Quarterly Commodity Outlook

Transcription

1 Quarterly Commodity Outlook Group Economics 25 July 2013 ABN AMRO Price Outlook Q months view long term view (until 2015) WTI k h i k Brent i k i k h Natural gas i k h h Gold k i k Silver i h k h Platinum i k k Palladium i h i k h Aluminium k h Copper h i k Nickel k h i h Zinc k h h Energy: For oil, news about higher production will balance out the impact of the rise in seasonal demand. As a result, oil prices are expected to trade within small ranges, but volatility will remain elevated. Geopolitical worries form an upside risk, while changes to the Fed stimulus measures could result in downward pressures. The Brent/WTI spread should be about USD 5/barrel. US natural gas prices are rising, due to increased demand, while European gas prices will ease, based on renegotiations of longer-term oil-linked contracts. As a result, the price difference will halve in the coming years, taking into account our forecasted appreciation of the US dollar. Precious metals: For the second half of 2013, we expect precious metals to again fall under pressure, based on further investor liquidation. We also remain negative on gold for 2014 and 2015, driven by a stronger US dollar, higher US rates, low inflation and positive investor sentiment. Excessive investor positions first need to be sold before the market for other precious metals will again reflect fundamental factors. Following the expected downturn in 2013, we continue to expect platinum, palladium and silver prices to recover in 2014 and 2015, but to remain below the 2013 average. This move is driven by a stronger global economy, which should lead to an improvement in industrial, car sales and jewellery demand. Base metals: General global economic uncertainty will continue to be the main drivers for metal markets. Although metal demand will grow further in the coming year, the pace of growth will be relatively slow from a historical perspective. ABN AMRO expects that the eurozone economy will pick up modestly in H Together with the continued recovery in the US, long-term metal demand will remain relatively strong, also bolstered by demand from new end-user growth areas. This means that the prices of the various base metals in the period will increase further. Steel (HRC) i Iron ore i k i Coking coal k i k Wheat i k h k Corn i k h k Soybeans i k h k Sugar i k h i Coffee i k h i Cocoa i k h Cotton i k i Ferrous metals: For the global steel industry, market conditions remain challenging. Developments in Asia and the EU are key. Together, Asia and Europe have an almost 80% share of global crude steel production and a 75% share in world apparent steel use. While both regions announced ambitious and encouraging plans to restructure the sector, to battle overcapacity and to increase competitiveness, we expect it will take time for the plans to have an effect. Pressure will persist in the iron ore market. Coking coal supply is currently sufficient. Although overcapacity exists, the problem is less significant than what is seen in the iron ore and steel sectors. Agriculture: Wheat is expected to ease, but as higher demand keeps pressure on stock levels, prices will remain relatively high. Corn prices will be volatile, but overall will be under pressure. Soybeans prices will fall, as supply outpaces demand. Cocoa, however, will appreciate, with demand outstripping production and markets heading for a deficit. Arabica coffee and sugar prices will remain at low levels, due to high surpluses. Cotton prices are set to rise, assuming China extends its cotton policy. i decrease by 11% or more i k decrease between 5% and 10% i price movement between -4% and + 4% k increase between 5% and 10% h increase by 11% or more - Short term: our three month outlook versus spot rate on July 23 rd. - Long term: 2015 average forecast price versus 2013 forecast price.

2 2 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics FORECASTS Q (1) Energy: Spot rate 23 rd July Average price Q months (Q3 exit) Brent (USD/barrel) WTI (USD/barrel) Natural gas (USD/mmBtu) Precious metals: - Gold (USD/oz) 1, , ,200 1,325 1, Silver (USD/oz) Platinum (USD/oz) 1,424 1, ,250 1,365 1,150 1,330 - Palladium (USD/oz) Base metals: - Aluminium (USD/t) 1, , ,875 1,900 2,150 2,200 Aluminium (USD/lb) Copper (USD/t) 7,023 7, ,100 7,400 7,900 8,100 Copper (USD/lb) Nickel (USD/t) 14,061 14, ,800 15,750 17,500 18,000 Nickel (USD/lb) Zinc (USD/t) 1,851 1, ,980 1,950 2,200 2,250 Ferrous metals: Zinc (USD/lb) Steel (global, HRC; USD/t) Iron ore (fines, USD/t) Hard coking coal (USD/t) (2) Agricultural: - Wheat (USDc/bu) Corn (USDc/bu) Soybean (USDc/bu) 1,520 1, ,410 1, Sugar (USDc/lb) Coffee (USDc/lb) Cocoa (USD/t) 2, , ,400 2, Cotton (USDc/lb) (1) The 3-months forecasts is a Q exit price. Forecasts for 2013, 2014 and 2015 are average year prices. (2) Prime coking coal Australia,CIF

3 3 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics CONTENTS Macro economic developments Macro Commodity Top Down Energy Brent WTI Natural Gas Precious metals Gold Silver Platinum Palladium Base metals Aluminium Copper Nickel Zinc Ferrous metals Steel (HRC) Iron ore Coking coal Agriculturals Wheat Corn Soybeans Sugar Coffee Cocoa Cotton Macro-economic indicators Facts & Figures Contributors Analysts and economists Disclaimer

4 4 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Macro Nick Kounis (Head Macro Research, Group Economics) A communication campaign by central banks to cool worries of early rate hikes is underway Global demand is still sub-par, with the emerging markets slowing more than expected We think that fundamentals are in place for a US-led acceleration in world economic growth Government bond yields 10y Central banks move to calm exit worries Financial markets have been dominated by worries about a fall-out from an easing of monetary stimulus ever since Chairman Ben Bernanke s signal that the central bank could start to reduce the pace of asset purchases later in the year. This unsettled growth-sensitive assets and pushed up government bond yields. Nevertheless, the tightening of financial conditions so far, both in terms higher US mortgage interest rates and lower equity prices, should be manageable, while central bank officials on both sides of the Atlantic have recently intervened verbally to dampen expectations of early rises in short-term interest rates. US employment growth Group Economics GDP forecasts e 2014e China US Eurozone World trade Global demand still lacklustre Recent data suggest that global economic growth is still lacklustre, but there are also indications that it will accelerate going forward. The global manufacturing PMI was steady at 50.6 in June. This is a level that is consistent with very weak growth of the industrial sector. Global demand is nothing to write home about right now, with the eurozone stagnating, the US expanding moderately and China and other big emerging markets softening more than expected and yet to convincingly turn. Indeed, we have revised down our forecasts for all the big emerging markets over recent months. On the other hand, we have revised up our forecasts for eurozone economic growth next year as budget cuts have been scaled back, while we have upgraded our view of the US economic outlook, because of strengthening domestic fundamentals. Foundations laid for stronger recovery US private sector balance sheets look healthy, helped by rising asset prices and falling debt levels, while the housing market upswing has some way to go. Meanwhile, employment growth has been picking up steam. At the same time, in both the US and the eurozone fiscal consolidation which has been a major break on demand growth is set to ease noticeably over the coming months. Meanwhile, the eurozone should also benefit from the ebbing of financial stress and uncertainty following the announcement of the ECB s conditional sovereign safety net last year. Emerging markets should get a lift from a strengthening of advanced economy demand, as well as infrastructure spending in some countries. Having said that, the Chinese authorities are determined to engineer slower but better quality economic growth, which involves a curbing of excesses in the property and shadow banking sectors. Although the shift in China s growth model and the related end of the commodity super cycle means that emerging market growth rates will not reach pre-crisis levels, growth will still be decent, and comfortably outstrip that seen in the advanced economies. Bringing the picture together, we expect the global economy to gain some pace later in the year and to reach above-trend growth rates next year. - Stronger return of confidence - Bigger than assumed impact of budget cuts - Pent-up demand larger than expected - Sovereign debt worries return to markets in eurozone - Accommodative monetary conditions - Abrupt investment slowdown in China

5 5 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Commodity top-down Georgette Boele ( ) Commodities in Q2 under pressure on growth concerns and higher US rates We remain negative on commodities as an asset class, despite an expected global recovery in H2 Excess supply, Fed exit expectations and a higher US dollar to be negative drivers Performance CRB Index Source: Bloomberg Reaction in days on Fed exit expectations Index Jan Feb Mar Apr May Jun Jul Days following start of rate hike expectations Q1 Q2 Ytd average 2013 Source: Bloomberg, ABN AMRO Group Economics Correlations with USD (average, current) Jul-13 Gold Silver Aluminium Copper Brent Cocoa WTI Coffee Corn Wheat Sugar Nat Gas Source: Bloomberg, ABN AMRO Group Economics Commodities under pressure in Q2 Commodity prices came under heavy pressure in the second quarter. There are several reasons for this. The growth outlook in emerging markets has disappointed, especially in China, and this resulted in expectations of lower demand for commodities. Moreover, the US economy experienced a soft patch, and the eurozone economy remained weak. In addition, the prospects for an easing of monetary stimulus in the US and the wait-andsee stance of the Bank of Japan and the ECB led to worries that easy monetary conditions are not here to stay. This resulted in the exiting of some carry trades in base metals, adding more downward pressure. The sell-off in precious metals continued. Lower gold prices dragged down prices for other precious metals, resulting in a synchronised move down. Oil prices initially also came under pressure on expectations of lower demand and higher supply, but unrest in the Middle East pushed prices higher. Higher growth but low support The higher growth we expect for the second half of this year and in 2014 will not be strong enough to overcome the excess supply of most commodities. Many commodities face oversupply following the reaction of producers during the boom years. In China, the shift from investment towards more private consumption does not mean that Chinese demand for commodities will disappear. It may decline slowly but, even given a greater emphasis on domestic consumption, construction will remain important, although it will proceed at a slower pace. Demand for food will also become increasingly significant. The easing of monetary stimulus in the US and the dampening of credit growth in China will end the era of cheap financing. Lower commodity prices and the prospect of higher credit costs will squeeze producer margins, resulting in a rationalisation/efficiency wave. This, in turn, may lead to possible lower mine supply in Fed exit expectations and higher USD are negative In the second half of 2014, the market will anticipate higher official rates in the US (with the first hike expected in Q1 2015). We expect the Fed to hike interest rates at a modest pace in an environment of strong US growth and low inflation. In such an environment (as seen in 1998), the CRB has a tendency to move lower in the first 90 days after the market starts to anticipate Fed rate hikes and to recover afterwards (see graph on the left). Higher interest rates will result in the further unwinding of financing deals linked to US rates, resulting in more investment-related supply coming to the market. In addition, we expect the US dollar to rally strongly in the coming years. Base metals, precious metals and energy have the largest sensitivity to the US dollar (see table on the left), with a higher dollar creating headwinds. But for these metals, especially the cyclical ones, fundamentals also need to take into account. - Large supply disruptions - Ample commodity supply - Stronger-than-expected global growth, including in China - Stronger US dollar

6 6 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Hans van Cleef ( ) Energy Brent Support seen after months of range-trading Balanced drivers means increased volatility but longer-term direction is still downward, as oversupply remains Historical price Brent Global oil supply and demand (x 1mln bbl) Source: IEA Group Economics price forecast (USD/barrel) 3-m price end of quarter and year averages Brent Weak data and lower demand forecasts add pressure In May and June, oil prices were trading in remarkably small ranges (USD /bbl). Speculation of possible changes to the stimulus measures by the US Federal Reserve led to increased volatility in oil prices. In fact, Fed Chairman Ben Bernanke s comments about reducing the bond buying programme led to a 6% drop in just two days. Early July, however, Brent oil prices appreciated, mainly based on geopolitical tensions in the Middle East triggering supply-related worries. The tensions in Egypt also led to a small rise of the risk premium. Moreover, OPEC spare capacity remains uncomfortably low, with export and/or production disruptions in Iran, Libya and Sudan. In mid-july, the publication of the dovish minutes from the Fed s June meeting, which suggested that rates will remain low for longer, pushed oil prices out of the neutral range towards USD 109/bbl. Supply and demand drivers in balance In Q3, Brent oil is expected to trade around USD 100/bbl, as several opposite drivers continue to balance each other out. News about higher production (or supply) will be trading off with demand-related news, which could lead to increased volatility. Seasonal demand and industrial or refinery demand could show modest gains if the global economy gains some pace (see Macro page). As a result, there will be a floor under oil prices. Nevertheless, major oil organisations, such as the US Energy Information Administration (EIA) and the International Energy Agency (IEA) have all again lowered their demand forecasts. Other indirect drivers which may create some upside risk for the oil price are related to geopolitics, such as possible Iran nuclear talks, which could resume in Q3 and the tensions in the Middle East (mainly Egypt, Syria and Libya). The outcome of the Iranian elections signalled a modest change in policy, but substantial modifications to the nuclear programme cannot be expected soon. No change in the role of the OPEC With oil output expected to continue to rise at a faster pace than the gain in global demand, the pressure on oil prices will remain. As a result, our longer term forecast implies modestly lower oil prices on the back of oversupply. The start of Fed hiking expectations (H2 2014) and a higher USD could be headwinds as well. In addition to the US shale revolution, OPEC is facing some other headwinds. The impact of the Arab Spring will continue to be felt in the coming years. Ongoing political uncertainty will dominate in some of the countries involved, leading to worries of contagion risks for the major oil producers. Furthermore, OPEC has to deal with the ambition of Iraq to triple its oil output in the coming decade. Finally, sanctions against Iran continue to take a bite out of OPEC/Saudi spare capacity, which makes the oil market vulnerable to new calamities. We believe that Saudi Arabia will continue to be the only major swing-producer, even if the US would become energy independent. Therefore OPEC and Saudi Arabia will continue to control oil prices. - Escalation of the Iranian, Egypt and/or Syrian conflict - A higher-than-expected rise in global oil production - A larger-than-expected pick-up in economic growth/risk appetite - A breakthrough in negotiations with Iran - Unexpected supply disruptions

7 7 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Hans van Cleef ( ) Energy WTI (West Texas Intermediate) WTI found support after stock withdrawals and a dovish Fed, closing the gap with Brent Demand set to gain moderately, supply to outpace demand Oil prices remain under pressure, due to gains in non-opec supply and global spare capacity Historical price WTI Oil price spread Brent-WTI Group Economics price forecast (USD/barrel) 3-m price end of quarter and year averages WTI WTI support led to narrower Brent/WTI spread The combination of a dovish Fed - indicating that taper off stimulus measures will start this year but it will take more time to start hiking - and larger than expected withdrawals from weekly crude stocks, pushed WTI crude prices higher. Nevertheless, stocks remained at record-high levels, which should cap oil prices in the coming months. The impact on Brent and WTI of several oil organisations downscaling their demand expectations was similar. However, the impact of the stock withdrawals and the Fed comments proved to be exclusively supportive for WTI. As a result, the Brent/WTI spread completely disappeared, after touching USD 23/barrel in February. WTI should be cheaper than Brent As indicated, the US Energy Information Administration (EIA), the International Energy Agency (IEA) and OPEC, all again lowered their demand forecasts for On supply expectations, they are less aligned. Nevertheless, for all organisations, forecasts of demand expectations are not deviating much from supply expectations. We expect that the oversupply situation will remain. But the impact could, from time to time, be overtaken by hopes of economic demand and increased geopolitical tensions leading to supply-related worries in the coming quarter. The Brent/WTI should be approximately USD 5/barrel for two reasons. The first reason is that the risk premium for geopolitical tensions in the Middle East will remain for several years. Although a part of this risk premium is also reflected in the WTI price, it should be more supportive for Brent. The second reason is the fact that US refineries in the US Golf Coast are mainly set to use a different quality of oil than the crude stored in Cushing, Oklahoma. For refineries to use the higher quality WTI crude stored domestically, there should be a discount to make this more attractive than imported crude. If not, stock building in Cushing will further increase. Non-OPEC supply gives relief to OPEC spare capacity Global oil supply is expected to grow, mainly in North America where output is forecasted to grow from two million barrels per day (mbpd) now to approximately four mbpd in Global oil demand is also expected to accelerate as a result of the global economic recovery, although consolidation is expected for the OECD region. As a result, the rise in demand will be largely compensated by the higher output from the non- OPEC countries. Therefore, the expected increase in capacity by OPEC will lead to an increase in global spare capacity. Due to oil production disruptions in Libya and Sudan/South Sudan as well as the sanctions against Iran, OPEC spare capacity was reduced and Saudi Arabia increased its output to compensate. The increase in spare capacity should help to push oil prices lower, as swing-producer Saudi Arabia is able to deal with possible new escalations within the region. Therefore, WTI is expected to decline to USD 85/barrel in Stronger than forecasted global/us economic growth - Increased production of unconventional/shale oil in the US/Canada - Possible escalation of the geopolitical conflicts (Middle East) - Pricing in the unwinding / discontinuation of US stimulus measures - More pipelines announced which transport oil to the Gulf Coast - Disappointing economic growth US

8 8 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Hans van Cleef ( ) Energy Natural gas Lower gas prices in Q2, but seasonal demand will provide support Despite slower storage building, inventories remain around record-highs With US gas prices rising, the country s competitive advantage will diminish Historical price natural gas Natural gas prices Group Economics price forecast (USD/mmBtu) 3-m price end of quarter and year averages Natural gas Pressure in Q2, but uptrend intact The longer-term uptrend in natural gas prices, which started after touching an all-time low during the second quarter of 2012, is still intact. In fact, a 21- month high of USD 4.44/MMBtu was reached in early May. Nevertheless, this rising trend is characterised by relatively large price swings which are dependent on the market s focus. The stock building, which is normally seen after winter demand fades, emerged very late this year as temperatures remained low for much longer than normal. During the second half of Q2, prices started to decline again, as demand decreased and some stock building was seen (mainly associated gas). The number of natural gas rigs dropped to an 18-year low and to half of the number in 2007, as producers preferred to focus on oil. It is more profitable, given high oil prices and low natural gas prices. The lower number of rigs, in combination with increased demand, particularly for cooling, put a floor under natural gas prices. Demand driver to be supportive in Q3 The combination of an increase in demand (both seasonal and industrial) during the second half of the year will lead to further upward pressure on US natural gas prices. There is even a possibility that US natural gas prices could retest the high set earlier this year, and, therefore, end the Q downward trend, as storage building remains below the five-year average. Overall, this will lead to an average price of USD 4.00/MMBtu during H and bring the average price for 2013 to USD 3.90/MMBtu. Prices, however, will not rally much further as, from a historical perspective, large stocks and a stronger US dollar will cap further upside. Furthermore, if natural gas prices would rally further, electricity producers would switch back from gas to coal as carbon prices are low. Finally, if prices rally, it will become more profitable to produce more natural gas, which ultimately will lead to higher stocks, and therefore put a cap on natural gas prices. US prices to rise within small ranges Similar to oil, volatility will remain elevated for US natural gas. The large supplies and the expected increase in production towards 2020 will continue to cap natural gas prices at approximately USD 5.00/MMBtu for the coming three years. Note that this is still a very low level from a historical perspective. In addition, weather-related demand and news about production levels will set the tone within a range of approximately USD /MMBtu. News about and confirmation of the US economic recovery will result in an overall moderate rising trend within this range during the coming years. With US natural gas prices slowly rising, and European gas prices under pressure (with a development towards market-driven prices) and taking into account our forecast for a stronger US dollar, the price difference will probably half in the coming three years. This will reduce the US competitive advantage of lower natural gas prices. - Switch to additional gas-fired power generation - Continued and accelerating unconventional gas output - Extreme weather conditions (longer periods of cold or heat) - Disappointing economic recovery

9 9 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Georgette Boele ( ) Precious metals Gold Gold prices fell by 21% year-to-date Outlook for this year remains dim Fed exit expectations and a higher USD US dollar to be negative drivers in 2014 Gold positions Ounces, contracts of 100 ounces millions Source: Bloomberg Reaction in days on Fed exit expectations Index Total ETF positions in mln (lhs) Days following start of rate hike expectations Source: Bloomberg, ABN AMRO Group Economics Commodity Research price forecast (USD/oz), end of the month and year average Gold 1,200 1,325 1, Non-commercial positions number of contracts (rhs) average 2013 millions Performance year-to-date Gold prices have fallen by more than 21% this year. Position liquidation has been a driving force behind the sell-off. Investors liquidated gold positions as the technical picture turned negative on 12 April 2013, the gold price outlook was dim (no capital gains), interest rates in the US started to rise (gold pays no income), inflation pressures remained low and the US dollar gained traction. Moreover, fears of lower demand from China and India also added to the pain. Indian authorities are making a serious effort to reduce the current account deficit and thereby discouraging gold imports. In addition, the sell-off in emerging market currencies have made gold prices unattractive, despite the fall in prices denominated in US dollars. Outlook for this year remains dim Speculative investors are far advanced in their liquidation of gold holdings, but total ETF positions remain large. We expect gold prices to remain under pressure this year and the next, as speculative positions are liquidated further. The outlook for gold remains negative going forward. The expected acceleration in the US economy in the second half of 2013 and in 2014 will make growth and cyclical assets more attractive. Gold prices have, from time to time, performed well in an environment of positive investor sentiment, but this was mainly driven by the prospects of higher commodity prices. The difference this time around is that monetary stimulus will ease (which was not the case before). This will make gold an unattractive asset: it is not leveraged to the global cycle, it does not earn income and the potential for capital gains appears dim. As long as gold prices remain under USD 1,525/ounce, the technical outlook remains negative; and investors have the tendency to sell on rallies. The Indian authorities will continue their pursuit of reducing the current account deficit. This means that Indian gold demand will remain under pressure unless the rupee rallies strongly. Fed exit and the higher USD to be negative drivers Gold prices have a tendency to strongly underperform in an environment that the US economy is strong, inflation is relatively low and the market starts to anticipate higher Fed rates at a moderate pace (Fed cycles 1983 and 1998, see graph). We expect the upcoming Fed cycle to be in a similar environment and therefore for gold to underperform. Since US rates have increased since May, the sell-off in gold has restarted. We expect gold to remain under pressure, as prices are coming from bubble-like levels. Moreover, gold has a strong negative correlation with the US dollar. Since we have a bullish US-dollar view, we expect the US dollar to become a strong negative driver for gold. The prospect of lower gold prices could trigger the reinstatement of gold hedging (forward selling) and this would further increase pressure on prices. If gold prices drop to below the total cash costs of the major miners for a considerable period of time, it would result in a rationalisation/efficiency wave in the gold mining industry resulting possibly in lower mine supply. This will likely be felt in the longer term ( ) which lead to lower downward pressure on prices. - Monetary policy to remain accommodative longer than expected - Central banks running for the exit - US dollar debasement - Strong global growth makes equities & base metals more attractive - Distrust in paper money and inflation fears - Position liquidation

10 10 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Georgette Boele ( ) Precious metals Silver Silver was completely out of favour in Q2 Weakness to continue in 2013 based on investor liquidation A recovery in 2014 and 2015 is expected, as silver s industrial character wins out Spot price USD per ounce Total silver ETF positions Source: Bloomberg Group Economics price forecast (USD/oz), 3-m price end of quarter and year averages Silver Completely out of favour Q was dreadful for silver prices. Whereas they dropped by 6% in Q1, they lost another 30% in Q2, making silver the worst performing precious metal so far in Silver prices felt the brunt of the large weakness in gold prices. Silver is often seen as the gold proxy, and it is bought and sold for the same reasons as gold. Weaker-than-expected economic data from the US and emerging markets were other reasons why investors sold silver. The combination was a double whammy. Investor liquidation was in full swing and speculative positions dropped to an all-time low (but remained positive). Liquidation of some ETF positions also occurred. After a weak start in July, prices recovered as the Fed further calmed expectations on its tapering of asset purchases and rising interest rates. Weakness to continue in 2013 on investor liquidation For the remainder of 2013, we expect silver to be sensitive to a further decline in gold prices, a strong US dollar and higher US rates. In our June monthly, we adjusted our forecast for precious metals for 2013, mainly reflecting more investor liquidation. As is the case for gold, investors should ask themselves why they want to hold silver. It does not pay income (dividend or coupon), the recent volatility is viewed as undesirable, capital gain appears to be limited and it does not have a safe-haven status, such as gold holds for doom-and-gloom investors. We expect the US economy and the global economy to recover, but we also expect the US dollar to rise. Silver prices have a strong tendency to move lower if the US dollar rallies; only gold has a higher sensitivity. In addition, silver is also sensitive to higher US rates. The Fed has done most of the calming of market expectations. If US data start to come in stronger than expected, US rates could move higher, especially when the market starts to anticipate the start of the Fed hiking cycle, which we expect to start in Q with anticipation beginning in the second half of Silver recovery in 2014 and 2015 As stated above, the liquidation of investor positions has more room to go. But once this is behind us, silver will become more sensitive to the improvement in the global economic outlook. Then its industrial character will come to the fore. Once this occurs and prices start to move higher, silver will be less vulnerable to a renewed weakness in gold prices in 2014 and It will also become less sensitive to higher US rates. Our supply outlook remains unchanged. For , we expect silver mine production to increase by 2% to 3%. Silver is often mined as a by-product of gold or base metals. Demand for silver for investment positions will be weak in 2013, but could recover somewhat in 2014 and The demand for silver in industrial applications is the strongest in the US, followed by China, Japan and India. The recovery in the US and China is therefore of particular interest, and we expect both economies to further recover in Our silver price forecasts for year-end 2013, 2014 and 2015 are USD 16, USD 18 and USD 23 per ounce respectively. - Sharp increase in global growth and hawkish central banks - Long-term investors abandon positions - US dollar debasement - Global recession

11 11 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Georgette Boele ( ) Precious metals Platinum Aggressive sell-off in platinum in Q2 The outlook for 2013 remains dim because of more investor liquidation Fundamentals to support the outlook for Spot price platinum Source: : Thomson Reuters Datastream Supply & demand balance, Commodity Research price forecast (USD/oz) Platinum 1,250 1,365 1,150 1,330 Aggressive sell-off in platinum in Q2 The second quarter of 2013 was a dreadful quarter for platinum prices: they dropped by around 15%. The main reasons behind the weakness were the following: Most of fears of lower supply from South Africa, because of wildcat strikes during difficult wage negotiations, were already reflected in the price. The prospect of lower supply as a result of rationalisation and efficiency waves in the platinum mining industry was also already fully anticipated. In addition, the market started to adjust its expectations on the demand side, following weaker-than-expected economic data in the US and China and weak growth in the eurozone. The sell-off in gold prices, the rally in the US dollar and higher US yields resulted in investors abandoning their speculative positions. More price weakness in H2 Whereas ETF position liquidation in gold has already been underway for some time, for platinum it is still at an early stage. Platinum prices are currently very sensitive to higher US yields. In addition, platinum has an important sensitivity to the US dollar. Higher US interest rates in the coming years and a strong rally of the dollar. This combination will make platinum investment unattractive for investors. More weakness in gold prices going forward will further dent sentiment for precious metals in general. In the case of gold, investors can still say that they hold gold in case of doom-andgloom. Positions in the other precious metals do not have this safe-haven appeal. Positions are mainly driven by the price outlook, sentiment on precious metals and the fundamental balance. This year we expect investors to further liquidate their large positions in platinum because of a less optimistic price outlook. As a result, we have adjusted our outlook for this year downwards resulting in lower forecasts. Fundamentals to support the outlook for In 2014 and 2015, we expect platinum prices to reflect fundamentals and to be less sensitive to moves in US rates. The current rationalisation/efficiency wave in the South African platinum mining industry will lead to lower mine supply going forward. This will have repercussions for the platinum supply and demand balance. Last year, the balance turned into a supply shortage at a time when global demand was not very strong. But for , we expect platinum demand to recover and supply to remain under pressure, resulting in a larger supply shortage in the coming years. This should support prices. We expect auto-catalyst platinum demand to pick up during forecast period, driven by an improvement in eurozone and global car sales. In addition, we also expect other demand categories to grow. We expect industrial demand to recover in line with an improvement of the global economy and jewellery demand (mainly from China) to increase, driven by a growing Chinese middle class. But platinum is less attractive than gold in terms of price because it is currently more expensive. Our year-end forecasts for 2013, 2014 and 2015 are respectively 1,100, 1,250 and 1, Stronger-than-expected economic recovery in the eurozone - Global recession - Supply disruptions - Investors liquidating positions - Greater risk appetite and/or USD debasement - Chinese consumers preferring white gold to platinum

12 12 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Georgette Boele ( ) Precious metals Palladium Weak Q2 followed by a rebound in July Investors remain too optimistic for 2013, more position liquidation in the cards Outlook will improve for 2014 and 2015 based on fundamentals Spot price palladium, Total palladium ETF positions In ounces, Commodity Research price forecast (USD/oz) Palladium Weak Q2 followed by a rebound in July The strong start in Q1 was completely offset by a sharp sell-off in Q2, when the soft patch in the US economy started to have an impact. Weaker-thanexpected data from emerging markets resulted in fears of lower demand for palladium from these growth markets. Moreover, continued weakness in other precious metals hurt palladium as well. Investors realised that their optimistic palladium outlook may not have been very timely and that there will be more volatility down the road. In addition, palladium may not be able to shake off further weakness in other precious metals going forward. In addition, prospects of a higher US dollar and rising US yields may have a larger impact after all. Palladium prices dropped by almost 15% in Q2, before posting a 9% gain in July on improved fundamentals. Investors remain too optimistic for 2013 As is the case with other precious metals, we expect investor liquidation to continue this year. Investors holding palladium ETF positions may have become less optimistic, but overall these positions remain extremely large. Some of the more speculative positions have been reduced, but there is room for further downscaling in this area. Reasons why investors are holding on to these positions likely include the following: The palladium market has a supply shortage; a situation that is unlikely to improve in the near-term. The US economy is expected to accelerate in the second half of this year and next year this is good news for palladium. Among precious metals, palladium is the most resilient to increases in the US dollar and to rising US rates. Moreover, compared with other precious metals, palladium is being used the most for industrial purposes, making it less vulnerable to declining jewellery demand. This makes it a favourite among precious metals. While these arguments are very valid, we believe they are already reflected in the price. We expect investors to become more nervous and to start liquidating positions if other precious metals again come under pressure. The outlook to improve We believe that palladium prices are currently not reflecting the actual supply and demand balance, and are based more on investor optimism. Investor positions first need to be cleared out before prices will reflect fundamentals again. We expect this to happen in 2014 en 2015, supporting palladium prices. Market conditions have been tight for some years now. In the future, we expect mine supply in South Africa to modestly increase, but as Russian stock sales will decrease (there are signs that they may be exhausted), the result is a neutral supply trend at best. Non-investment demand is expected to improve over the coming years. Demand for auto catalytic converters is set to increase, in turn driving palladium demand from the US and emerging markets, including China and Russia. Emerging markets will most likely continue to focus on palladium as a cheaper alternative to platinum. All in all, we are optimistic about demand for palladium catalysts. - Stronger global economy - Global recession - Supply disruptions - Larger-than-expected Russian stock sales - Risk-seeking environment and/or US dollar debasement - Larger-than-expected supply

13 13 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Casper Burgering ( ) Base metals Aluminium Inventories in Vlissingen increased the most, growing by almost 18% in only 3 months We expect challenging market conditions over the next three months, but demand will remain solid Aluminium sector is burdened by overcapacity, and significant price increases are unlikely Historical price Aluminium Supply, demand & stocks 60,000 50,000 40,000 30, Source: Metal Bulletin Group Economics price forecast 3-m price (Q3 exit) and year averages Stocks (weeks of consumption), r.axis World production ('000 tonnes) World consumption ('000 tonnes) 2015 Aluminium (USD/t) 1,875 1,900 2,150 2,200 Aluminium (USD/lb) Stocks have increased further Over the last couple of months, sentiment in the aluminium market has been sluggish, with aluminium prices declining by 8%. Demand was relatively weak, as stakeholders worried about growth in China and inventory building at warehouses across the globe. The gain in inventory volumes was, however, relatively soft. Since the release of our previous quarterly (published 25 April), total inventories increased gently but steadily by 3%. Stock levels at London Metal Exchange (LME) warehouses increased by 6%, while inventories at the Shanghai Futures Exchange (SHFE) decreased by 25%. Currently, total stocks represent weeks of consumption. Inventories in Vlissingen increased the most, growing by almost 18% in only 3 months. The LME warehouse in Vlissingen remains the biggest warehouse for aluminium worldwide, with a share of more than 37%. In fact, Vlissingen overtook Detroit on 11 January 2013 as the world s biggest LME aluminium warehouse. Demand remains solid We expect challenging market conditions for the next three months. Uncertainty regarding the global economy, worries about China s future growth, overcapacity and high stocks weigh on the aluminium sector. Prospects for aluminium demand remain solid, however. The US aluminium producer Alcoa, after reporting a loss in Q2 due to special charges, remained buoyant over end-use demand. We expect aluminium price to increase coming three months. Changing warehousing rules By volume, aluminium is by far the most stocked metal in LME warehouses and thereby very sensitive to changes in warehousing policies. In early July 2013, the LME, where most metal stocks are held, proposed new warehousing rules that will significantly reduce the power of warehouses in metal markets. The proposal could become effective by April The new rules force the reduction of queues and ensure that warehouses (with queues of more than 100 calendar days) deliver more metal than they take in. This will lower warehouse premiums and possibly could have a dampening effect on aluminium prices. Until that time, we think aluminium prices will slowly increase, but the pace will be relatively slow. Fortunately for the aluminium sector, demand growth from new and existing end-using sectors is projected to continue in , which will prevent aluminium prices from falling. The sector will, however, be burdened with overcapacity in the forecast period. The Chinese government has bold initiatives to tackle overcapacity and seems to be serious in eliminating obsolete aluminium plants. But even if this initiative is executed, the effect will only be seen in the long run and in our forecast period, overcapacity will remain. Therefore, we do not expect significant price increases in 2015 yoy. - Sentiment towards the eurozone improves, resulting in risk appetite - Adoption of new LME warehousing rule by April Significant Chinese smelter output cutbacks - Further stagnation EU and Chinese economy - Increased demand from substitution (for copper and steel) - New capacity entering the market (India, Middle East)

14 14 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Casper Burgering ( ) Base metals Copper Copper prices reacted more to economic data releases and less to fundamental changes The health of China s economy is what worries stakeholders most Long-term demand will remain strong, further triggered by demand from new end-user growth areas Historical price Copper Supply, demand & stocks 24,000 22,000 20,000 18,000 16,000 14, Source: Metal Bulletin Group Economics price forecast 3-m price (Q3 exit) and year averages Copper (USD/t) 7,100 7,400 7,900 8,100 Copper (USD/lb) Stocks (weeks of consumption), r.axis World production ('000 tonnes) World consumption ('000 tonnes) Economic worries predominate In the last three months, copper prices have been volatile, reacting strongly to macroeconomic developments. General global economic uncertainty based on concerns about Europe s economic performance and about future growth in China were the main drivers for copper prices. Disappointing (manufacturing) data from major economies, including China, the US and Europe, and a stronger dollar pushed prices further down. Copper prices were to a lesser extent influenced by fundamental changes. However, there were some concerns fundamentally, especially over demand from China, the world s biggest copper consumer. Refined copper imports into China increased in May by 27% on a monthly basis, but decreased by 23% on a yearly basis. Indeed, in the first five months of 2013, Chinese import demand was down by 33% year over year (yoy). Copper stocks at London Metal Exchange (LME) warehouses have increased by 3%. Copper stocks increased the most strongly at the major LME warehouses in Johor (45%), New Orleans (13%) and Antwerp (4%), while in almost all other LME warehouses across the globe, inventories decreased. The current level of LME stocks is more than 640,000 tonnes, a high not seen since mid When China returns Since the release of our previous quarterly (25 April 2013), copper prices have decreased by 2%. Copper prices reached USD 7,445/t on 22 May the highest level of the past three months and then lost almost 6%, settling at USD 7,023/t on 23 July. Worries over global economic performance will continue to dictate price directions in the short term. In particular, the strength of China s economy going forward, the pace of recovery in the US and the vitality of the eurozone economy will be drivers. Given our macro view, ABN AMRO expects that prices will strengthen from current levels in the coming months. Although China retreated from the refined copper market in the first five months of 2013 with a decrease in refined copper imports of 33% yoy we expect that import demand should increase again. Loss of momentum We have lowered our forecast in comparison with our previous Quarterly Commodity Outlook because of disappointing data. Given the weaker economic data including manufacturing data from China in the first half of 2013 and a tighter credit policy going forward, ABN AMRO has revised its China GDP forecast to 7.5%. This slowdown and tightening of credit availability will affect Chinese copper demand. We expect copper prices to average USD 7,400/t in We think that the loss of economic momentum in China will have an effect in the years that follow, and forecast an average price of USD 7,900/t and USD 8,100/t for 2014 and 2015 respectively. Europe (with an 18% share in world copper consumption) will continue to struggle in the forecast period with a relatively slower pace of economic expansion. ABN AMRO expects that the eurozone economy will pick up modestly in the coming quarters. Together with the continued recovery in the US, long-term demand for copper will remain relatively strong, bolstered by demand from new end-user growth areas. - Recovery in construction (US, EU, China) - Risk aversion / need for liquidity increases - Stronger-than-forecasted Chinese economic performance - Further stagnation EU and Chinese economy - Rising Chinese copper import requirements - Funds scaling back their interest in copper as an asset class

15 15 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Casper Burgering ( ) Base metals Nickel Since Q3 2011, the international nickel market has been structurally oversupplied At the current rate of price declines, high-cost producers will find themselves in the danger zone ABN AMRO remains confident regarding long-term nickel market developments Historical price Nickel Supply, demand & stocks 2,000 1,800 1,600 1,400 1,200 1, Source: Metal Bulletin Stocks (weeks of consumption), r.axis World production ('000 tonnes) World consumption ('000 tonnes) Asia sets the trend Since October 2011, the trend in LME nickel inventories has been upward. Inventories at LME warehouses more than doubled in this period and an additional three weeks of consumption were added. Total stocks currently represent almost 13 weeks of consumption. Nickel prices have been in a downtrend, decreasing by almost 30% since October As of 23 July, the nickel price settled at USD 14,061/t. The price decrease is mostly the result of an imbalance between supply and demand in the nickel market. From Q onward, the international nickel market has been structurally oversupplied, after a period of deficits and market tightness. Asia sets the trend in nickel consumption, accounting for approximately 75% of total world consumption. China takes the majority share (50%) followed by Japan (7%). Import of nickel and related products into China has increased strongly, with imports of nickel ore and unwrought nickel increasing by more than 30% until April. Refined nickel imports into Japan declined until May 2013, decreasing by 7% year on year (yoy). Nickel ore imports, however, increased by almost 27% yoy until May. Price support in September The current weakness in the nickel price can be fully ascribed to seasonal weakness in demand, due to a more negative outlook on the stainless steel market, resulting in an oversupplied market. Since our previous quarterly, published on 25 April, the nickel price decreased by 11%. We expected some price support during May, as is normally the case, but instead, the demand situation deteriorated further and the price decreased at a faster pace than anticipated. In line with our expectations, China increased its import demand further during the first four months of 2013, but this did not result in price support. At this rate of price decreases, high-cost producers will find themselves in the danger zone. It will be almost inevitable that production cuts will be announced. During July and August, we expect the nickel price to stabilise, generally because demand is weak during these months and the open interest positions have reached new highs, which suggests a weakening of market conditions. During September, however, we again expect prices to increase, based on rising demand from the stainless steel sector. We forecast a Q3 exit price of USD 14,800/t. Group Economics price forecast 3-m price (Q3 exit) and year averages Nickel (USD/t) 14,800 15,750 17,500 18,000 Nickel (USD/lb) Imbalance will remain During the forecast period, the international nickel market is expected to remain unbalanced. Production will outpace consumption. This implies that stocks will increase further to approximately 14.5 weeks of consumption, which will not support prices. We therefore think that in the price will slowly gain strength on continued demand growth from the Asian region, but the pace of demand growth will be relatively slow. We remain confident regarding long-term nickel market developments. The gap between supply and demand will slowly narrow until 2015, leading to a more balanced market. - Stainless steel output increases on strong demand - Funds scale back their interest in nickel - Supply disruptions and delays in pipeline projects - Further stagnation EU and Chinese economy - Government stimulus spending - Substitution by stainless steel industry with lower nickel content

16 16 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Casper Burgering ( ) Base metals Zinc US construction spending has increased since May, but remains weak in China and the EU In September, conditions should normalise and prices should regain some momentum Zinc demand is expected to increase further in the forecast period Historical price Zinc Supply, demand & stocks 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8, Source: Metal Bulletin Group Economics price forecast 3-m price (Q3 exit) and year averages Stocks (weeks of consumption), r.axis World production ('000 tonnes) World consumption ('000 tonnes) 2015 Zinc (USD/t) 1,980 1,950 2,200 2,250 Zinc (USD/lb) Steady gains in US construction On 19 February 2013, the zinc price reached USD 2,130/t, its peak level so far this year. Since then it has decreased, based on sluggish demand and economic uncertainty, touching a 2013-low of USD 1,785 in early May. After this point, market conditions started to turn for the better in some zinc enduser sectors. Demand from the car manufacturing sector, especially in China and the US, increased again. In China, total sales of new cars in the first six months of 2013 increased by 14% year on year (yoy), while in the US, new car registrations until April increased by 4% yoy. In Europe, car registrations until May dropped by 10% yoy. However, construction & infrastructure spending is by far the most important indicator for developments in zinc demand and construction activity increased further in the US. The American Institute of Architects (AIA) signalled a steady gain in US construction activity, despite the sluggish recovery in the US economy. The AIA reported an increase in construction spending for buildings and increased building activity since May. On the other hand, conditions in the Chinese and European construction sector remained relatively weak. Entering the seasonal lull We expect weakness in the zinc market in the coming months, due to the seasonal lull. We do not expect the zinc price to change significantly during July and August. Fundamentally, however, conditions in the zinc market have improved. The volume in inventories across the globe declined again. Since 6 June, zinc inventories at the LME have steadily decreased, and already 10% of total LME inventories has been issued out of warehouses. Stocks at Shanghai Futures Exchange (SHFE) have also been decreasing non-stop and declined by 6% in the same period. We expect this trend to continue, especially during the seasonal weak period, when maintenance programmes for production facilities are common, resulting in total capacity draw downs. In September, conditions should normalise, with zinc prices regaining some momentum. ABN AMRO forecasts a Q3 exit price for zinc of USD 1,980/t. Favourable supply/demand balance Despite the slower pace of macroeconomic expansion in China, the world s biggest zinc consumer, zinc demand is expected to increase further in the forecast period. The pace of demand growth, however, will be relatively slow. We have already witnessed a slower pace of expansion in fixed asset investments in the construction & infrastructure sector, while we further expect the pace of growth to slow down in the manufacturing sector and in the property market. The supply and demand balance remains favourable, with zinc demand growth outpacing the growth in zinc production in both 2014 and The macroeconomic outlook in major zinc-consuming countries (US, China) will improve until Economic and market conditions in Europe, however, remain challenging. - Demand recovery in major zinc-consuming countries - Sharper weakening of Chinese housing/construction sector - Rising galvanised sheet use in China - Substitution of zinc with aluminium in e.g. automotive die-casting - Government stimulus spending - Severe position liquidation

17 17 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Casper Burgering ( ) Ferrous metals Steel (global HRC) Mills have produced 789,015,000 tons until June at an average capacity utilisation rate of 79.2% US steelmakers are also dealing with oversupply issues, but the problem is less significant As long as steel demand remains depressed, overcapacity will remain a burden worldwide Historical price steel (USD/t) Steel production & world trade (y-o-y % change) 40% 30% 20% 10% 0% -10% Source: IISI, Thomson Reuters Datastream Group Economics price forecast (USD/t), 3-m price (Q3 exit) and year averages Steel (HRC, global) China steel production World (ex. China) steel production World trade Utilisation rates in Asia still on high level Supply pressures continue to dominate the international steel market. Despite the weak steel market conditions, with sluggish steel demand from end-using sectors in most regions, global steel output increased by 3% year over year (yoy) during the first six months of While steel output in both the US and the EU decreased by 6% in the same period, China managed to increase its steel output by 8%. Apparently, weak market conditions have not triggered producer discipline in China, and mills continue to produce at high utilisation rates. Globally, steel mills have produced 789,015,000 tonnes so far this year up 2% yoy at an average capacity utilisation rate of 79.2%. This average, until May, is still below the historical average. With a reading of 74.1%, the average industrial utilisation rate for US steel products is currently still below the 2012 average utilisation rate of 75.4%. In Europe, utilisation rates are probably between 70-75%, while rates in Asia will remain above the global average (between 80-85%). These high rates do not bode well for a sound and balanced steel market. Supply pressures on short-term prices will persist Economic conditions in many international steel markets continue to be driven by uncertainty, not only caused by weak demand, but also triggered by oversupplied markets. We think that the supply pressure will persist, at least throughout In the short term, international steel markets will not witness any relief to the current headwinds. Regionally, however, there are some positive signals. This is especially the case for the US steel market. Of course, US steelmakers also have to deal with some level of oversupply, but the problem is less significant. And while the US steel sector performs relatively well with a modest recovery in demand conditions in Asia and the EU will remain worrisome. Steel demand in these regions will stay sluggish in 2013, while steel output in Asia is expected to grow further. Together with the upcoming summertime breaks, this will put pressure on short-term steel prices and prevent any swift recovery. Time for action Our long term view on steel prices remains depressed, and we expect a downward trend in prices until Developments in Asia and the EU are key. Together, Asia and Europe have an almost 80% share of global crude steel production and a 75% share in world apparent steel use. While both regions announced ambitious and encouraging plans in order to restructure the sector, to battle overcapacity and to increase competitiveness, we expect it will take time for the plans to have an effect. If governments would seriously address the issues stated in the plans, the sector could witness some modest recovery in the course of But given the size of the sector in both regions, we doubt the pace of the restructuring initiatives. Moreover, as long as steel demand remains depressed, overcapacity will remain a burden for the sector worldwide. We expect that production growth will continue to exceed demand growth in both Europe and China in the forecast period. In the US, conditions are fundamentally better, and the US mills benefit from lower energy costs (due to shale gas) as well. - Meaningful stimulus packages by governments worldwide - Strong decline in steel demand activity in China - Strong pick-up in steel demand from key sectors in EU - Further stagnation EU and Chinese economy - Permanent shut-down of Chinese capacity (small mills) - Continued oversupply of steel and limited producer discipline

18 18 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Casper Burgering ( ) Ferrous metals Iron ore (fines) In the first six months of 2013, China s imported volume of iron ore increased by 4.8% yoy We expect that iron ore prices will soften and forecast a price of USD 121/t at the end of September Due to overcapacity in steel and looming iron ore oversupply, long-term iron ore prices will soften Historical price iron ore (fines) Iron ore trade (y-o-y % change) 250% 150% 50% -50% , Clarksons SIN Group Economics price forecast (USD/t), 3-m price (Q3 exit) and year averages Iron ore (fines) Australia export China import Brazil export Prices softened since February On 28 February, China iron ore prices for fines reached USD 157/t, their highest point so far this year. Since then, prices started to decrease and settled at USD 112.5/t on 6 June. The steep downtrend a loss of more than 28% in just over three months was due to weak steel demand and, as a result, relative sluggish buying activity by steel mills and service centers on the international iron ore market. In the first six months of 2013, China s imported volume of iron ore increased by 4.8% yoy, while in the same period in 2011 and 2012 this volume increased by respectively 8.1% and 9.7%. This sign of slowing demand growth in the world s biggest iron ore consuming country is what worries stakeholders in the sector most. The international steel sector is struggling with oversupply. The situation is most imminent in Asia and Europe. Both regions together account for 80% of total crude steel production. Nonetheless, iron ore prices managed to increase again from 10 July onward. The rebound in prices was, however, the result of improved sentiment rather than any changes in fundamentals. Short-term softer price Prices strengthened further mid-july. Sentiment improved as the Chinese government eased concerns amongst stakeholders about further economic slowdown in China, by announcing that economic growth would not slide below 7.5% this year. We think, however, that the increase in iron ore prices will be short-lived for two reasons. In a situation where the steel market is struggling with worsening market conditions and also has to battle structural oversupply, the prospects for the international iron ore market are not that rosy. As a result, the pace of demand growth is likely to soften. Next to that, pressures from the supply side are expected to mount. In the boom years, iron ore miners invested heavily in new mining projects (both green- and brownfield). This new supply will enter the international iron ore market in the coming period. This does not bode well, in a market in which the end users of iron ore (steel mills) are considering to cut capacity due to weaker demand growth. We expect therefore that prices will soften and forecast a price USD 121/t at the end of September. Also long-term softer prices Pressure will persist in the iron ore market during the forecast period. General sentiment in the global steel market is that steel demand will stay relatively weak and that there will probably be sufficient steel supply to service demand. Indeed, the steel sector s overcapacity is a persistent problem and going forward, we expect that further capacity cuts will be announced globally and plants will be closed. Next to that, there are still new iron ore mining projects in the pipeline, which will come on stream in the next five years. Therefore oversupply is also looming in the international iron ore market. This will lead to a further deterioration of iron ore prices and we have revised our price forecast downward. The pace of price declines will, however, be limited. China will remain the biggest iron ore consumer in the forecast period and, given the low domestic iron ore grades, large Chinese steelmakers will continue to source high-quality imported ore. - Infrastructural problems, unfavourable weather conditions - Shut-down of steel capacity (small mills in China) - Expansion of government policies limiting total exports - Further stagnation EU and Chinese economy - Government coal stockpiling strategies - New mining capacity entering the market

19 19 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Casper Burgering ( ) Ferrous metals Coking coal Supply from Australia s main coal area increased strongly, due to improved mining conditions in Q2 Coal supply is sufficient, even with solid demand growth from China and Japan Asian countries will continue to put their stamp on market developments Historical price coking coal Source: Metal Bulletin, Thomson Reuters Datastream Coking coal international trade (y-o-y % change) 150% 100% 50% 0% -50% , Clarksons SIN Group Economics price forecast (USD/t), 3-m price (Q3 exit) and year averages Hard coking coal China import Australia export Japan import Prices deteriorated on weak fundamentals Spot prices for Australian hard coking coal have declined steadily since May 2011, decreasing by 60%. The decrease in price was due to supply finally catching up with demand, in a market situation where demand was slowing. In the boom period when the market was getting used to high prices many investment initiatives in new mining projects were developed. The output of these projects finally entered the market, but at the wrong moment, as demand conditions were deteriorating and prices softened. From October 2012 until February 2013, prices recovered somewhat on a strong increase in China s import demand. Since then, however, prices fell again, losing 12% until mid-july. The price decline was driven by weakness in fundamentals. Supply from Australia s main coal area increased strongly, due to improved mining conditions during the second quarter, while demand from China was relatively weak. Supply is sufficient to meet demand China is the world s biggest coal producing country, but the domestic coal mining sector still faces some structural problems related to mine safety and relatively high mining costs. And although China has abundant domestic sources of coking coal, the mined coking coal is of medium quality. For highquality coking coal, China continues to depend on imports, notably from Mongolia and Australia. We therefore expect that import demand from China will stay buoyant. Import demand from China improved significantly during the first half year of 2013, increasing by more than 40% year on year (yoy). At this stage, the supply side is what is keeping prices depressed. Although overcapacity exists, the problem is less significant than what is seen in the iron ore and steel sectors. Supply is currently sufficient to meet demand, even given China s strong demand growth rate and improving demand from Japan. Globally, coking coal miners, faced with strong declines in coking coal demand growth rates, have been forced to cut capacity in some instances. For the next three months, we think coking coal prices should show signs of mild recovery. Asian countries dominate market Asian countries will drive coking coal demand and will continue to put their stamp on market developments going forward. The outlook for import demand from Asian countries in 2013 is expected to remain firm, with 6% growth yoy. In addition, import demand from Europe is projected to increase in 2013 by 4% yoy, with increases expected in Spain, UK and Germany. What worries most market participants, however, is that supply will be sufficient in the forecast period and new capacity from mining projects will be added to the international coking coal market. In addition, the popularity of direct reduced iron, a technique that uses gas instead of coking coal, can increasingly add pressure on future coking coal market developments. Given the shale gas developments in the US, this shift in the production process may accelerate. Even though, it will still take considerable time to transform steel production processes, we think prices will soften further in the forecast period. - Supply problems (weather-related) in major supplying countries - Stronger decrease in steel demand - Other coal supply difficulties (strikes, export limits, regulations, etc.) - Further stagnation EU and Chinese economy - Government coal stockpiling strategies - Steel mills switching to (cheaper) alternatives (PCI or gas)

20 20 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Thijs Pons ( ) Agriculturals Wheat Feed use will decrease, due to a rebound in corn supplies Wheat production to increase in 2013/2014, returning to average yields Prices will decline steadily, but will remain high Historical price wheat Wheat production and consumption x 1 million tonnes / / /14 Source: IGC Production Group Economics price forecast (Cts/bu) 3-m price end of quarter and year averages Wheat Consumption Production deficit and declining stocks in 2012/2013 In 2012/2013, global wheat consumption is decreasing by 2.8% to million tonnes (source International Grains Council, IGC). Global demand for food use is growing modestly, mainly fuelled by population growth. Consumption for feed use is declining by 15.8 million tonnes, due to smaller harvests. Especially in the EU and Russia, feed use is declining. Feed use remains strong in the US, however, due to its competitive price compared with corn. Wheat and corn prices are closely correlated. Industrial use of wheat is increasing slightly. In 2012/2013, global wheat production is declining by 5.8% to million tonnes. Production is decreasing due to adverse weather conditions in the Black Sea region, the EU, South America and Australia and a reduction in harvested areas. US production is rising to 61.8 million tonnes, due to increased plantings and higher yields. Harvests were good in China and India. In 2012/2013, global ending stocks are projected to total million tonnes, a decline of 18.1 million tonnes compared with the previous season. Global stocks are declining, due to the production deficit. Most of the decline is in Russia, Ukraine, Kazakhstan and Australia. A large proportion of global stocks (46.0%) is owned by China and India and not freely available on the world market. In Q2 2013, wheat prices weakened, due to expectations for a rebound in global production, despite slow crop developments in the EU. Wheat prices will ease, but remain relatively high In 2013/2014, global wheat consumption is forecast to rise by 1.2% to million tonnes. Food use will increase in line with the long-term trend of around 1%. Feed use, however, will decrease slightly, due to a rebound in corn supplies. Industrial use will be slightly higher. In the EU, demand for ethanol production has faltered, due to weak economic developments and competition with other raw materials. Assuming normal weather conditions, global wheat production is forecast to increase by 4.3% to million tonnes, due to both a larger harvested area and increasing yields. In the EU, Russia, Kazakhstan and Ukraine, the harvested area is projected to increase. High prices have encouraged farmers to increase plantings. The increase in production in these countries will be partly offset by lower crops in the US, China and India. Reviewing the supply/demand ratio, global wheat stocks will recover only slightly to 181 million tonnes, equal to 97 days consumption. A solid higher production will be absorbed by higher consumption and a modest recovery of stocks is likely. Rising demand will keep stocks under pressure. Assuming normal weather conditions, wheat prices will decline slightly over the course of 2013, but will remain at historically high levels. - Production risks, due to adverse weather in production areas - Impact of a slowing global economy - Below-average crop quality in the Black Sea region and the EU - Better weather conditions leading to adjustment in crop outlook

21 21 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Thijs Pons ( ) Agriculturals Corn Increasing global production with a return to trend-like yields Global stocks will be rebuilt Corn prices will be pressured but volatile Historical price corn Corn production and consumption Source: IGC Group Economics price forecast (Cts/bu) 3-m price end of quarter and year averages Corn Global stocks fall to six-year low In 2012/2013, global corn consumption is projected to decline by 1.1% to million tonnes (source International Grains Council, IGC). Global feed use will decrease by 1.4%, while feed use in China and Brazil will increase, due to strengthening demand for meat and other animal proteins. Industrial use of corn is decreasing, due to a drop in US ethanol output. Global demand for food use will grow modestly. Despite an increasing global planted area (+1%), global corn production will decrease by 2.5% to million tonnes in 2012/2013. In the northern hemisphere, production is decreasing, due to drought in the US and parts of the EU. Despite a record acreage in the post-war era, US production (-12.8%) fell to its lowest level in seven years. Production in the southern hemisphere is increasing, with record crops in Argentina and Brazil. Production in China is rising, due to increasing yields and an increasing planted area. Regarding supply and demand, global stocks will decrease by 9.0% to million tonnes, equal to 50 days consumption, the lowest level in six years. In the four main exporting countries, stocks are at the lowest level since 1996/1997. In Q2 2013, corn prices were volatile. In early Q2, prices fell back on new crop production prospects. In the second part of Q2, prices recovered, due to concerns about a late harvest. US bumper crop in 2013/2014 and a rebound in stocks In 2013/2014, global corn consumption is forecast to rise by 5.7% to million tonnes. Feed use is forecast to increase by 7.1%, especially when corn is competitively priced in comparison with wheat. Demand for meat continues to strengthen, fuelled by population growth, rising prosperity and shifts in tastes and diets. Industrial use of corn is expected to increase by 5.7%, due to increasing US ethanol production. In 2013/2014, global production is forecast to increase by 10.7% to million tonnes. Assuming normal weather conditions, average yields are likely to rebound to trend-like levels, while planted area is expected to increase slightly. In the US, production is forecast to increase by 29.7% to a record of 355 million tonnes due to increasing plantings in response to tight stocks and historically high prices. Production and consumption forecasts point to a production surplus of 30 million tonnes. Global stocks will be rebuilt and will increase by 25.2% to million tonnes. US stocks will recover to an eight-year high. Stocks are forecast to be more comfortable. In the short and medium term, corn prices will be pressured, due to the prospects of a large increase in supplies and a rebound in global stocks. In Q3 2013, prices will be volatile, as the new US bumper crop approaches. With the progression of the crop year, there will be more clarity about harvest data. Prices, however, will not fall too much with smaller than average stocks and continuing strong demand. - Weather-related problems in the main corn-producing countries - Larger-than-expected production - Argentinean biofuels programme planning more new plants

22 22 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Thijs Pons ( ) Agriculturals Soybeans Global production will increase due to bumper crops in the three major exporting countries Increasing use of soybeans, especially in China Prices will decline as supply outpaces demand Historical price soybeans Soybeans production and consumption Large harvests in South America In 2012/2013, global soybean use will increase by 1.1% to million tonnes (source US Department of Agriculture, USDA). Long-term demand in China, the world s largest consumer, is increasing due to a strengthening of demand for meat and other animal proteins. In 2012/2013, demand is growing slightly, primarily due to an outbreak of avian influenza. Despite a small decrease in US consumption, US soybean demand remains strong. The decline is largely attributable to a reduced crush of soybeans, owing to very tight supplies. In 2012/2013, global soybean production will rise by 12.1% to million tonnes, centred on a recovery in South American output, due to increasing areas and yields. Harvests were particularly good in Brazil and Argentina. Production in the US declines by 2.5% to 82.1 million tonnes, due to a severe Midwest drought. In 2012/2013, global stocks will increase slightly, but are set to remain tight. Stocks in the three major exporting countries (US, Brazil and Argentina) will increase, as a decline in the US is more than compensated by a rise in stocks in Brazil and Argentina. In Q2 2013, soybean prices increased, reflecting a tightening in old crop availability. Prices were initially supported by worries about planting delays, but at the end of Q2, plantings were almost on schedule. Source: USDA Group Economics price forecast (Cts/bushel) 3-m price end of quarter and year averages Soy 1,410 1, Rebound in production In 2013/2014, global soybean use is forecast to rise by 4.5% to million tonnes. Long-term global demand will increase, due to a growing population, rising prosperity and shifts in diets leading to increasing meat consumption. In 2013/2014, world soybean production is forecast to rise by 6.7% to million tonnes, based on expectations for bumper crops in the US and South America. Assuming normal weather conditions, in the US average yields are expected to rebound to trend-like levels, following last year s drought, with plantings only rising slightly. Crop prospects in Brazil are highly tentative, as plantings are still a number of months away. Reviewing the supply/demand ratio, in 2013/2014 global soybean stocks will recover by 20.5% to million tonnes, equal to 100 days consumption. Long-term, world production is expected to exceed the use of soybeans, and as a result, global stocks will rise. In Q3 2013, prices will be volatile as the new US all-time high crop approaches. With the progression of the crop year, there will be more clarity about harvest data. In general, soybean prices will decline, as the increase in supply will outpace the rise in demand and stocks will increase. - Weather-related problems in the main soybean-producing countries, threatening harvests - Feed demand in Asia increases sharply - Much larger crops than expected

23 23 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Mathijs Deguelle ( ) Agriculturals Sugar World production set to reach a record million tonnes Sugarmix moving away from sugar as ethanol demand rises ABN AMRO expects sugar prices to trade around USDc 18/lb on average in 2013 Historical price sugar Sugar production and consumption Source: ISO Group Economics price forecast (Cts/lb) 3-m price end of quarter and year averages Sugar World surplus reaching record levels Two consecutive seasons during which production outstripped demand have led to a world surplus of sugar, putting heavy pressure on market prices. For the 2012/13 harvest, production is set to outpace demand yet again, making this the fourth season in a row in which the world statistical surplus will increase. In its latest quarterly report, the International Sugar organization (ISO) projected world production to reach a record million tonnes, an increase of 4.3% compared to the 2011/12 season. Demand is forecasted to come in at million tonnes. This is an increase of 2.21% as compared with the 2011/12 season, and in line with the long term average. This would put the global statistical surplus at a record of almost 10 million tonnes. For the past few months, rising stock levels, as well the forecasted harvest levels have added pressure to prices. As a result, prices, which were already under pressure since September of last year, have dropped even further, below USDc 17/lb and well into the 16s. Even though Brazilian output fell in the first two weeks of June, due to heavy rainfall, the current high stock levels have left markets comfortable enough in terms of supply to prevent any fears of lowered output, which would lead to prices rebounding. Especially since the ISO expects a production surplus for the next season as well. Sugarmix moving to ethanol At current price levels, however, sugar is now trading below ethanol parity, which we calculate at slightly below USDc 17/lb. The latest UNICA reports show that for the last few months, the sugar/ethanol mix has seen a decrease of the sugar component to 41.85% for the 2012/13 season to date (1 April to 1 July), a level that was last structurally seen in the early 2010/11 season. The swing to ethanol is compounded by the Brazilian government revising the obligatory addition of ethanol to gasoline from 20% to 25% as of 1 May Coupled with the removal of the PIS/cofins taxes (a combined 12% tax) on hydrous ethanol, this is estimated to account for a growth in demand of almost 2 billion litres of ethanol per annum, consuming much of this season s additional sugar supply for ethanol production. Still, capacity constraints at the mills will ensure that sugar production will not fall sharply. Nonetheless, ABN AMRO believes that sugar prices have now bottomed out. Markets have price din the supply surplus condition and the mentioned switch to ethanol, coupled with the current low prices, will rein in the production growth seen in the past few seasons. While over the past few weeks, there have been predictions that sugar will fall to the USDc 15-range, we believe this is unlikely. Especially given the fact that the United States Department of Agriculture has shown that it is willing to step in and support prices when it believes domestic surplus is growing too large. All in all, we expect sugar to remain in the low USDc 17s/lb, appreciating slightly to a level of USDc 17.40/lb by the end of the third quarter of 2013, as sugar mills, especially in Brazil, switch to producing ethanol. Our expected average price for 2013 remains at USDc 18.00/lb. There is a slight downside risk if prices would stabilise sooner than we expect. - Weather-related production risks in big production areas - Economic recovery takes longer - Unexpected rise in Chinese imports - Increase of ethanol production is even bigger than expected

24 24 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Mathijs Deguelle ( ) Agriculturals Coffee La Roya disease worst outbreak since 1976, but effects seem priced in for now Rebound from current low Arabica prices not to be expected soon Robusta outlook remains bullish Historical price coffee Coffee: production and consumption Source: USDA Group Economics price forecast (Cts/lb) 3-m price end of quarter and year averages Arabica Supply set to grow despite La Roya outbreak In June 2013, the International Coffee Organization (ICO) estimated total production for the crop year 2012/13 to reach million bags, an increase of almost 8% compared with the 2011/12 season. Especially strong forecasts exist for Ethiopia (+19.1%), Tanzania, (+90.3%) and Indonesia (+74.7%). Brazil is also having a strong forecast, due to it being an on year in its biennial production cycle. Crop year 2013/14, which has already started in Brazil, is also off to a good start, with Conab estimating production at a provisional 48.6 million bags. An especially good showing for an off year in the production cycle. With production growth far outpacing the growth in demand, prices have seen firm pressure in the past months. Arabica coffee depreciated from USDc 152/lb at the start of this year to USDc /lb as of 23 July. Even the current outbreak of La Roya disease (coffee leaf rust), does not seem to be able to drive prices up, despite the current outbreak affecting all countries in Central America with a 53% incidence. Even though the current outbreak is the worst since the disease first appeared in the region in 1976, markets seem to have already priced in its effects. Robusta coffee, on the other hand, has stabilised off the low of 14 June and has recovered quite a bit on the back of speculative short covering, with prices coming out at USD 1931/T on 23 July.. Producing Arabica uneconomic Current low prices, may have fallen below the cost of production for some origins, which for most growers has steadily increased in the past few years. Still, a rebound should not be expected soon. Production responses are slow, with coffee being a perennial crop and alternatives, such as sugar, also trading at near or below production prices. Brazil is looking to set up government support programmes for growers, ensuring that supplies remain ample for the foreseeable future. This prevents the drop in supply that would normally occur in a boom and bust scenario, when low prices make production uneconomic. In regions where no government support is forthcoming, however, growers need to find different solutions to make ends meet. The ICO fears that this may have repercussions on husbandry techniques. In the longer term, this could very well lead to a rather steep drop in supply, leading to increased price volatility, as buyers compete for tighter supplies. In the short- to mid-term, however, ABN AMRO expects prices to remain below production costs, at least until the current enormous surplus has been absorbed. As such, we expect prices to remain at around USDc 120/lb for the next quarter, with only limited room for appreciation in the following months. For the longer term, we see a growing risk on the upside, as the world surplus dwindles and production indeed suffers from the current economic situation. For Robusta, our views remain similar to our last quarterly report. Fundamentals have not changed, and the outlook remains supportive. We expect Robusta to appreciate to a level of USD 2100/T by the end of 2013, with some risk on the upside. - Coffee production s sensitivity to weather conditions - Downturn in the global economy - Long term: switching from a world surplus to a deficit as stocks dwindle

25 25 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Mathijs Deguelle ( ) Agriculturals Cocoa Stocks-to-use ratio down to 44.5% Ivory Coast cocoa sector reforms are paying off Cocoa prices to appreciate in the course of the year Historical price cocoa Cocoa beans production and grinding Source: ICCO Group Economics price forecast (USD/t) 3-m price end of quarter and year averages Cocoa 2,400 2, Demand still set to outstrip production In its second quarterly report of 2013, the International Cocoa Organization (ICCO) revised its production forecast for the 2012/13 season down to slightly lower than its first forecast earlier this year. Production is estimated to total million tonnes, a decline of 2.7%, or 110,000 tonnes, compared to the 2011/12 season. The downward revision is mostly due to a significantly reduced production forecast for Brazil. Brazilian production is expected to decline by 35,000 tonnes, even though the harvest numbers until April are higher than last year s. However, current forecasts for the temporao crop are not at all promising, having suffered damage from dry spells earlier in the season. Forecasts for Ivory Coast production have been raised slightly, as favourable weather conditions promise a strong mid-crop. In addition, the gap in year-on-year figures that was visible at the start of this season is narrowing. Demand however, is still forecasted to outstrip production. Most recent grinding figures show an increase of 6.1% in Europe, whereas in Asia, second-quarter grinds saw 2% growth. US grindings also increased by almost 12%. Still, ICCO forecasts set demand to rise just under 1% this crop year, totalling million tonnes, even though grinding figures may support optimism about the cocoa market recovering from its slow demand growth. The slow growth in ICCO s forecasts is mostly attributed to poor economic circumstances, which may affect near-term demand in Asia in particular. However the cocoa market is still heading towards a deficit, trimming the stocks-to-use ratio to 44.5%. Production set to rise in future seasons In the mid- to long term, we expect production capacity to rise, in particular for African and Indonesia producers. Especially in Ivory Coast, the stable price producers can now expect to see production increases. This is due to governmental reforms that enable more planning ahead and improved husbandry techniques. With planting material and phytosanitary products becoming more widespread, combined with cocoa and chocolate processing companies financing fertilizers, yields are expected to rise substantially. In our opinion, these gains more than offset concerns over Brazil s potential to further increase production in the Bahia region. Concerns that are reinforced now that the witches broom fungus appears to be back. This disease, which was cause for Brazil s fall from its position as the world s No. 2 producer in the 1990s, has been affecting the mid-crop; and its severity is still being assessed. In 2012/13 and 2013/14, however, the major factors driving cocoa prices will still be the production deficit, the global stock situation and, in Ivory Coast, the cocoa-sector reforms and the country s more general plans to make its economy less dependent on cocoa. Still, because supplies are tight and a deficit continues to loom on the horizon, at least in the short term, ABN AMRO expects pricing to remain strong. We expect a slight appreciation to about USD 2,400/t in the next three months, after which appreciation will become steeper due to concerns about upcoming deficits at the end of this season and the next. - Cocoa production s sensitivity to weather conditions - Downturn in the global economy - High vulnerability of the cocoa crop to diseases

26 26 Quarterly Commodity Outlook 25 July 2013 ABN AMRO Group Economics Thijs Pons ( ) Agriculturals Cotton Decreased production in 2012/2013, due to a smaller planted area In 2013/2014, global stocks will grow Prices will increase, assuming China extends its cotton policy into 2013/2014 Historical price cotton Cotton production and consumption Global mill use is increasing In 2012/2013, global cotton production decreased by 5.0% to million tonnes (source International Cotton Advisory Committee, ICAC), despite an increasing yield due to favourable weather conditions in the main producing countries. Planted areas decreased, due to decreasing prices during 2012 and increased planting of more profitable competing crops, such as corn and soybeans. Despite weak economic developments, in 2012/2013 global cotton mill use increased by 7.6% to million tonnes, after two years of contraction. Due to a fall in cotton prices in 2012, cotton is becoming more attractive compared with man-made fibres and blends. In 2012/2013, the global cotton trade decreased, due to lower imports by China. In 2011/2012, China implemented a minimum cotton support price and rebuilt its strategic national reserve. China is a major buyer of domestic and international cotton. Despite a decrease in production and an increase in consumption, global stocks are rising by 17.0% to million tonnes, the highest level ever, due to a production surplus of 2.60 million tonnes. The stock-to-use ratio is increasing and has reached a high level (0.75), while the stock-touse ratio not including China is About 50% of global stocks are held in China, and thus not free on the market. In 2013/2014, China is maintaining its cotton policy with a minimum cotton support price. In Q2 2013, cotton prices rose, due to concerns about the tight supply/demand balance outside of China. Source: ICAC Group Economics price forecast (USDc/lb) 3-m price end of quarter and year averages Cotton In 2013/2014, China will extend its cotton policy In 2013/2014, global cotton production is forecast to decline by 4.8% to million tonnes. The planted area will decrease due to greater competition from other crops. The average yield will also decrease. Next season, global cotton mill use is forecast to increase by 2.3% to million tonnes. Long-term cotton consumption will grow moderately, driven by income and population growth in spite of the ongoing shift away from cotton to man-made fibres. In 2013/2014, production and mill use forecasts point to a production surplus of 0.78 million tonnes. Global stocks will increase to million tonnes of which 42% is held outside China. The main driver behind global cotton prices is China s cotton policy. The policy, which includes reserve purchases and a minimum support price programme, will push demand. It will maintain higher prices globally while global stocks are more concentrated in China. China has indicated that the 2012/2013 cotton policy will be extended in 2013/2014. In Q3 2013, we expect cotton prices to rise slightly, due to the tight supply/demand balance outside China. One of the questions is how China will manage its large cotton reserve. A Chinese release from its cotton reserves would put downward pressure on prices. To a certain extent, the timing and aggressiveness of a release will also have an impact on prices. - Weather-related problems in the main cotton-producing countries - Change in China s cotton policy - Downturn in the global economy