Report Summary LME 3M: USD 7092 (+1.17%) SHFE: CNY (+0.04%) MCX Nov 13: (+0.68%) Optimistic demand sentiments from China

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1 Decision enabling cash market analysis & price outlook For the week beginning Nov 25, 2013 LME / SHFE / MCX on Nov 22 th 2013 Fundamental Summary Technical Summary Price Outlook Summary Price Ranges (LME 3M Forward) Procurement Strategy (LME Cash) Turnaround point Report Summary LME 3M: USD 7092 (+1.17%) SHFE: CNY (+0.04%) MCX Nov 13: (+0.68%) Price drivers Optimistic demand sentiments from China Inventory movement at LME Increase in physical premiums Increase in arbitrage for Chinese traders Sharp rise in TC/RC charges Lack of immediate measures to support economy in China's reform package Slowdown in Euro zone growth Inventory build up at Chinese non exchange warehouses Sum up Impact on Price Bullish Bullish Bullish Bullish Bearish Bearish Bearish Bearish Mixed Corrective pattern is evident, support is around USD However, short term trend is bearish, likely to provide resistance around USD Concisely, pull back in the price is likely to be restreicted in the range of USD and turn negative again in the forthcoming few weeks. Concisely, price is likely to trade trade mixed around INR 445 and turn negative in the coming few weeks. 0 2 Weeks 0 1 Month Range Price Bias Range Price Bias Mixed Negative Oct 13 procurement completed at an average of USD compared to the monthly average of USD per ton. Nov 13 procurement completed at an average of USD compared to the monthly average of USD per ton. A sustain close above USD 7200 shall negate the downside potential and then price could test USD 7350 in the said time frame. Discuss with our expert 1 Phone: E mail: services@transgraph.com Internet:

2 Market Analysis While subdued demand sentiments stemming from a lack of immediate measures to boost commodities demand in China's reform package kept base metal prices under pressure at start of the week, signs of growth in economic activity during Q stemming from better than expected macroeconomic data particularly from Germany and US pinned up investors risk appetite inducing positive momentum in industrial red metal during the last week trade at LME. While US Fed Chairman Ben Bernanke assured market of support for ultra easy monetary policy for as long as needed, FOMC minutes reinforcing the idea that the Fed is still on course to taper bond purchases which is likely to emerge over the next few months, let to some panic among market participants during the week. However, renewed concerns of supply shortage in spot market stemming from rising premium weighed down on the pessimism surrounding Fed tapering and below expected factory activity in China. At another front, LME Copper prices got support from better than expected data from Germany during the week which further raised hopes of sustained growth in Euro area biggest economy during the Q4. In addition, inventory movement at LME and SHFE continues to point towards tightening supply of metal in spot market thereby aiding positive momentum in prices. Finally, LME Copper cash contract settled the week at USD up by USD (1.40%) compared to preceding week. Tightening Spread pointing of near term price strength but prevailing fundamental indicates of any strength to be temporary. Price spread between Jan 14 and Dec 13 contracts at LME fell into negative territory in late October and early November. While spread between the two contracts recovered in second week of November it has again fell to USD 2 per ton last week. After the initial and aggressive move, the spread has eased significantly with lending activity re emerging. As we head into December 2013, strong physical premium, tightness in the nearby spreads and a market that has been aggressively short points to a period of price strength, albeit perhaps temporary in nature. 12 Copper Price Spread between contracts, USD/T Dec'13 Nov'13 Jan'14 Dec'14 7 Oct 12 Oct17 Oct22 Oct27 Oct 1 Nov 6 Nov 11 Nov16 Nov21 Nov However, uncertainty surrounding sustainability of economic growth in China and Euro Zone, and possible tapering of stimulus by US Fed coupled with increasing mine supply shall keep overall tone on weak note in the medium term. Global market balance narrowing defict and building surplus expectation of 2013 to keep prices under pressure and negate any significant upside movement in prices despite of other positive developments According to the data reported by ICSG, after three straight months of deficit global copper market reported a small surplus of 21 KT in August. Increased mine production owing to a 2

3 recovery in production levels from new mines and softening of demand from China and loss of demand from Euro zone and Japan remained the major factors driving the production surplus. Cumulatively, global copper market reported deficit of 45 KT in first eight months (Jan Aug 2013) compared to deficit of 567 KT during the same period in In the first eight months of 2013, world demand is estimated to have increased by 1.9 percent to 266 KT, compared with that in the same period of Meanwhile despite of July and August high levels, Chinese apparent demand in the first eight months is expected to have increased only by 3.6 percent from that in the same period of However, anecdotal evidence suggests that the lower import level was accompanied by a decline in unreported inventories held in bonded warehouses in China, which may have been all or partially directed to domestic industrial use. Excluding China, world demand year on year has increased by 0.7 percent, with growth in the United States, the Gulf countries, Brazil and Russia offsetting declines in Japan and the European Union. Moving ahead, while new capacities and improvement of ore grades shall keep mine output higher, start of new smelting units in China and plants coming off their maintenance in India and Chile shall further increase supply of refined metal in Sep Dec period. Amid higher supply and sluggish demand of metal from power and construction sector we expect market to enter into net surplus by end Premium negotiations for 2014 signaling of optimistic industry perception for demand of metal Reflecting strong Chinese demand, Chile's Codelco, the world's top copper producer has raised the premium for 2014 term shipments to China by around 41 percent to a nine year high level. The proposal to increase the premium by USD 40 to USD 138 per ton, highest since 2005, offers potential support for copper prices which have witnessed sharp fall of around 3.8 percent since start of the month. Meanwhile the offered premiums reflects spot market conditions, where premiums have increased significantly in last couple of months. Spot premiums for bonded stocks in Shanghai and the shipments due to arrive in China are ranging in between USD per ton. Further aiding demand sentiments of metal were sharp rise in in warehouse copper premiums at Rotterdam. Premiums in the region surged to USD per ton on 15 th November, an increase of around USD per ton compared to the premium in early November. With brokers reporting sharp rise in sales of warrants at the highest levels in at least last seven years for the materials that s not in a queue the same indicates of tight supply of copper in spot market. 3

4 However, despite of improving demand sentiments as indicated by rising premium in spot market particularly in western nations, report of sharp rise in treatment and refining charges (TC/RC) for 2014 signaling of sharp rise in output of refined metal has kept overall tone bearish. Rising treatment and refining (TC/RC) charges pointing of looming concerns of sharp rise in supply of refined metal. China's Jiangxi Copper Company Ltd and US miner Freeport McMoRan have agreed to treatment and refining charges (TC/RC) of USD 92 per ton and 9.2 cents per pound for copper concentrate shipments in 2014, an increase of around 31 percent from charges of USD 70 per ton and 7 cents per pound on 2013 shipments. While smelters have managed to fetch higher charges it remains below than the earlier market expectations of USD 100 and 10 cents. Miners pay TC/RCs to smelters to convert concentrate into refined metal, with charges deducted from the sale price. Rise in charges indicates of higher supply of concentrates by the miners. Meanwhile sharp rise in charges agreed between the Freeport and Jiangxi Copper is likely to increase the pressure on rival BHP to raise its own offer on the charges of USD 80 and 8 cents offered last week to Chinese smelters At another front, reflecting an anticipated strong growth in mine supply in 2014, Pan Pacific Copper, Japan's biggest smelter, won its highest copper processing fees in eight years in a deal with US miner Freeport McMoRan Copper & Gold Inc. The treatment and refining charges (TC/RCs) for 2014 were set at USD 92 per ton and 9.2 cents per pound respectively, and increase of around 31 percent from USD 70 and 7 cents for Economy: Summary of global macro and market themes At US front: While Federal Reserve Chairman Ben Bernanke assured market of support for ultra easy monetary policy for as long as needed, FOMC minutes didn't say anything new, other than reinforcing the idea that the Fed is still on course to taper bond purchases, and that the tapering is data dependent and likely to emerge over the next few months. Whether the tapering starts in December or March is still uncertain, though we expect the tapering to be more likely taking place in March. Meanwhile amid hovering clouds of uncertainty data from labor market to be released in first week of December shall remain crucial. Meanwhile the flash PMI for November at 54.3 shows that the manufacturing in the region continues to expand at an unspectacular rate and indicates that business are returning to normal after the uncertainty and disruption caused by the government shutdown. However, raising concerns over sustainability of growth in manufacturing factor is the fact that while the overall pace of growth remained modest it is barely generating any employment growth in the sector. In addition, despite some positivism stemming from the growth in manufacturing sector another data from the region showing sharp fall in Philly Fed Manufacturing Index which showed sharp 4

5 plunge in new orders, shipments and unfilled orders signals that the economy is once again losing steam. Euro Zone economic update: The flash PMI data for November signals of unexpected fall in the regions business activity igniting fresh concerns that the economic recovery is losing steam in Euro area. While PMI signaling expansion of the Euro zone economy for a fifth successive month in November induce some optimism over sustained growth in the region, the average reading so far in the fourth quarter signals that growth in the region is losing momentum again in Q4. We expect a very modest expansion in Q4 GDP growth. Meanwhile raising further concerns of growth in Euro zone is the fact that improvements in business activity were largely confined to Germany, whereas France continues to be the sick man of Europe and growth outside the big two slowing to near stagnation. In a positive development which shows that the recovery in Europe s largest economy remains on track even after growth slowed in the third quarter, German business confidence in November surged to the highest level since April The Ifo institute s business climate index which gives an indication of future economic activity such as spending, hiring, and investment, increased to in November from in October. The data further underscores that German companies are becoming more optimistic as they invest to take advantage of domestic unemployment near a two decade low thereby indicating that the nation s economy remains on a solid growth path. Asian economic update: As per the flash PMI data released by HSBC, China s manufacturing economy expanded for the fourth successive month in November, albeit at a slightly slower rate than October indicating off softening growth momentum amid weak new export orders and slowing pace of restocking activities. However, increase in output and new orders during the month, although at a slower pace indicates of relatively better domestic demand. In addition, muted inflationary pressures shall enable Beijing to keep policy relatively accommodative to support growth. While the HSBC flash PMI registered 50.4 in November, down from a seven month high of 50.9 in October the index has held above the 50.0 for four successive months signaling of an ongoing improvement in business conditions. Looking ahead for the week Below are the couple of key data releases/events during coming week: At USA front latest development at macroeconomic front has defied ripening expectations of slowdown in October amid 16 day government shutdown during the month. While latest speech from Fed nominee and other official underscores thought of delay in tapering, the plodding nature of the economy is likely to be underscored by the latest snapshots of pendinghome sales, build permits and goods order along with unemployment claims. While we expect housing sector to show some improvement during the month, unemployment claims data could 5

6 surprise market on upside. Meanwhile data from labor market and manufacturing sector to be released in first week of December shall remain the major focus. Economic data from Euro zone with latest flash PMI data igniting fresh concerns that the economic recovery is losing steam in Euro area market shall eagerly wait for final PMI numbers to gauge the exact extent of slowdown. Moving forward, consumer centric data (retail sales, consumer spending, unemployment, etc) shall remain the major attraction in the coming weeks. At Chinese front with flash HSBC PMI data for November indicating of softening growth momentum in manufacturing sector, focus shall shift towards official manufacturing PMI data and services PMI numbers to gauge the overall growth for Q4. Concisely uneven development at macroeconomic front across US, EU and China dampening investor sentiments shall keep base metals under pressure in next couple of weeks before uptick in restocking demand from China and improvement in consumer sales across US and EU induce some positive momentum in prices. Upcoming key economic releases Calendar Key Economic & Other Fundamental Data Event Date Expected Value Current Value Pending Home Sales m/m (US) 25 Nov 2.5 % 5.6 % Building Permits (US) 26 Nov 0.94 M Housing Starts (US) 26 Nov 0.92 M CB Consumer Confidence (US) 26 Nov GfK German Consumer Climate (EUR) 27 Nov Core Durable Goods Orders m/m (US) 27 Nov 0.5 % 0.2 % Unemployment Claims (US) 27 Nov 331 K 323 K M3 Money Supply y/y (EUR) 28 Nov 1.8 % 2.1 % German Retail Sales m/m (EUR) 29 Nov 0.5 % 0.6 % Unemployment Rate (EUR) 29 Nov 12.2 % 12.2 % Manufacturing PMI (China) 01 Dec ISM Manufacturing PMI (US) 02 Dec Non Manufacturing PMI (China) 03 Dec Fed Chairman Nomination Vote (US) 03 Dec Chartist view on LME Copper 3 Month Forward A. Chart Analysis: Negative to Mixed Rise in the price since posting of low at USD 6602 is seen getting resistance in the range of USD The short term trend has turned negative again; however support is likely around USD

7 Price oscillator has retraced towards equilibrium and metal is hovering below 18 pd EMA hence lacking upside momentum. The long term trend is still bearish and demand for the commodity is likely to be contented around USD On the immediate front, price is likely to hold support around USD 6900 and move higher towards USD 7200 before turning negative again in the coming few weeks. B. Elliott Wave Perspective: Corrective The development from low of USD 6602 is corrective in nature and likely to take the price towards USD 7300/7400. After culmination of b leg up a sharp decline is expected which could take the price below USD 6600 in the coming few months. Concisely, pull back in the price is likely to be restreicted in the range of USD and turn negative again in the forthcoming few weeks. Chartist view on MCX Copper Futures Continuation Chart The Weakness in the MCX Copper futures price after posting life time high at INR is still intact and it continues to hover around 18 pd EMA. Price has closed below upward sloping trend line hence negative momentum is likely to drive the price towards INR 393 in the coming few months. However, retracement based support is expected around INR 425/410. However, on the upside momentum based resistance is expected around INR 460 and resistance at INR 471 likely to keep the downside trend intact. On the Weekly technical setup, Price oscillator is trending lower while RSI (9) is hovering around equilibrium hence consolidation with negative bias is likely in the coming few weeks. Concisely, price is likely to trade trade mixed around INR 445 and turn negative in the coming few weeks. 7

8 Weekly Dashboard LME Copper SHFE Copper Copper Spreads (3M Cash) Jul-13 Aug-13Oct-13 Nov-13 ($/T) ( /T) (CNY/T) LME Cu, Merchant Cu and Copper Scrap Prices Aug-13 Sep-13 Nov-13 LME Cu/Al Ratio (3M Forwards) ($/T) ( /T) (CNY/T) LME ($/T) SHFE ($/T) Aug-13 Sep-13 Oct-13 Nov-13 Physical Premium/Discounts Aug-13 Sep-13 Oct-13 Nov-13 LME Copper Cu Scrap Prices US Merchant Prices Global Production Consumption (Million Tons) Aug-13 Sep-13 Oct-13 Nov-13 LME Cu/Al Ratio Chinese Copper D/S ( 000 Tons) Aug-13 Sep-13 Oct-13 Nov-13 USA Europe Global Copper Inventory ( 000 Tons) Facts and Figures digest Market and details 22 Nov Nov 13 Change %Change LME Copper Cash (USD/Ton) LME Copper 3M Forward (USD/Ton) LME Copper 15M Forward (USD/Ton) LME Copper 27M Forward (USD/Ton) Changjiang Spot Prices (CNY/Ton) SHFE 3M Futures (CNY/Ton)

9 Stocks LME (Tons) Stocks SHFE (Tons) MCX Nov 13 Futures MCX Feb 14 Futures LME Copper Futures Open Interest * # LME Copper Call Option Open Interest * # LME Copper Put Option Open Interest * # * LME Open Interest is released with a lag of one day, # Data as on 21 st Nov

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