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1 : Daily Focus: Impact of Japan earthquake on the energy market 14 March 2011 Focus: Japan s devastating earthquake is likely to have two consequences: Firstly, the mix of Japan s electricity generation source will need to be rebalanced. Secondly, the shutdown of several oil refineries will affect refining margins, product cracks and Japan s oil import/export balance. However, we view the impact on the energy market as mixed and short-term. Initially, the base metals market s response to the Japanese quake was to focus on the negative impact to the economy and to demand. The base metals are holding up relatively well, however any bounce due to an expected rebuild effort seems premature. Oil declined further last Friday as general risk-off moves continued across several markets. 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 Gold and silver are benefiting from a renewed flight to safety in the wake of the earthquake in Japan. We believe that at an aggregate level, the impact on platinum and palladium demand should be muted as far as autocat demand is concerned. Auto production can be shifted from Japan elsewhere. Short-term demand from Japan specifically may slump as auto sales decrease. Commodity price data (11 March 2011) Base metals LME 3-month Open Close High Low Daily change Change (%) Change in cash Cash Settle settle Cash - 3m Aluminium 2,519 2,545 2,544 2, % 2, Copper 9,070 9,191 9,240 9, % 9, Lead 2,410 2,428 2,458 2, % 2, Nickel 25,500 25,955 26,000 25, % 25, Tin 29,350 29,500 29,850 29, % 29, Zinc 2,275 2,276 2,321 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil % API2 Q2' % ICE EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFP's Gold 1, , , , , /0.3 Silver /-1.0 Platinum 1, , , , , /2.0 Palladium /2.0 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Daily 14 March 2011 Focus: Impact of Japan earthquake on energy Last Friday, Japan was hit by a devastating earthquake, later upgraded to a Richter scale of 9.0 by Japan s Meteorological Agency. It triggered a large-scale tsunami, causing severe damage to many coastal installations, including nuclear power stations and oil refineries. From the most recent updates, approximately 9,700 megawatts of nuclear power generation capacity has been shut down, representing about 30% of Japan s total nuclear power generation capacity and 7% of Japan s total power generation capacity. About 1.5mbd of oil refinery capacity has also been halted, equivalent to about one-third of Japan s total refining capacity. We see the impact on the energy market coming from two aspects: Firstly, the mix of Japan s electricity generation source will need to be rebalanced. Japan relies on nuclear power for about one-quarter of its total electricity generation, while conventional thermal power accounts for 65% of total generation capacity. Of the 65%, coal, LNG and oil make up approximately 25%, 30% and 10% respectively. Due to high oil prices over the past few years, oil-fired power plants in Japan are used primarily as extra capacity to meet peak demand. With explosions in some nuclear plants and the subsequent radioactive scares, it s very likely that a significant amount of nuclear power generation capacity will remain shut for a long time. Given the existing mix, the supply shortfall from nuclear will have to be filled by coal, LNG and fuel oil. The rebalance should be supportive to these substitutive energy sources. That said, there is likely to be some shortterm demand drop due to general slow-down of economic activities and as short-term imports dip due to damaged infrastructure. Secondly, the shut-down of several oil refineries will affect refining margins, product cracks and Japan s oil import/ export balance. The damage to Cosmo Oil s 220kbd refinery at Chiba seems severe as fires continued there over the weekend, which could see the refinery remain out of operation for a long time. Several other refineries have also been reported as shut. These will support refinery margins and product cracks in general. However, we don t see significant upside in the margin and cracks, given abundant spare ca- Japan s oil product import/export balance kbd EXPORTS IMPORTS IM -300 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Gasoline Jet/Kero Gasoil/Diesel Sources: Japan FEPC, Standard Bank pacity in the global refining industry. The refinery shut-down also affects Japan s import/export balance. While Japan imports all of its crude oil, it typically exports around 200kbd gasoil/diesel and is broadly balanced on gasoline. It is also shown as net short in fuel oil during 2010, as the economy recovered (see graph). Within this context, the refinery shutdown is likely to cause more imports on gasoline and fuel oil and less export of middle distillates. The latest weekly Japanese oil inventories show gasoline and distillate stocks both at around historical seasonal lows. Therefore, it must rely on imports/exports to balance the change in domestic supply. We ve also analysed the oil product demand after the Kobe earthquake in 1995; the impact on oil demand from the earthquake was mixed and short-term. We expect coal, LNG and fuel oil, as substitutes for nuclear power generation, to be supported by the loss of nuclear power generation capacity. Refinery shutdowns in Japan are likely to boost refining margins and product cracks in general, and to have a knock-on impact on Japan s oil product balance. That said, there is likely to be some short-term demand drop due to a general slow-down in economic activity and a short-term import dip due to damaged infrastructure. By James Zhang Base metals Initially, the base metals market s response to the Japanese quake was to focus on the negative impact to the economy and to demand. The most immediate concerns surround the nuclear reactor problems and potential for a more significant accident and release of radioactive material should efforts to cool the reactor fail. Should the situation deteriorate, the markets will likely react very negatively once again. Overall however, the base metals have held up well, with the uncertainty over demand issues being offset by expectations of a rebuilding effort - though this is premature in our view. Physically and psychologically, the quake and tsunami will take some time to recover from, with the country likely to take many months to get back on its feet. As such, any rebuilding programme is many months away, with the priority for the next few days and months being search and rescue, provision of sanitation facilities, shelter, food, and the prevention of waterborne dis- 2

3 Daily 14 March 2011 eases. Only then, and after a thorough cleanup and structural assessment of damaged buildings, roads and bridges, will any reconstruction efforts start. As such a bounce on the back of a reconstruction programme seems a little premature. Short term, global equity markets and global economic indicators will remain key, while reduced metals demand will likely weigh on sentiment and prices. For the base metals, China s monetary policy and economy still remains key. In terms of how the base metals are affected by the quake, we have split the metals up into markets with large supply/demand differentials, like aluminium, copper and tin, and those where the markets are relatively self contained such as lead, nickel and zinc. For metals where Japan is only a small net exporter/importer, the biggest risk is the downturn in domestic demand. Japan is a small net exporter of lead, so, being essentially self contained, the main impact will be to consumption of the metal. The auto industry has been hit hard by the quake, therefore assuming a slower recovery from the demand side than production, lead exports may creep up over the coming months, until the auto industry is in a position to rebuild inventory and participants want to buy cars again. Similarly, Japan s nickel industry is also relatively self-contained with the country a small net importer of metal. The impact form the quake on battery and steel markets may be significant however, with stockpiles perhaps being run down or reexported until economic activity starts to normalise, perhaps via increased exports of stainless steel, until domestic demand recovers. Japan is large consumer of zinc, consuming ~ kt. It produces around 580 kt however and, as a result, is a significant albeit relatively small net exporter. The zinc smelting industry has been hit by the quake, with a number of facilities, including Toho Zinc s, Annaka smelter (140ktpy) and Mitsui Mining s Hachinohe smelter (112 ktpy) being closed. With large inventory overhangs however, and a slowdown in immediate Japanese demand, the impact on the market from the stoppages is likely to be fairly muted. Where things differ is for metals like tin. Japan is a large consumer of tin, used for solder in the electronics sector. Refined Tin imports were ~35 kt last year (around 10% of global consumption), nearly all of which was consumed. Refined exports were only 371 mt. A sharp downturn in electronics production (quake related and/or due to subsequent power cuts) would likely see tin stocks build up at manufacturers. The impact may not manifest itself quickly, however, reduced buying by Japanese consumers and potential de-stocking may see LME inventory remain higher than expected, and may result in fresh deliveries into the LME if stocks are sold down. Tin prices should therefore come under pressure, or at least be capped, though we note that reduced consumption may be partially offset by the impact of reduced production levels from Indonesia and Malaysia. The latest Indonesian production figures today show February exports fell 15.7% m-o-m to only 6,181 mt. For copper, Japan consumes around 1Mt of refined metal a year, while it produces around 1.5Mt. Of the net 500kt or so of exported metal, around half goes to China. On paper that statistic appears bullish, however, Japan is primarily a processing hub, with its smelters processing concentrate from Latin America and Indonesia, then exporting finished cathode. So far the Onahama smelter (~260kt) and Pan Pacific s Hitachi Works refinery (120 ktpy ) are reportedly affected, with power supply issues being the main problem rather than structural damage. With global smelter capacity utilisation rates running at around 80% however, it would be relatively easy for other smelters around the world to increase processing rates to compensate if needed. As such, the negative impact in terms of Japanese copper consumption looks to be more of a worry at the moment than reduced production rates, with the bias to copper prices appearing to remain to the downside, until the Chinese return to the market. Japan is a very large consumer and importer of aluminium, with net imports of aluminium and alloys coming in at around 2.7Mt. The main source of Japan s aluminium imports are Russia and Australia. Aluminium therefore looks potentially to be one of the worst affected metals following the quake, with domestic consumption likely taking a big hit. Ongoing power related problems should however also impact on production of primary metal (~1Mt) and semi fabricated products, thereby helping keep inventory in check and reducing the likelihood of metal being re-exported. This will facilitate a recovery once the rebuilding effort starts, however as noted above, a recovery is still a long way away. By Leon Westgate Oil declined further last Friday as general risk-off moves continued across several markets. The 9.0 Richter scale magnitude earthquake in Japan exacerbated the negative sentiment. Front-month WTI lost $1.54/bbl, to settle at $101.16/bbl, while frontmonth Brent weakened by $1.59/bbl, to close at $113.84/bbl. On the back of the weakness in flat prices, the term structures for WTI and Brent also weakened. In contrast, ICE gasoil term structure strengthened significantly, even though we re approaching 3

4 Daily 14 March 2011 the end of the winter. Net for the week, front-month WTI and Brent fell by $3.26/bbl and $2.13/bbl respectively. Although the situation in the Middle East and North Africa region (MENA) remains turbulent, the market has appeared to shifted its focus slightly away from it. Mixed economic news last week, high oil prices and the re-emergence of the European sovereign debt crisis heightened the concerns over the strength of the economy. The Japan earthquake has added to the woes. In Libya, Gaddafi army appeared to have made some advance, by taking over the oil town, Brega, over the weekend. Meanwhile, the Arab League called on the UN to enforce a non-fly zone over Libya, which increases the possibility of some form of international military intervention. However, limited signs suggest an intervention is imminent. In addition, large-scale protests were reported in Bahrain over the weekend. The latest weekly CFTC report shows that Money Managers increased their net length in crude by 3.7% w/w on 8 March (futures and options combined), which set a new record high after massive increases of 24.5% and 36.9% in the previous two weeks. The data shows extremely strong fund money flow into the oil market. The net long position held by non-commercials as a percentage of total open interest is recorded over 9%. CFTC also report that commercial hedgers net short position fell by 4.6% w/w as both consumers and producers appeared to slow down in their hedging activities. The strong fund money flows into the oil market have lent support to the oil market. However, historic data also suggests that the exodus of fund money could, equally, exaggerate downside moves. We expect coal, LNG and fuel oil, as substitutions for nuclear in power generation, to be supported by the loss of nuclear power generation capacity. Refinery shutdown in Japan is likely to boost refining margins and product cracks in general, and to have a knock-on impact on Japan s oil product balance. That said, there is likely to be some short-term demand drop due to general slow-down of economic activities and short-term import dips due to damages to infrastructure. For this week, the market will be loaded with economic news, including the Fed s policy announcement, US PPI, CPI and Industrial Production. More news will emerge on the full scale of the damage caused by the earthquake in Japan. We still see upside risks to the oil price and price volatility driven by the turmoil in MENA. However, we remain cautious about the shortterm impact on the market from any significant fund outflows from the oil market. By James Zhang Gold and silver are benefiting from a renewed flight to safety in the wake of the earthquake in Japan. Ongoing unrest in the MENA region is also contributing to uneasy investor interest. Over the next few weeks, further support could come from a weaker dollar, as Japanese financial institutions are forced to repatriate funds through the sale of dollar-denominated assets, in order to pay out insurance claims and rebuild the Japanese economy. New yuan loans eased substantially in February, and although this slowdown is partly seasonal it does indicate continued monetary tightening in China. This caused some price weakness in gold and silver, although this proved temporary, given the elevated levels of risk aversion. Gold support is at $1,410 and $1,397. Resistance is at $1,430 and $1,437. Silver support is at $34.48 and $33.21, resistance is at $36.59 and $ PGM, however, have fallen sharply due to the ramifications of the Japanese earthquake. The three largest Japanese car manufacturers have been forced to shut down plants. Toyota announced the closure of two factories, while Nissan and Honda said they had both closed four plants. This has raised serious doubts about the demand for PGM, prompting sharp losses in overnight trade. Japan accounts for almost 17% and 20% of global platinum and palladium demand respectively. We believe that at an aggregate level, the impact on platinum and palladium demand should be muted as far as autocat demand is concerned. Auto production can be shifted from Japan elsewhere. Short-term demand from Japan specifically may slump as auto sales decrease. However, ultimately damaged vehicles need to be replaced in the country. While some of the auto catalysts in damaged vehicles will be recycled, recycling is likely to lag demand once it picks up in Japan. Platinum support is at $1,746 and $1,737, resistance is at $1,776 and $1,795. Palladium support is at $742 and resistance at $772. By Marc Ground 4

5 Daily 14 March 2011 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 4,590,300 4,597, ,050-7, , , ,727 Copper 425, ,475 1, ,325 14, ,519 Lead 288, , , ,975 21, ,900 Nickel 128, , ,248 9, ,516 Tin 18,050 18, , ,898 Zinc 734, , ,650 4, ,774 Shanghai 3-month forward prices COMEX active month future prices Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,650 16, Ali May' Copper 69,600 68, Cu May' % Zinc 17,780 17, ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 17,300 62,838 16, , ,836 15, month 17,918 64,708 17, , ,692 16, 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 Q2-11 Q3-11 Q4-11 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 , , , , , ,776 Palladium Active Month Future COMEX GLD COMEX SLV NYMEX PAL NYMEX PLAT DGCX GLD TOCOM GLD CBOT GLD Apr'11 May'11 Apr'11 Apr'11 Apr'11 Feb'12 Apr'11 Settlement 1, , , , , Open Interest 515, ,677 22,634 37,841 1, ,417 2,365 Change in Open Interest 5, , Sources: Standard Bank; LME; Bloomberg 5

6 Daily 14 March 2011 Forecasts Base metals Base metals LME cash prices (US$/mt) Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg Aluminium Copper Lead Nickel Tin Zinc front-month prices Q1:11 Q2:11 Q3:11 Q4:11 Avg Avg WTI ($/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 1,370 1,440 1,500 1,435 1,430 1,450 Silver Platinum 1,850 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 6

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