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1 : Daily Focus: Aluminium tom-next metronome continues to tick 14 June 2011 Focus: Aluminium tom-next metronome continues to tick Since the aluminium nearby spreads first started to show significant tightness, around the August-10 to September-10 spread, it appears the tom-next spread has settled down into a regular 3-month pattern. Chinese lead production fell dramatically in May, falling 16% m/m. While the headline figure seems rather drastic, the fall is in response to a shutdown of many lead-acid battery makers (lead consumers), following a recent government clampdown on pollution. Yesterday s downward pressure on precious metals has eased off as concerns over the Eurozone debt situation and global inflation have re-emerged. The recent downgrade by S&P has put Greece s sovereign debt rating at the lowest level of any country, as the agency has cited an increased likelihood of default. Strategists Walter de Wet, CFA* Walter.DeWet@standardbank.com Leon Westgate* Leon.Westgate@standardbank.com James Zhang* Jinzhong.Zhang@standardbank.com Marc Ground, CFA* Marc.Ground@standardbank.com Following last week s OPEC meeting, the market is anticipating that Saudi will be push more crude to the market. As any incremental crude production from Saudi is likely to be heavy sour grades, the benchmark for this type of crude, the Dubai contract weakened further relative to Brent. Consequently, the Dubai/Brent spread has reached the level seen during Commodity price data (13 June 2011) Base metals LME 3-month Close High Low Daily change Change (%) Cash Settle Change in cash settle Cash - 3m Aluminium 2,595 2,590 2,608 2, % 2, Copper 8,905 8,912 9,003 8, % 8, Lead 2,525 2,536 2,550 2, % 2, Nickel 22,410 22,275 22,375 22, % 22, Tin 24,625 24,800 25,750 24, % 24, , Zinc 2,242 2,247 2,261 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil % API2 Q3' % ICE EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFP's Gold 1, , , , , /0.1 Silver /-1.5 Platinum 1, , , , , /4.0 Palladium /1.5 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Focus: Aluminium tom-next metronome continues to tick Since the aluminium nearby spreads first started to show significant tightness, around the August-10 to September-10 spread, it appears the tom-next spread has settled down into a regular 3-month pattern. The spread has flared out from a small contango to significant backwardation on the approach of the third Wednesday prompt date for December-10, March-11 and now June-11. Whether this pattern continues and another tightening in the spread emerges on the approach of the September prompt date remains to be seen, particularly with participants perhaps anticipating the move. Aluminium Tom-Next spread $/mt Dec-09 to current Nevertheless, the latest LME Futures bandings data still shows the presence of large long and short positions in the June date - which may be rolled further along the curve - and the presence of a dominant position holder of warrants, albeit down in the 40-49% band. Therefore, with physical demand for metal remaining robust, as evidenced by strong regional premium s, episodes of tightness in the nearby spreads are likely to remain a feature of the market for some time to come. 0-5 Dec-09 Mar-10 Jun-10 Source: Standard bank; Bloomberg Sep-10 Dec-10 Mar-11 Jun-11 By Leon Westgate Base metals The base metals reacted positively to the Chinese data overnight, in particular the stronger than expected Industrial Production growth of 13.3% y/y. A weaker dollar also lent support, triggering a bout of short covering heading into the afternoon, with the market choosing to ignore another 50-basis point hike in Chinese bank reserve ratios, a record jump in the May CPI (+5.5% y/ y), higher than expected PPI (+6.8% y/y) and lower than expected Retail Sales (+16.9% y/y). Although the Chinese IP figure was stronger than anticipated, suggesting the economy is doing well in spite of the recent monetary tightening, the figure seems a little anomalous given the recent slowdown in the Chinese manufacturing PMI figures (still above 50 indicating expansion, but trending lower). With inflation remaining a major problem - one that requires further aggressive action - we remain concerned about Chinese growth, particularly if strong metal production figures are masking a deterioration in manufacturing demand. The downgrade of the Greek debt rating by S&P to CCC (currently vulnerable to a default and dependent on favourable business, financial and economic conditions to meet financial commitments), had little impact on either the dollar or on commodity prices. The dollar-euro may in fact become a distraction over the coming days as the relative problems in Europe and the US vie for dominance. Nevertheless, risk factors appear to be mounting, with the metals looking set for another volatile couple of weeks as developments in Europe and elsewhere unfold. Chinese lead production fell dramatically in May, falling 16% m/m. While the headline figure seems rather drastic, the fall is in response to a shutdown of many lead-acid battery makers (lead consumers), following a recent government clampdown on pollution. Consequently, inventories are unlikely to build significantly, with production likely to improve once Chinese battery makers start to come back on-line (albeit perhaps after some consolidation in the industry). China producers around ktpy more refined lead than it consumes, however, LME inventories are at the highest level in well over a decade and are well placed to meet any temporary shortfall in Chinese exports. Copper prices rallied sharply following the Chinese IP data, triggering short covering as it rallied back above $9,000. The metal has run out of steam a little heading into the afternoon however, with the market remaining nervous heading into the afternoon. Meanwhile, Chinese copper production fell m/m in May, coming in at 439 kt. This is still 10% higher in y/y terms however, with strong domestic production a key factor in terms of reducing the country's reliance on refined imports so far this year. On a ytd basis, domestic copper production is now up 14.4% y/y, compared to a 15.2% y/y increase in copper products during the same period. 2 By Leon Westgate

3 Yesterday s downward pressure on precious metals has eased off as concerns over the Eurozone debt situation and global inflation have re-emerged. The recent downgrade by S&P has put Greece s sovereign debt rating at the lowest level of any country, as the agency has cited an increased likelihood of default. This has raised anxiety in markets, enhancing the safehaven appeal of precious metals, especially gold and silver. Chinese price data has also prompted a renewed fear that inflation could erode the value of investments, pushing investors into precious metals as a more reliable store of value. Consumer inflation in China rose to 5.5% y/y, the highest level since July Producer inflation which remained steady at 6.8% y/y is still considered high. In response to stubborn inflationary pressures the Chinese central bank raised reserve requirements by 50 bps this morning. According to our analysis, changes in Chinese monetary policy (especially reserve requirements) have limited impact on precious metals prices, with base metals more harshly affected. Gold support is at $1,509 and $1,499. Resistance is at $1,531 and $1,543. Silver support is at $34.27 and $33.54, resistance is at $36.02 and $ PGMs are largely benefiting from the renewed interest in precious metals, although not to the extent of gold and silver. A slight slowdown in Chinese industrial production (13.3% y/y in May, from 13.4% y/y in April) as well as dismal Japanese industrial activity data could be weighing on the platinum and palladium. While the Japanese data is not surprising it still serves to refocus attention on the uncertainties surrounding the economic recovery from March s disaster. Platinum support is at $1,787 and $1,769, resistance is at $1,829 and $1,852. Palladium support is at $786 and resistance at $810. By Marc Ground WTI fell further yesterday, while Brent held up strongly despite an intraday sell-off. Net for the day, front-month WTI lost $1.99/ bbl, to settle at $97.30/bbl, while front-month Brent gained 32c/bbl, to close at $119.10/bbl, which pushed the spread between WTI and Brent to a record $21.8/bbl. Despite the weakness on the flat price WTI, the term structure barely moved, which might suggest that the widening WTI/Brent spread has not necessarily been caused by concerns over Cushing storage. Meanwhile, Brent term structure strengthened on lower North Sea production and Shell s force majeure on Bonny Light cargoes. On oil products, Nymex Heating oil was broadly unchanged yesterday, while Nymex RBOB gasoline weakness slightly. This morning, China raised the bank reserve ratio by 50 bps again as inflation remained heated. China s May CPI and PPI came in at 5.5% y/y and 6.8% y/y, while industrial production remained strong, at 13.3% y/y. As our analysis reveals, Chinese monetary policy changes have limited impact on the oil market, at least in the short term. Following last week s OPEC meeting, the market is anticipating that Saudi will be push more crude to the market. As any incremental crude production from Saudi is likely to be heavy sour grades, the benchmark for this type of crude, the Dubai contract weakened further relative to Brent. Consequently, the Dubai/Brent spread has reached the level seen during However, there is abundant spare refining capacity today compared to 2008, particularly conversion and desulphurisation capacities. It is likely the Dubai/Brent spread might have over-blown as refining margin for sour grades outperforms that for sweet crude. The Brent was supported by the news yesterday that Shell declared force majeure on its June and July Bonny Light crude loading. Despite the headline bullishness, we believe only a very small number of cargoes of Bonny Light crude are likely to be affected. More importantly, the premiums of WAF crude over Brent have failed to strengthen on the back of the news. In the financial market, S&P downgraded Greek sovereign debt rating by three notches and signalled strong possibility of a default. However, the euro moved higher yesterday. As we noted in our Weekly last week, the Eurozone crisis is a debt and fiscal crisis not a currency crisis, therefore, it does not have to drag the euro down. Today, US PPI, CPI and retail sales will be in focus following the recent softening in US economic data. In the near term, we see increasing downside risk in oil prices on the back of a softening economy and sluggish physical market. By James Zhang 3

4 Base metals Daily LME Stock Movement (mt) Metal Today Yesterday In Out One day change YTD change (mt) Cancelled warrants (mt) Cancelled warrants (%) Contract turnover Aluminium 4,631,200 4,636,925 3,000 8,725-5, , , ,956 Copper 473, , ,650-2,075 96,125 16, ,044 Lead 321, , ,450 2, ,284 Nickel 112, , ,166 5, ,434 Tin 21,930 22, , ,307 Zinc 865, , ,925 12, ,605 Shanghai 3-month forward prices COMEX active month future prices Metal Open Last 1d Change Open Close Change Change (%) Aluminium 17,080 17,080 0 Ali Sep' Copper 67,150 67, Cu Sep' % Zinc 17,370 17, ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 17,423 60,539 17, , ,428 15, month 17,868 61,481 17, , ,088 15, futures pricing Price Change Price Change Price Change Price Change Price Change 1 month 2 month 3 month 6 month 1 year Sing Gasoil ($/bbbl) Gasoil 0.1% Rdam ($/mt) NWE CIF jet ($/mt) 1, , , , , Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q3-11 Q4-11 Q1-12 Cal 12 Cal 13 API2 (CIF ARA) API4 (FOB RBCT) 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 MA 200-day MA Support Resistance Gold , , , , , , Silver Platinum , , , , , , Palladium Active Month Future COMEX GLD COMEX SLV NYMEX PAL NYMEX PLAT DGCX GLD TOCOM GLD CBOT GLD Aug'11 Jul'11 Jul'11 Jul'11 Aug 11 Apr'12 Aug'11 Settlement 1, , , , , Open Interest 498, ,630 21,890 37,304 2, ,780 2,088 Change in Open Interest Sources: Standard Bank; LME; Bloomberg 4

5 Forecasts Base metals Base metals LME cash prices (US$/mt) Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg Aluminium 2, Copper 9, Lead 2, Nickel 26, Tin 29, Zinc 2, front-month prices Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg WTI ($/bbl) Brent ($/bbl) ICE Gasoil ($/mt) Nymex RBOB Gasoline (c/gal) API2 Coal Cif ARA ($/mt) API4 Coal Fob Richards Bay ($/mt) spot prices (US$/oz) Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg Gold 1,388 1,440 1,500 1,435 1,430 1,450 Silver Platinum 1,793 1,800 1,750 1,950 1,850 2,000 Palladium Rhodium 2,400 2,300 2,400 2,700 2,500 3,000 Source: Standard Bank 5

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