Quarterly Commodity Outlook

Transcription

1 Quarterly Commodity Outlook Commodity Research 25 October 212 ABN AMRO Price Outlook Q months view WTI Brent Natural gas Gold Silver Platinum Palladium Aluminium Copper Nickel Zinc Steel (HRC) Iron ore Coking coal 3-months view Wheat Corn Soybeans Sugar Coffee Cocoa Cotton long term view (until 214) mid term view (until 213) Energy: Energy prices are likely to remain rather flat during the coming quarter. Despite a moderate rise in demand for oil (both Brent and WTI), we expect oil prices to ease based on an even larger increase in production and possible easing of geopolitical tensions in the near term. We expect some support for US natural gas prices in Q4 as a result of increased seasonal demand while European gas prices will remain under pressure due to renegotiations of long-term gas contracts. Our longer-term outlook includes on average stable oil prices and moderately rising US gas prices. Precious metals: Expectations that the QE3 by the Fed would boost precious metal prices were high but investors have been disappointed. We expect this disappointment to continue as we don t see QE3 as a major driver for precious metals going forward. The global growth outlook will be a more dominating force. Therefore we favour the more cyclical precious metals palladium and silver in 213. But on short term there is risk of a position washout in silver which we see as an opportunity to position for the medium term. For the coming years alternatives (within and outside the commodity sphere) will become more attractive for investors compared to gold prices. Base metals: Weak sentiment and lacklustre economic growth will continue to affect the base metal markets. The fourth quarter is normally a seasonally dull quarter, without any significant price movements. We therefore do not expect base metal demand to pick up significantly. Besides some regional differences, demand will therefore remain subdued the rest of the quarter. Construction sectors worldwide are expected to remain flat, and demand from the home appliances sector will remain subdued. However, we expect demand for all base metals will remain solid over the long term. Ferrous metals: Market conditions continue to be challenging for the global steel sector. Economic growth is sputtering in emerging and developed economies. Steel mills must prepare themselves for more headwinds. With the upcoming seasonal slowdown in the global steel sector, growth in steel consumption (and thus in steel making raw materials) will remain weak. Overcapacity will persist in the long term and remains a structural problem for the sector. This problem will continue to have an effect on long-term steel price developments and only structural capacity cutbacks (especially in China) or very strict producer discipline can bring the market back into more balance. Agriculture: Soybean, corn and wheat prices have all fallen after reaching a high in August. Increasing demand will cause prices for soybeans and wheat to rise again. Same for corn, where low stock ratios also factor in. Due to current high prices, a lower quantity of corn will be used in creating ethanol, as importing Brazilian ethanol becomes a viable alternative in the US. So, though sugar supplies will increase, so too will demand, causing prices to remain flat. Prices for cocoa and coffee too will remain at current levels due to market fundamentals. decrease by 1% or more decrease between 5% and 9% price movement between -4% and +4% increase between 5% and 9% increase by 1% or more - Short term: our three month outlook versus spot rate on October 23 rd. - Long term: 214 average forecast price versus 212 forecast price.

2 2 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research FORECASTS Q4-212 (1) Energy: Spot rate 23 rd Oct Average price Q months Brent (USD/barrel) WTI (USD/barrel) Natural gas (USD/mmBtu) Precious metals: - Gold (USD/oz) 1,711 1,653 1,7 1,6 1,5 1,4 - Silver (USD/oz) Platinum (USD/oz) 1,577 1,496 1,6 1,55 1,55 1,55 - Palladium (USD/oz) Base metals: - Aluminium (USD/t) 1,923 1,923 2,75 2,5 2,1 2,25 Aluminium (USD/lb) Copper (USD/t) 7,828 7,715 8,2 8, 8,35 8,4 Copper (USD/lb) Nickel (USD/t) 16,287 16,346 17,3 18, 18,5 19,75 Nickel (USD/lb) Zinc (USD/t) 1,86 1,887 1,95 2,5 2,15 2,25 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) 1,542 1,681 1,68 1,52 1,6 - - Sugar (USDc/lb) Coffee (USDc/lb) Cocoa (USD/t) 2,531 2,491 2,5 2,5 2,6 - - Cotton (USDc/lb) (1) The 3-months forecasts is a Q4 212 exit price. Forecasts for 212, 213 and 214 are average year prices. (2) Prime coking coal Australia,CIF

3 3 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research 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 October 212 ABN AMRO Commodity Research Macro Nick Kounis ( ) ECB and Fed actions have eased systemic risks and supported financial conditions Evidence that the global economy is bottoming out is building Budget cuts in the west, and only cautious EM easing will limit pace of growth The Draghi effect on bond markets 8 % 7 Manufacturing PMI-headlines Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Draghi's London speech Spain yields 2y Italy yields 2y Eurozone US China Macro Research GDP forecasts e 213e China 1.5% 9.3% 7.5% 8. % US 2.4% 1.8% 2.2% 2.% Eurozone 1.9% 1.5% -.5%.2% World 5.3% 3.8% 3.% 3.4% Macro Research ECB and Fed take bold steps The risks of a severe escalation of the euro crisis have declined over recent months. This largely reflects the ECB s signal that it will intervene aggressively in government bond markets to eliminate unwarranted risk premia in bond yields as long as countries sign up to Euro-IMF conditionality. This is crucial because the level of bond yields is a key determinant of a country s debt service costs and hence its debt sustainability. As such, the ECB s actions have reduced the chances of Spanish and Italian sovereign financing crisis or even a default. Consequently, the potential for major sovereign-related losses to the eurozone banking sector has also declined. Systemic risks related to the euro crisis have eased, but they have not evaporated. The ECB s action, together with the launch of the Fed s open-ended QE programme, which could eventually amount to more than a trillion dollars, has underpinned risk appetite in financial markets. Global economy in bottoming out phase We expect the global economy to bottom out, helped by the easing of financial conditions and some ebbing of uncertainty. There are already some signs that this is taking shape. The global whole-economy PMI rose for the second successive month in September, on the back of gains in both services and manufacturing. Hard industrial production data also showed some signs of stabilising in July. Against this background it looks like the global cycle has turned, with momentum no longer deteriorating. We think that the global economy will now gradually get back on its feet, but there are reasons to think that the coming recovery will be rather moderate. Breaks on the pace of recovery The authorities in most big emerging markets have been rather cautious in putting in place monetary and fiscal stimulus, with the exception of Brazil, where policymakers have been aggressive. The People s Bank of China and Reserve Bank of India have eased policy only modestly. China has announced a fiscal stimulus, but it is multi-year and will have rather small effects in the coming quarters. Clearly, the Chinese authorities continue to have one eye on re-balancing the structure of the economy. At the same time, most developed economies will continue to feel the effects of a fiscal hang-over. The hope is that the patient can be weaned off gradually to avoid a system shock. We judge that after the US presidential elections, Republicans and Democrats will come together to push some of the planned consolidation forward to avoid a fiscal cliff. However, it is likely that a significant fiscal tightening will remain in place. This could well lead to some softening in US demand in the first half of next year. Meanwhile, the pace of budget cuts will be just as severe next year in the eurozone, as it has been this year. - Earlier return of confidence following decisive policy action - Sovereign debt crisis spirals out of control - Stepping up of stimulus in key emerging markets - US fiscal cliff left in place - Companies are cash-rich - Confidence remains subdued

5 5 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Commodity Top-Down Georgette Boele ( ) The rally in prices has lost momentum and impact of QE is lower than generally perceived Weak short-term activity due to seasonal slowdown in the fourth quarter We have a balanced outlook for commodities on the long run Historical price CRB Index Rogers Int. Commodity Index Total Return 6, 5, 4, 3, 2, Rally has lost momentum Since the release of our Quarterly Commodity Outlook in July, the CRB has rallied more than 12% on the following reasons: 1) geopolitical worries (Iran, Syria), 2) fears of lower supply of crude oil, 3) supply fears in agriculturals (extreme weather), 4) improvement in investor sentiment and 5) anticipation of a third round of quantitative easing (QE) by the Fed. Since 14 September the CRB has corrected lower on the back of lower oil and agricultural prices and a correction of precious metals as the impact of QE waned. Furthermore, concerns on the global growth outlook have not helped commodity markets. During the first round of quantitative easing, the CRB index rallied by 13%. On the back of the second round of quantitative easing the CRB index increased by more than 25%. During the operation TWIST scheme, the CRB showed a mixed performance. Since the market had already priced in the third round of quantitative easing, the CRB was slightly down after the announcement. The market performances of the commodity subcategories during the periods of QE by the Fed have seen wide divergences. Due to seasonal lull, demand patterns will shift Market conditions continue to be challenging for most commodity markets, with global growth and uncertainty continuing to limit the upside. Demand in the fourth quarter is especially influenced by seasonal patterns. With the upcoming seasonal slowdown in the fourth quarter, growth in base and ferrous metals demand will remain relatively weak. However, we expect some support for natural gas as a result of increased seasonal demand. Although we expect a moderate rise in the demand for oil, supply should 1, rise more quickly so we expect oil prices to ease. In agriculturals, Rogers International Commodity Index Total Returnfundamental developments seem to have the upper hand. Relative low stock ratios and an increase in demand and supply will keep prices steady. Historical price CRB Index Fed's QE announcements CRB commodity prices TR/Jefferies CRB Index Balanced outlook The global economy is bottoming out and a moderate improvement should become visible in coming months. We have a constructive outlook on the US economy and on emerging markets. However, growth in the eurozone will remain weak. For the Chinese economy we see stable growth in 213. Even though our macro outlook will be supportive for commodity prices, we don t believe in another bull-run. There are several reasons for this. China has moved to a lower growth speed and is transforming its economic growth model from being investment-dependent to being more driven by consumer demand. This will make its growth less commodity intensive in the coming years. Although commodity demand will continue to rise, the pace will not be quite as strong as during the last few years. Another reason is that the market was quick to anticipate further easing of monetary policy so its effects are already largely priced in. Furthermore, we expect the economic growth outlook to be supportive but the modest improvements are not significant enough to support a surge in commodity prices. In addition, we remain constructive on the USD and last but not least, the supply/demand situation for most commodities is either in balance or points towards oversupply. - Large supply disruptions - Ample commodity supply - More resilient global growth - Global recession - USD depreciation - Change in structural demand

6 6 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Hans van Cleef ( ) Energy Brent Opposing forces of economic crises and geopolitical tensions resulted in stable oil prices Higher production and lower geopolitical tensions will lead to somewhat lower prices in Q4 Oil production will increase and even outpace the rise in demand Historical price Brent Global oil supply and demand (x 1mln bbl) Source: Energy Intelligence (USD/barrel) 3-month Brent Crude Oil-Brent Dated FOB U$/BBL Supply Demand Oil prices stuck within small ranges During the past three months, oil prices both Brent and WTI traded within a small range. Highly important issues like economic crises and geopolitical tensions balanced each other out and resulted in a lack of direction. OPEC production was cut back somewhat, but this had no impact as demand dropped even faster. The building-up of oil stocks also had no visible effect, due to the increased tensions in the Middle East regarding Syria and Iran which worked in the opposite direction. News about Iranian oil exports coincided with the IEA reporting a 25% drop in Iranian oil production compared to last years levels, whereas the Iranian Oil Minister stated an even production so far in 212. As always, the truth will lie somewhere in the middle, with an estimated drop of approximately 15% in volume. Brent oil price to ease in Q4 There are several reasons why we believe that upside potential is limited and, in fact, oil prices are set for a decline during this quarter: 1) Most energy organisations expect higher production in Q4. 2) North Sea maintenance is completed and production is increasing. 3) Despite stronger sanctions, Iranian oil is still finding its way to the market, as it is traded for rice, medical equipment, cooking oil, engineering supplies, medicine and steel. Countries like South Korea and India have resumed their imports of Iranian oil. 4) With early elections in Israel (January 22), the immediate threat of an escalation between Israel and Iran is pushed back towards the spring/early summer in 213. A lower risk premium could be seen in the near term. 5) Risk appetite may diminish and geopolitical risks seem exaggerated. Profit taking on existing long positions seems likely, especially if supply and demand dynamics remain as they are. We expect Brent prices to ease towards USD 1 at year-end. The 212 average remains USD 11. Higher production versus moderate rise in demand Our longer-term outlook includes a rise in production. Saudi Arabia has a large spare capacity. With new techniques available, this spare capacity could even be much bigger than currently considered. However, the rise in production should come from a wider-based spectrum. We expect production increases in several regions/countries: the US, the North Sea, former Soviet republics, as well as a resumption of production in countries like Iraq, Libya, Nigeria, Angola and Sudan/South Sudan. In fact, Iraqi oil production is believed to increase from 3 million barrels per day (mbpd) to more than 6 mbpd in 22 and even more than 8 mbpd in 235. These higher production levels will more than compensate for the increase in demand, based on our moderate global growth expectations for 213 and 214. We also expect geopolitical tensions to ease in the course of 213 resulting in a lower risk premium. So, even though Saudi Arabia may cut its production somewhat, an oil price rally is not very likely unless a geopolitical escalation were to lead to a major reduction in (expected) production. - Escalation of the Iranian and/or Syrian conflict - Tensions in the Middle-East ease earlier than forecasted - A sooner-than-expected pick up of economic growth/risk appetite - Even higher oil production or disappointing data hurting demand - Release of SPR resulting in psychological effect

7 7 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Hans van Cleef ( ) Energy WTI (West Texas Intermediate) WTI unaffected by Fed s QE3 statement, Middle East tensions and lack of economic growth A rise of seasonal demand will be outpaced by a rise in oil production Higher continental oil production will keep the Brent-WTI spread intact during the US energy transformation process Historical price WTI Oil price spread Brent-WTI Crude Oil-WTI Spot Cushing U$/BBL - DS MID PRICE Oil price spread Brent-WTI US$/BBL (USD/barrel) 3-month WTI WTI unchanged as QE3 had no effect As with Brent oil, WTI prices moved within a small range during the last few months. The effects of the tensions in the Middle East (mainly regarding Syria and Iran) were balanced out by the lack of economic growth and persistent demand worries. The announcement of a third round of quantitative easing (QE3) hardly had any effect on oil prices, as: 1) It was already largely priced in. 2) Higher oil prices would be capped by increased production (mainly Saudi Arabia) and a possible Strategic Petroleum Reserves (SPR) release in the US. 3) Higher prices would dampen oil demand. 4) Market focus is shifting towards the US fiscal cliff. Higher production will outpace rise seasonal demand The fact that Saudi Arabia boosted its exports to the US to a 4-year high could indicate that the ties between the two countries are even closer than they were before, confirming the drive of Saudi Arabia to cap the rally of world oil prices. It could also mean that a release of the SPR has become less likely. Highly remarkable was the open rejection of a SPR-release by some Republicans, basically using the same argument as the International Energy Agency: high oil prices are not a reason for a SPR-release, as it does not immediately affect global stocks. The Brent-WTI spread increased to levels above USD 2, based on ongoing tensions in the Middle East resulting in a high risk premium priced into Brent. WTI prices were more stable, as US domestic output increased while demand remained subdued. WTI will continue to lack direction as a further increase in production will cover the seasonal increase of heating oil demand (on average +5% during Q4). We expect WTI to trade within a range of USD in Q4, the main drivers being similar to Brent s drivers. Brent-WTI spread will remain during transformation The US elections will be closely watched as the outcome could have a serious effect on US energy policy. The US will continue to increase its production, but the transformation towards being a much smaller importer of energy could even gain track if the Republican candidate Mitt Romney wins the presidential elections. Nevertheless, irrespective of the election outcome, US oil production will continue to increase rapidly. If we add the increase in Canadian and Mexican production/exports to the US and the fact that the reversal of pipelines towards the Gulf of Mexico starts to have effect, the imports of the US from other continents will continue to decline in the years to come. We expect the Brent-WTI spread to remain intact, based on changes in intercontinental production and demand dynamics, even despite a decline in the risk premium. We do, however, expect that the spread will narrow to approximately USD 1 in the next two years. - Confirmation of stronger global economic growth - Increased production of unconventional oil in the US/Canada - Possible escalation of the geopolitical conflicts (Middle East) - Renewed pressure on global economic growth - A higher-than-expected rise of oil production

8 8 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Hans van Cleef ( ) Energy Natural gas Difference between US and European gas prices results in new contract negotiations Low prices cap production, but rise in Q4 seasonal demand could trigger higher prices and thus higher production Natural gas will play crucial role in future energy mix Historical price natural gas Natural gas and oil prices Natural Gas-Henry Hub $/MMBTU (USD/mmBtu) 3-month Natural gas WTI Spot Cushing U$/BBL - DS MID PRICE Crude Oil-Brent Dated FOB U$/BBL Natural Gas-Henry Hub $/MMBTU 5 Trend towards more flexible natural gas contracts The trend of lower gas prices in Europe continued, with long-term contracts being revised ever more, cutting the link with oil prices. The link between natural gas prices and oil prices is becoming weaker. Consumers demand more flexibility and market conform prices, given that the gas market has different dynamics than the oil market. Nevertheless, the Norwegian Oil Minister warned that long-term contracts are needed to justify the high investments in order to produce gas. European gas is still much more expensive than US natural gas (Henry Hub), which is more plentiful. Seasonal price increase in Q4 Although there is little evidence that US gas output is slowing, the number of rigs continued to slide and even hit a 13-year low. The main reason for closing rigs is the fact that, due to low gas prices, production is not always profitable any longer. However, the fact that gas is also a by-product of oil production keeps gas production, and thus gas inventories, at high levels. The October-December period traditionally marks a significant increase in natural gas demand. Recent demand data already indicates that both industrial and residential/commercial demand is already rising. Industrial demand is currently even outpacing its 5-year average. Normally, this rise in demand goes hand in hand with a rise of the natural gas prices. In the past 1 years, natural gas prices rallied on average by 1% in these three months. With the short-term trend already being positive, we expect Henry Hub prices to rally towards USD mmbtu in the coming months based on this rise in seasonal demand. Large production caps upside potential Although Japan restarted two of its nuclear reactors, Japanese demand for natural gas and Liquefied Natural Gas (LNG) will remain strong. During the coming winter months more restarts are not likely. Nevertheless, Japan will need to restructure its energy mix significantly to accomplish its goal to eliminate all nuclear energy production by 24 and gas (either natural gas or LNG) will play a crucial role. News about serious investments in China to develop a similar shale gas boom as in the US suggests that even more gas could hit the markets in the years to come. This would change supply dynamics even more, resulting in lower natural gas prices for a longer period of time. It could also mean that the oil indexation for European gas will fall under even more pressure. For 213/14, it is very likely that US production will increase again, should demand gradually pick up in line with the modest US economic recovery. The rise in production, however, will also cap the upside potential of natural gas prices in the US. We expect Henry Hub prices to remain below their longer-term average (USD 5.5 between 2-212), as production will be high and inventories are only slightly below record high levels. As a result, our price forecasts for respectively 213 and 214 are USD 3.5 and USD 4.5 mmbtu. - Switching to additional gas-fired power generation - Continued and accelerating unconventional gas output - Extreme weather conditions (longer period of heat) - Deteriorating economic conditions

9 9 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Georgette Boele ( ) Precious metals Gold Expectations o QE3 by the Fed supported gold prices... but we expect QE3 impact to fade Alternatives to gold are becoming more attractive Historical price gold and ETF positions (x 1 mln) 2, 1,8 1,6 1,4 1,2 1, Gold price per ounce Total gold ETF positions (r.a.) Gold and inflation expectations 2, 1,5 1, Gold price per ounce US 1-year break even rate (r.a.) (USD/oz) 3-month Gold 1,7 1,6 1,5 1, Renewed optimism During the holiday months gold prices tried a few times to approach the important USD 1,525/ounce support level, but the market lost steam on each occasion. There was simply too much anticipation that after a period of calm prices would rally again, so investors were reluctant to liquidate positions. The trigger for a new rally in gold prices was the expected new round of quantitative easing, or QE3, by the Fed. Expectations as such were very supportive and gold prices headed higher again. Investors stepped en masse in investor-related products again, which resulted in a sharp increase in total gold ETF positions and non-commercial positions in the futures market. Impact Quantitative Easing During the first round of QE, when the Fed bought mortgage-backed securities, gold prices by about 12% during the programme period. When in 28 the Fed announced that it would also start buying Treasuries, gold prices rallied further. The rally of gold prices during QE2 was stronger than in the second phase of QE1 (when the buying of Treasuries was announced and the market sentiment strongly improved) but weaker than compared to the complete QE1 program (27% versus 21%). During Operation TWIST - the purchase of long-term bonds financed by the sale of short-term paper - gold prices showed mixed performance. Since the market started to hope for QE3, gold prices have rallied by 7% but the move lost momentum. Some commentators argue that gold prices may rally even further than the 27% of QE1 and the 21% of QE2, bringing the price to USD 2,/ounce. We believe this is too simplistic. Recently inflation expectations and distrust of paper money in general were behind the anticipation rally, but positions are already heavy. Investors may become impatient if the gold rally further loses momentum. Furthermore, we do not share the market view on inflation and the distrust in paper money. Additionally, gold prices are simply too high to stoke large jewellery demand (a pick-up is expected in the Christmas season). Improving alternatives The low real yield environment continues to sound like music to the ears of gold investors and they may be right. But if central banks actions/measures prove to have the impact on growth they have been designed for and countries continue to reign in their deficits (including the US), gold prices have not much room to rally. Expectations of higher growth make other assets more attractive and higher US growth in combination with an improvement of the fiscal and current account balances in the coming years will have a positive effect on the USD. As a result, the USD is expected to rally versus gold. On the supply side, the costs are sharply increasing but the production remains attractive as long as gold prices are above USD 9/ounce. But easy-to-find gold and the gold grades are diminishing, resulting in a slower supply increase. This is not a problem if jewellery demand picks up again when investor demand starts to be scaled back. - Prolongated period of accommodative monetary policy - More optimistic global growth outlook triggering central bank action - Improvement in investor sentiment - Strong global growth make alternatives more attractive - Distrust in paper money - Forced clearing of positions to raise liquidity

10 1 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Georgette Boele ( ) Precious metals Silver High expectations of strong QE3 impact But disappointment is around the corner and this could result in wash-out of positions Silver is more attractive than gold as global economy is expected to improve ETF positions and historical price silver (x 1mln) Total silver ETF positions Silver price per ounce (r.a.) Historical gold / silver ratio 9, 8, 7, 6, 5, 4, 3, gold / silver ratio (USD/oz) 3-month Silver High QE expectations For most of the year silver prices have moved within a range of USD /ounce. The increase in liquidity and improved global growth prospects pushed silver prices quickly to above USD 37/ounce but the deterioration in sentiment pushed prices back towards USD 26/ounce before they rose towards USD 35/ounce again, on the back of rising hope for another round of quantitative easing, by the Fed (QE3). During the previous rounds of quantitative easing silver prices showed a stunning performance, especially in the run-up to and during QE2, when silver prices rallied from USD 13.11/ounce (27 August 21) to USD 34,77/ounce (3 June 211). If we take the daily close at USD 48.53/ounce on 28 April 211 into account, the rally would even have been more spectacular. Between August, when the market started to anticipate QE3, and 19 October silver prices rallied by only around 9%, whereas a QE2-like performance was expected. Investors are clearly positioned for this, considering the sharp increase in total silver ETF and non-commercial positions in the futures markets. But up till now the price performance has been disappointing. More cyclical gold proxy Silver prices have suffered on lower expectations on the global growth front compared to their performance during the periods of the first two rounds of quantitative easing. For this reason, silver prices have been capped. Apart from this the market is already positioned for sharply higher prices, which is a weak point going forward. When investors lose their patience, or if their perception that silver prices will not be able to move to April 211 territory (close to USD 5/ounce), liquidation of their positions is in the cards. Some of these positions have already been cleared recently, but this could only be the start. Should the market turn to the view that gold prices may also not be able to rally to the all-time high (daily close just above USD 1,9/ounce on 5 September 211), then a liquidation in investor gold positions could further drag down silver prices. On the short term, this risk has clearly risen. A drop below USD 3/ounce would in that case be highly likely, especially if the global growth prospects remain downbeat. Silver preferred to gold Going forward, we prefer silver to gold. The large net investor positions would first need to be cleared, however. We believe that if silver prices would to drop to below USD 28/ounce, this would be an attractive level to position for the likely cyclically-driven rise in prices in 213. As we have stated in our macro economic outlook, we remain constructive about the outlook for the US economy and emerging markets. If this plays out, demand from the industrial sectors should be spurred, and triggering an outperformance of silver prices compared to gold. We expect this to start playing out at the end of this year and into More optimistic global growth outlook - Long-term investors abandon positions - USD debasement - Global recession

11 11 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Georgette Boele ( ) Precious metals Platinum Mining unrest and QE expectations have supported platinum prices Fed QE is unlikely to be a major driver going forward Major price drivers: state of the eurozone economy, Chinese demand and supply disruptions Historical price platinum 2,5 2, 1,5 1, Historical platinum/palladium ratio London Platinum Free Market $/Troy oz platinum / palladium ratio (USD/oz) 3-month Platinum 1,6 1,55 1,55 1,55 Mining unrest and QE were supportive Over the last few months platinum prices have been volatile in a large range between USD 1,375 and USD 1,725/ounce. Expectations of more quantitative easing (QE) by the Fed and unrest at major platinum mines pushed prices up from USD 1,4/ounce on 15 August to USD 1,73/ounce on 5 October, or more than 23%. This price increase was not a straight line, however, as there were some downward corrections during this period when global growth concerns got the upper hand. The contained though ongoing - eurocrisis and budget cuts will keep expectations for demand from Europe low. Fed QE and platinum prices During the previous rounds of QE, platinum prices were supported in most of the cases (including during operation TWIST), but their performance sharply contrasts to the performance of gold prices during the same period. During QE1, platinum prices outperformed gold prices, as the action by the Fed improved market sentiment. During QE2, platinum prices only rallied by around 12%, whereas gold prices rallied twice that rate. During operation TWIST 1, platinum prices lost more than 23%, whereas they rallied by 8% during TWIST 2 (October 19). Since end of August, when the market started to anticipate a third round of quantitative easing by the Fed, platinum prices rallied by around 6%, but this was also due to the mining unrest in South Africa. In summary, quantitative easing may have a supportive impact but the outlook on global growth and supply/demand balance seems to be more important for platinum prices going forward. Balanced outlook The mining sector in South Africa is plagued by high operating costs and the mining unrest seems to have triggered a rationalization wave. Mining companies are looking for ways to reduce costs and improve efficiency. South Africa accounts for 75% of the global platinum mine output, making safety interruptions and mining unrest crucial variables to watch in 213. But we expect the mining unrest to fade and this would increase platinum supply. Miners have to deal with higher energy costs and a volatile South African rand. The energy cost issue is a variable that is here to stay. In 213 the rand (ZAR) may also continue to be an adverse factor. We expect the ZAR to remain weak in 213. One of the reasons why platinum prices have not rallied further is the prospect of weak demand from Europe. Demand for platinum highly depends on the state of the European car industry and jewellery demand from China. Expectations on both are downbeat. Domestic demand in the eurozone has been contracting on the back of budget cuts, rising unemployment and uncertainty related to the eurozone crisis. Expectations about jewellery demand from China have also been low, as consumers are concerned about the Chinese growth outlook. We believe that the outlook for the Chinese economy will improve before the end of the year and this should support platinum demand from China. - Improving economic situation in the eurozone - Global recession - Supply disruptions - Eurozone break-up - Risk seeking environment and/or USD debasement - Chinese consumers to favour white gold in stead of platinum

12 12 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Georgette Boele ( ) Precious metals Palladium Concerns about global economy has hurt palladium prices Earlier rounds of QE had significant impact, due to improving global growth outlook Our constructive view on economic outlook for the US and emerging markets makes us positive on palladium Historical price palladium 1, Total palladium ETF positions x 1, Palladium U$/Troy Ounce Total Palladium ETF positions (USD/oz) 3-month Palladium Global growth remains a crucial driver Palladium prices started 212 well on the back of improved investor appetite, driven by a more constructive view about the global economy. For quite some time the market expected that emerging market economies would be able to hold up well when developed markets started to weaken again. As soon as it became clear that this was not the case, palladium prices corrected lower. Since the release of our previous Quarterly Commodity Outlook in July, palladium prices recovered more than 23% up to 14 September, as the market lost some of its bearishness on the eurozone debt crisis and the global growth outlook. The unrest at platinum mines and an expected third round of quantitative easing (QE3) by the Fed also supported prices. But concerns about the global economy resurfaced and disappointment about the impact of QE3 did not help either. The result was that palladium prices gave back almost 1% of their 25 July 14 September gains. Fed QE and palladium prices We also looked at the performance of palladium prices during earlier rounds of QE. They showed a stunning performance generally, though the performance during the second round was lower. During both rounds the global growth outlook improved, even if the situation in the eurozone started to deteriorate. This improvement in overall sentiment (excluding the eurozone) proved to be supportive to palladium prices. The anticipation and announcement of QE3, however, barely had an impact on palladium prices, showing that the global growth outlook and the supply/demand balance are currently of greater importance. Constructive outlook Given that there are two countries that are big producers of palladium (South Africa and Russia); supply is far less vulnerable than is the case for platinum. Russian stock sales have tended to be an important source of supply as well. They have been on a declining trend and are expected to fall further this and during the coming years. Another source of supply is recycling, which has risen sharply in recent years. We expect this trend to continue going forward. From the demand side (industrial), palladium is a cheaper alternative to platinum. Furthermore, demand for palladium is far more broadly based than demand for platinum. It is therefore less vulnerable. Once the global economic outlook improves, which we expect will happen at the end of this year and at the start of next year, palladium prices have room to rally. Investment-related demand has been mixed. If global growth prospects improve, investor positioning will likely become more aligned. - Stronger global economy - Global recession - Supply disruptions - Larger-than-expected Russian stock sales - Risk seeking environment and/or USD debasement - Larger-than-expected supply

13 13 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Casper Burgering ( ) Base metals Aluminium Poor fundamentals continue to dominate the market Output of aluminium will remain strong as new capacity will be introduced With high oil prices, energy costs for smelters are expected to stay relatively high Historical price Aluminium 3,5 3, 2,5 2, 1,5 1, Supply, demand & stocks 5, 4, 3, 2, LME-Aluminium 99.7% Cash U$/MT Source: Metal Bulletin 3-month Aluminium (USD/t) 2,75 2,5 2,1 2,25 Aluminium (USD/lb) Stocks (weeks of consumption), r.axis World production (' tonnes) World consumption (' tonnes) Short rally in aluminium prices after QE3 Since January 212, aluminium prices have lost 4%. Sluggish macroeconomic data, negative economic expectations and poor market fundamentals weigh heavily on price developments in the aluminium market. The announcement of a third round of quantitative easing (QE3) by the Fed on 13 September led to a short rally in aluminium prices, but they retreated quite quickly again as poor fundamentals continue to dominate the aluminium market, especially in China. This country has numerous high cost aluminium smelters that are hampered by the low prices. Supply outpaces demand and stock levels continue to rise. The market is oversupplied, which puts pressure on prices. World primary aluminium production was up 4.4% y-o-y in the first three quarters of 212 and world primary aluminium consumption increased by 4.8% y-o-y in the same period. New capacity will become available Weak sentiment and the global economic turmoil will continue to affect the aluminium market. Aluminium production is expected to increase in the second half of 212 by 3.1% y-o-y, while aluminium consumption will increase by 4.8%. Despite the stronger consumption growth, the aluminium market will remain oversupplied. Availability of aluminium will, however, remain tight for the next three months, because large stocks are tied up in financing deals. Nevertheless, output of aluminium in China will remain strong as new capacity will be introduced and marginal producers will able to continue their operations thanks to continued governmental subsidies to domestic smelters by lowering power tariffs. Meanwhile, capacity in the Middle East will also be expanded (due to cheap power costs) with the construction of new aluminium smelters. Apparently, investors in this region are still optimistic about future developments for the aluminium sector. ABN AMRO expects that aluminium prices will remain flat coming three months. Prices will remain at comparatively high levels The Asian region (and especially China) will continue to dictate the direction of the global aluminium sector, with the key drivers being the end-user sectors such as transport equipment, packaging and construction. In general, the outlook for the aluminium consuming sectors in Asia will remain firm in the forecast period. Although the fundamentals seem to be less supportive to aluminium prices (e.g. the structural overcapacity), other economic developments will continue to have a significant influence. Oil price developments, in particular, will be translated into aluminium prices. Aluminium is highly energy intensive, making it sensitive to volatility in energy and oil prices. With the relative high oil prices, energy costs are expected to stay comparatively high. High-cost producers remain at risk in the forecast period because of these high energy prices. - Sentiment towards the eurozone improves, resulting in risk appetite - Chinese construction continues deterioration - Significant Chinese smelter output cutbacks - Further escalation of EU crisis and China economic slowdown - Increased demand as substitution (for copper and steel) - New capacity entering the market (India, Middle East)

14 14 Quarterly Commodity Outlook 25 October 212 ABN AMRO Commodity Research Casper Burgering ( ) Base metals Copper Copper price hovers around USD 8,/t since the start of 212 Short-term price direction will be dominated by release of economic data from major economies Long-term demand outlook for copper remains solid Historical price Copper 12, 1, 8, 6, 4, 2, Supply, demand & stocks 22, 2, 18, 16, 14, LME-Copper, Grade A Cash U$/MT Source: Metal Bulletin 3-month Copper (USD/t) 8,2 8, 8,35 8,4 Copper (USD/lb) Stocks (weeks of consumption), r.axis World production (' tonnes) World consumption (' tonnes) Volatility in prices not due to fundamentals Since the start of 212, copper price has been hovering in a bandwidth of -9% and 9% at USD 8,/t. Copper reached its maximum price of USD 8,735/t early February and slowly deteriorated until June to reach its minimum price of USD 7,382/t. Copper prices rallied briefly after the US Federal Reserve announced QE3 mid September. The volatility in copper prices was not due to changes in fundamentals. The economic slowdown in China, the debt crisis in the EU and the stuttering of the US economy have all left their mark on prices until the third quarter of 212. In the second quarter the copper market was in surplus, even if amounting to only.6% of consumption. Stocks are still relatively low and represent only 2.2 weeks of demand. China is the biggest consumer of copper worldwide and remains the key market to monitor. Import demand from China for copper concentrates increased by a meagre.2% y-o-y until August of 212. Until September, industrial production of refined copper in China increased by 4.3%. In August, imports of copper concentrate decreased by 21% y-o-y. Prices dominated by macro economics Apart from fundamental changes, macro economic developments weigh heavily on copper price movements. In these times of economic uncertainty, fundamentals have much less influence on prices. Therefore, the short-term direction in copper prices will continue to be dominated by the release of economic data from the major economies. The financial markets also have a strong impact on the price direction, because of the active futures market in copper, and could easily affect short-term prices, regardless of fundamental developments. In Europe and North America, the physical copper market is quiet and Chinese demand (4% of the world s copper demand) is also relatively weak. End users of copper have little incentive to re-stock at these volatile prices. Although uncertainty continues to be high (which is discouraging investors from taking up new positions), the current macroeconomic expectations for copper consuming countries are positive for copper price developments in the short term. ABN AMRO is therefore confident about the copper market s short-term future and forecasts a price increase from the current low levels. Hope for positive effect economic stimulus measures In the forecast period, the copper market is expected to remain tight, as stock levels are generally low. ABN AMRO also expects that the long-term demand outlook for copper will remain solid. We expect some new impulses for construction demand in the forecast period, but also continued demand from new-end user growth areas (such as the healthcare sector, aquaculture and transportation). After 213, new copper projects will boost output and supply will be growing stronger than demand and this ease the tightness and price will ease, but it will remain at elevated levels. However, the copper market remains volatile until 214 due to continued uncertainty around the EU debt crisis, disappointing economic data from key countries (US, China) and cautious investor risk appetite. - Recovery in construction (US, EU, China) - Risk aversion / need for liquidity increases - Stronger-than-forecasted Chinese economic performance - Further escalation of EU crisis and/or cooling off Chinese economy - Rising Chinese copper import requirements - Funds scaling back their interest in copper as an asset class