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1 : Daily Focus: SHFE LME arbitrage narrower but still negative 15 April 2011 Focus: The weakness in the LME copper prices over the last week has seen the differential between prices on the SHFE and LME narrow in recent days. The SHFE price has nevertheless also come under quite heavy pressure with the arbitrage window remaining firmly shut. It has been more of a mixed bag this morning for the base metals complex, with aluminium, nickel and tin managing to move higher while copper zinc and lead have come under further selling pressure. With the exception of copper, thin volumes are again a feature for much of the rest of the complex. During late afternoon trade yesterday, precious metals, in particular gold and silver, enjoyed support from growing fears of rising inflation and extended dollar weakness. The trade-weighted dollar index drifted to a low of around 74.7, a level last seen in December Investors have been drawn to the euro in anticipation of a widening US-Eurozone interest rate differential. Unexpectedly high Chinese inflation figures should support precious metals markets on inflation-hedge buying. 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 Oil had a mixed day yesterday as WTI continued its recovery, while Brent showed signs of weakness. Net for the day, front-month WTI gained $1.00/bbl, to settle at $108.11/bbl. May Brent contract expired yesterday and settled at $122.36/bbl, a 52c/ bbl decline from the day before. Oil products most followed Brent and ended the day lower, with RBOB gasoline holding up better than distillates on the relative strength of fundamentals. Commodity price data (14 April 2011) Base metals LME 3-month Open Close High Low Daily change Change (%) Change in cash Cash Settle settle Cash - 3m Aluminium 2,642 2,644 2,673 2, % 2, Copper 9,355 9,411 9,512 9, % 9, Lead 2,615 2,614 2,663 2, % 2, Nickel 25,800 25,850 26,400 25, % 26, Tin 32,175 32,225 32,700 32, % 32, Zinc 2,383 2,400 2,427 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil 1, , , , % API2 Q2' % ICE EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFP's Gold 1, , , , , /1.1 Silver /2.0 Platinum 1, , , , , /4.0 Palladium /1.5 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Daily 15 April 2011 Focus: SHFE-LME arbitrage narrower but still negative The weakness in the LME copper prices over the last week has seen the differential between prices on the SHFE and LME narrow in recent days. The SHFE price has nevertheless also come under quite heavy pressure with the arbitrage window remaining firmly shut. SHFE forward curves (Rmb) and LME equivalent At the beginning of the week, the arbitrage loss per tonne for the moist liquid Jun-11 contract was around $335. This has since narrowed to around $163/mt this morning. Taking into account taxes and currency rates, some far-dated SHFE contracts are trading above the LME equivalent numbers, albeit a mere $15/mt in the case of the Feb-12 contract. Its worth pointing out however that open interest and liquidity is so low in that portion of the curve that the arbitrage opportunity is more theoretical rather than actually achievable Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 SHFE inventories have continued to fall this week, dropping 6,578 mt to a 2-month low of 147,651 mt, however, regional physical premiums have also fallen back following the Japanese earthquake and increased hand to mouth activity in early April. CIF Shanghai premiums are now back around $10-$30/mt compared to $30-$50 a couple of weeks ago. While lower prices are expected to trigger increased Chinese buying activity, this has yet to translate to a re-opening of the arbitrage window. Instead it is likely that SHFE inventories SHFE- 15/04/2011 LME Equiv - 15/04/11 SHFE - 11/04/11 LME equiv - 11/04/11 Sources: SHFE; Standard Bank will take up any slack in the system, with a sustained increase in demand likely to be needed before the arbitrage window opens properly again. By Leon Westgate Base metals It has been more of a mixed bag this morning for the base metals complex, with aluminium, nickel and tin managing to move higher while copper zinc and lead have come under further selling pressure. With the exception of copper, thin volumes are again a feature for much of the rest of the complex. Looking ahead to this afternoon, the US CPI and Industrial Production data will be keenly watched (expected +0.5% and +0.6% respectively), while the performance of the US equity markets will again also be key in terms of dictating price direction for the base metals complex. The Chinese economic figures released overnight matched very closely with the leaked figures and rumours that were circulating the market yesterday. Whether a strong condemnation of the leaks by China s statistics bureau overnight results in tighter control of the figures and their dissemination going forward however remains to be seen. Nevertheless, economic growth remains very strong indeed with GDP growth coming in above initial expectations at 9.7%. IP growth also exceeded pre-leaked estimates at 14.8%, however inflation has also increased sharply with CPI coming in at 5.4% in March compared to 4.9% previously and expectations of a 5.2% increase. The higher than expected inflation figure means that further tightening measures are likely, particularly with the other economic figures suggesting the economy is strong enough to take it. As far as the metals are concerned, China s output of copper reached a record in March, climbing 24% y-o-y to 470,000 mt as increased concentrate availability and higher spot TC/RCs, following the Japanese quake, saw smelters raise their capacity utilisation rates. Higher Chinese domestic output has been another factor weighing on copper prices this morning, with the red metal trading back towards Thursday s intraday lows. 2 Chinese aluminium production also hit a record in March, coming in at million tonnes, as government power restrictions eased off. The impact on the price has been fairly limited however, perhaps with China now firmly established as the worlds largest producer and consumer of the metal and seen as a self contained unit from that respect. In that regard, SHFE aluminium inventories posted another fall this morning, declining 7,627 mt, with the decline alleviating any market concerns that increased Chinese production is being dumped onto the exchange. By Leon Westgate

3 Daily 15 April 2011 During late afternoon trade yesterday, precious metals, in particular gold and silver, enjoyed support from growing fears of rising inflation and extended dollar weakness. The trade-weighted dollar index drifted to a low of around 74.7, a level last seen in December After the ECB s rate hike last week and Fed members comments, together with the Fed s Beige book indicating that the US central bank would be staying the current course of monetary accommodation, investors have been drawn to the euro in anticipation of a widening US-Eurozone interest rate differential. Speculation that Chinese consumer inflation would be closer to 5.3% y/y (rather than the consensus expectation of 5.2% y/y) also pushed precious metals markets higher on inflation-hedge buying. As it turns out, China s price data revealed that consumer inflation for March stood at 5.4% y/y, well above expectations and the highest level since August Producer inflation also came in higher than expectations (consensus 7.2% y/y) at 7.3% y/y an indication of strengthening pipeline inflationary pressures. At the onset this contributed to further inflation-hedge buying, but since the darkens China s outlook for inflation it might raise the threat of more aggressive monetary conservatism by Chinese authorities (especially given that Q1:11 GDP figures were also unexpectedly strong). This could be bearish for commodities in general, although the effect on base metals could be particularly acute. Eurozone consumer inflation figures also bested expectations, coming in at 2.7% y/y for March (consensus: 2.6% y/y). This should provide support for precious metals from two angles, in that it both (a) heightens fears over rising inflation and (b) raises the prospect for further ECB rate hikes and consequently a weaker dollar. Gold support is at $1,458 and $1,444. Resistance is at $1,482 and $1,490. Silver support is at $40.86 and $39.77, resistance is at $42.62 and $ Platinum support is at $1,771 and $1,753 resistance is at $1,803 and $1,816. Palladium support is at $760 and resistance at $780. By Marc Ground Oil had a mixed day yesterday as WTI continued its recovery, while Brent showed signs of weakness. Net for the day, frontmonth WTI gained $1.00/bbl, to settle at $108.11/bbl. May Brent contract expired yesterday and settled at $122.36/bbl, a 52c/ bbl decline from the day before. Oil products most followed Brent and ended the day lower, with RBOB gasoline holding up better than distillates on the relative strength of fundamentals. WTI structure strengthened rather sharply with June/Dec spread moving up by almost a dollar, which also appeared to have caused WTI/Brent spread to narrow. In Europe, the latest ARA total oil product inventories fell by 436kt w/w, with inventory changes in gasoline/naphtha/gasoil/ kero/fuel oil at -65/-249/+1/-249/-82/-41kt w/w respectively. Despite the sharp decline in gasoil inventories, the current stock level for gasoline remains at seasonal highs, and is 31% higher that this time last year. In Singapore, the total oil product inventories declined by 304kbbl w/w, with changes in light distillate/middle distillate/residues at -322/-699/+717kbbl. The restart of some Japan s naphtha cracks is likely to have started to reduce the pressure on light distillate stocks. The latest data reveals that China s refining throughput in March came out at an equivalent of 8.9mbd, a 0.3mbd decline from February on the back of refining maintenance activities. The throughput also represents an 8% increase versus March last year, with productions for gasoline/diesel/fuel oil growing by 4.4%/9.3%/17% respectively y/y. The strong y/y growth in refining activities took place on a back of China s robust Q1:11 GDP, which grew by 9.7%. However, China s inflation appears to have been accelerating, with March CPI hit 5.4%, a 32-month high, which fuels speculation of further monetary policy tightening in China. Yesterday, the US Labor Department reported that weekly jobless claim reports numbers unexpectedly rose by 27k, to 412k, the highest in two months. The number does not represent a change of scene for the slowly improving job market in the US, rather it is a reflection of data volatility caused by quarter-end. Meanwhile, US March producer price index rose by 0.7% m/m, driven by high energy prices. The number came in lower than the expected 1% nevertheless, which is broadly positive for the market. There are more important US economic data release today, including CPI, Industrial Production (IP), consumer confidence and empire manufacturing survey, with the IP number being the most important for the oil market. As the market expects the data to show a continuous US recovery, a confirmation of this should support the oil market, while any weakness in the data could push the price down. Equally important, the Nigerian presidential election, scheduled for this Saturday, will keep the oil market on its toes. We believe that the oil market will be in a correction mode for a while in the absence of any new headline development; then we expect the oil market to regain its upward momentum on tightening market fundamentals. By James Zhang 3

4 Daily 15 April 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 4,569,125 4,571,200 1,525 3,600-2, , , ,676 Copper 450, ,925 1,925 1, ,250 15, ,460 Lead 283, ,400 3, ,450 75,575 3, ,270 Nickel 121, , ,490 9, ,225 Tin 19,025 18, , ,089 Zinc 763, ,050 26, ,675 62,300 5, ,758 Shanghai 3-month forward prices COMEX active month future prices Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,720 16, Ali May' Copper 71,300 70, Cu May' % Zinc 18,420 18, ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 17,987 64,092 18, , ,309 16, month 18,400 65,488 18, , ,254 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) 1, , , , , 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 , , , , , , Palladium Active Month Future COMEX GLD COMEX SLV NYMEX PAL NYMEX PLAT DGCX GLD TOCOM GLD CBOT GLD Jun'11 May'11 Jul'11 Jul'11 Jun 11 Feb'12 Jun'11 Settlement 1, , , , , Open Interest 511, ,065 21,422 35,838 1, ,580 2,184 Change in Open Interest 2, Sources: Standard Bank; LME; Bloomberg 4

5 Daily 15 April 2011 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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