Quarterly Commodity Outlook

Transcription

1 Quarterly Commodity Outlook Commodity Research 2 May 212 WTI Brent Natural gas Gold Silver Platinum ABN AMRO Price Outlook Q months view Palladium Aluminium Copper Nickel Zinc Steel (HRC) Iron ore long term view (until 214) Coking coal Energy: Natural gas prices continued to decline, due to mild weather conditions, strong production, and high inventories. As demand is not likely to significantly pick up and inventories continue to rise, near-term natural gas prices will remain under pressure in Q2. Later this year demand should start to increase and result in a price correction higher. The Brent/WTI-spread narrowed as Brent prices eased due to a lower risk premium, whereas WTI prices remained stable on an expected improvement in supply (i.e. the Seaway Pipeline becoming operational). The negotiations with Iran about its nuclear program will remain a trending topic in Q2. ABN AMRO expects Brent oil to remain under pressure and WTI to stay stable. Precious metals: Precious metals are generally still rather expensive, whereas the cycle has lost momentum on the back of lower global and Chinese growth expectations. This could result in players adjusting to the new normal of relatively lower Chinese growth. Gold, and to a lesser extent silver, has been losing its shine, which is reflected in earlier supportive variables not being outright bullish anymore. Gold and silver are the most sensitive to changes in monetary policies; the US and the eurozone are not likely to ease their monetary policy any further. This has changed the game for both already but until news about an exit hits the wires, gold and silver will not be aggressively sold off. Base metals: China is the key factor in the future developments of the metal markets. The current economic slowdown in China has a downward effect on metal (import) demand. There are other headwinds as well: negative sentiment in eurozone (Spain), slower pace of demand growth in the construction and manufacturing sectors, monetary policies and governmental restrictions (resource nationalism). In our view, short-term prices for base metals (for the next three months) will remain stable, but downside risks will increase. Longer term, demand will stay on relative high level, driven by ongoing urbanisation and industrialisation in Asia. Ferrous metals: Despite regional differences, we expect that in the short term global ferrous metal prices will stabilize. Demand for steel in the EU (including steelmaking raw materials) will remain subdued, while conditions in the US look more promising. Due to the economic slowdown in China, sentiment amongst major steel end users in China is still low and there seems to be little taste for a short-term increase in activity. Steel foundries long-term strategy focuses on upstream integration; captive (raw materials) production decreases the exposure to price volatility. Grains Coffee Cocoa Sugar decrease by 1% or more decrease betw een 5% and 9% price movement betw een -4% and + 4% increase betw een 5% and 9% increase by 1% or more Agriculture: Production levels in 212 will be healthy for most agriculturals, even after the bumper crops in 21/211. Long-term, global consumption will increase, fuelled by a growing population, ongoing urbanisation, improving prosperity and a shift in consumption patterns. In the current season consumption will stabilize. Most markets are well balanced. In 212, prices of most agriculturals will remain on high levels given the tight market undertone. Weather conditions, obviously, can have a significant impact on production. - Short term: our three month outlook versus spot rate on April 3 th. - Long term: 214 average forecast price versus 212 forecast price.

2 2 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research FORECASTS Q2-212 (1) Energy: Spot rate 1 May Average price Q months WTI (USD/barrel) Brent (USD/barrel) Natural gas (USD/mmBtu) Precious metals: - Gold (USD/oz) 1,66 1,691 1,6 1,55 1,4 1,3 - Silver (USD/oz) Platinum (USD/oz) 1,57 1,63 1,35 1, Palladium (USD/oz) Base metals: - Aluminium (USD/t) 2,79 2,178 1,95 2,2 2,5 2,4 Aluminium (USD/lb) Copper (USD/t) 8,535 8,316 7,75 8,3 8,7 8,2 Copper (USD/lb) Nickel (USD/t) 17,817 19,625 17,5 19,2 19, 18,5 Nickel (USD/lb) Zinc (USD/t) 2,55 2,25 1,95 2,15 2,5 2,65 Ferrous metals: Zinc (USD/lb) Steel (global, HRC; USD/t) Iron ore (fines, USD/t) Hard coking coal (USD/t) (2) Agricultural: - Wheat (Cts/bu) Coffee (Cts/lb) Cocoa (USD/t) 2,39 2,339 2,35 2, Sugar (Cts/lb) (1) The 3-months forecasts is a Q2 212 exit price. Forecasts for 212, 213 and 214 are average year prices. (2) Prime coking coal Australia,CIF

3 3 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research CONTENTS Macro economic developments Macro Commodity Top-Down Energy WTI Brent Natural Gas Precious metals Gold Silver Platinum Palladium Base metals Aluminium Copper Nickel Zinc Ferrous metals Steel (HRC) Iron ore Coking coal Agriculturals Wheat Coffee Cocoa Sugar Macro-economic indicators Facts & Figures Contributors Analysts and economists

4 4 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Macro Nick Kounis (Head Macro Research, Group Economics) Global economy has regained some traction Euro crisis set to continue, but systemic risks have eased Budget cuts in the west, and China s transformation to limit pace of growth Regional industrial production Change ECB loans to banks and bond holdings Asia US World Emerg. Europe industrial production Lat Am Eurozone SP IT GR DE FR BG PT NL IE Loans from ECB Euro area government bond holdings Global economy regaining some traction The global economy has recently started to regain its footing after slowing for much of last year. World trade and industrial production had come to a standstill between September and November 211, but firmed in December and January. The regional breakdown shows that the strengthening in growth in those months was led by the US and Asia, while the eurozone s industrial sector continued to contract. The more up to date survey data from the global manufacturing PMI point to some further gain in momentum in February and March but the pace remains below what we have seen during past upswings. Systemic risks from euro crisis have eased The improvement followed a decline in systemic risks related to Europe s sovereign debt crisis. The key factor that turned sentiment was the ECB s 3- year loans to banks, which amounted to over a trillion euros. It had a powerful effect in easing worries about the banking system. Commercial banks in Spain and Italy led the charge for ECB funds and subsequently used them to buy domestic government bonds. Since March, stress in peripheral sovereign bond markets has returned, reflecting the difficulties of reducing deficits during a recession. These problems are unlikely to go away in a hurry and the crisis looks set to continue. Still, the eurozone and the IMF have increased the available rescue funds substantially, given them the firepower to prevent defaults of large eurozone sovereigns. Meanwhile, emerging market central banks have changed course after tightening policy for much of last year. Budget cuts, China s transformation to limit growth With financial conditions becoming more favourable and confidence returning, our central scenario is one of continued economic expansion. In the US, the corporate sector in particular looks to be in good shape. As the economic outlook becomes less misty, we are likely to see more capital spending and hiring. Meanwhile, although domestic demand has slowed in the emerging markets, it remains robust. As ever, the eurozone will hope to travel in the slipstream of improving economic conditions elsewhere. However, this will not be the kind of economic upswing that we got used to before the financial crisis. The good times are not back! There are a number of factors that will limit the pace of the upturn. At the top of the list are the significant budget cuts that the advanced economies face over the coming years. Another significant factor that will limit the pace of the upturn is a less buoyant pace of growth in China. The authorities have become increasingly concerned about the investment-led, commodity-intensive growth path that the economy has been on over recent years. They want to manage the economy s transformation to a more consumer-led growth model. - Earlier return of confidence - Even larger budget cuts - Further monetary policy stimulus - Sovereign debt crisis spirals out of control - Companies are cash-rich - Policymakers lack of ammunition in advanced economies

5 5 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Commodity Top-Down Georgette Boele (ABN AMRO Private Banking) Neutral stance maintained, but with a negative bias More upside potential later this year on growth outlook China and the US Commodities as an asset class remain expensive compared to equities Historical price CRB Index TR/Jefferies CRB Index Dow Jones/WTI ratio Dow Jones / WTI ratio Dow Jones/CRB ratio Dow Jones/CRB ratio Less compelling Since the release of our Quarterly Outlook in January the dynamics have become less supportive for commodities. China is targeting a lower - but higher quality - growth. Expectations on Chinese growth going forward have been adjusted downwards. The concerns about the eurozone debt crisis have re-emerged again, and eurozone data deteriorated. Furthermore, the likelihood of another round of quantitative easing by the Fed has diminished. The ECB is also unlikely to inject more liquidity into the system. All in all there is more uncertainty in financial markets. The prospect of less liquidity going forward and a possible adverse impact of relative high oil prices on consumer activity and growth have made the outlook for commodities less strong. At the end of February the CRB index appears to have topped out and since then it has edged lower. The crucial support level lies around , a break below this level would signal a sharp deterioration in the outlook. Outlook We expect crude oil prices to decline during this quarter. Lower crude oil prices will also lower the costs for other commodities and support the economies in the US, the eurozone, China and Japan. Base and precious metal prices generally are still at high levels and the cyclical nature has lost momentum following the downward revision of the Chinese growth expectations. This could result in players adjusting to the new normal of relatively lower Chinese growth. A similar case holds true for platinum and palladium. Gold, and to a lesser extent silver, has been losing its shine, which is reflected in earlier supportive variables not being outright bullish anymore. Gold and silver are the most sensitive to monetary policy and the US and the eurozone are unlikely to ease their monetary policy further. This has changed the game for both already, but until news about an exit hits the wires, gold and silver will not be aggressively sold off. Later in the year we see more upside potential for commodities if and when eurozone tensions ease and our expectations of the US and Chinese growth front play out. Relatively unattractive Our call that commodities were relatively unattractive held true in the previous quarter. The ratio of the Dow Jones/CRB has continued to edge higher. We believe that this ratio will have more upside potential going forward, which would be reflected in the Dow Jones rallying faster than commodities in times of positive market sentiment or selling off less aggressively in times of deteriorating sentiment. Crude oil prices have held up very well, but any correction in Brent prices will push the CRB index lower. Lower oil prices would be positive for the overall sentiment. In the such situation a move lower in crude oil prices could be somewhat balanced out by increasing prices of cyclical commodities, as expectations on the growth outlook will be adjusted upwards as well. A sharp deterioration in overall sentiment would hurt both equities and commodities. All in all, for the second quarter we hold on to our Neutral view, but with a negative bias. - Large supply disruptions - Ample commodity supply - More resilient global growth - Global recession - USD depreciation - Liquidity trap or market panic

6 6 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Hans van Cleef (ABN AMRO Sector & Commodity Research) Energy WTI (West Texas Intermediate) The Brent/WTI spread narrowed more than 2% Reversed oil stream towards the Gulf of Mexico will affect WTI prices during Q2 Unconventional oil drilling increasingly reduces US vulnerability to global oil movements Historical price WTI US oil production( barrels per day) 5,8 5,55 5,3 5,5 4,8 4,55 4,3 4,5 Crude Oil-WTI Spot Cushing U$/BBL 3, Source: Oil Market Intelligence (USD/barrel) 3-month WTI Brent/WTI spread continued to narrow Ahead of the actual reversal of the oil stream through the Seaway Pipeline from Cushing, Oklahoma US to the Gulf of Mexico (May 17 th ), the market already started to anticipate on a higher premium, leading the WTI price to gain somewhat recently. As a result of the lower Brent price and the rally in WTI, the Brent-WTI spread narrowed more than 2% to USD 15. As a result of the pipeline reversal, the US can in the end lower their oil imports, as US refineries now have access the Cushing supplies. With news of greater supply from both the US and Canada, more projects will likely be started in this rescheduling of US energy logistics. Release of SPR would only have psychological effect Another logistics problem is related to fuel prices. In this case, too, some regions are well supplied, while others have a shortage. Since it will take some time to fix this problem, market rumours about a release of official Strategic Petroleum Reserves (SPR) become stronger, ahead of the US presidential election in November. Whether that would solve the problem is doubtful, as it is a logistic problem, and not an overall supply-related issue. The impact would thus be more psychological than that it would have an actual effect on supplies. When we look at the tariff setting by the Federal Energy Regulatory Commission (FERC) regarding the Seaway pipeline, the Brent-WTI spread should narrow to levels between USD 5-1, which is in line with our forecast. This will probably occur in the second half of the year. Demand will pick up, but so will supply, due to unconventional oil drilling. As a result, WTI prices will probably remain elevated prior to the start of the Seaway pipeline reversal, before they ease somewhat towards Brent prices. Our second quarter WTI price forecast is USD 1. Unconventional oil will prevent new rallies As the US makes more use of unconventional oil drilling methods than other countries/regions, there will probably be no supply issue in the near term. Nevertheless, the US remains the world s largest oil importer. This will keep WTI prices related to Brent oil price developments, albeit less than before. The US will benefit from the relatively lower oil prices and demand may increase as a result, as the economic recovery in other countries/regions is still fragile. This may keep a lid on oil price developments for now. Nevertheless, the costs of US imports were never as high as they are now. After two years of supply shortages, 212 may see a supply surplus and some room for new (strategically) stock building. The impact on global oil market developments of the large increase of US unconventional oil production is one of the bearish price drivers for the longer term and is likely to outweigh the better economic conditions: USD1/bbl in 212, USD95/bbl in 213 and USD9/bbl in Markets positioning for economic recovery - Increased production of unconventional oil in the US - Possible conflict between the West and Iran - Global economic growth falls under new pressure

7 7 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Hans van Cleef (ABN AMRO Sector & Commodity Research) Energy Brent Pressure on Brent starts to increase now risk premium is reduced Negotiations with Iran to remain an important driver Brent to remain elevated in the medium- to long-term, as drivers balance each other out Historical price Brent Oil price spread Brent-WTI Crude Oil-Brent Dated FOB U$/BBL Oil price spread Brent-WTI US$/BBL (USD/barrel) 3-month Brent Brent price topped out The most important driver of Brent oil prices during the first four months of 212 was Iran s nuclear programme. In January and February Brent continued its rally before it ran out of steam in March. However, it took until the second week of April before prices started to weaken, primarily because of the renewed talks between Iran and the west. This combined with the fact that Saudi Arabia increased its production with more than one million barrels per day (mbpd) and sluggish demand due to fragile economic conditions led to a downward correction in Brent prices. The last reason for prices decline was the change in sentiment for the worse as downside risks to economic growth and the eurozone debt crisis increased again. Price pressure will remain: USD 11 for Brent in Q2 Negotiations with Iran about its nuclear programme will remain the most crucial driver in the coming quarter. On 23 May further talks are scheduled and, as long as Iran is participating in a positive way, may keep the pressure on Brent prices on the back of a further cutback of the risk premium. The oil market remains vulnerable to new calamities as (OPEC s) spare capacity is being reduced (about 1% of total demand), now that Saudi Arabia has increased its production in anticipation of the start of the EU and US sanctions against Iran. The unrest in South Sudan is ongoing, but with Saudi Arabia being determined to lower oil prices and production of the deep sea drilling rigs in the Golf of Mexico back at the pre-spill -levels, prices will most likely continue to decline. Other factors, such as supply disruptions, weak economic data and renewed tension regarding the eurozone debt crisis could also have a negative impact on oil prices. As a result, we expect Brent will remain under pressure, leading to a Brent oil price of USD 11 per barrel at the end of Q2. Supply is not the issue for now Global economic growth is not expected to pick up before the second half of the year. An increase in demand will nevertheless result in a bottom in Brent oil prices in the summer months. The risk of new Middle East tensions remains, but the likelihood of an actual escalation is slowly diminishing. Our macro economic outlook of moderate growth in the major regions for the coming years will result in solid demand for Brent. As a result, we expect oil prices to remain elevated. However, we do not expect a significant rally, as supply is sufficient to meet demand in the next few years. With new techniques becoming more and more accepted and profitable, other expensive ways of drilling oil (sand oils, horizontal drilling, hydraulic fracturing, deep-sea drilling, etc.) will more and more be used. This is, unless new production disruptions occur especially in conventional oil findings. We expect oil to trade around or slightly above USD 1 per barrel in the coming years: 212 and 213: USD 11 and 214: USD 1. - Escalation as a result of EU/US Iran embargo - The EU debt crisis leads to further recessionary pressures - An earlier and stronger-than-expected solution to the EU crisis - Additional non-opec oil supplies roll into the market - Easing fears for US economic soft-patch - Release of SPR resulting in psychological effect

8 8 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Hans van Cleef (ABN AMRO Sector & Commodity Research) Energy Natural gas Mild weather conditions, strong production and near record level inventories hurt natural gas Rising inventories and slowing demand result in a Q2 neutral view (at best) It will take time before demand matches supply in the run for cleaner energy Historical price natural gas Natural gas and oil prices Natural Gas-Henry Hub $/MMBTU Crude Oil-WTI Spot Cushing U$/BBL Crude Oil-Brent Dated FOB U$/BBL Natural Gas-Henry Hub $/MMBTU (USD/mmBtu) 3-month Natural gas No change in drivers; pressure on gas held on Last quarter s drivers did not change and, as a result, the Henry Hub Natural Gas (NatGas) future prices (1 st contract) continued to head lower. The mild weather conditions in gas consuming countries, in combination with the near record high US inventories which are still increasing, pushed prices below USD 2/mmBtu. This is more than 85% below the all-time high set in 25. Production is down with more than 3%, as some gas drilling operations had to be shut down due to low profitability. There is a significant price difference between US NatGas (see drivers above) and European gas, the pricing of contracts of the latter being largely linked to Brent oil price developments. Q2: Neutral view before bottoming out start in H2 As indicated above, production is down but inventories continue to rise. This is despite stronger demand from for instance Japan for generating electricity. The main reason is clearly formulated by the Energy Intelligence Agency (EIA) as drilling rigs have moved from dry gas wells to wet or liquid gas wells. These wet gas wells produce a mixture of gas, oil and NatGas liquids. With oil prices well above USD 1 and NatGas Liquids being expensive, NatGas is seen as a by-product. With the current rise in inventories and more unconventional gas projects ready for production, the main question is whether there is enough capacity to store the gas. Taking into account that several Japanese nuclear plants are expected to restart in the course of the year, demand is likely to decline during the coming months. As a result, pressure on NatGas prices will probably continue during the upcoming quarter. It is hard to say when prices will actually start to bottom out with production costs already having reached levels that indicate downside risks should be limited. Mild weather conditions will not hold on forever and the bottom will therefore likely be reached sometime this autumn. We remain neutral for the next three months. Supply driven natural gas will keep lid on prices With new techniques (like hydraulic fracturing and horizontal drilling) becoming available, it is fair to conclude that gas production will further increase in the coming years. Lower Japanese demand in 212 compared to 211 will probably be countered by an economic recovery in the US and the eurozone in the second half of this year and beyond. This should result in an average NatGas price of USD 2.3 for 212. ABN AMRO does not expect spectacular price rallies in the years The ongoing stream of extra production will not be matched by the same level of demand growth in the coming years, as switching from other fossil fuels in electricity generation will take time to materialize. This will keep a lid on prices, which will only gain modestly. Further in time, NatGas prices may start to rise at a faster pace, as NatGas will increasingly be seen as an important relatively clean transition energy in the process of reducing carbon dioxide, or CO2, as committed in the several climate change programs up to Switching to additional gas-fired power generation - Continued and accelerating unconventional gas output - Extreme weather conditions (long period of heat) - Deteriorating economic conditions hurt demand

9 9 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Gold Gold losing its shine Re-evaluation of drivers Lack of alternatives remains Historical price gold and ETF position 2, 1,5 1, Historical Gold/Platinum ratio gold/platinum ratio (USD/oz) 3-month Gold 1,6 1,55 1,4 1, Gold Bullion LBM U$/Troy Ounce ETF position 1 x 1 million Losing its shine In 211 the market had lots of reasons for buying gold and even if there hadn t been any, the old ones would have been recycled. This continued up to that point in time when gold positions had to be liquidated to raise cash. The liquidity-related liquidation hurt gold prices. At the end of last year, market sentiment improved, mainly thanks to the ECB s liquidity operations (LTRO) and improvement of the global economy. The extra liquidity and improved risk appetite were supportive to gold prices in the first quarter of this year, but another bull-run failed to take off. The market is currently reevaluating the market drivers such as gold s safe haven status, the low real yields, the fiscal deficits of, especially, European countries, inflation expectations, the direction of the USD, jewellery demand, investment demand, demand from the official sector and producer hedging. Re-evaluation Gold s safe haven status is challenged, as investors are confused by the current duality of gold; lately it was sold off when markets are much concerned about liquidity risks and rallied in quieter times with increasing risk appetite. The selling-off is hard to explain; the rallying is easier to understand given the low real yields. Such confusion hampers any rally. Real yields remain low, but it is not very likely that the Fed and the ECB will embark on further quantitative easing. From this side there will be no extra support to gold prices. The huge fiscal deficits are the main focus these days. In the eurozone they are in the process of being tackled. In the US, awareness is there, but the upcoming Presidential elections prevent the issue from being really tackled. Inflation expectations have calmed down recently following the release of somewhat weaker economic data and markets expecting lower economic growth. We expect the USD to rally modestly in 212 against most major currencies and this is not supportive of gold, either. Demand for gold from China remains strong, whereas India is trying to dampen gold imports and to increase regulation of loans with gold as collateral. Investment demand for gold has stalled, with total ETF positions still close to the all-time high, but non-commercial positions on the futures market have been reduced. Producers have virtually completely dehedged; renewed hedging will also weigh on gold prices. All in all, the price drivers are Neutral at best. Lack of alternatives Even though the Fed s monetary policy and the expectations thereof remain crucial variables to watch. We do not expect a reversal from the current accommodative policy this year. Changes in expectations will have a direct impact on gold prices, causing short-term volatility. As long as official interest rates and real yields remain low in the developed economies, gold is unlikely to be sold off aggressively. Furthermore, it remains one of the more attractive commodities in an environment of economic uncertainty and relatively high oil prices. In the end, there is a lack of alternatives for now, but as soon as these present themselves, gold will suffer. - More quantitative easing - More optimistic global growth outlook triggering central bank action - Improving investor sentiment - Strong global growth make equities & base metals more attractive - USD debasement - Liquidity related position liquidation

10 1 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Silver Liquidity and growth outlook revision Opportunity to position for cyclical recovery But keep a close eye on the behaviour of longer-term investment community Silver price and total ETF demand , Bloomberg Historical gold / silver ratio 1, 8, 6, 4, 2, (USD/oz) 3-month Silver gold / silver ratio Silver Fix LBM Cash Cents/Troy ounce Total silver ETF position x 1 million Liquidity and growth outlook revision The optimism about global economic growth prospects at the start of the year supported silver prices, but the subsequent price action was very limited. Silver prices rallied to USD 37 per ounce, far short of the levels close to 5 USD per ounce seen in 211. The rally ran out of steam on 28 February. Since then prices have fallen back to the low 3s on a less optimistic view on the global growth outlook and concern about the eurozone debt crisis. Non-commercial positions on the CFTC were cut back sharply, but not to the extent as at the start of 212. Total ETF positions were modestly reduced but remain on a high level. Neutral for now The global growth outlook remains crucial for silver prices going forward. Nevertheless, expectations about the Fed and the perception of liquidity in the system are likely to take the centre stage. Even if silver is usually considered to be more an industrial metal than gold, the market s first reaction will be to look for an alternative to the USD trade. The cyclical growth argument will likely only be back to explain for the relative performance versus gold, or in the case of large moves. For the moment silver trades in the shadow of gold again and we expect this to continue for the coming quarter, as eurozone concerns will likely remain in place. Should the market become more optimistic about global growth prospects again later this year, and concern about the eurozone debt crisis fade, only then could silver outperform gold again. Where we expect gold prices to suffer in an environment of improved growth prospects and ditto expectations, and higher US yields, silver could be relatively resilient, as its cyclical nature would balance or dampen the impact of higher US yields. Market positions signal that there is the risk of more position liquidation ahead. If the eurozone crisis intensifies in the short-term, several market players may be forced to liquidate positions in precious metals. Silver is hardly likely to escape such liquidation. The largest risk is that investors find a more attractive asset than silver to invest in. This could also play out in an environment of increased risk appetite. In the options market, volatility (1- month) on silver has declined to 21 levels, just above 26. It could continue to edge lower towards 2, which is likely to happen in an environment of range trading or a comfortable rally without much stress. If the 1-month volatility were to move towards the low 2s, the risk would then be that the market is too comfortable for the reigning trend. This means that the chance of more turbulent markets is seriously underestimated. We are not there yet but we keep a close eye on it. All in all, we remain Neutral on silver but we do not see large upside potentional for 212. We have therefore adjusted our overall view for the year to a more neutral outlook. - More quantitative easing - Long-term investors abandon long positions - More optimistic global growth outlook - Market panic - USD debasement - Global recession

11 11 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Platinum Positive start of the year Weak demand from eurozone Further investor liquidation in the cards Historical price Platinum 2,5 2, 1,5 1, London Platinum Free Market $/Troy oz Total ETF Platinum positions 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, , Bloomberg (USD/oz) 3-month Platinum 1,35 1,5 - - Total ETF positions platinum Positive start followed by weakness Platinum prices showed a strong performance in the first quarter of this year, on the back of supply disruptions triggered by labour disputes and safety stoppages at major mines in South Africa. Lower supply and buyers expecting even tighter markets pushed platinum prices higher and even resulted in platinum outperforming gold. The rally ran out of steam on 22 February. Since then prices have been under pressure, as most supplyrelated fears had been priced in. Moreover, investor sentiment deteriorated as the debt crisis in Europe (a crucial market for platinum) came to the fore again. Prices, however, only modestly gave up the previous gains. They are still far above the 211 closing level of 141 per ounce. Investor positions have been cut back aggressively. Net platinum longs are back to end 211 levels and total ETF positions have also been modestly brought back. Weak outlook Economic data from the eurozone, except for Germany, have started to deteriorate again. Furthermore, the growth outlook and the outlook for eurozone car sales do not look promising. With Europe being the largest platinum market, weakness and uncertainty there are not particularly supportive to platinum prices. Additionally, the supply-related issues have abated to such an extent that the market is getting concerned about a possible oversupply again. But safety stoppages in South Africa could occur again later this year. Miners continue to face a challenging environment with possible higher energy costs and demands for higher pay and weaker demand prospects. We nevertheless expect the sky to brighten later this year, if the tensions from the eurozone debt crisis ease and economic data improve somewhat. Non-commercial positions at the CFTC have been cut-back, but the level of total ETF platinum positions remains very high. Platinum prices are not back to their normal level yet. There is still a lot of investor-related demand in the price and positions need to be cut back further before the overall platinum sentiment could turn positive again. One important variable to watch for this is the behaviour of the Fed. The US central bank has already hinted that it is unlikely to embark on another round of quantitative easing. This has hurt all precious metal prices. But on the other hand the market has also been very hesitant to price in an earlier exit by the Fed. Any notion of a possible earlier exit will send the price of platinum and other precious metals tumbling. With platinum prices still being lower than gold s, the Chinese may substitute (white) gold for platinum in their jewellery production. This may dampen the downside. - Improving economic conditions in the eurozone - Liquidity trap results in complete scaling back of open positions - Supply disruptions - Regulatory overhang making markets nervous - Risk seeking environment and/or USD debasement - Global recession

12 12 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Palladium Similar price development as platinum We remain constructive on palladium Buy on the dips Historical price Palladium Total ETF palladium positions 2,5, 2,, 1,5, 1,, 5,, Bloomberg (USD/oz) 3-month Palladium Palladium U$/Troy Ounce Total ETF positions palladium Similar price development as platinum As for platinum, the start of the year was positive for palladium. On the back of better-than-expected economic data markets expected an improved economic outlook for 212. As palladium did not have the supply disruptions that platinum had, overall it underperformed platinum at the start of the year. The world s largest palladium producer indicated that its output will be flat or lower in 212. Sentiment turned for the worse on 22 February on weaker economic data, re-surfacing concerns about the eurozone and waning hope for another round of quantitative easing by the Fed. When prices started to decline, the market mainly focused on negative news, such as passenger car sales in China having declined by the largest amount since 25. News of better-than-expected US and Japanese car sales was ignored. Concern that emerging market economies may not be as strong as previously anticipated hurt overall palladium sentiment. Palladium has started to outperform platinum only since the end of March. Overall constructive Investor sentiment towards palladium has changed. At the start of the year investors repositioned for a positive surprise in the growth outlook for 212. This resulted in an increase in total ETF palladium positions and noncommercial positions. Total ETF positions appear to be topping out, while non-commercial CFTC positions have been cut back aggressively. On the speculative (CFTC) front we do not expect much liquidation anymore. Further liquidation of ETF positions will only then happen, if the global growth outlook, including emerging markets, deteriorates. Palladium is the precious metal that is the most exposed to the global growth cycle (especially the industrial cycle), diversified demand coming from Europe, North America, China and emerging markets. Palladium is much used in the car industry (catalysts) and electrical engineering. Our outlook for the US this year is constructive, whereas for China it is higher than the consensus. Furthermore, car sales have already picked up (with the exception of Europe) and should they remain strong, this would support palladium prices. Another factor that could trigger liquidation of ETF positions is a more hawkish-than-expected Fed. The Fed s stance has also affected other precious metals. We believe that palladium is the least sensitive-to-the-fed precious metal. To palladium the outlook for US car sales is far more important. There is always uncertainty surrounding the Russian stocks and for the remainder of 212 this will be no different. This year we do not expect a release of Russian palladium stocks. Mining conditions in the world s second largest supplier South Africa remain a challenge. For this year we expect a supply deficit. All in all we are constructive on palladium and prefer to buy on weakness. - Improving global economic prospects - Liquidity trap resulting in complete scaling-back of open positions - Supply disruptions - Larger than expected supply - Risk seeking environment and/or USD debasement - Global recession

13 13 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Base metals Aluminium Casper Burgering (ABN AMRO Sector & Commodity Research) Hans van Cleef (ABN AMRO Sector & Commodity Research) Lower production triggered upward price correction Fragile economic recovery and lower Chinese demand keeps downside risks alive ABN AMRO expects that demand from end users will stay robust Historical price Aluminium 3,5 3, 2,5 2, 1,5 1, Supply, demand & stocks 5, 4, 3, 2, 1, Source: Metal Bulletin 3-month Aluminium (USD/t) 1,95 2,2 2,5 2,4 Aluminium (USD/lb) LME-Aluminium 99.7% Cash U$/MT World production (' tonnes) World consumption (' tonnes) Stocks (w eeks of consumption), r.axis New rise in inventories kept downtrend intact The decrease in production as a result of the low prices in the second half of 211 resulted in the downtrend being tested. However, as the market absorbed the news of reduced production quite smoothly, aluminium prices failed to break this downtrend. The years of overcapacity have resulted in huge inventories, which continue to cap the upside in aluminium prices. In fact, the pressure on aluminium prices in the previous quarter was also underpinned by further rises in LME inventories. Volatility dropped to the August 211 levels (below 2) after the peak of 3.22 in December 211. Q2 outlook neutral but downside risks increased The aluminium forward curve is in contango (spot prices lower than future prices), reflecting the absence of stress in the aluminium futures market. Production costs continue to surge as energy prices remain elevated and the market again expects a surplus in 212, just like last year. This even despite the fact that major aluminium producers continue to scale back production. This is mainly because demand e.g. industrial demand and the automotive sector is also expected to decline given that the global economic recovery remains very fragile and is not expected to accelerate until the second half of the year. Combined with lower economic growth from China, this will likely cap the upside potential of aluminium prices in the coming quarter. Even stronger-than-expected industrial production data would not be helpful. As a result, we maintain our neutral outlook, but the downside risks clearly increased and could have a negative impact on prices if demand data disappoint. Long-term prospects for aluminium demand solid Aluminium prices have been subdued for the last couple of years, mainly due to the fact that inventories of aluminium worldwide are at historic high levels. The industry has massive overcapacity, especially in China, and this keeps prices depressed. Approximately 4% of global aluminium output is produced in China, and many of the Chinese smelters are relative high cost producers. Aluminium is highly energy-intensive, making it sensitive to volatility in energy and oil prices. With the relatively high oil prices and the uncertainty in nuclear power and coal supply, energy costs are expected to stay comparatively high in the forecast period. This could turn out negatively for Chinese smelters. Despite the fact that overcapacity in the aluminium market will remain significant in coming years, we expect that demand from end users (producers of transport equipment, packaging and construction) will stay robust, which will support prices. Nevertheless, with limited willingness among global producers to cut production, overcapacity will remain the problem in the forecast period and we have adjusted our longterm price forecast downward. - Sentiment towards the eurozone improves, resulting in risk appetite - Chinese construction continues deterioration - Significant Chinese smelter cutbacks in output - Further escalation of EU crisis and China economic slowdown - Increase substitution demand (copper and steel) - New projects entering the market (India, Middle East)

14 14 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Base metals Copper Casper Burgering (ABN AMRO Sector & Commodity Research) Hans van Cleef (ABN AMRO Sector & Commodity Research) Lower demand expectations at the start of April started to weigh on prices The new Chinese economic stance has a dampening effect on copper demand Ongoing urbanisation and investments in the Chinese construction sector will continue Historical price Copper 12, 1, 8, 6, 4, 2, Supply, demand & stocks 25, 2, 15, 1, 5, Source: Metal Bulletin 3-month Copper (USD/t) 7,75 8,3 8,7 8,2 Copper (USD/lb) LME-Copper, Grade A Cash U$/MT World production (' tonnes) World consumption (' tonnes) Stocks (w eeks of consumption), r.axis Pressure increased after first quarter s range trading After the strong rally in copper prices during the first three weeks of January, copper has traded within a small neutral trading range around the USD 8,5, as forecasted in our previous Quarterly Commodity Outlook. Only since the start of April, copper prices declined as the financial markets turned more negative about the global economic outlook and the impact of the ECB s LTRO programme to solve the eurozone debt crisis started to ebb away. Chinese copper imports declined with almost 5% in March, but this disappointing outcome was still the fourth best import figure ever. While for most base metals short-term volatility continued to decline, copper volatility picked up again at the start of April. Second quarter: Neutral, but downside risks are high LME copper inventories may have significantly declined since October 211; this did not lead to a positive effect on copper prices. This clearly indicates that the copper price is demand-driven and, with inventories still at sufficient levels, the supply side is less of an issue. With growth in China (good for about 4% of the global copper consumption) slowing and the economic recovery in the US and eurozone still being fragile, downside risks for copper prices are significant. The Chinese slowdown could be part of the announced transformation of the Chinese economy from quantitatively- to qualitatively-driven. Other short-term signals, like a cutback in CFTC speculative long positions and the technical picture, also point to lower copper prices. As a result, a test of the first crucial support level at USD 7,5 could be seen. For this quarter we maintain our neutral stance but with a clear negative bias. Our quarter-end target is set at USD 7,75 but this may be too optimistic if technical support levels do not hold. Tight conditions keeps price elevated until 213 Global economic sentiment affects confidence in key copper-consuming sectors, especially in the construction sector (35% of world copper demand). Developments in the construction sector worldwide will remain mixed in 212. Uncertainty continues to dictate market developments in the eurozone and the prospects for construction activity will remain subdued in 212. We expect the conditions for the European construction sector to improve in 213. The construction and manufacturing sectors in the US have been showing more strength than in other advanced economies. Construction output in China is set to grow further, albeit at a slower pace. Ongoing urbanisation and investments in the construction sector will continue for the next few years. In our view, copper demand from China should remain strong in 213 and prices are expected to increase further from their 212 level. Both the construction and manufacturing sectors are expected to growth robustly. We think the copper market will more be balanced in 213. We expect production to increase stronger than consumption in 214, leading to a surplus and downward pressure on copper prices. We have therefore lowered our 214 price forecast by 3.5%. - Recovery in construction (US, EU, China) - Risk aversion / need for liquidity increases - Stronger-than-forecasted Chinese economic performance - Further escalation of EU crisis and/or cooling off Chinese economy - Rising Chinese copper import requirements - Funds scaling back their interest in copper as an asset class

15 15 Quarterly Commodity Outlook 2 May 212 ABN AMRO Commodity Research Base metals Nickel Casper Burgering (ABN AMRO Sector & Commodity Research) Hans van Cleef (ABN AMRO Sector & Commodity Research) Downtrend was broken but negative drivers did not disappear With inventories building and demand slowing, nickel prices are under pressure Prospects for consumer spending and demand for consumer durables will improve in the long term Historical price Nickel 6, 5, 4, 3, 2, 1, LME-Nickel Cash U$/MT Downtrend was broken but rally failed to set through Although nickel broke out of its downtrend at the start of this year, the recovery was very short-lived. In fact, all gains (+3%) were reversed since mid-february, resulting in a possible test of the November 211 lows. After the spike in October 211, volatility eased to the August 211 lows before it nudged higher again. Sentiment amongst stainless producers and distributors also worsened. Global stainless output decreased in the first quarter by 3%, with an output decrease in the EU and North America of 14% and 22%, respectively. Stainless production in Asia increased by 3% (because of output increases in China and India). The forward curve is neutral, which suggests that the market is aware of possible lower prices in the coming months. The lack of stress in the front-end of the curve prevents it from moving into backwardation (spot prices above future prices), however. Supply, demand & stocks 1,8 1,6 1,4 1,2 1, Negative stance maintained Market talks suggest that, for commissioning reasons, upcoming projects using the high pressure acid leaching (HPAL) process for extracting metal from lateritic ore bodies will be delayed. This means that the extra price pressure that would be the result will probably not yet be felt in the second quarter. It will nevertheless be a risk to prices in the future. The question is whether the imposed taxes on Indonesian nickel ore exports will have an effect on prices. Nickel demand may be disappointing in the coming months, as many mills will be closed in order to push stainless steel prices higher. On the other hand, production will probably still be in surplus in the second quarter, thus adding even more pressure to the nickel prices. As a result, LME inventories will likely continue to rise, just as we forecasted they would in the previous quarter. We do not see any reason to change our neutral stance with a negative bias World production (' tonnes) World consumption (' tonnes) Stocks (w eeks of consumption), r.axis Source: Metal Bulletin 3-month Nickel (USD/t) 17,5 19,2 19, 18,5 Nickel (USD/lb) Prices remain subdued until 214 Stainless steel (widely used in domestic appliances and white goods) is an important driver for our outlook on the global nickel market; the industry is responsible for 65% of total nickel demand. And the demand outlook is still quite positive, with good prospects in some key end-using sectors, especially in Asia. In Europe, stainless demand is likely to stay subdued this year. In North America, however, conditions should improve further, while market conditions in emerging markets will stay buoyant. Despite the shortterm hurdles and macro economic worries, we think that the prospects for consumer spending and demand for consumer durables will improve in the longer term. Nevertheless, regional differences will remain. In the long term, new capacity will be added and the list of new nickel projects keeps growing strongly, resulting in further downward pressure on refined nickel prices in and we therefore maintain our long-term price view. - Stainless steel capacity expansion exceeding expectations - Funds scaling back their interest in nickel - Supply disruptions and delays in pipeline projects - Further escalation of EU crisis and/or slowdown Chinese economy - Increase in Chinese imports due to ETF demand - Substitution by stainless steel with lower nickel content