Commodity Watch. Global. Looking at 2H2011 for further upside momentum. Commodities Research

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1 Commodity Watch Looking at 2H2011 for further upside momentum Commodities Research Progress in dealing with the Greek budget crisis and better economic data have improved sentiment around cyclical assets in recent days. We continue to expect further increases in commodity returns later this year and into We maintain our overweight recommendation for commodities on a 3-, 6- and 12-month horizon and our 20% 12-month commodity returns forecast. Demand growth still likely to be sufficient to tighten key markets We believe that the Greek situation, ongoing tension between the inflation/growth tradeoff in China, and still mixed economic data from several key economies will continue to drive near-term volatility in the commodity markets. However, we maintain that commodity prices and returns will rise further later this year and into Underlying this view are Goldman Sachs economists expectations for reacceleration in global economic growth during 2H2011 as temporary drags from the Japanese earthquake and the April oil price spike diminish. On net, while growth is expected to slow in 2011 from 2010 s above-trend pace, it is expected to remain substantially positive and generally supportive of rising commodity demand. We expect this demand growth will be sufficient to tighten key commodity markets over the next six to twelve months, particularly for those markets where supply constraints will become binding even on slower economic growth. We reiterate our long trading recommendations for Brent crude oil, UK natural gas, copper, zinc and soybeans. Greatest upside expected over twelve months, but could be sooner Although our forecasts suggest greatest upside on a twelve-month horizon, we note that further improvement in economic data may be sufficient to pull forward substantially positive commodity returns, particularly for those cyclical commodities that are more anticipatory in nature, such as the metals. As a result, we maintain our overweight recommendation for commodities on a 3-, 6- and 12-month horizon and our 20% 12-month total returns forecast for the S&P GSCI Enhanced Commodity Index. Jeffrey Currie +44(20) jeffrey.currie@gs.com Goldman Sachs International Allison Nathan (212) allison.nathan@gs.com Goldman Sachs & Co. David Greely (212) david.greely@gs.com Goldman Sachs & Co. Damien Courvalin (212) damien.courvalin@gs.com Goldman Sachs & Co. Samantha Dart +44(20) samantha.dart@gs.com Goldman Sachs International Stefan Wieler, CFA (212) stefan.wieler@gs.com Goldman Sachs & Co. Johan Spetz +44(20) johan.spetz@gs.com Goldman Sachs International Investors should consider this report as only a single factor in making their investment decision. For Reg AC see the end of the text. For other important disclosures, see the Disclosure Appendix, or go to The Goldman Sachs Group, Inc. Goldman Sachs Economics, Commodities and Strategy Research

2 Hedging and trading recommendations Petroleum Hedging recommendations Consumers: With world economic growth continuing to drive oil demand growth well in excess of non-opec production growth, the oil market continues to draw on inventories and OPEC spare capacity in order to balance. In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply. Consequently, we believe the recent market correction provides a good opportunity for consumers to begin to hedge their forward oil exposure. Refiners: Refining margins have recently shown counter-seasonal strength. However, this strength largely owes to the local weakness in WTI. As we expect the spread between WTI and Brent to narrow from current levels, we also expect product cracks to weaken. Further, we maintain that refining margins will remain under pressure owing to the large increase in refining capacity in Asia. As a result, we view any renewed rise in long-dated refinery margins in 2011 as a selling opportunity for refinery hedgers. For 2012 and beyond, we believe that crude will be the bottleneck in the system, rather than refining; this would squeeze margins from the crude side through backwardation, suggesting that refiners should also look for potential time-spread hedges. Producers: While the risk-reward trade-offs for producer risk management programs have diminished with the recent market correction, additional economic disappointments could generate more downside in the near term. We recommend that producers look at option strategies to hedge against this risk. However, we expect supply-demand balances to continue to move to critically tight levels in 2012, with prices above recent levels by next year. Consequently, we think opportunities for producer hedging longer term are less attractive. Trading recommendations Long ICE Brent December 2012 contracts (initial price $105.16/bbl, current gain $7.05/bbl) We recommend opening a long position in the ICE Brent December 2012 contract, as we expect that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand. Natural Gas Hedging recommendations Consumers: We believe there are opportunities for consumer hedging in the long end of the NYMEX natural gas curve, particularly in calendar 2015 and 2016 contracts, given the recent declines along the forward curve. Specifically, we believe that US natural gas prices will likely be supported above the $6/mmBtu range from 2015 onwards, as we expect significant increases in generation demand for natural gas driven by the retirement of more than 40 GW of coal-fired power plants. In addition, long-term US natural gas demand may be further supported by industrial demand growth, possible delays in the construction or license renewals of nuclear power plants as well as by potential US LNG exports. Goldman Sachs Economics, Commodities and Strategy Research 2

3 We believe there are currently good hedging opportunities for consumers exposed to European spot markets; we expect a tightening shift in global LNG markets intensified by this year s events in Japan and Libya to lead to a reconnection of European spot prices to oil-indexed prices this year. As a result, we see upside to UK NBP prices relative to the forward curve. Producers: We believe the hedging opportunities for US producers in calendar 2012 and 2013 contracts are increasingly limited, as prices have come off since their early June highs. In the UK, we believe there are limited hedging opportunities for producers exposed to spot prices as we see upside relative to the forward curve from 3Q this year and onward. Trading recommendations Long UK NBP Q ICE Natural Gas contracts (initial price 70.8 p/th, current gain 2.9 p/th) We recommend opening a long position in the UK NBP Q contracts, as we expect a continued tightening of global LNG markets to lead to a reconnection between spot prices and oil-indexed prices in Europe, with spot gas pricing above oil-indexed in the beginning of the winter to attract incremental volumes for the peak demand period. This reconnection between spot and oil-indexed natural gas prices in Europe is not currently priced in the UK NBP forward curve. Base Metals Hedging recommendations Consumers: We believe that cost-push support stemming from tightening hydrocarbon markets and currency moves will likely keep prices elevated across the complex and continue to see cyclical tightness developing in copper and zinc in particular over the medium term. As a result, we believe that sell-offs could offer some opportunities for longer-dated purchases. Producers: We believe that the current historically high price environment for copper and aluminum looks attractive for producer hedging, especially for aluminum given the contango in the forward curve. Trading recommendations Long Copper: Buy June 2012 LME copper (initial price $8,804/toz, current gain $731/mt). We see further upside in copper prices despite the recent rally. Underscoring this view are Goldman Sachs economists expectations for moderate reacceleration in global economic growth in 2H2011, which we believe will be supportive of metals demand. We expect this demand growth will be sufficient to substantially tighten the copper market over the next year, especially as Chinese buyers continue to return to the market. Although the sharp drawdown in Chinese copper inventories has stabilized, we maintain that the winding down of destocking will lead to a stronger Chinese pull on global supply in 2H2011, tightening the market and generating price upside later this year. Long Zinc: Buy December 2012 LME zinc (initial price $2,189/toz, current gain $288/mt). Although we do not see the zinc balance as tight as copper next year, we believe that zinc price risk is also skewed to the upside given our views of a developing deficit. We emphasize that China is a growing net importer of zinc raw materials, like copper, setting Goldman Sachs Economics, Commodities and Strategy Research 3

4 up for sizable upside for the metal even before important mine closures are set to take place in Precious Metals Hedging recommendations Consumers: We expect gold prices to continue to climb in 2011 given the current low level of US real interest rates. However, with our US economics team forecasting strong US economic growth into 2012, we expect US real interest rates to begin to rise next year, likely causing gold prices to peak in Consequently, we recommend near-dated consumer hedges in gold. Producers: While we expect gold prices to increase in 2011, our view that downside risks will likely increase heading into 2012 suggests this is a good time for gold producers to begin scaled-up hedging of forward production, particularly for calendar 2012 and beyond. Trading recommendations Long Gold: Buy December 2011 COMEX Gold (initial value of $1,364.2/toz, current gain $150.8/toz). We expect gold prices to continue to climb in 2011 given the current low level of US real interest rates. Agriculture Hedging recommendations Consumers: Our expectation of lower corn and wheat prices does not offer compelling opportunities for consumer hedging in the near term. We would, however, recommend soybean consumers to layer in upside protection given our expectation for higher prices. We also recommend cotton consumers to layer in asymmetric upside hedges for 2012 as any weather disappointment, especially in the US South, will likely support higher prices. Producers: Our expectation for corn and wheat prices below the current forward curve points to opportunities for producers to take advantage of the current higher levels and implement hedge programs. Trading recommendations Long soybeans: Buy November 2011 CBOT soybeans (initial value of $11.60/bu, current gain $1.58/bu). We recommend holding long Nov-11 soybean positions as we see soybeans as likely to remain in a deficit in 2011/12 on strong demand and acreage loss to corn and cotton. Goldman Sachs Economics, Commodities and Strategy Research 4

5 Current trading recommendations Current trades First recommended Initial value Current Value Long Brent Crude Oil Buy December 2012 ICE Brent Crude Oil May 23, Energy Watch $105.16/bbl $112.21/bbl $7.05/bbl Long Copper Buy June 2012 LME Copper May 23, Commodity Watch $8,804/mt $9,535/mt $731/mt Long Zinc Buy December 2012 LME Zinc May 23, Commodity Watch $2,189/mt $2,477/mt $288/mt Long UK Natural Gas Buy Q ICE UK NBP Natural Gas April 26, Natural Gas Weekly 70.8 p/th 73.7 p/th 2.9 p/th Long Soybeans Buy November 2011 CBOT Soybean November 18, Agriculture Update $11.60/bu $13.18/bu $1.58/bu Long Gold Buy December 2011 COMEX Gold October 11, Precious Metals $1,364.2/toz $1,515.0/toz $150.8/toz ¹As of close on July 5, Inclusive of all previous rolling profits/losses. Current profit/(loss) 1 Source: Goldman Sachs ECS Research. Goldman Sachs Economics, Commodities and Strategy Research 5

6 July The Goldman 7, 2011 Sachs Group, Inc. Goldman Sachs Economics, Commodities and Strategy Research Price actions, volatilities and forecasts Prices and monthly changes 1 Volatilities (%) and monthly changes 2 Historical Prices Price Forecasts 3 Energy WTI Crude Oil $/bbl units 05 Jul Change Implied 2 Change Realized 2 Change 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 3m 6m 12m Brent Crude Oil $/bbl RBOB Gasoline $/gal USGC Heating Oil $/gal NYMEX Nat. Gas $/mmbtu UK NBP Nat. Gas p/th Industrial Metals 4 LME Aluminum $/mt LME Copper $/mt LME Nickel $/mt LME Zinc $/mt Precious Metals London Gold $/troy oz London Silver $/troy oz Agriculture CBOT Wheat cent/bu CBOT Soybean cent/bu CBOT Corn cent/bu NYBOT Cotton cent/lb 119 n/a -43 NYBOT Coffee cent/lb 269 n/a -2 NYBOT Cocoa $/mt 3228 n/a 350 NYBOT Sugar cent/lb CME Live Cattle cent/lb n/a 9.2 CME Lean Hog cent/lb 93.4 n/a Monthly change is difference of close on last business day and close a month ago n/a n/a n/a n/a n/a Monthly volatility change is difference of average volatility over the past month and that of the prior month (3-mo ATM implied volatility, 1-mo realized volatility). 3 Price forecasts refer to prompt contract price forecasts in 3-, 6-, and 12-months time. 4 Based on LME three month prices. Source: Goldman Sachs ECS Research. S&P GSCI Enhanced Commodity Index and strategies total return and forecasts 1 Current 12-Month Weight Forward (%) YTD 12-mo Forecast S&P GSCI Enhanced Commodity Index Energy Industrial Metals Precious Metals Agriculture Livestock YTD returns through June 30, Source: Standard & Poor s, Goldman Sachs ECS Research. Goldman Sachs Economics, Commodities and Strategy Research 6

7 Looking at 2H2011 for further upside momentum Progress in dealing with the Greek budget crisis as well as nascent signs that at least some of the recent economic disappointments owed to temporary disruptions from the Japanese earthquake have substantially improved sentiment around cyclical assets in recent days, pushing key metals in particular above recent ranges. In addition, drags from commodityspecific events have also eased, with the IEA s unexpected announcement of a coordinated 60 million barrel release of emergency stockpiles to compensate for lost Libyan supplies in particular likely to be less impactful than first appears. Although we believe that the Greek situation, ongoing tension between the inflation/growth tradeoff in China, and still mixed economic data from several key economies will continue to drive near-term volatility in the commodity markets, we maintain that commodity prices and returns will rise further later this year and into Underlying this view are Goldman Sachs economists expectations for reacceleration in global economic growth during 2H2011 as temporary drags on growth stemming from the Japanese earthquake and the April oil price spike diminish. On net, while growth is expected to slow in 2011 from 2010 s above-trend pace, it is expected to remain substantially positive and generally supportive of rising commodity demand. We expect this demand growth will be sufficient to tighten key commodity markets over the next six to twelve months, particularly for those markets where supply constraints will become binding even on slower economic growth. Accordingly, we reiterate our long trading recommendations for Brent crude oil, UK natural gas, copper, zinc and soybeans. Although our forecasts suggest upside is greatest on a twelve-month horizon, we note that further improvement in economic data may be sufficient to pull forward substantially positive commodity returns, particularly for those cyclical commodities that are more anticipatory in nature, such as the metals. As a result, we maintain our overweight recommendation for commodities on a 3-, 6- and 12-month horizon and our 20% 12-month total returns forecast for the S&P GSCI Enhanced Commodity Index. Oil: IEA release less impactful than first appears For oil, we emphasize that the impact of the emergency stock release on the global balance is likely to be relatively short-lived and more muted than first seems. As details of the release have begun to be made available, it is now clear that only about two-thirds of the release of 60 million barrels will be through a sale from government-controlled inventories that would otherwise be unavailable to the market. Further, the impact of the release is likely to be substantially more muted as time goes on. On net, while this oil will moderately increase near-term supply availability, it does little to alter inventory levels and the trajectory of crude oil prices over the medium-term. We continue to expect that oil demand growth fueled by moderate economic growth expectations will be sufficient to draw down crude oil inventories and OPEC spare capacity by early next year, leading to considerable oil price upside on a 6- to 12-month horizon. Accordingly, we reiterate our long position in December 2012 Brent crude oil. Metals: Upside may be pulled forward For metals, we also anticipate further upside, especially for the more supply-constrained metals. For copper in particular, we maintain that the winding down of destocking will lead to a stronger Chinese pull on global supply in 2H2011, tightening the market and generating further price upside later this year. We also maintain that zinc price risk is skewed to the upside given our view of developing deficits in 2012, and believe that aluminum prices will continue to be buttressed by our view of higher oil prices over the Goldman Sachs Economics, Commodities and Strategy Research 7

8 next year. Given these views, we continue to recommend long positions in June 2012 LME copper and December 2012 LME zinc. We also maintain a long recommendation for December 2011 COMEX gold given our expectations for continued low real rates and moderate increases in monetary buying that will likely remain supportive of the metal in coming months. Agriculture: We still expect soybeans to outperform For agriculture, we continue to expect that soybean prices will outperform corn prices and reiterate our long position in November 2011 soybeans. Recent data points reinforce our conviction in these views. Although higher inventories reported across the major crops have eased concerns about the tightness of old and new crop balances, a higher-thanexpected rise in US corn and cotton acreage has resulted in an even larger-than-expected decline in soybean acreage. As a result, we maintain that soybeans will likely achieve a deficit over the next year, leading to a rise in soybean prices from current levels, albeit a smaller rise than we had expected previously given downward revisions to our corn and wheat price forecasts following these reports. Goldman Sachs Economics, Commodities and Strategy Research 8

9 Petroleum: +9.2% ytd through June 30, 2011 Brent crude oil prices have remained remarkably flat since the sell-off in May, trading in a $ /bbl range. Crude oil prices rallied last week, reversing their sharp declines following the IEAs announcement of a coordinated release of 60 million barrels of emergency oil stocks by its member countries two weeks ago. Although part of last week s rally was driven by progress on the Greek debt issue and some positive signs in the US economic data, the rally was bolstered by the fact that as more details on the IEA stock release have emerged, the downside to oil prices from the release has declined. As more details on the nature of the IEA release have emerged over the past week, it has become clear that the impact will be much smaller than the initial announcement suggested. More specifically, the IEA announced last week that of the 60 million barrels in the release, fewer than 40 million barrels will be through a sale from governmentcontrolled inventories. The remainder will be released by a lowering of governmentmandated industry stockholding requirements. We expect that the impact of lowering stockholding requirements will have an almost negligible impact on oil prices. The oil industry tends to hold inventories well in excess of the government stockholding requirements, and so it is highly unlikely that the requirements have been constraining the industry in the recent period. Consequently, we expect the impact of the IEA release on prices to be determined by the amount of oil sold from government-controlled inventories, which represent less than two-thirds of the IEA release (see Exhibits 1 and 2). Until the final details of these sales emerge next week, we will continue to view the IEA release as posing a downside risk to our oil forecasts, and after the details released so far, that downside risk is substantially reduced. Further, the IEA emergency stock release does little to alter the trajectory of crude oil prices in 2012, which remains bullish. As a result, we continue to recommend a long position in the December 2012 ICE Brent crude oil contract. Exhibit 1: The sale of 39 million barrels from government stocks would still provide support for industry stocks... OECD industry stocks, million barrels Exhibit 2: but would have substantially lower impact on Brent crude oil prices than a sale of 60 million barrels $/bbl year max year average year min Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 with 39mmb release with 39mmb release Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 39mmb release 60mmb release 39mmb release and restocking Forecast Source: IEA and Goldman Sachs ECS Research. Source: ICE, GS ECS Research. Relevant publications: Energy Watch: After the correction, a more bullish trajectory for oil prices, May 23, Energy Weekly: IEA emergency stock release: more details, less downside, July 1, Goldman Sachs Economics, Commodities and Strategy Research 9

10 Natural gas: -7.6% ytd through June 30, 2011 US natural gas prices have been highly volatile in the past couple of months, largely driven by significant swings in weather deviations from average (see Exhibit 3). Prices and returns have ultimately declined substantially since late April owing to a recent softening of the balance. Specifically, June natural gas production was up more than 4 Bcf/d year-on-year, according to pipeline data, while generation demand for natural gas has been losing support from declining nuclear outages and still high hydro reservoirs. Going forward, we expect NYMEX natural gas prices to remain under pressure. Specifically, we have recently updated our balances and revised our production and end-summer inventory expectations higher (see Exhibit 4), underscoring the need for continued demand from price-induced coal-to-gas fuel substitution in the generation sector (see further details in our June 28 Natural Gas Watch). However, US coal prices have traded above our expectations this year, allowing this fuel substitution to take place at a higher gas price level. Seeing an improving outlook for US thermal coal exports, our equity analysts recently raised their CAPP coal price forecast to $75/t or $5.60/mmBtu gas equivalent through Accordingly, we recently raised our NYMEX gas price forecast slightly by $0.25/mmBtu to $4.13/mmBtu for the remainder of this year. We maintain our $4.25/mmBtu forecast for Exhibit 3: Extreme weather deviations have kept the US natural gas market volatile US gas consumption-weighted CDDs Exhibit 4: We have raised our 2011 production growth forecast to 2.9 Bcf/d and our end-summer inventory expectation to 3807 Bcf US dry production, realized and forecasted, Bcf/d Realized and forecasted CDDs year average CDDs Mar Mar Apr May May Jun Jul Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012E 2011E Source: EarthSat, Goldman Sachs ECS Research. Source: DOE, Goldman Sachs ECS Research. Relevant publications: Natural Gas Watch, US structural surplus revised higher; tightening gears up elsewhere, June 28, Goldman Sachs Economics, Commodities and Strategy Research 10

11 Industrial Metals: -1.6% ytd through June 30, 2011 Industrial metals prices have broken out of recent ranges in recent days on the Greek Parliament s passage of an austerity package required to secure the next tranche of emergency loans as well as on better economic data. Although we continue to expect the metals markets to remain relatively volatile in the near term as the market grapples with the still-uncertain Greek situation and mixed economic data, we maintain that Goldman Sachs economists mainline views of slowing but still substantially positive global economic growth will remain supportive of base metals demand. This is particularly the case as reacceleration in global growth is still expected during 2H2011. We expect this demand growth will be sufficient to substantially tighten the copper market in particular over the next year, especially as Chinese buyers continue to return to the market. Although the sharp drawdown in Chinese copper inventories has stabilized, we maintain that the winding down of destocking will lead to a stronger Chinese pull on global supply in 2H2011, tightening the market and generating price upside later this year (see Exhibit 5). We also maintain that zinc price risk is skewed to the upside given our view of developing deficits in 2012, and believe that aluminum prices will continue to be buttressed by our view of higher oil prices over the next year. We continue to expect nickel fundamentals to weaken in 2H2011, with some of this weakening likely already taking place as reflected in weaker nickel time-spreads (see Exhibit 6). Widely reported slowdowns in stainless steel melting globally during 2Q2011, combined with the seasonally slower 3Q2011 demand period ahead suggest nickel demand growth will likely remain lackluster. At the same time, supply is rebounding with the resumption of operations at the Hachinohe Smelter and at Copper Cliff, on top of new supply ramping up from Barro Alto and Onca Puma and likely further rises in Chinese nickel pig iron (NPI) production. Although we have maintained a bearish stance on nickel fundamentals, prices have moved to the downside faster than we had anticipated, posing downside risk to our nickel price forecasts. Exhibit 5: Inventories on the SHFE have declined sharply, consistent with a shift in the curve into backwardation Chinese refined copper supply/chinese semis production Exhibit 6: Nickel time-spreads have weakened 3-27 month time-spread in $/mt Above line: stocking Below line:destocking Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Source: China Non-Ferrous Metal Industry Association, Goldman Sachs ECS Research. Source: LME. Relevant publications: Commodities Update: Still-low China copper imports consistent with arb and inventory, June 10, Goldman Sachs Economics, Commodities and Strategy Research 11

12 Precious Metals: +6.5% ytd through June 30, 2011 Although gold prices declined sharply over the past two weeks, they continue to trade within the $1,480-$1,560/toz range established since mid-april. We continue to consider the gold market to be under-bought relative to the level of US real interest rates, and expect current low real rates to motivate a rise in net speculative positions, providing support for a further rally in gold prices. The rally in gold prices this spring received strong support from low US real interest rates, with 10-year US TIPS yields declining from 1.00% in late March to 65 bp in early May before settling at their current 70 bp level. At this current real rate level we would expect net speculative length on the COMEX to be significantly higher, in turn supporting gold prices (see Exhibit 7). We are rolling forward our gold price forecast along the path that we laid out on December 1 and expect prices of $1,565/toz, $1,635/toz and $1,730/toz in 3-, 6- and 12-months, respectively (see Gold rally to continue in 2011, but prepare for prices to peak in 2012, December 1, 2010 for details). As a result, with gold trading near $1,500/toz, we expect prices to rally back to our near-term $1,565/toz forecast. While we view the persistently low level of US real interest rates as the primary driver of our bullish outlook for gold over the next 12 months, we also expect monetary demand for gold to continue to exert a strong influence on prices, with the risk skewed towards stronger physical demand for gold. Specifically, while traditional gold-etfs holdings remain flat over the past few months, we continue to see sustained strong EM monetary demand with gold holdings by EM central banks up 3.4 million toz in March, significantly more than the 0.5 million toz monthly increase averaged since May 2009 (see Exhibit 8). While higher inflation or monetary demand would present upside risk to our bullish gold price forecasts over the next 12 months, we continue to expect gold prices to peak in 2012 as US real interest rates rise with the ongoing economic recovery, and the potential for US real interest rates to rise more quickly than we anticipate presents a downside risk to gold prices. Net, we continue to believe that gold at current price levels is a compelling trade, not a long-term investment. Exhibit 7: COMEX net speculative length remains low relative to the current level of US real rates Million toz, left axis; % yield, inverted, right axis Exhibit 8: EM central bank holdings continue to rise Central bank gold holdings (million toz) % % 1.0% % % 1.9% % % 2.8% % Net speculative length US 10 year TIPS yield (right axis, inverted) Advanced Economies Emerging and Developing Economies (rhs) Source: FRB, CFTC, Goldman Sachs ECS Research. Source: COMEX, FRB, Goldman Sachs ECS Research. Goldman Sachs Economics, Commodities and Strategy Research 12

13 Agriculture: -6.8% ytd through June 30, 2011 Agriculture prices and returns declined sharply over the past month on the successive impacts of concerns for US ethanol subsidies, lower oil prices and improving US weather conditions. This move lower was accelerated last week by the USDA s June 30 Acreage and Grain Stocks reports which eased concerns about the low level of crop inventories. Specifically, the USDA Grain Stocks report featured higher stocks than expected across crops, pointing to lower feed and residual demand over the past quarter and higher ending stocks for the 2010/11 balances. While some uncertainty remains on the exact level of US old-crop inventories, the report eased concerns that demand destruction is necessary in coming months. Although revisions to acreage were in line with our expectations, with increases in corn and cotton acreage and lower soybean acreage, the magnitudes were larger. This points to a larger supply response than we expected for corn and cotton and reinforces the tight soybean balance that we expect. Following these releases, we lowered our 3-, 6- and 12-month corn and wheat forecasts to $5.90/bu, $5.75/bu, $5.70/bu from $5.90/bu, $6.00/bu, $6.20/bu, respectively, below current forward curves. We further expect wheat to return to trading at a premium to corn prices. We maintain that soybean prices will outperform corn prices, as we expect the US soybean balance to return to a deficit in 2011/12 (see Exhibit 9). Although lower corn prices translate into a more limited upside in soybean prices, our updated 3-, 6- and 12-month soybean forecasts of $13.00/bu, $13.75/bu, $13.75/bu are still above the forward curve and point to further upside for our long Nov-11 CBOT soybean trade recommendation. On net, these revisions suggest lower agricultural price inflation over the next twelve months (see Exhibit 10). We believe that above-average weather conditions this summer will be required to sustainably push prices below our new forecasts and offset this spring s negative impact on acreage, abandonment and yield potential. Exhibit 9: We expect soybean prices to outperform corn prices given the relative tightness of both crops Soybean to corn price ratio (lhs); Ratio of US corn and soybean stocks-to-use ratios (rhs). Exhibit 10: Our updated price forecasts point to lower ag inflation over the next 12 months yoy % return of monthly average level of the S&P GSCI Agriculture spot index % % 60% % 20% 0% -20% Soybean/corn price ratio US corn vs. soybean stocks-to-use ratios (rhs) Updated 2011/12 forecasts -40% S&P GSCI Ag Corn, Wheat, Soybean basket GS Forecast 30-Jun-11 Source: USDA, CBOT, Goldman Sachs ECS Research. Source: S&P, CBOT, Goldman Sachs ECS Research. Relevant publications: Lowering price forecasts but still expect soybean outperformance, July 1, Hit to acreage, abandonment, yield lowers US production outlook, June 13, Assessing the impact of an end to the ethanol tax credit, June 22, Goldman Sachs Economics, Commodities and Strategy Research 13

14 Livestock: -1.2% ytd through June 30, 2011 Livestock prices rebounded over the past month on expectations for limited supply growth. While we expect a continued decline in placements on feed to support cattle prices, the larger-than-expected US hog herd will likely weigh on lean hog prices (see Exhibit 11). Despite high feed prices weighing on margins, the USDA s Hogs and Pigs report as of June 1 showed higher pig inventory than last year. Further, the continued rise in litter rate is likely to offset intentions for fewer sow farrowing over the next semester. This modest expansion stands in contrast to cattle, where the lower placements that we expected materialized as early as May with placements on feed down 7% from last year (see Exhibit 12). This shift reflects lower cattle margins as well as tight feeder cattle availability following strong placements earlier this year on elevated deferred margins and the persistent drought in the southern Great Plains. As a result, we expect that continued lower placements in months ahead will push fed cattle supplies sharply lower by year end. Despite high feed and in turn livestock prices, we expect that demand for meat will continue to improve in 2011 as our economists forecast a continued recovery in US economic growth as well strong EM GDP and income growth, which will continue to support US exports. We believe that US exports will be further supported by strong imports by both Japan where the tsunami and possible radiation put up to 20% of domestic meat production at risk and South Korea, where the foot-and-mouth disease outbreak has led to the culling of a quarter of the pig and cattle herd. With Japan and South Korea among the largest importers of both US pork and beef last year, this points to continued strong import demand for US meat. We expect a tight live cattle balance in 2011/12 and following the earlier-than-expected decline in placements, are raising our 3- and 6-month forecasts to 120 cents/lb, 130 cents/lb from 95 cents/lb and 115 cents/lb previously (our 12-mo forecast remains 120 cents/lb). In turn, we are lowering our 6 month hog forecasts from 105 cents/lb to 95 cents/lb, in line with our 3- and 12-month forecasts. Exhibit 11: The US hog herd as of June 1 is slightly larger than last year Thousand heads Exhibit 12: while cattle on feed placements declined strongly in May Thousand heads ,500 12,000 11,500 11,000 10,500 10, Mar Jun Sep Dec ,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: USDA, Goldman Sachs ECS Research. Source: USDA, Goldman Sachs ECS Research. Goldman Sachs Economics, Commodities and Strategy Research 14

15 Commodities in a nutshell Commodities Recent events/outlook and key issues 12-m price forecasts Energy WTI Crude Oil Brent Crude Oil RBOB Gasoline USGC Heating Oil NYMEX Nat. Gas UK NBP Nat. Gas Industrial Metals LME Aluminum LME Copper LME Nickel LME Zinc The US oil market itself has become increasingly fragmented by the high level of oil inventories in the midcontinent and particularly at Cushing, OK. As a result, WTI has been trading at a significant discount to other light sweet crudes, such as Brent and Light Sweet Louisiana (LLS). While we expect the congestion at Cushing to ease, we believe that WTI will remain volatile and prone to dislocations in the future until the pipeline infrastructure is improved, which will occur in late 2012, at the earliest. With world economic growth continuing to drive world oil demand growth well in excess of non-opec production growth, the oil market continues to draw on inventories and OPEC spare capacity in order to balance. In our view, it is only a matter of time until inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supplies. While near-term downside risk remains as the oil market negotiates the slowdown in the pace of world economic growth and assesses the impact of the IEA emergency stock release, we believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand. Gasoline inventories have recovered from their very low levels in April and early May while gasoline demand has picked up markedly as we entered the summer driving season, supported by a substantial decline in retail prices which have dropped almost $0.40/gal since the peak in early May. While gasoline cracks continue to remain strong, this reflects weakness in WTI prices rather than strength in gasoline prices as margins relative to Brent crude oil have largely normalized by now. Over the medium term, upside risks on gasoline cracks are likely limited given the expansion in refining capacity over the past few years. While US distillate stocks have started the year well above last year s levels, inventories have declined sharply over the course of the year and have so far lacked the typical seasonal increase over the past weeks. This supporting trend is driven primarily by strong export demand from Latin America and increasingly Europe rather than domestic demand, which remains well below last year s levels. We expect this export demand to continue this summer, likely supported by diesel-fired electricity generation demand in China and Japan. Growing shale gas production remains the dominant driver of the US gas market, by creating a structural overhang of supply, thereby pressuring prices and crowding out conventional production and imports. We expect these trends to continue and recently raised our growth forecast for US dry production to +2.9 Bcf/d this year and +1.2 Bcf/d in However, we expect continued adjustments on the demand side from increasing generation, industrial and export demand to partly offset the supply growth. Net, our end-of-summer inventory estimates are 3807 Bcf this year and 4002 Bcf in However, US coal prices have traded above our expectations this year, allowing coal-to-gas substitution to take place at a higher gas price level. Seeing an improving outlook for US thermal coal exports, our equity analysts recently raised their CAPP coal price forecast to $75/t or $5.60/mmBtu gas-equivalent through Accordingly, NYMEX gas prices may find some support from coal over the second half of this year, and we recently raised our NYMEX gas forecast slightly by $0.25/mmBtu to $4.13/mmBtu for the remainder of this year. The cyclical oversupply in the global gas market between 2008 and 2010, driven by liquefaction capacity additions and weak global demand due to the economic slowdown, is currently giving way to a cyclical tightening. We expect global LNG demand to outpace supply, and test effective LNG production capacity. Hence, we maintain our view that European spot and oilindexed natural gas prices will re-connect on a sustainable basis this year. Our 2011 and 2012 UK NBP forecasts are $10.90/mmBtu and $13.70/mmBtu, respectively. Although we maintain that supply growth will likely outpace demand growth for aluminum, we maintain a generally neutral stance on the metal given the importance of energy and currency cost drivers in price determination. Movements in longdated aluminium prices can be almost entirely explained by movements in oil and the dollar. Going forward, we believe that tightening oil fundamentals and production cost inflation will generally keep long-dated oil prices elevated. At the same time, GS currency economists expect further weakening of the dollar. On net, these views suggest that aluminium prices will likely remain supported at historically high levels owing to sustained cost-push inflation. The combination of Chinese consumer destocking and EM tightening effects has moderated the expected copper market deficit this year, pushing out the timing of a drawdown in copper inventories to critically low levels beyond 2011, in our view. As a result, the cyclical breakout that we had been expecting for copper in particular later this year is likely no longer required to balance the market. Nevertheless, we maintain that the critically low inventory environment has been deferred, not avoided. Although the sharp drawdown in Chinese copper inventories has stabilized, we maintain that the winding down of destocking will lead to a stronger Chinese pull on global supply in 2H2011, tightening the market and generating price upside later this year. We continue to expect nickel fundamentals to weaken substantially in 2H2011, with some of this weakening potentially already taking place as reflected in weaker nickel time-spreads. Widely reported slowdowns in stainless steel melting globally during 2Q2011, combined with the seasonally slower 3Q2011 demand period ahead suggest nickel demand growth will likely remain lackluster. At the same time, supply is rebounding as unexpected disruptions are resolved and new supply comes on line. Although we have maintained a generally bearish stance on nickel fundamentals, prices have moved to the downside faster than we had anticipated, posing downside risk to our nickel price forecasts. Although the global zinc market remains in surplus, we believe that demand growth is outpacing supply growth sufficiently to tip the market into deficit in While we do not see the zinc balance as tight as copper next year, we believe that zinc price risk is also skewed to the upside given our views of a developing deficit. We emphasize that China is a growing net importer of zinc raw materials, like copper, setting up for sizable upside for the metal even before important mine closures are set to take place in $126.50/bbl $130.00/bbl $3.35/gal $3.48/gal $4.00/mmBtu p/th $2900/mt $11000/mt $23000/mt $2700/mt Goldman Sachs Economics, Commodities and Strategy Research 15

16 Commodities Precious Metals London Gold Recent events/outlook and key issues We expect the low US real interest environment, combined with continued Central Bank buying will continue to provide support for gold prices in However, with our US economics team forecasting strong US economic growth in 2012, we expect US real interest rates to begin to rise into 2012, likely causing gold prices to peak. Our forecast for the second half of 2011 currently stands at $1,565/toz and $1,690/toz in 6- and 12-months, respectively. 12-m price forecasts $1730/toz London Silver Over the long run, silver prices tend to track gold prices. Thus, our silver forecast reflects the historical ratio to gold. $28.9/toz Agriculture CBOT Corn Corn prices declined strongly last month on the successive impacts of concerns for US ethanol subsidies, lower oil prices and improving US weather conditions. This move lower was accelerated last week by the USDA s June 30 Acreage and Grain Stocks reports which eased concerns about the low level of old-crop inventories and pointed to a larger supply response in 2011/12. These releases suggest that corn prices do not need to incentivize demand destruction this summer and strongly lowers the probability that the 2011/12 US corn balance will be in a deficit under average weather conditions. We therefore revised our corn price forecast lower over the next 3-, 6- and 12- months to $5.90/bu, $5.75/bu and $5.70/bu, below the current forward curve. We believe, however, that above-average weather conditions would be required this summer to sustainably push prices below our new forecasts. 570 c/bu CBOT Soybean CBOT Wheat NYBOT Cotton NYBOT Coffee NYBOT Cocoa NYBOT Sugar CME Live Cattle CME Lean Hog Soybean prices declined last month on further signs that the 2010/11 US balance will be in a surplus with the June 30 Stocks report confirming the higher level of old-crop ending stocks. The Acreage report pointed to sharply lower acreage and comforted us in our expectation for a renewed deficit in 2011/12. As a result we expect that soybean prices will outperform corn prices. Although lower corn prices translate into a more limited upside in soybean prices, our updated soybean forecast of $13.00/bu, $13.75/bu, $13.75/bu is still above the current forward curve and points to further upside for our long Nov-11 CBOT soybean trade recommendation. Wheat prices declined last month and while on aggregate the USDA s June 30 reports were fairly neutral to the US wheat outlook, we believe that the decline in corn prices that we forecast will also weigh on wheat prices. As a result we revised our price forecast lower, to $5.90/bu, $6.00/bu, $6.20/bu, currently below the CBOT wheat forward curve. In particular, we expect wheat to return to trading at a premium to corn prices given the expected deficit in the US wheat balance. Cotton prices declined in June on further signs of old-crop demand destruction with ongoing cancelations of US export sales. For the new crop, the USDA s June 30 Acreage report featured significantly higher US cotton acreage, confirming our expectation that elevated margins offered by new crop cotton prices would incentivize higher cotton acreage in the US, India and China, the three largest producers. We expect this supply response under average weather conditions during the 2011/12 crop year to push prices lower over the medium term. Accordingly, and following the July contract expiration, we are rolling our price forecast forward to 125 c/lb on a 3- and 6-mo horizon and are introducing a 100 c/lb 12-mo price forecast. We acknowledge, however, that risks are skewed to the upside on any weather disappointment. In particular, we expect concerns for large abandonment in the US South will limit price downside in the near term. After declining last month on a cross-commodity price decline and improving outlook for the Brazilian crop, coffee prices recovered over the past week on reports of frost in two Brazilian producing regions. So far, the freeze seems to have only impacted minor regions of production and the outlook remains for a record off-year harvest in Brazil in 2011/12, as wet conditions this spring have been beneficial. On net, the outlook for lower global 2011/12 production on Brazil s off-year of the Arabica plant two-year cycle in the face of both strong EM demand growth and very low beginning stocks will likely keep prices elevated in 2011 and our 3- and 6-mo price forecasts remain 235 c/lb and 200 c/lb. Barring weather shocks, we expect prices to decline over the longer term (12-mo price forecast of 175 c/lb) on an expected supply response to the current higher coffee prices. In particular, a large on-year harvest in Brazil in 2012 would present downside risk to this forecast. Cocoa prices rallied over the past month on growing supply concerns. While earlier this month the ICCO revised its expected 2010/11 surplus higher on the current strength in West African production, ongoing supply concerns have supported prices with reports of poor quality beans arrival in Ivory Coast ports and excessive rains in Southeastern Ivory Coast and Indonesia (the third largest producer). We still expect the normalization in the Ivory Coast production and exports as well as a 2010/11 global stocks-to-use ratio back to its highest level since 2005 to push prices slightly lower to $2,700/mt over the next 3 months. Over the medium term, as demand continues to grow, the production outlook for the Ivory Coast will remain key as aging orchards, poor infrastructure and political instability have curbed production and investment over the past few years. Further, while La Niña was beneficial to West Africa production, a return to neutral weather conditions suggests that 2011/12 production will not be as large as the current crop. As a result we see increasing risks that the 2011/12 global balance returns to a deficit and see upside risk to our 6- and 12-mo price forecasts of $2,700/mt. Sugar prices rallied in June on downward revisions to Brazil s Centre/South production estimates, which accounts for the vast majority of the country s sugarcane crop, as well as delays in loading sugar at Brazilian ports. These concerns more than offset increased exports out of India, the second-largest producer, and the potential for lower import demand following better weather in Europe and expected higher production in Russia. While we had expected prices to find support when trading near 20 c/lb, the recent downward revisions to Brazil s production creates upside risk to our 3-mo 25 c/lb forecast. Medium term, we see limited upside to sugar prices given the expected continued supply response to recent elevated prices and forecast 6- and 12-mo prices of 20c/lb. Finally, we don t expect export demand for Brazilian ethanol to pick up in the near term as it is currently not economical for the US to import sugarcane-based ethanol from Brazil, even should the US ethanol import tariff be repealed. Live cattle prices rebounded over the past month as placements of cattle on feed for May showed the decline that we were expecting later this year. While current large feedlot counts point to large fed cattle supplies in coming months, low feeder cattle inventory will continue to limit placement in coming months and point to strong live cattle prices into year end. Lean hog prices increased slightly over the past month. While we expect domestic and foreign demand for pork to remain strong this year, larger-than-expected pig and hog inventory as of June 1 will likely weigh on prices in coming months c/bu 620 c/bu 100 c/lb 175 c/lb $2700/mt 20 c/lb 120 c/lb 95 c/lb Goldman Sachs Economics, Commodities and Strategy Research 16