global stocks-to-use ratio should improve to around 39% from this season‟s 36%. This will be the first time in five seasons that the world would be able to replenish inventories (albeit modestly), but stock cover remains far below historical norms of 45-55%. Prices will accordingly drift lower, but remain comfortably around 100c/lb through much of 2011/12.Fig 163 NY cotton futures peaking out… Fig 164 …as world cotton market edges to a surplus USc/lb Mn bales Mn bales 230 130 20 125 15 210 120 10 190 115 110 5 170 105 150 100 -5 130 95 -10 90 110 85 -15 90 80 -20 70 10 0f 20 11f 01 1 02 2 03 3 04 4 05 5 06 6 07 7 08 8 09 09 2f 20 200 20 200 20 200 20 200 20 200 20 200 20 200 20 200 20 201 /1 20 /20 0 11 /2 / / / / / / / / 50 00 / 20 18/05/10 18/06/10 18/07/10 18/08/10 18/09/10 18/10/10 18/11/10 18/12/10 18/01/11 18/02/11 18/03/11 18/04/11 balance (RHS) production consumptionSource: Bloomberg, Macquarie Research, May 2011 Source: ICAC, USDA, Macquarie Research, May 201117 May 2011 58
    • Macquarie Research Commodities CompendiumFig 165 Cotton vs PTA prices as quoted in China‟s Fig 166 US cotton stocks sharply lower, despitefutures: spread is narrowing projected production expansion Mn bales 35000 25 30000 20 25000 20000 15 15000 10 10000 5000 5 0 Mar/08 Mar/09 Mar/10 Mar/11 Jun/07 Sep/07 Dec/07 Jun/08 Sep/08 Dec/08 Jun/09 Sep/09 Dec/09 Jun/10 Sep/10 Dec/10 0 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11f 2011/12f ZCE cotton ZCE PTA Production Exports Beginning stocksSource: Reuters, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011Fig 167 US cotton plantings for 2011/12 are lagging Fig 168 … but US weekly export sales are slowingbehind normal levels due to dry conditions… down amidst cancellations and weaker import demand 000 running bales 900 800 700 600 500 400 300 200 100 0 -100 -200 6-May 6-Mar 6-Jan 6-Feb 6-Apr 6-Jun 6-Aug 6-Sep 6-Oct 6-Nov 6-Dec 6-Jul 2009 2010 2011 5 yr AvgSource: NOAA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011Fig 169 Global cotton supply and demand balance(1000 480lb bales) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12fProductionChina 28,400 35,500 37,000 36,700 32,000 30,000 33,500India 19,050 21,800 24,000 22,600 23,200 25,000 27,500US 23,890 21,588 19,210 12,815 12,190 18,130 18,262World total 116,691 121,953 119,908 107,140 101,150 115,031 124,749 % change -4.0% 4.5% -1.7% -10.6% -5.6% 13.7% 8.4%ConsumptionChina 43,500 48,000 48,500 41,700 50,000 47,000 48,000India 16,700 18,100 18,600 17,750 19,450 21,000 21,500Pakistan 11,525 12,025 12,025 11,250 10,800 10,250 10,750World total 115,061 121,979 120,906 109,950 118,400 116,830 119,695 % change 6.7% 6.0% -0.9% -9.1% 7.7% -1.3% 2.5%BalanceProduction less consumption 1,630 -26 -998 -2,810 -17,250 -1,799 5,054Stocks 61,841 62,108 60,613 60,520 43,850 42,051 47,105Stocks-to-use ratio 53.7% 50.9% 50.1% 55.0% 37.0% 36.0% 39.4%PriceNY ICE (US cents/lb) 52.2 57.2 63.7 56.9 93.7 148.8 98.8Source: ICAC, USDA, national trade sources, Macquarie Research, May 201117 May 2011 59
    • Macquarie Research Commodities CompendiumImportant disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Australian/NZ/Canada stocks only Reporting Standards). Macquarie - USA Recommendations – 12 months Outperform (Buy) – return >5% in excess of Russell Note: Quant recommendations may differ from 3000 index return Fundamental Analyst recommendations Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return Recommendation proportions – For quarter ending 31 March 2011 AU/NZ Asia RSA USA CA EUR Outperform 45.65% 65.72% 59.70% 43.02% 68.91% 51.16% (for US coverage by MCUSA, 14.36% of stocks covered are investment banking clients) Neutral 39.49% 19.00% 29.85% 53.09% 26.43% 35.73% (for US coverage by MCUSA, 17.55% of stocks covered are investment banking clients) Underperform 14.86% 15.28% 10.45% 3.89% 4.66% 13.11% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)Company Specific Disclosures:Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.Analyst Certification:The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of thecompensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. 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