Copper spreads and stocks still out of line. Daily. Global Commodities. 7 May 2014

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1 Copper spreads and stocks still out of line LME on-warrant copper stocks have declined sharply over the latter part of April, reaching the lowest point since June The stock to price relationship for copper and for most metals generally is pretty poor, with unreported stock changes, stock in the process chain and changes in consumption rates all diluting the importance of the headline stock to price relationship. The stock to spread relationship is however generally much closer, with copper s stock to spread relationship continuing to look out of line compared to historical behaviour. Daily Copper s nearby spreads, i.e. Cash-3m portion of the forward curve are more or less inline with historical patterns and do reflect the fact that on-warrant LME inventory is at very low levels. It wouldn t take much to see those spreads widen further, with 2006, 2007 and the early part of 2008 all seeing much more pronounced backwardations than we have in place at the moment. The world was a much more bullish place back then, however, the nearby spreads could well tighten further given on-warrant stock levels, particularly if there are positioning issues overlaid on top. That said it is the 3-15 month portion of the curve that is the most interesting. The 3-15 month spread has started to tighten in recent days, however it remains very benign at ~$60 backwardation, and well out of line with historical levels which have been from $250 - $850 backwardation at similar on-warrant stock levels. The spread is instead behaving as if there is at least another 100 kt to 200kt of available copper in LME sheds. Large unreported stocks in bonded warehouse in Shanghai may be clouding matters, with participants believing that the metal can be re-exported. It might, however with the SHFE-LME arb window narrowing, bonded premia picking up strongly, SHFE stockpiles falling and with China still consuming some 3Mt more refined copper than it produces, it would need a significant and sustained backwardation in the nearby LME spreads to liberate that bonded inventory. With the SRB also rumoured to have picked up 200kt, even if that number is exaggerated, it means metal is even less likely to flow out of China anytime soon. On that basis, there is a strong argument for even greater tightness in the farther dated portion of the copper forward curve. By Leon Westgate LME Copper 3-15 month spread to on-warrant stock Last Source: LME; Standard Bank Commodities Strategist Walter de Wet Walter.DeWet@standardbank.co.za Commodities Strategist Leon Westgate Leon.Westgate@standardbank.com Commodities Strategist Melinda Moore Melinda.Moore@standardbank.com This material is "non-independent research". Non-independent research is a "marketing communication" as defined in the UK FCA Handbook. It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

2 Base metals The base metals complex remains fairly choppy, with volumes also dropping away as the market waits for the next slug of Chinese economic data released later this week and next. Price-wise, the complex has split in two with copper, lead and aluminium losing a bit of ground heading into US trade while nickel, tin and zinc have managed to hang onto yesterday s gains. Aluminium has resumed its slump, following a few days of relative stability, with the metal trading below $1,770 and giving up all of its April gains. Turnover is relatively strong, with aluminium volumes outpacing those of copper, though the main news really is the launch of the CME s physical aluminium contract. The contract is aimed at creating a North American benchmark for managing price risk with access to the metal at warehouses in Baltimore, New Orleans and at Ypsilanti, Michigan. Arbitrage opportunities aside, it will be interesting to see how much traction the contract gains amongst US corporations and how much liquidity builds up. Also worth watching is, how the contract stands up once the LME introduces its proposal for an aluminium premium contract, essentially an exchange-traded aluminium warrant swap mechanism. Copper has come under further selling pressure heading into Wednesday afternoon with the metal trading below $6,650. With some of the nearby physical tightness easing in Shanghai, the hardcore bearish element in the Chinese speculative community appear to be getting stuck in again, though weaker shorts are blunting the overall effect. Copper nevertheless has come under pressure and is back where it was this time last week. Lead is also under pressure, though the most notable thing is the lack of volume, with the metal trailing behind nickel in terms of turnover. Lead volumes on LME Select are marginally lower than were seen in 2013,, with copper and zinc also seeing little change. Instead it has been nickel turnover that has surged on LME Select, bumping lead down to 5 th place in terms of daily average turnover. Bulks By Leon Westgate Chinese financial steels lost further momentum today, given a lack of positive economics / newsflow, with heavy profit-taking being seen into the close. The China HSBC Services index fell from 51.9 in March to 51.4 in April, highlighting the property sector difficulties. The employment component fell from 51.7 to 50.3, only just expansionary. The China Securities Journal focused on the property sector today, warning of liquidity problems for many developers, which are likely to worse as the year progresses. Shanghai Equities fell 0.89% to 2010 points, close to its daily lows, ahead of April s trade data tomorrow. Poor land sales, which fell 5% y/y in March, but fell 27% y/y in 3rd tier cities continue to threaten local government finances. New home sales fell 47% y/y during the May Day holidays. Meanwhile national fiscal revenue growth slowed to 5.2% in March, from 8.2% in February, with the budget moving into a deficit. The MOF is asking local governments to subsidise small company closures in high capacity industries. Toyota China s April vehicle sales grew 12.4% y/y. Shanghai 7-day interbank rates rose to 3.1% into the close, with the PBOC is likely to conduct further repos tomorrow. The spot currency largely range-traded, closing at , while the PBOC set the reference rate at The PBOC s Q1 report has received mixed interpretations on future policy moves, which suggest a broader RRR may be implemented, despite comments that credit controls would not be relaxed, even as the economy slows. As well, the PBOC is calling for 2

3 shanty-town financing costs to be lowered, suggesting that developments are running behind schedule, with Beijing looking to resolve. Q1 M2 growth was 12.1%, still relatively high. Shanghai Rebar Futures Oct-14 contract closed RMB 30/t lower at RMB 3,195/t, closing at record lows since debutting in Dazong HRC Oct-14 futures shifted off RMB 2/t to RMB 3,357/t, while SHFE HRC Oct futures fell RMB 12/t to RMB 3,332/t. Among physical steels, Tangshan billet prices remained steady at RMB 2,900/t. The Yangang billet tender fell RMB 7/t to RMB 2,907/t. Rebar prices fell RMB 10/t in Shanghai and Beijing. HRC prices rose RMB 10/t in Shanghai, while remaining unchanged in Beijing. Mills are talking of likely mounting steel industry bankruptcies. Dalian Commodity Exchange IO active Sept-14 contract prices fell RMB 21/t to RMB 749/t, while the Jan-15 contract fell RMB 18/t to RMB 730/t. Among physical iron ore, BHPB sold a combined Fe 62.3% Newman and a Fe 57.6% Yandi fines cargo via private sale, yesterday evening, with Newman at $106.51/t. Vale sold a late May-cargo of Fe 62.55% LONT (lump Tub unscreened) at a floating $2.11/dmt premia to Platts Fe 62%. globalore was offering MNP Fe 62% fines for June at $105/t with no bids. PB fines at Shandong ports is believed to be trading at RMB 700/t. The TSI Fe 62% China CFR price index fell 90 cents to $105.10/t (MTD: $105.75/t). The Platts Fe 62% index fell $1/t to $105/t (MTD: $105.56/t), while the TSI Fe 58% index fell 10 cents to $93.40/t (MTD: $94.93/t). The Metal Bulletin Fe 62% index fell 3 cents to $106.26/t, while its Fe 58% index fell 74 cents to $89.44/t. Argus Fe 62% index rose 5 cents to $104.40/t. In IO supply news, Vale expects to lift output by 10-15mt in 2014 from last year s 306mt levels, while lifting totals to 453mt by Brazil exported 5.9mt last week, down from 6.2mt the prior week. The country also exported 23.99mt in April, down from 27mt in March, due to maintenance and weather issues. India exported 1.08mt in April, including 0.091mt of pellets and 0.073mt from Goa. NMDC dropped its lump prices by Rs 100/t to Rs 5900/t for May sales. The Aquila bid by Baosteel/Aurizon is reigniting plans to develop the 55mtpa Anketell Point terminal, which may also gain backing from FMG. SNIM shipped 3.32mt in Q1 from Mauritania, up 5.8% y/y, after expanding capacity to 13mt last year. Dannemora is seeking additional financing for working capital and investment purposes, after shipping 0.294mt in Q1, up from 0.189mt y/y. Kogi Iron is reorganising after experiencing capital market difficulties. CSN sold 6.4mt in Q1, virtually all for exports, up 54% y/y, although off 18% q/q due to port maintenance at Itaguai. Manganese 44% ore prices are trading at $4.23/dmtu this week, off from $4.40/dmtu w/w. The Baltic Exchange Cape index shifted off 0.7% to $11,829/day, with C3 at $20.486/t and C5 at $7.905/t. Q3 FFA capes are trading below c.$22,000/day. For Q3:14 thermal coal prices, API 2 is trading at $76.90/t; API 4 is trading at $74.40/t; while Newcastle is trading at $74.65/t. Clashes are continuing in Odessa, with a rising death toll, fuelling international concerns ahead of het 25 May elections. India imported 15.2mt of coal in April, up 2% m/m, with Indonesia the biggest supplier. Glencore produced 34.1mt of coal in Q1, up 4% y/y, with growth in both Cerrejon (up 93% to 2.9mt; for a realised price of $69/t) and Australia, up 7% to 11.8mt for export. Prodecco had a realised export price of $77/t. 27mtpa Wiggins Island Stage I expects to export its first coal in Nov-14, ahead of schedule, with the rail line completed in February. Zhengzhou Futures Sept-14 contract price rose RMB 0.6/t to RMB 527.2/t, while the Jan-15 contract fell RMB 0.6/t to RMB 536/t. The Bohai Index rose 0.4% or RMB 2/t 3

4 to RMB 534/t. Total port stocks rose 0.7% to 13.16mt, with GZ at 3.15mt. China s 6 key coastal plant stocks are at 13.38mt, covering 22.2 days, since their daily burn has fallen to 0.6mt. China s April coal sale fell 1.29% y/y, due to margin squeeze, following from a drop in 1Q sales of 1.4% y/y to 844mt, due to slower growth. Premium Hard Coking Coal spot prices are trading in the $ /t Qld FOB range, with China CFR prices ranging $ /t. Glencore is cutting its met coal output slightly (c.1.2mtpa) due to margin pressures, switching to thermal. The SGX has finally launched coking coal swaps/futures, offering both FOB Qld and CFR China contracts, priced against the monthly TSI average. US coal exports fell 24% in March, due to falling prices, from 13.6mt to 10.4mt y/y. March exports were up from February s weather-constrained 8.8mt figure however. On the Dalian Exchange, Sept-14 coke price traded flat at RMB 1,175/t, while the Jan- 15 contract rose RMB 3/t to RMB 1,226/t. Among Dalian HCC prices, Sept-14 contract prices fell RMB 4/t to RMB 835/t, while the Jan-15 contract traded flat at RMB 870/t. By Melinda Moore 4

5 Commodity Prices Base Metals LME 3 month Open Close High Low Daily Change (%) Cash Settle Change in Cash - 3m change cash settle Aluminium Copper Lead Nickel Tin Zinc Daily LME Stock Change (mt) Metal Today Yesterday In Out One day change YTD change (mt) Cancelled warrants (mt) Cancelled warrants (%) Contract turnover Aluminium Copper Lead Nickel Tin Zinc Shanghai 3-month Open Last 1d Change COMEX Open Close Change Change (%) Aluminium Ali Feb' Copper Cu Feb' Zinc #N/A N/A ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash month Precious metals AM Fix PM Fix High bid Low offer Closing bid Daily EFP's change Gold /-0.5 Silver /0 Platinum /+3.5 Palladium /+1.0 Forwards (%) 1 month 2 months 3 months 6 months 12 months Gold Silver USD Libor Technical Indicators 30-day RSI 10-day MA 20-day MA 100-day 200-day Support Resistance MA MA Gold Silver Platinum Palladium Active Month Future COMEX COMEX SLV NYMEX NYMEX DGCX GLD TOCOM CBOT GLD GLD PAL PLAT GLD Settlement #N/A N.A Open Interest Change in Open Interest Energy Energy futures pricing 1 month Change 2 month Change 3 month Change 6 month Change Sing Gasoil ($/bbbl) Gasoil 0.1% Rdam ($/mt) NWE CIF jet ($/mt) Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q2 14 Change Q3 14 Change Q4 14 Change Cal 15 Change API2 (CIF ARA) API4 (FOB RBCT) Source: LME, NYMEX, COMEX, SHFE, Standard Bank Research 5

6 Commodity Prices Bulks Steel Physical Latest Price 1-day 1-week 1-month 3-month 6-month Turkish Scrap 80:20 (Iskinderun CFR) $/t % -2.86% -0.75% -6.95% -0.03% China Tangshan Steel Billet $/t % -2.10% -1.89% -5.85% -9.14% China HRC export (Shanghai FOB) $/t % 0.00% -2.80% -0.95% -5.97% North Europe HRC domestic (ex-works) $/t % -1.15% -3.37% 0.00% -7.53% North America HRC domestic (Midwest FOB) $/t % 4.74% 1.78% 3.32% 16.89% Steel Futures LME Billet Cash $/t % -0.06% 7.37% 67.83% % LME Billet Futures (1-mth) $/t % -0.51% 7.20% 66.81% % LME Steel Billet Stocks change Shanghai Rebar Futures (Active contract) $/t % 0.39% -0.34% -1.94% -4.60% Shanghai Rebar Futures On-Warrant Stocks change SHFE Rebar - Open Interest SHFE Rebar - Total Volume China Steel Inventory (million tonnes) % % 10.02% 15.89% % Iron ore China Iron Ore Fines (62% Fe; CFR Tianjin) $/t % -9.56% % % % China Iron Ore Fines (58% Fe; CFR Tianjin) $/t % % % % % SGX AsiaClear IO Swaps 62% Fe $/t (1-mth) % % % % % Platinum China Iron Ore Inventory (million tonnes) % 1.23% 17.08% 43.85% 55.47% Coking coal Premium Hard Coking Coal (Qld FOB) $/t % 1.94% % % % Capesize freight Saldanha South Africa-Beilun China % % 3.57% % 16.00% Financials pricing RMB Currency % 0.21% 2.71% 2.18% 0.97% China 7-day repo % 2.65% % % -3.43% API2 (CIF ARA) % -1.50% -0.25% -5.21% -9.10% Source: LME, SGX, McCloskey, SHFE, Bloomberg 6

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