Investment Research — General Market Conditions

30 June 2010

Commodities Monthly
New price floors materialising
Short view: Cost curves catching up ............................................................................................... 2
Key points
The month of June brought about some respite to the sell-off in risky assets seen in May.
Crucially, the price slides seen (not least in the base-metals complex) imply that cost • Commodity prices appear to be
curves may now be catching up with prices. finding new price floors after the
Asia: Odds for soft landing in China are good ........................................................................... 3 massive spring sell-off. Notably,
cost curves may now be catching
Our Asia economist gives the latest on the Chinese economy following the announcement
up with oil and metals prices alike.
that the yuan will be allowed to appreciate. We argue that the direct impact from the
European debt crisis is modest and that the odds for a soft landing are good. • We have made few changes to
our price forecasts. US demand is
Energy: Demand rebound continues................................................................................................ 5
now clearly improving and we still
Oil prices have recovered firmly after the spring sell-off and strong support is currently look for the strength of the OECD
found at USD70. Although OECD stocks are elevated and some dark clouds have shown recovery to surprise the market.
up in the horizon, oil demand growth is nevertheless turning truly global at present.
• China remains a crucial factor
Base metals: Copper lags aluminium ......................................................................................... 14
and we argue that the Chinese
Base metals extended the spring losses into early June and remain highly sensitive to any economy sees good chances of a
doubts regarding the strength of global growth. While aluminium looks fairly strong for soft landing.
now, we continue to look for weakness further out. Copper demand remains subdued but
• We see oil prices averaging
we see market balances tightening going forward on structurally weak mine supply.
USD81 this year and USD90 in
Metals focus: Speculative positioning at LME..................................................................... 23 2010 with future supply
We consider the impact of investor flows on metals prices by constructing indices of concerns a new supportive factor.
speculative positioning at LME from data on open interest and price changes. Using • Copper currently lags aluminium
weekly data we are not able to identify any causal effect of speculation on prices though. on the demand side but we
Grains: Crop progress weighs down prices ........................................................................... 27 continue to see the former
While less sensitive to the business cycle, grains – notably corn – have suffered of late as outperform in the longer term.
crop progress has proved better than expected, pointing to a good harvest this season.
Danske Markets forecasts.................................................................................................................. 34
Commodities Research:

Expected relative performance of commodities Chief Analyst

Arne Lohmann Rasmussen
+45 4521 8532
125 Al Cu Matif Wheat Brent crude Steel
arr@danskebank.dk
120
Senior Analyst
115 Christin Tuxen
110 +45 4513 7867
tux@danskebank.dk
105
100 Commodities Sales:

95 Senior Dealer
90 Martin Vorgod
+45 4514 3286
10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 mavo@danskebank.dk

Source: EcoWin, Danske Markets. Note: index with 10Q2=100. Vice President
Fredrik Åberg
+45 4514 3285
faberg@danskebank.dk

www.danskeresearch.com
Commodities Monthly

Short view: Cost curves catching up

The month of June brought about some respite to the sell-off in risky assets seen in May
Monthly changes
as market fears that financial crisis part II would lead the global economy into a double-
dip recession seemed to fade a little. Gold has, however, continued to surge as inflation
LIFFE Wheat
worries have replaced debt fears, but cyclical commodities such as oil and base metals
Gold
have also increased from the new found lower levels. Not least oil prices have recovered
Copper
firmly with prices up from below USD70 in late-May to now trade close to USD80. Base
metals took a major dip at the end of May, but have since gained much of the lost ground. Aluminium
API2 coal
Our macroeconomists remain complacent that the global recovery is on track and that
ICE Brent
financial turmoil and fiscal consolidation will not endanger this, despite new risks
surfacing, see Global Scenarios. Indeed, the recovery is now relatively robust and while -8 -5 -3 0 3 5
% m/m
leading indicators are likely to be currently peaking in many countries the impact of an
extended period of low interest rates and indications that firm are now increasingly hiring Source: Bloomberg, Danske Markets.

more people should ensure that the recovery becomes self-sustainable. Crucially, our
economists have revised their growth outlook higher for commodity-intensive regions
Relative price moves in commodities
such as Asia and the US. Our FX strategists still look for the euro to weaken in the near
term, which could give some headwinds to commodities due to the numeraire effect.

Importantly, in June, China announced that it will return to a managed float of the yuan as
part of its attempts to fight mounting inflationary pressure. Risk sentiment improved on
the news with both stocks and commodities gaining and the market thus appeared to focus
on the improvement in purchasing power – rather than the loss in competitiveness for the
export sector – that a stronger yuan would lead to. We view the Chinese announcement as
an important element in re-balancing the global economy and thus see a stronger yuan as Source: EcoWin, Danske Markets.
positive for global growth and hence commodities in the longer term.

Crucially, the price slides seen not least in the base-metals complex imply that cost curves
may now be catching up with prices. Not least for aluminium this is increasingly More euro weakness in the near term
becoming an issue as both alumina and energy costs are on the rise, meaning that
marginal Chinese producers could thus soon be squeezed out. Some producers of zinc and
nickel are also on the brink of loss-making production at current prices levels. This could
lead to cutbacks in metals output in the near term. At the same time, the oil industry is
also facing rising costs going forward: due to offshore drilling restrictions, stricter safety
standards and an increase in insurance premiums, oil majors also look set to face higher
pressure on margins going forward. All in all, this suggests that both the oil and the base-
metals markets are seeing price floors materialising at the moment. Source: Bloomberg EcoWin, Danske Markets.
Note: historical EUR/USD spot rate, Danske
Overall, the message from our last Commodities Monthly remains intact, new price levels Markets’ forecasts, forward rates and uncertainty
have been reached but the course of direction is in our view still higher from here. As a priced on the option market.
result, we have made few changes to our price forecasts this time. Thus, we still look for
Brent to average USD81 in 2010 (previously USD80) and USD90 in 2011 as the rebound
in energy demand continues and supply restraint leads to stock draws. We expect that
aluminium will eventually see weakness from elevated stocks and unwinding of term
deals, but also receive potential support from the launch of a new ETF and rising costs.
Copper should benefit from an improving housing/construction sector whereas steel could
see some seasonal weakness over the summer but perform again later in the year as
OECD activity gains pace. Senior Analyst
Christin Tuxen
To put our outlook for the rest of 2010 into perspective: over the winter of 2009/10 we +45 4513 7867
saw a decoupling of commodities from the US dollar – during spring this year, tux@danskebank.dk
decoupling from fundamentals was a defining feature – later in the year, we expect to see
commodities re-couple with both the dollar and fundamentals, both of which should
eventually prove broadly supportive for prices.

2| 30 June 2010
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Commodities Monthly

Asia: Odds for soft landing in China are

good
The Chinese economy is currently seeing a difficult balancing act for policymakers who Overheating is the main risk in China
have to balance the economy between the risk of overheating and fear that growth could 10 % y/y % y/y
Money supply M2, 12M lag>> 30
slow substantially in the wake of the European debt crisis. Over the past year, our main 8
<< Consumer prices
message on China has been that the risk of overheating was bigger than a substantial 6 25

slowdown in growth later in 2010. The Chinese leadership has also gradually 4
20

acknowledged that containing inflation now should be the main focus in China’s 2
15
0
economic policy. China has started to unwind some of its measures in terms of stimuli
-2 10
and most recently resumed the appreciation of its currency. However, in the financial 00 01 02 03 04 05 06 07 08 09 10 11

markets and among Chinese policymakers there is increasing fear that the economy could
Source: Reuters Ecowin and Danske Markets
be sandwiched between the impact from domestic tightening and slower global growth, as
happened in late-2008 following the collapse of Lehman Brothers.

Fiscal policy is not expected to be tightened until 2011

So far the tightening of fiscal and monetary policy in China has actually been modest. Investment demand resilient despite
There have been few changes in fiscal policy. As originally planned, fiscal policy will be slower credit growth
15.0
slightly stimulative this year, following massive stimulus last year, through higher public 12 % 3m/3m % 3m/3m
Fixed asset investment, SA>> 12.5
infrastructure investments and consumer subsidies for purchase of consumer durables 10
10.0
8
7.5
such as cars, televisions and white goods. In 2010, the high level of infrastructure 6 5.0
investments will be largely maintained and the consumer subsidies are expected to be 4 2.5
2 0.0
maintained at least this year. However, in 2011, the Chinese government plans to
0 -2.5
<<Credit growth, NSA
“normalise” infrastructure investments and reduce investments from the current -2 -5.0
05 06 07 08 09 10
extraordinary elevated levels. Hence, fiscal policy will be slightly stimulating in 2010, but
a significant negative impact on growth from fiscal policy is not expected until 2011. Source: Reuters Ecowin and Danske Markets

That said there has been substantial regulatory tightening in past months, primarily
targeting real estate that could start to have a negative impact on real estate investments in
H2 10. Among other things the down-payment requirement for property purchases has
been increased substantially and there is increasing speculation that a property tax could
soon be introduced. Seasonally adjusted property sales fell 20% m/m in May and this "[Heading 2]"

suggests that such regulatory tightening would have a negative impact on real estate Even public investments have picked
investments in H2 10, although property sales appear to have recovered somewhat in up in early-2010
June.
200 Jan. 08=100 Jan. 08=100 200
180 180
160 Public Total 160
Monetary policy remains accommodative 140 140
120 120
If we look at monetary policy it has gone from being extremely accommodative in 2009 100 100
Real estate
to moderately accommodative now. In China the overall stance of monetary policy is best 80 80
08 09 10
judged by the development in credit growth, as interest rates matter less in China. True,
credit growth has slowed, but less than in 2005 and 2008, when China last tightened Source: Reuters Ecowin and Danske Markets
monetary policy substantially. The government’s target for credit growth for 2010 as a
whole is 16% and hence is planned to continue to exceed nominal GDP growth,
suggesting monetary policy will remain slightly accommodative. Finally, while interest
rates matter less in China, it is noteworthy that real interest rates are extremely low. Senior Analyst
Flemming Jegbjærg Nielsen
Particularly, it is not unproblematic that real interest rates on deposits have turned +45 45 12 85 35
negative, because this could boost speculative inflows from deposits into property or the flemm@danskebank.dk
stock market.

3| 30 June 2010
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Commodities Monthly

Direct impact from European debt crisis is modest

While policy adjustments are unlikely to be a major drag on growth until next year, fiscal Odds for soft landing still good
and monetary will of course, not to the same degree as last year, provide a boost to
20 20
% q/q Forecast for GDP growth % q/q AR
growth this year. In 2009 we estimate fiscal policy boosted GDP growth by 3 percentage
16 Potential GDP 16
points (pp). This year it will only boost GDP growth by ½pp and next year fiscal policy
12 12
could shave as much as 2pp off GDP growth. In 2010 China’s exports have again become
a major growth engine. China’s exports are now back at pre-crisis levels and the positive 8 8

impact from exports has so far more than offset the impact from less stimulus from fiscal 4 4

policy in particular. However, the big question is to what degree China’s export engine 0 0
06 07 08 09 10 11
will start to lose steam just as policy adjustments within China start to slow domestic
demand. This is particularly a risk in 2011. Source: Reuters Ecowin and Danske Markets

As long as the current sovereign debt crisis is confined to the Europe, the direct impact on
growth in China should be modest. If fiscal policy is tightened by 1% of GDP across the
Euro-area, we estimate China’s exports here to decline by about 4.5%. However, this will
only shave about 0.2pp off China’s GDP growth. For the European debt crisis to have any
substantial impact on China’s growth it will have to turn into a global financial crisis with
a significant impact on business confidence globally. The expected appreciation of CNY
Will China’s export recovery
over the next year is actually more important, as it could add another 0.8pp of GDP continue?
growth over the next two years. 120 Jan. 08=10 120
Jan. 08=100

100 100
Export, sa
Expor
Odds for a soft landing are still good 80
t
80

The question concerning China is really not if growth slows, because Chinese growth will 60 60
have to slow and one way or another it will. GDP growth around 12% q/q AR, as Import, sa
40 40
recorded in Q1, is simply unsustainable and without some moderation the longer-term 08 09 10
costs would cause a harder landing of the economy. The important question is first how
Source: Reuters Ecowin and Danske Markets
much China’s growth will slow and to what degree it will be driven by domestic
tightening or weaker export growth.

We still believe the odds for a soft landing in China are good. It should be remembered
Slower real estate investment could
that China compared with the US and Europe still have considerable policy flexibility. If
weigh on commodity imports
growth should slow more than expected, China can ease both fiscal and monetary policy
once more. However, for the rest of the world the negative message is that with the 190
Jan. 08=100 Jan. 08=100
190

170 170
Chinese output gap closing fast and inflationary pressure increasing, China cannot, to the
150 150
same degree as was the case in 2009, constitute the global growth engine. In addition, in Iron ore import
130 130
2011, demand in China is expected to be driven, to a lesser degree, by the resource
110 110
intensive investment demand that recently has been an important driver for global 90 90
Real estate investment
commodity prices, particularly metals prices. 70 70
07 08 09 10

Source: Reuters Ecowin and Danske Markets

4| 30 June 2010
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Commodities Monthly

Energy: Demand rebound continues

Strong support at USD70/barrel
In the last issue of Commodities Monthly we argued that the sell-off in May was primarily
Monthly changes, %
a correction – not a change in direction. And in fact oil prices have recovered over the
past month. Brent crude traded just below USD80/barrel on June 21 after touching
Fuel oil, 1%, FOB
USD70 at the beginning of June. Prices are now in the mid 70ties, but still up close to
API2 coal
10% from the bottom. Hence, oil prices once again met strong support at USD70. ICE Gasoil
NY Heat oil
ICE Brent
Oil outperforms base metals, but correlate closely with equities NY Gasoline
NY WTI

0 1 2 3 4
% m/m
Source: Bloomberg, Danske Markets.

Oil: Strong support at USD70/barrel

Source: Ecowin

The performance of oil in June has been notably strong relative to base metals. The
LMEX base metal index is down 10% this year, whereas Brent oil is running flat. The
divergence has primarily taken place in June. We believe the stronger performance of oil
can be attributed to, not least, supportive factors on the demand side. The US demand
numbers were particularly strong in May. But also note the very close correlation with US
equities underlining that oil is currently very sensitive to risk appetite. Source: Ecowin

The apparent de-coupling of oil prices from EUR/USD has continued in June. In our
view, the lower EUR/USD can primarily be attributed to a risk premium attached to the
euro and it is certainly not a consequence of a global recession as was the case after the
Lehman collapse in 2008. Our FX analysts forecast that EUR/USD will bottom out at Oil prices continue to decouple
1.15 (currently 1.23) during the autumn – a development that, everything else being EUR/USD
equal, would cap the upside for oil prices. However, we believe that the oil market will
continue to focus on the demand side and keep oil prices well supported even if the price
in euros rises further.

The strong demand side is also the reason we continue to forecast that oil will move
above USD 80/barrel in the second part of 2010 and trade in a USD80-90/barrel range for
close to 12 months before moving toward a USD90-100/barrel range in the second part of
2011. We have made no changes to our oil price forecast this time.
Source: Ecowin

Dark clouds in the horizon

Chief Analyst
But there are also some clouds in the horizon for oil prices. The current debt crisis has the Arne Lohmann Rasmussen
potential to dampen growth, fuel risk aversion and strengthen the dollar further. It should +45 4512 8532
arr@danskebank.dk
also be noted that even though the demand side currently surprises on the upside supply
does the same. Opec compliance is now well below 60% and non-Opec supply is

5| 30 June 2010
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Commodities Monthly

expected by the IEA to rise by 800,000 barrels this year. It will add more oil to a market
with already abundant stocks reflected in OECD forward demand cover at 60.5 days and
US weekly crude oil stocks above the level seen a year ago.

Global oil demand growth becomes truly global

For some time now we have based our oil price forecast on the presumption that OECD
demand would surprise on the upside in 2010 and if we take a close look at the May US industrial production recovery
drives distillate demand higher
numbers it seems that demand is now recovering quite strongly.

In May US oil demand rose by 6.6% y/y or 1.2mb/d, and according to very preliminary
numbers Germany and India also showed healthy growth rates in May. If these
preliminary data are confirmed it could lift global oil demand growth to above 2.75 mb/d
y/y in May.

It is once again distillates that are the main contributor to growth. According to the
weekly oil date from the US Energy Information Agency (EIA), US implied distillate
Source: Ecowin, EIA
demand rose by close to 13% y/y over the past four weeks. The strong distillate demand
is reflected in the continuing recovery in US industrial production and regional trade.

Chinese apparent demand rose according to the IEA by 12.7% in April. The underlining Falling Chinese gasoline demand, but
numbers continue to reflect strong Chinese industrial growth. Chinese demand for strong car sales
naphtha rose by 41.5% y/y in April, which mirror China’s aggressive expansion of its
petrochemical capacity in the past twelve months. But also demand for jet fuel/kerosene
(30.1% y/y), gasoil (30.1% y/y) and “other products” (22.5% y/y), such as bitumen,
continues to grow strongly. However, Chinese use of gasoline is quite weak and actually
fell 2.7% y/y in April despite Chinese domestic sales of automobiles in the first five
months of 2010 are 58% above the level seen in the same period in 2010.

However, it seems that Chinese demand has levelled off somewhat in May and growth
might have dipped to 700-800kb y/y after running above 1mb the first four months of Source: Ecowin

2010. The weekly import of crude dropped to 4.4% y/y in May, the lowest growth rate
since March 2009.

The long-awaited Yuan revaluation in June briefly boosted oil prices, as the market saw
Global 2010 demand forecasts
the move as positive for Chinese inland demand. However, for now the revaluation has
been rather modest and no one-off move has been seen. The move should ensure that Global oil demand growth 2010, mb/d y/y
China will be able to grow steadily going forward based on a more diverse mix between 2
export and domestic growth. However, China is still pivotal for commodity markets and
1.5
signs of a more severe Chinese slowdown or further monetary policy tightening due to
1
inflationary pressure could depress prices. In the theme article: Odds for a soft landing in
0.5
China are good we argue that the risk of a so-called hard landing in China is modest and
0
that growth should continue close to trend at approximately 9.5% for the rest of 2010 and
OPEC US DOE IEA Danske
2011. A growth path should support mild upward pressure on oil prices going forward.
Source: OPEC; DOE, IEA, Danske Markets.
There has been no official change to China’s product price scheme, but on June 1 a cut to
“guideline” prices of 3% was implemented just 1½ month after prices were hiked by 5%.
Hence, it seems that China has moved a step closer to letting prices be decided in the
market. However, as the IEA notes in its latest Oil Market Report it seems that the
Chinese authorities are much more reactive to falling prices than rising prices.

All in all, we believe that we are on track for our forecast for a 1.8 mb/d growth in global
oil demand in 2010. Our forecast is still slightly more positive than the IEA’s that
forecasts growth of 1.7 mb/d and well above that of Opec that sees demand growing at
just 1mb/d. The US Department of Energy (DOE) forecasts 1.5 mb/d oil demand growth
in 2010.

6| 30 June 2010
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Commodities Monthly

We have now clearly reached an important turning point in global oil demand. During Q2
Weaker Chinese oil imports in May
OECD demand started to add to positive demand growth, whereas the growth
contribution from non-OECD continued to stay at elevated levels, still being by far the
most important factor. In 2010 we forecast that non-OECD demand will contribute close
to 90% of projected global oil demand growth.

OECD area oil demand has firmly turned positive … but non-OECD still the far
modest important contributor to growth in 2011

Source: Ecowin

Source: Energy Information Agency, EIA. May numbers are EIA forecast.

Global oil demand with forecasts

mb/d 2008 2009 Danske 2010 IEA 2010

OECD 47.6 45.5 45.7 45.5
non-OECD 38.4 39.3 40.9 40.9
Total demand 86 84.8 86.6 86.4
Source: IEA, Danske Markets.

Note that the IEA revised its global demand marginally higher to 1.7 mb/d in the June oil
market report, from 1.6 mb/d in the May report. The IEA says the revision came after
stronger than expected preliminary data from the OECD area.

Finally, we should not ignore the risk that a soft patch in global demand could hit oil
consumption in coming months. Indeed, we forecast that global indicators are now close
to peak, or have already peaked. We believe they will continue to point to healthy
economic growth. But the market could very well interpret lower PMI and ISM readings
more negatively as lower indictors would be interpreted as global growth momentum
fading. The market might also start to worry about monetary and fiscal tightening
measures ahead. The latter has become the focal point for the market in the aftermath of
the European debt crisis. Several countries have already announced austerity measures
that everything equal dampens economic growth.

Room for new short-term long speculative oil positions

The latest Commitment of Traders Report, CFTC, data showed that the speculative part of
the market scaled back on long crude oil positions in June to the lowest level since July
last year. It probably reflects that the speculative community left commodities as risk
appetite came under pressure in May and June. But that said the market is still marginally
speculative long by 39.6 thousand contracts. But it represents just 3.1% of open interest.

7| 30 June 2010
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Commodities Monthly

A slightly different picture emerges when looking at the monthly “Asset under
Front-end spread has tightened
Management” data that Barclays Capital publishes. These flow data showed that the 5.0 5.0
4.5 USD/barrel
energy complex attracted USD2.9bn in new investment flows in May. Energy came in 4.0
4.5
4.0

second after Precious Metals as an investment favourite. The apparent different pictures 3.5
3.0 2.pos-1.pos., WTI Nymex
3.5
3.0

between the two statistics could reflect that the latter better captures primarily medium- to 2.5
2.0
2.5
2.0
1.5 1.5
long-term investments that are less sensitive to short-term swings in risk appetite. 1.0 1.0
0.5 0.5
0.0 0.0
All in all, we believe the CFTC data primarily pose a short-term upside risk for oil prices. January February March April May June
10

If we see further global demand growth in oil, as we expect, we believe that the Source: Ecowin
speculative part of the market will re-enter long positions in oil, which could add upside
in Q3 to prices in a situation with focus on hurricanes and driving season in the US. The
negative roll in the front-end of the WTI crude oil curve has also fallen compared with
May where is reached USD4.5/barrel – a spread that made long WTI positions in the
front-end of the curve very expensive.

Room for new long speculative oil positions if the positive demand picture continues

$/bbl 1000 contracts

140 175
Speculative positions >> Net long oil << Crude oil
120 125

100 75

80 25

60 -25

40 Net short oil -75

20 -125

04 05 06 07 08 09 10

Source: CFTC

Opec supply steady in May… but will it continue OPEC compliance marginally higher
During May global oil supply fell 0.6mb/d to 86.3 mb/d. The decline was primarily due to 90 OPEC compliance
80
lower non-Opec production. Maintenance in the North Sea and elsewhere, was the main 70
60
reason production slowed. Opec production was also marginally lower in May with 50
output pencilled in at 29.0 mb/d by the IEA. 40
30
20
If we take a closer look at Opec it is noteworthy that production by the quota countries 10
fell by 160kb/d to 26.61mb/d. Opec still produces well above the 24.845 mb/d quota and 0

the compliance rate is a modest 58% compared with 55% in April. Even if the compliance
rate is not convincing, it might underline that Opec has become more worried about the
still abundant global oil stocks. Source: IEA, Danske Markets

In Opec’s own June Oil Market Report the cartel stressed very clearly that the current
market balance leaves no room for additional oil supplies in the market. As mentioned
above Opec forecasts modest 1 mb/d demand growth in 2010. If the Opec forecast proves
to be correct we should expect lower oil prices if Opec do not cut production
significantly. However, the latest announced Opec customer allocations to Asian buyers
actually points to higher production in the coming months. On the other hand, the latest
Reuters survey shows that analysts on average expect a small decline in production in
June.

8| 30 June 2010
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Commodities Monthly

Even though Opec’s own economists argue that the oil market is at risk of being
oversupplied the Opec secretary general El-Badri does not seem to be overly concerned.
He said recently that he finds the current price of close to USD80/barrel comfortable and
that he sees no reason to change production or quotas ahead of the October Opec meeting.
However, he stressed that Opec compliance should not go any lower. The story once
again underlines that Opec has a quite flexible interpretation of a “comfortable” or “fair”
oil price.

For a long time Opec has been talking about a USD70-80/barrel level. We believe it is
quite likely that the “fair” level is moving to USD80-90/barrel later in the year. During
2011 we will not be surprised to see Opec discussing that USD100/barrel is needed to
secure adequate oil supplies.

Global oil supply with forecasts

mb/d 2008 2009 Danske 2010 IEA 2010

OECD 19.3 19.4 19.4 19.5
non-OECD 28.8 29.4 30.2 30.2
OPEC 35.6 33.3 34.1 n.a.
Misc 2.7 2.7 2.7 n.a.
Total supply 86.4 84.8 86.4 n.a.
Source: IEA, Danske Markets.

Oil spill to push marginal costs higher

Outside Opec much focus is on the catastrophic oil spill in the US Gulf of Mexico. The
missing production from Deepwater Horizon rig is in itself too small to matter in terms Longer-dated oil prices stay high,
on the output side. But the spill has meant that deepwater drilling has suddenly become a Nymex WTI (USD/barrel)
controversial technology and the accident will almost inevitably have a major impact on Diff. (r.h.) Jun-28 Apr-19

100 8
the sector going forward.
7
95
6
The Obama administration has halted all drilling in deep water in the Gulf of Mexico for 90
5

six months, although current production will be permitted to continue for the time being. 85 4

3
80
The Norwegians have also suspended any new drilling in deep water, but are allowing 2
75
ongoing drilling to proceed. The six month Obama moratorium is currently under legal 1

70 0
challenge but the challenge itself could take longer than six months. 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Bloomberg
The IEA’s latest monthly Oil Market Report looks at the long-term consequences of the
disaster. The IEA reckons that it could have a marked effect on oil supply, with up to
300,000 b/d of deepwater production in the danger zone in the Gulf of Mexico by 2015.
According to media reports the IEA Chief economist Fatih Birol has expressed concern
that up to 900,000 b/d of global production could be delayed over the next five years. The
2011 effect of the ban is expected at 70,000 b/d by the US DOE.

Considering that the market balance is expected to tighten in the coming years, this is far
from insignificant – not least because deepwater drilling has for many years been seen as
the way forward, especially outside Opec. If this scenario plays out the sure winner will
be Opec as the western dependence on the cartel will grow.

However, the impact on costs could in fact turn out to be much more important for the
market pricing. With Opec keeping a rein on production, oil prices are, in principle,
decided by the most expensively produced oil to be sold in the market – the marginal cost
is equal to the price. The cost of deepwater drilling is now set to rise. Following the Piper
Alpha disaster in the North Sea in 1988, for example, the UK introduced more than 100
new maintenance and safety regulations. There are already reports that the price of
insurance for deepwater drilling has rocketed. Future insurance and contingency

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Commodities Monthly

requirements may also make it difficult for smaller operators that do not have the same
financial strength as the oil majors.

The oil spill might also intensify the supply effect of the current hurricane season in the
Gulf of Mexico. The tendency to shut-in production will likely be higher than normal to
avoid anything similar to the Deepwater Horizon oil spill. According to National Oceanic
and Atmospheric Administration (NOAA), the US hurricane season is expected to be
“active to extremely active”.

Since the oil spill we have seen a marked steepening of the oil curve. Spot prices have
moved lower, but long-dated oil prices (DEC17, DEC18) have stayed above
USD90/barrel. In our view, the sticky long-dated oil prices reflect a market pricing in
rising costs going forward. The oil spill might also further support the current market
perception that USD70/barrel poses a strong cost resistance for oil prices. However, it is
worth noting that Opec currently has large spare capacity and with Iraq planning to
expand operations markedly over the next decade, it is in our view far too early to price in
a supply crunch.

Stocks are still elevated

On balance, we anticipate that the global oil market will see minor stock draws during the
course of the year. The last time a decline in global stocks was seen was 2007 – last year
Global changes in oil stocks
the market was largely in balance. With consumption simultaneously picking up, this
should lead the OECD forward-demand cover to decrease gradually, although we may not mb/d 2008 2009 2010
Stock change 0.4 0 -0.2
reach the 52-54 days that Opec prefers until 2011. Prices (USD/bbl) 102 70 80
Source: IEA, Bloomberg, Danske Markets.

OECD forward demand-cover at elevated level in April

days
63 2009 US stocks above 2009 level
61
59 mean
57 2010 2005-2009
55
53
51
49 Min/max
47 2005-2009
Jan Feb Mar Apr Maj Jun Jul Aug Sep Okt Nov Dec Jan Source: EIA, Ecowin

Source: IEA, Danske Markets

In April the OECD forward demand cover stood at 60.5 days up from 59.5 at end-March
and the preliminary data actually points to another rise during May. The weekly US stock
data from the EIA have shown that US commercial crude oil stocks have risen
countercyclical in the past two weeks and the level is now above the level seen a year
ago, when demand was significantly weaker. There has lately been some speculation that
the reason why US stocks in particular have risen lately is oil stored at sea being
offloaded in the US Gulf. But, even if we take this effect into account the stock situation
is a risk factor for our relative bullish oil price call.

10 | 30 June 2010
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Commodities Monthly

Still some upside for oil prices, but financial factors could weigh
negatively
Our fundamentally based fair-value models for crude oil did not catch the dip in oil prices
to USD70/barrel in May. It underlines that there was little fundamentally behind the move
lower. The fundamental model has no clear direction for oil prices at the moment pointing
to a fair value in the mid USD70s.

However, the version of the model augmented with financial factors such as the stance of
US equity and bond markets and EUR/USD points to prices being overvalued at the
moment. If oil should correct fully to other financial factors we should expect a correction
well below USD70/barrel. The financial augmented model might have a short-coming in
catching the new drivers for EUR/USD. As we elaborated earlier in this section we
believe the oil market will continue to ignore the lower EUR/USD, as it primarily reflect
a risk premium attached to the euro.

All in all, we expect to see a minor upside risk to oil prices in Q3, as the market continues
to factor in the improvement in underlying fundamentals. We have left our oil profile
unchanged and continue to pencil in a Brent average of USD81 in 2010 and USD90 in
2011.

WTI: Danske Markets vs forward Brent: Danske Markets vs forward

WTI Danske WTI fwd Brent Danske Brent fwd

100 100
95 95
90 90
85 85
80 80
75 75
70 70

Source: Bloomberg, Danske Markets. Source: Bloomberg, Danske Markets.

Fundamentals-based model of crude prices suggests that oil Financial-factors augmented model says oil prices are
is close to fair value overvalued

Source: EcoWin, Danske Markets. Note: variables include US stocks, China IP, Source: EcoWin, Danske Markets. Note: variables include US stocks, non-com
US IP, non-com pos, EUR/USD. pos, EUR/USD, S&P500, 2-10 spread, 3m-2y spread.

11 | 30 June 2010
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Commodities Monthly

Energy charts
Crude oil prices WTI futures curve

Source: Ecowin Source: Ecowin

Natural Gas, Henry Hub, 1-pos Fuel Oil, 3.5% CIF NWE

Source: Ecowin Source: Ecowin

Gasoline RBOB, 1-pos NYMEX RBOB gasoline futures curve

Source: Ecowin Source: Ecowin

Heating oil, 1-pos NYMEX Coal, 1-pos, API2

Source: Ecowin Source: Ecowin

12 | 30 June 2010
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Commodities Monthly

Electricity price, Nordpool, 1-pos, quarterly Emission rights, CO2, ICE ECX

Source: Ecowin Source: Ecowin

Bunker fuel oil and crack spread Total crude oil stock, EIA

Source: Ecowin Source: Ecowin

Gasoline stock, EIA Gasoline crack spread, NYMEX 1-pos

Source: Ecowin Source: Ecowin

Distillate stock, EIA Heating oil crack, NYMEX 1-pos

180 180
mb mb
170 170
2009
160 2010 160

150 150
Mean 2005-2009
140 140

130 130

120 2008 120

110 110
Min/max last 5 years
100 100
W W W W W W W W W
1 5 9 13 21 29 37 45 53

Source: Ecowin Source: Ecowin

13 | 30 June 2010
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Commodities Monthly

Base metals: Copper lags aluminium

Base metals have witnessed an extensive sell-off since April and did not join the energy
Monthly changes in base metals
complex in its mid-June recovery. Not least nickel has come down significantly from
peaking close to USD27,300/tonne in April. Compared with May the losses seen in Steel
industrial metals in June are fairly limited however. This should not be viewed as a Zinc
stabilisation of prices at new levels though – indeed, volatility is likely to stay as the
Nickel
market remains in a stance of high alert to any negative news on the economy.
Lead

2009 surge replaced by spring sell-off Copper

Aluminium

-12 -7 -2
m/m, %
Source: Bloomberg, Danske Markets.

Growth momentum fading – will jobs

creation materialise next?

Source: EcoWin, Danske Markets.

Although we had projected more strength in metals prices for H1 than has in fact
materialised, what has surprised us the most is that copper and aluminium have moved so
Source: EcoWin, Danske Markets.
closely together and are now 10% lower than at New Year. On the contrary, steel and
nickel, which have also co-moved strongly, are up 10% in the year-to-date. The main
reason for the close association of aluminium and copper is, in our view, that a pick-up in
demand for aluminium has outweighed the prospects of structural oversupply of the
Stronger yuan to boost imports
metal. In contrast, consumption of copper has surprised on the downside and thus limited
price potential despite projections of weak mine supply for years to come.

Manufacturing sentiment has improved rapidly since bottoming out in early-2009. But,
with leading indicators now likely close to a peak and already pointing to weaker
momentum in some countries – not least in China – the next thing to focus on for the
cyclical base metals is the self-sustainability of the upswing. There are signs that
employment growth is in the wakening and thus that consumer sentiment is improving.
This should benefit private consumption and together with historically low interest rates Source: EcoWin, Danske Markets.
the still rather distressed housing market in the US.

Strength of Chinese commodity imports wearing off, but support from stronger yuan

Latest One month ago m/m One year ago y/y

Copper (1000 tonnes) 397 436 -9% 423 -6%
Aluminium (1000 tonnes) 94 93 1% 332 -72%
Crude Petroleum Oil 18 21 -16% 17 4%
Steel Products 1 2 -9% 2 -18% Senior Analyst
Christin Tuxen
Soybeans 4 4 4% 4 24%
+45 4513 7867
Iron Ore & Concentrate 52 55 -6% 53 -3% tux@danskebank.dk
Source: Bloomberg, Danske Markets. Note:

14 | 30 June 2010
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Commodities Monthly

While the recent G20 meeting ended with an agreement for governments to cut their
deficits in half by 2013, this should not have a major direct impact on Chinese
infrastructure spending and thus the ample demand for base metals from that side remains
intact for now, see also Asia update. Also, the announcement by the People’s Bank of
China that yuan appreciation will now be tolerated should increase the purchasing power
of Chinese companies – but simultaneously weigh on external competitiveness. Notably,
the strength of Chinese commodity imports has started to come down from previous
elevated levels with particularly aluminium and steel products below last year’s levels
when the Chinese State Reserve Bureau conducted strategic buying. In the short run, the
net effect on Chinese demand for metals of a stronger yuan is somewhat ambiguous but in
the longer run stronger domestic consumption should be positive for global growth and
hence industrial metals.

Aluminium demand has been fairly strong in the cycle so far followed by an upsurge in
steel and nickel earlier in the year. We anticipate that the next phase in the cyclical
recovery will bring about improvement in copper demand as well. Aluminium could see a
soft patch end-2010 as demand momentum fades and metal currently tied up in term deals
is released to the market. Steel and in turn nickel and zinc could suffer over the summer
period due to seasonal weakness in demand, but we expect to see a resurrection in late-
2010, as construction demand finally advances.

Expected relative performance of base metals

Al Cu Zi Ni Steel
125
120
115
110
105
100
95
90
10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4

Source: Bloomberg, Danske Markets. Note: index with 2010 Q2 =100.

15 | 30 June 2010
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Commodities Monthly

Aluminium: Stronger now but

weakness seen further out
Aluminium has proved relatively resilient despite the still large stocks globally. While
Elevated stocks weigh on aluminium
producer inventories have declined and LME stocks have been broadly stable, its SHFE
prices
counterpart has been creeping higher still. Taken together, global stocks remain at the
record highs built up during the massive consumption shortfall in wake of the recession.

Global aluminium stocks continue to rise as SHFE inventories increase

Producer LME Japanese ports TOCOM SHFE

7000
6000
5000
4000 Source: EcoWin, Danske Markets.
3000
2000
1000
0
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Source: CRU, Danske Markets.

Car production struggles to catch up

The main reason why aluminium has fallen relatively little compared with copper, which with sales
sees much more moderate stock levels, is support from a continuously improving demand
side. Pent-up demand pressures have benefitted aluminium with not least car production
picking up after a massive decline in late-2008, where production fell more than sales,
thus leading to a large draw in auto inventories. Moreover, a range of government
schemes to support the automotive industry have increased demand for fuel-efficient cars,
which require relatively large amount of aluminium to produce. In particular, US demand
has improved substantially with new orders rather strong.

Aluminium orders surge... ... with US leading the way Source: EcoWin, Danske Markets.

3000 North America

Europe
Asia
2000

1000

0
Jan-06 Jan-08 Jan-10

Source: EcoWin, Danske Markets. Source: CRU, Danske Markets.

This improvement in demand is also evident from an increase in cancelled warrants at the Senior Analyst
LME. Owners of the aluminium in LME warehouses are thus increasingly asking for the Christin Tuxen
+45 4513 7867
metal to be prepared for delivery. Indeed, physical premiums have risen markedly since tux@danskebank.dk
early-2009 – not least in Europe recently – and it now costs up 9% more to obtain
aluminium in the physical market compared with LME prices. As a result, it pays for
owners of aluminium stored at LME to take the metal out of exchange warehouses and
sell it to end users.

16 | 30 June 2010
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Commodities Monthly

Cancelled warrants edge higher still... ...but China is now a net exporter

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

Unlike other base metals, China is now a net exporter of aluminium, as domestic smelters
have ramped up output noticeably since mid-2009. H1 has seen production levels stabilise
at high levels though. However, rising costs from higher energy prices and rising alumina
prices suggest that the cost curve for aluminium is gradually catching up with spot prices.
Thus, as a range of Chinese smelters are marginal producers, some of these may be on the
brink of loss-making production and thus soon be squeezed out. This suggests that we
may see stalling production in H2, ensuring that stockpiling comes to an end.

Crucially, there has been some discussion in the market of letting alumina pricing
undergo similar changes to that of iron ore and thus increasingly use contracts that tie the
price which aluminium producers pay miners to spot-market levels.

Chinese aluminium production has

Input costs catching up with prices
been stable in H1

Market comfortably in surplus

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

The aluminium market has been in a comfortable surplus for all of this year, as has been 600 Western world S/D balance
the case since the mid-2007 only interrupted by a small temporary deficit in June last 500
400
year. This consistent market surplus has induced a marked rise in the global stocks-to-
300
consumption indicator. This indicator of market tightness is still above 20 weeks, albeit 200
the ratio has come down a little since peaking in early-2009. 100
0
Stocks-to-consumption ratio points to a well-supplied market -100
-200
Stocks-to-consumption (total stocks) Stocks-to-consumption (LME) Feb-06 Feb-08 Feb-10
30

25 Source: CRU, Danske Markets.

20

15

10

0
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Source: CRU, Danske Markets.

17 | 30 June 2010
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Commodities Monthly

In our view, these plentiful stocks continue to pose important downside risk to aluminium
Aluminium forward-curve: contango
going forward. For the time being, however, a lot of the metals are tied up in financial
deals and these could continue to be rolled over as long as the contango profit is large
enough to make up for financing and storage costs. Rising interest rates and warehousing
costs going forward could, however, imply that deals are increasingly unwound. This may
induce some weakness in aluminium around New Year 2010/11.

However, a new aluminium EFT is due to be launched at the end of the year and with this
to be backed by physical aluminium, some support to prices from the investor side may
be anticipated. In recent months, gold has attracted a lot of investor funds and gold ETFs Source: EcoWin, Danske Markets.
are currently the most popular form of physical commodity ETFs; inflows have continued
to rise since the first gold ETF was made available to the market in 2003. Indeed, ETFs
are becoming ever more important for supply-demand balances, both from a stock and
Danske Markets forecast vs forward
flow perspective. The evidence from precious metals ETFs suggests that physical
holdings of commodities as an asset class can be positive for commodity prices. Alu Danske Alu Fwd
However, if inflows cease at some point, this could leave significant holes in demand 2,500
2,400
even if the stock of ETF holdings is constant.
2,300
In terms of fair value, the spring sell-off has taken prices close to model-implied value. 2,200
On the whole, we look for aluminium to have only limited potential to go higher this year. 2,100
2,000
We expect that aluminium will eventually see weakness from elevated stocks and
1,900
unwinding of term deals but also that the metal could receive potential support from the
launch of a new physically-backed ETF and rising production costs. Specifically, we see
aluminium averaging USD2,100/tonne (previously USD2,200) this year and
USD2,300/tonne (previously USD2,400) in 2011. Source: Bloomberg, Danske Markets. Note: index
with 10Q2=100.

Aluminium prices now close to fair value

Source: EcoWin, Danske Markets.

18 | 30 June 2010
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Commodities Monthly

Copper: Balance to tighten further out

Copper has been sold off to broadly the same extent as aluminium despite the fact that
LME copper stocks coming off a peak
global stocks in the former has been coming off a peak in H1. For a while, it seemed that
the drop in LME stocks was offset by a rise in SHFE inventories as traders took
advantage of the arbitrage window with the difference between LME and SHFE prices
outweighing costs, but SHFE inventories are now declining too.

Global stocks decline Production struggling to increase

Source: EcoWin, Danske Markets.

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

On the supply side, Chilean and Chinese production alike is struggling to rise.
Notwithstanding, the market saw a surplus in both 2008 and 2009. However, according to
figures from the International Copper Study Group, the balance for refined copper turned
negative (deficit) in March. Also it is noteworthy that the share of secondary sources in
production – i.e. use of copper scrap – is high as output from primary sources remains
weak. Indeed, US copper scrap discounts are at fairly low levels, suggesting that the
market is quite tight.

Going forward, it is difficult to see how copper supply can expand much at current price
levels. New mines due to come on stream in the next few years will only broadly make up
for declining production at existing mines. In addition, Australia’s recent announcement
of a 40% super-tax on miner’s revenues has already led some mining companies to
reportedly cancel investment plans. Although, the final form of the tax is not know yet
with negotiations between policymakers and miners still ongoing, this highlights the
problems in increasing mine production.

Copper market in deficit Scrap usage rising

Refined copper balance Share of scrap in refined prod

400 18
200 17
0 16
-200 15
-400
14
-600
-800 13
-1000 12
Senior Analyst
Christin Tuxen
+45 4513 7867
tux@danskebank.dk
Source: ICSG, Danske Markets. Source: ICSG, Danske Markets.

19 | 30 June 2010
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Commodities Monthly

For now, however, there are only a few signs of improvements in demand for copper.
While the Chinese housing market is booming, construction sectors in US and Euroland Chinese appetite for copper still high
are still only about to invoke on a recovery. Notwithstanding a small decline in May,
Chinese demand for copper has bounced back to the remarkable levels seen in the
summer of 2009 when China did strategic buying at low prices. Notably, Chinese semis
production have picked up in recent months. In contrast, there are still few signs that the
property sector in the US is getting better: building permits and housing starts are still at
historically very low levels. Indeed, cancelled warrants are subdued and show no
immediate signs that owners of metal at the LME wish to take this out of warehouses.
Source: EcoWin, Danske Markets.
US housing market at a turning point Cancelled warrants still low

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

China thus remains the key driver of copper demand at present with fiscal stimulus
measures continuing to provide support via spending on rail network and purchase Danske Markets forecast vs forward
subsidies for both durable goods and hybrid/fuel-efficient cars. These effects should Copper Danske Copper fwd
however start to fade from 2010/11 but as the business cycle matures we expect the
8,400
OECD region to take over on the demand side, as low financing costs should act to
eventually get construction activity going again in these regions too. Notably, there are 7,900

already signs that demand for durable goods in the US is becoming more healthy with 7,400
May seeing the capital goods orders ex-defence and aircrafts posting the highest three- 6,900
month average growth rate since 1997. Also, the weaker euro implies improved 6,400
competitiveness for the euro-area export sector.

On our fair-value measure, copper prices have been overvalued for most of this year. The
relatively low model-implied value is, however, mainly due to the weakening of the euro Source: Bloomberg, Danske Markets. Note: index
and the model crucially does not take future supply issues into account. We are still more with 10Q2=100.

positive on the copper market than the market at present and look for copper to average
USD7,300/tonne (previously USD7,500) and USD8,400/tonne (previously 8,500).

Prices still above fair value in spite of sell-off

Source: EcoWin, Danske Markets.

20 | 30 June 2010
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Commodities Monthly

Nickel/steel: Cost-push still in store

Nickel saw an impressive rebound at the start of the year when the stainless steel sector
raised production rapidly. Steel mills had run down inventories of nickel during the crisis Nickel stocks at record highs
and thus had to re-stock a large amount of material as production went up. The price of
LME steel billets rose markedly within a short time span but has since fallen back
somewhat. Similarly, prices of other steel products, such as hot rolled coil and plate also
edged higher but have since come down again.

LME steel – there and back again NYMEX steel – same picture

Hot rolled coil (USD/short ton)

750
Source: EcoWin, Danske Markets.
700
650
600
550
500
450
400
Apr-09 Oct-09 Apr-10

Source: EcoWin, Danske Markets. Source: Bloomberg, Danske Markets.

The nickel market is currently well-supplied with a stocks-to-consumption ratio close to

15 weeks. Cancelled warrants at LME suggest that demand is weak but potentially on the
rise. The interpretation of movements in LME data is, however, troubled by the fact that
one large market player is reportedly in charge of 50-80% of total stocks. Importantly,
Chinese imports of the metal have held up fairly well despite the end of official strategic
purchases. At the same time, US demand looks strong with physical premiums picking up
strongly and the premiums paid for obtaining nickel in the physical market in Japan are
also ticking up. We now look for nickel prices to average USD21,300/tonne (previously
USD22,000/tonne) in 2010 and USD22,900/tonne (previously USD23,000/tonne) in
2011.

Cancelled warrants for nickel subdued Danske Markets vs forward

Nickel Danske Nickel fwd

25,000
24,000
23,000
22,000
21,000
20,000
19,000

Source: EcoWin, Danske Markets. Source: Bloomberg, Danske Markets. Note: index
with 10Q2=100.

Senior Analyst
Christin Tuxen
+45 4513 7867
tux@danskebank.dk

21 | 30 June 2010
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Commodities Monthly

The main reason for the spring rise in steel prices was the cost-push shock from higher
iron-ore, nickel and energy costs. Crucially, the industry is undergoing significant Danske Markets forecasts
changes with respect to the pricing of iron-ore as steel mills and mining companies have
agreed to move toward more frequent negotiations of contracts. At present, this implies 120 Brent crude Steel
that higher iron-ore prices feed through to steel, but it is important to note that prices of 115
iron-ore have edged down a little in recent months. In the longer term, these industry 110
changes will, first and foremost, make steel prices more volatile as spot market 105
fluctuations for input factors are more directly felt via costs in the steel sector. 100
95
After the recent sell-off in metals prices, albeit less so in iron-ore, and rapidly recovering 90
energy prices, it seems that the initial cost-push effect has been priced out of steel prices
again. Hence, in our view, a second stage of cost-push pressure feeding into prices could
take place in H2 once the seasonal summer slowdown in demand is over. As a result, we
Source: Bloomberg, Danske Markets. Note: index
see the LME steel billet contract average USD475/tonne (previously USD525/tonne) in with 10Q2=100.
2010 and USD525/tonne (previously USD600/tonne) in 2011.

Global steel production now at pre-

Iron-ore prices down a little
crisis levels

Iron ore, spot price (USD/ton)

200
Contract price
150

100

50

0
Nov-08 Nov-09

Source: FT, Bloomberg, Danske Markets. Source: EcoWin, Danske Markets.

22 | 30 June 2010
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Commodities Monthly

Focus: Speculative positioning at LME

It remains an ongoing discussion in commodity markets as to whether speculation drives
Oil prices and speculative net longs
prices or not. Existing studies are divided on the issue: the CFTC found no effect of
speculators driving prices in their interim report, whereas the so-called Masters testimony
to the US Senate suggested that index speculator demand is in fact driving prices higher.
A recent draft report from the OECD draws on existing studies to conclude that
speculators do not drive commodity prices.

Using CFTC data, we have previously highlighted the existence of a significant causal
effect of non-commercial net long positioning at NYMEX on oil prices. For metals, the
lack of data on speculative positioning implies that it is not immediately possible to Source: EcoWin, Danske Markets.
assess the impact of investor flows. With the new aluminium ETF due to be launched at
the end of this year, this is becoming an increasingly pertinent issue.

In order to assess flows at the LME we here use data on open interest, combined with
price movements, to gauge the underlying non-commercial flows. Our method is as
follows. We first categorise likely investor flows based on changes in LME open interest
and in prices, i.e.:

• If open interest rises and price changes are positive, then this is taken as a
signal of investors adding net longs (value = 1).

• If open interest rises and price changes are negative, then this is taken as a
signal of investors adding net shorts (value = -1).

• If open interest declines and price changes are positive, then this is taken as a
signal of investors covering shorts (value = 1).

• If open interest declines and price changes are negative, then this is taken as a
signal of investors liquidating long (value = -1).
Copper speculative flows: COMEX
Second, we cumulate the direction of likely investor moves over time (i.e. values) to CFTC data vs own calculation for LME
arrive at a weekly index of speculative positioning at the LME. While the absolute level
of this index is difficult to interpret as we effectively assume investors are square at the
inception of the index in 1999, it arguably makes to compare levels over time and to
interpret changes in the index as indicating the direction of investor flows.

It is reassuring to see that the data available from the CFTC on net long positioning in
copper at COMEX – albeit a fraction of the market – co-moves well with our own-
calculated LME index of speculative flows for copper. This suggests to us that the above
method for categorising flows may do reasonably well in approximating actual changes in Source: EcoWin, Danske Markets.

positioning.

... but positions have been shed

Investors still in favour of copper...
recently

Senior Analyst
Christin Tuxen
+45 4513 7867
tux@danskebank.dk
Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

23 | 30 June 2010
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Commodities Monthly

Aluminium out of favour... ... and hit by the recent sell-off

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

Considering recent developments, our LME indices suggest that investors have generally
remained in favour of copper throughout the crisis while aluminium, in contrast, saw a
marked drop in investor interest in late-2008, according to our indices. During the spring
sell-off investors appear to have shed copper and aluminium positions to an equal extent.

Regarding the price impact of speculation, using statistical tests we are not able to detect
any clear pattern of causal relations between prices and the speculation indices for either
copper or aluminium. However, for these types of tests, the data frequency matters greatly
and it is possible that weekly changes blur the picture of causality. However, use of daily
index data may render our categorisation of flows invalid. Thus, until the LME decides to
publish data on speculative flows – this has reportedly been considered by the exchange -
it remains difficult to arrive at firm conclusions concerning the impact of investor flows
on metals prices.

24 | 30 June 2010
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Commodities Monthly

Base metals charts

Copper, LME Copper forward curve, LME

Source: Ecowin Source: Ecowin

Nickel, LME Nickel forward curve, LME

Source: Ecowin Source: Ecowin

Zinc Zinc forward curve, LME

Source: Ecowin Source: Ecowin

Lead, LME Lead forward curve, LME

Source: Ecowin Source: Ecowin

25 | 30 June 2010
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Commodities Monthly

Aluminium, LME Aluminium forward curve, LME

Source: Ecowin Source: Ecowin

Tin, LME Tin forward curve, LME

Source: Ecowin Source: Ecowin

Spread between Shanghai and LME Metal price index and the ISM

Source: Ecowin Source: Ecowin

Steel Billets, LME Stainless steel

Source: Ecowin Source: Ecowin

26 | 30 June 2010
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Commodities Monthly

Grains: Crop progress weighs down

prices
Monthly changes
Grains resilient to sell-off but crop progress weighs down prices
Compared with other commodities, grains have proved remarkably resilient during the CBOT Soybeans
spring sell-off. Soybeans and wheat are little changed in June but corn has lost close to
10%. Grains are notably much less cyclical than other commodities, although this may be CBOT Corn
changing somewhat due to the increasing use of bio-ethanol made from sugar as well as
LIFFE Wheat
corn, introducing a link to energy prices.

Unlike grain prices which have on the whole been relatively stable since early-2009, CBOT Wheat

exotics such as orange juice, cocoa, coffee and sugar rallied last year due to unfavourable
-10 -5 0 5
growing conditions. Significantly, the surge in sugar prices came to an end earlier in the m/m, %
year as Brazil and India increased production in response to high prices. In recent months,
Source: Bloomberg, Danske Markets.
prices have, however, started to edge higher again.

Overall, we continue to see wheat prices stalling over our forecast horizon whereas
soybeans and not least corn stand to gain a little.

Exotics outperformed grains last year Grains price remarkably stable

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

Danske Markets expected relative performance of grains

Wheat Corn Soybeans

120
115
110
105
100
95
90
10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4
Senior Analyst
Source: Bloomberg, Danske Markets.
Christin Tuxen
+45 4513 7867
tux@danskebank.dk

27 | 30 June 2010
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Commodities Monthly

Wheat: prices could continue to stall

US wheat stocks are currently at all-time highs due to record harvests in recent years.
With consumption broadly unchanged, this implies that the stocks-to-use ratio has surged
above 40% in the US. There is a close historical relationship with the ratio, an indicator of
spot market tightness, and proximate CBOT wheat prices. Raised inventories suggest that
wheat probably has little further short term potential.

Wheat stocks at record highs High stocks-to-use weigh on prices

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

However, in the case of grains the supply reaction to price changes can happen quickly.
Speculators bearish on wheat
Indeed, March WSADE data on prospective wheat plantings released by the USDA show
substantially less acreage being sown with winter wheat this year. Still, recent reports on
crop progress suggest that weather conditions have been constructive and that therefore
the yield could improve this season, partly offsetting the decline in production that lower
plantings indicate.

Non-commercial positioning in wheat has been net short since New Year – and we are no
less bearish than investors. With regard to wheat, China largely produces what it
consumes so we should not expect the Chinese to provide price support in the wheat
market. We believe wheat prices will stall this year, although the Liffe contract could Source: EcoWin, Danske Markets.
receive some tailwinds from further EUR/USD weakness as projected by our FX team.
We still expect average CBOT prices of USD482 in 2010 and USD494 per bushel in
2011 with corresponding Liffe prices of EUR128 and EUR125 a tonne, respectively. Danske Markets forecast vs forward

Wheat Danske Wheat fwd

Less wheat plantings... .. but crop progress is good 575

Wheat, US prospective plantings Wheat, crop progress (per cent) 525

(mn acres) 100
475
65000 80
60000 425
60
55000
50000 40
45000 20
Source: Bloomberg, Danske Markets. Note: CBOT
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

0
wheat contract.
2001 2004 2007 2010

Source: Bloomberg/USDA, Danske Markets. Source: Bloomberg/USDA, Danske Markets.

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Corn: ethanol production to provide structural demand boost

Corn prices initially held up well during the recent financial turmoil but saw some
Ethanol vs gasoline prices
headwinds in June as crop progress surprised on the upside. But, in fact, corn has more to
be positive about than wheat, for example. Although US stocks have edged higher in
recent years, so has consumption, with the stocks-to-use ratio fairly stable at around 13%
over the past few years. Chinese corn imports were strong last autumn, following a
decline early this year import volumes rose once again in May whereas other
commodities suffered from declines in Chinese appetite.

Corn stocks have increased Stocks-to-use moderate

Source: EcoWin, Danske Markets.

Source: EcoWin, Danske Markets. Source: EcoWin, Danske Markets.

Demand for corn is undergoing important structural changes due to rising demand from
Danske Markets forecast vs forward
ethanol production. US ethanol production has risen recently as energy prices have
recovered. However, the spread between gasoline and ethanol prices has increased as Corn Danske Corn fwd
motor gasoline prices have picked up. We expect this gap to close with corn prices 460
440
chasing gasoline, rather than the other way around. While gasoline prices have seen some 420
weakness of late, prices may have very little further upside at this point in the cycle. We 400
expect average CBOT prices of USD388 per bushel in 2010 and USD435 in 2011. 380
360
340
320
Corn crop progress surprise positively Corn-energy link via ethanol

Corn, crop progress (per cent)

100 Source: Bloomberg, Danske Markets.

80
60
40
20
0
2000 2003 2006 2009

Source: Bloomberg/USDA, Danske Markets. Source: EcoWin, Danske Markets.

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Soybeans: stocks up but demand supports prices

US soybean stocks are near decade-lows and the stocks-to-use ratio has been very low for
some time at around only 6%. However, Latin American production appears healthy
while stocks have recently begun to increase, leaving the tightness ratio to double to 12%
in past months with use simultaneously declining. Prospective US plantings are
marginally higher this season compared with last with less acres used for wheat due to the
relatively large stock overhang for that grain. Recent news on crop progress has been
good however, thus pointing to a good US harvest.

Chinese wheat appetite muted while

Stocks-to-use up recently
imports of soybeans continue to rise
Stocks-to-use, soybeans
25

20

15

10

0
1990 1996 2002 2008

Source: EcoWin, Danske Markets. Source: Bloomberg/USDA, Danske Markets.

China remains the driving force for demand in the soybeans market for the time being.
The country’s soybean imports have been steadily rising since 2000. Biodiesel production Danske Markets forecast vs forward
could also provide support for demand for soybean oil going forward if a US tax credit is Soybeans Danske
reintroduced. In addition, impaired production of palm oil due to adverse weather 1,100 Soybeans fwd
conditions may help support prices in the near term. We expect average CBOT prices of
1,050
USD967 per bushel in 2010 and USD1,015 in 2011.
1,000
Small increase in soy plantings Soybeans crop progress high 950

Soybeans, US prospective Soy, crop progress (per cent) 900

16000 plantings (mn acres) 100
15000 80
14000 60 Source: Bloomberg, Danske Markets.
13000 40

12000 20
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

2000 2003 2006 2009

Source: Bloomberg/USDA, Danske Markets Source: Bloomberg/USDA, Danske Markets

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Agricultural charts
Sugar Soybeans

Source: Ecowin Source: Ecowin

Wheat Corn

Source: Ecowin Source: Ecowin

Nominal prices Real price*

Source: Ecowin Source: Ecowin

Pig prices Feeder cattle

Source: Ecowin Source: Ecowin

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Precious metals charts

Gold, spot Forward curve, Gold, Nymex

Source: Ecowin Source: Ecowin

Silver, spot Forward curve, Silver, COMEX

Source: Ecowin Source: Ecowin

Platinum, spot Future curve, Platinum, Nymex

Source: Ecowin Source: Ecowin

Palladium, spot Future curve, Palladium, Nymex

Source: Ecowin Source: Ecowin

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Historical commodity prices

30/06/2010 Month ago Year ago This year
Price Price %, m/m Price %, y/y Start level YTD change,
%
Energy
NYMEX WTI 1.pos. 76.2 74.0 3.1 69.9 9.1 79.4 -3.9
NYMEX Gasoline RBOB
(Usc/gln), 1.pos. 206.1 202.0 2.1 189.7 8.7 205.3 0.4
ICE Brent 1.pos. 75.6 75.0 0.8 69.6 8.6 78.3 -3.4
ICE Carbon (€/tn), DEC-09 15.1 15.1 -0.1 13.8 9.5 12.5 20.4
Electricity Nord Pool,€, 1.month 44.5 46.3 -4.0 . - - .
TTF Natural Gas (€) 1st. month 19.9 16.4 21.0 10.7 86.1 12.9 54.4
Natural Gas, Nymex, 1.pos. 4.5 4.3 4.7 3.8 18.5 5.6 -18.4
API2, steam coal, 1st month 94.8 92.3 2.7 63.0 50.4 83.2 13.9

Base metals:
LME 3M Prices (US$/t)
Aluminium 1,955 2,041 -4.21 1,628 20.06 2,228 -12.24
Copper 6,514 6,953 -6.33 4,981 30.86 7,389 -11.86
Lead 1,727 1,852 -6.76 1,692 2.07 2,434 -29.07
Nickel 19,225 21,350 -9.95 15,375 25.04 18,525 3.78
Zinck 1,773 1,937 -8.47 1,550 14.40 2,561 -30.78

Precious Metals:
Spot Prices (US$/oz)
Gold 1,242.6 1,217.1 2.1 931.0 33.5 1,099.3 13.0
Silver 18.6 18.6 0.1 13.6 36.6 17.0 9.7

Agriculturals:
Front Month Prices
CBOT Wheat (USd/bushel) 458.5 475.5 -3.6 621.0 -26.2 580.5 -21.0
Matif Mill Wheat (€/t) 131.5 133.0 -1.1 138.5 -5.1 131.3 0.2
CBOT Corn (USd/bushel) 328.0 358.8 -8.6 347.5 -5.6 414.3 -20.8
CBOT Soybeans (USd/bushel) 950.5 937.8 1.4 1,226.3 -22.5 1,039.8 -8.6
NYBOT Sugar (USd/lb) 17.6 14.2 23.9 16.9 3.8 26.9 -34.8

Commodity indices
Reuters/CRB TR 256.3 254.8 0.6 250.0 2.5 283.4 -9.6
S&P GSCI Energy TR 904.7 894.4 1.2 1,010.4 -10.5 1,016.2 -11.0
S&P GSCI Industrial Metals TR 1,444.0 1,551.0 -6.9 1,236.9 16.7 1,706.9 -15.4
S&P GSCI Agriculture TR 485.7 491.0 -1.1 580.3 -16.3 615.5 -21.1
S&P GSCI Precious Metals TR 1,604.2 1,570.8 2.1 1,222.4 31.2 1,424.0 12.7
AIG 124.2 125.4 -0.9 122.5 1.4 139.2 -10.7
Rogers commodity index TR 2,933.9 2,950.0 -0.6 2,909.5 0.8 3,275.0 -10.4

Steel prices (EUR/t)

EU domestic hot rolled coil 610.0 610.0 0.0 375.0 62.7 370.0 64.9
EU domestic cold rolled coil 680.0 680.0 0.0 440.0 54.6 455.0 49.5
EU domestic hotdip galv. coil 690.0 690.0 0.0 507.5 36.0 580.0 19.0
Source: Bloomberg, Danske Markets.

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Commodity-price forecasts
2010 2011 AVERAGE
30/06/10 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 2009 2010 2011
Energy:
front month
NYMEX WTI (US$/bl) 76.2 81 81 80 85 87 89 92 94 71 82 91
ICE Brent (US$/bl) 75.5 79 81 79 84 86 88 91 93 70 81 90

Base metals:
LME 3M (US$/t)
Aluminium 1,955 2,199 2,131 2,100 2,100 2,150 2,200 2,300 2,400 1,702 2,132 2,263
Copper 6,514 7,274 7,072 7,200 7,500 8,000 8,400 8,600 8,700 5,188 7,261 8,425
Zinc 1,773 2,307 2,067 1,900 2,000 2,100 2,150 2,200 2,250 1,686 2,069 2,175
Nickel 19,225 20,163 22,569 21,000 21,500 22,000 22,500 23,000 24,000 14,746 21,308 22,875
Steel 440 464 491 460 475 500 510 530 550 361 473 523

Precious Metals:
spot (US$/oz)
Gold 1,242 1,110 1,194 1,200 1,150 1,100 1,050 1,000 1,000 974 1,164 1,038

Agriculturals:
front month
Matif Mill Wheat (€/t) 132 126 131 132 123 120 127 127 127 148 128 125
CBOT Wheat (USd/bushel) 459 518 490 470 450 475 500 500 500 600 482 494
CBOT Corn (USd/bushel) 328 389 379 375 410 420 430 440 450 419 388 435
CBOT Soybeans (USd/bushel) 951 969 932 975 990 1,000 1,010 1,020 1,030 1,040 967 1,015

Source: Bloomberg, Danske Markets.

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Disclosure
This research report has been prepared by Danske Research, which is part of Danske Markets, a division of
Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The authors of
this report are Arne Lohmann Rasmussen, Chief Analyst and Christin Tuxen, Senior Analyst.

Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high
quality research based on research objectivity and independence. These procedures are documented in the Danske
Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any
request that might impair the objectivity and independence of research shall be referred to Research Management
and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not
report to other Danske Bank business areas. Research analysts are remunerated in part based on the over-all
profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other
remuneration linked to specific corporate finance or debt capital transactions.

Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals’
Ethical rules and the Recommendations of the Danish Securities Dealers Association.

Financial models and/or methodology used in this research report

Calculations and presentations in this research report are based on standard econometric tools and methodology
as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be
obtained from the authors upon request.

Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.

Expected updates
This publication is updated monthly.

First date of publication

Please see the front page of this research report for the first date of publication. Price-related data is calculated
using the closing price from the day before publication.

Disclaimer
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independently, solely from publicly available information and does not take into account the views of Danske
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