Global Economics & Market Volatility - Impact on Commodities. Nagaraj Meda MD, TransGraph Consulting

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1 Global Economics & Market Volatility - Impact on Commodities Nagaraj Meda MD, TransGraph Consulting

2 Global economy summary Euro strength emanated from accelerated growth momentum and strong current account surplus despite accommodative monetary stance from ECB, highly diverging from that of its counterpart, the FED. Subdued inflation expectations for medium to long term while short term rates were continued to be increased by FED had led to flattening of treasury yield curve in US. The passage of the new tax reform bill for a ten year period effective this year, which would put significant negative impact on US fiscal account for the first couple of years had also weighed on the demand for short to medium term treasury bonds thus resulted in increase of yields. Euro Zone yield curve along with Japanese yield curve remained steep as short term rates are maintained at below zero levels while inflation prospects for medium term have picked up well. Debt markets priced in very quick normalization in long term Euro Zone rates as against US. For the short term, however, FED shall remain hawkish continuing with the rate hikes while ECB would do any kind of interest rate normalization only going into 2019 or beyond Real interest rate scenario bodes well for Dollar Continued expansion in Japan GDP even as the government is in fiscal consolidation mode shall bode well for Yen 2

EUR-USD decoupled from interest rate differentials 0.0-0.5-1.0-1.5-2.0-2.5 Interest rate differential vs Currency 5yr yield spread (Euro Zone - US) EURUSD 1.30 1.25 1.20 1.15 1.10 1.05 1.00 3.0 2.5 2.

3 EUR-USD decoupled from interest rate differentials Interest rate differential vs Currency 5yr yield spread (Euro Zone - US) EURUSD Jan-15 2-Jul-15 2-Jan-16 2-Jul-16 2-Jan-17 2-Jul-17 2-Jan Euro Zone treasury yield curve spread yr - 3m US treasury yield curve spread 10yr - 2yr y-3m 10y-2y 3

4 Technical Outlook Dollar Index and EUR-USD Dollar Index is likely to have limited downside potential below 87 and trade higher towards in coming 5 to 6 months EURUSD Spot pair is likely to stay below 1.27 on any gains and trade lower towards USD 1.16 in coming 5 to 6 months 4

83 and witness a phase of depreciation towards MYR 4.00 in coming 5 to 6 months.

5 Technical Outlook Asian Currencies (CNY,INR,MYR, IDR) Likely to strengthen towards CNY 6.25 ahead of depreciating towards CNY 6.45 and higher in coming 5 to 6 months. Likely to have limited potential below MYR 3.83 and witness a phase of depreciation towards MYR 4.00 in coming 5 to 6 months. Likely to weaken towards INR 66 initially ahead of appreciating towards in coming 5 to 6 months. IDR spot is likely to stay below and consolidate above in the in coming 5 to 6 months. Depreciation above is unlikely. 5

18 MBpd production cuts through 2018 ) has remained impressive at above 70% consistently despite the rise in Libya and Iran production due to deeper than allotted cuts bysaudi Arabia.

6 Crude oil summary US crude oil output is expected to continue to grow at a rapid rate and rise to 10.4 MBpd in 2018 from an average of 9.3 MBpd during 2017 amid higher prices facilitating higher profitability for shale oil producers. OPEC group compliance (1.18 MBpd production cuts through 2018 ) has remained impressive at above 70% consistently despite the rise in Libya and Iran production due to deeper than allotted cuts bysaudi Arabia. Non-OECD demand growth (1.1% YoY rise from MBpd in 2017 to MBpd in 2018) driven by the increasing consumption in India and China. Meanwhile OECD region growth is expected to witness moderate growth from MBpd in 2017 to Mbpd in Holistically, narrowing supply demand conditions in 2018 compared to 2017 is anticipated to provide support to prices in the long term. World oil Supply-Demand Balance Quarterly AMJ 2017 JAS 2017 OND 2017e JFM 2018p AMJ 2018p JAS 2018p OND 2018p World oil supply (MBpd) World oil demand (MBpd) Source: IEA, TG Estimates S-D Balance Global oil supply/demand balance Source: IEA, TransGraph estimates e 2018p Total supply (MBpd) Total demand (MBpd) Supply-Demand gap 6

7 ICE Brent Crude Oil Price Outlook ICE Brent Crude Oil 1M Futures prices are likely to test USD 74 and turn weak towards USD 57 ahead of retracing back towards USD 67 in the coming 5-6 months time frame. 7

8 Higher Crude Oil Price Helped Improve Bio-Diesel Margins 0 Biodiesel Margins in USD/T Singapore Diesel vs CPO FOB Indonesia PME Margin SE Asia PME Rotterdam, NW Europe SME Paranagua, Brazil SME New York, USA SME Margin Upriver Argentina Palm and Soy Methyl Ester Margins improved at key locations -400 through Nov-Jan, but corrected in Feb as Crude oil prices slipped. Sep-07 Sep-22 Oct-07 Oct-22 Nov-06 Nov-21 Dec-06 Dec-21 Jan-05 Jan-20 Feb-04 Feb-19 8

9 Four Major Global Veg-Oil Scenario Attribute Soy Sun Palm Rape Overall Beginning Stocks Production MY Imports Total Supply MY Exports Industrial Dom. Cons Food, Feed, Dom. Cons Total Consumption Ending Stocks S/C Ratio 6.03% 5.51% 9.02% 7.66% 12.95% 16.13% 14.47% 13.31% 10.45% 11.13% 9

10 BMD CPO and CME Soybean Oil Outlook BMD CPO 3M Futures prices are likely to stay below MYR 2650 and trade weak towards MYR 2200 in the coming 5-6 months time frame. CME SBO 1M Futures prices are likely to trade mixed below USc 34 and extend further weakness towards Usc 29.50/29 in the coming 5-6 months time frame. 10

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11 Click here Click here LEGAL INFORMATION This document is the whole property of TransGraph Consulting Private Limited, Hyderabad, India (hereafter TransGraph ). The following acts are strictly prohibited: Reproduction and/or forwarding for sale or any other uses Posting on any communication medium Transmittal via the Internet Thanking you for your attention. Talk to us on: Research Queries: Sales: TransRisk software: Schedule an interaction: More info: Click here Terms of usage Upon receipt of this document either directly or indirectly, it is understood that the user will and must fully comply with the other terms and conditions of TransGraph. By accepting this document the user agrees to be bound by the foregoing limitations. This publication is prepared by TransGraph and protected by copyright laws. Unless otherwise noted in the Service Agreement, the entire contents of this publication are copyrighted by TransGraph, and may not be reproduced, stored in another retrieval system, posted on any communication medium, or transmitted in any form or by any means without prior written consent of TransGraph. Unauthorized reproduction or distribution of this publication, or any portion of it, may result in severe civil and criminal penalties, and will be prosecuted to the maximum extent necessary to protect the rights of TransGraph. The information and opinions contained in this report have been obtained from sources TransGraph believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any assets (commodities, currencies, etc) or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient; they are subject to change without any notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any views expressed reflect the current views of the analysts, which do not necessarily correspond to the opinions of TransGraph or its affiliates. Opinions expressed may differ from views set out in other documents, including research, published by TransGraph. Any reference to past performance should not be taken as an indication of future performance. No member in the public related to TransGraph accepts any liability whatsoever for any direct or consequential loss arising from any use of material contained in this report. Locate TransGraph TransGraph Consulting Private Limited 6C/A, Melange Towers, Sy.No.80-84, Hitech City, Hyderabad , India Analyst Certification Each analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the analyst's views about any and all of the factors and assets (commodities, currencies, etc) named in this report, and (ii) no part of the analyst's compensation is directly or indirectly, related to the execution of the specific recommendations or views expressed herein. Copyright TransGraph Consulting Private Limited, Hyderabad, India. 11

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