commodity daily briefing 102634710

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COMMODITIES RESEARCH 14 October 20

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 6

COMMODITY DAILY BRIEFING

Daily Focus

Geopolitical risks pose a major threat to the stability of the base metals sector, and in

particular to the functioning of supply-dynamics both currently and in the future. The

combination of political cycles, ideology, fiscal concerns alongside the unique

public/private tensions inherent in resource rent debates, contribute to the perennial

risk of geo-political developments feeding through into an impact on market

fundamentals. This can materialise itself in various ways, from mild taxation shifts to

the threat of nationalisation. For example, in 2010 we have witnessed the Australian

government attempt to drastically reform it mining tax royalty system, and now similar

moves are afoot in Chile, and it remains to be seen how this will feed through into

exploration and project development. Perhaps such moves to extract higher fiscalbenefits from mining sectors is unsurprising given the current environment of rising

metals prices and heightened market sensitivity to sovereign fiscal dynamics. The most

significant risk though, in our view, for the metals and mining sector, comes from the

Democratic Republic of Congo. The DRC has long received heightened attention first

because it is a country rich in mineral wealth, not least copper and casserite in terms of

base metals, but also due because of its unstable political climate – indeed the World

Bank ranks it as the second worst country out of 183 surveyed to do business in and

recent events have gone some distance to confirm such a ranking.

While the civil war in the DRC officially ended in 2003, the leadership of Joseph Kabila in

the intervening period has constantly seen periods of political instability and continued

threat of rebel insurgency, particularly in the eastern area of country. A mine contractreview that began in 2007 has yielded several 'victims', most notably First Quantum

(FQM), while Freeport McMoran's Tenke Fungurume copper mine is still under review.

In the case of FQM, 2010 has seen a serious degradation in its relationship with the

DRC government, which has resulted in rights to two of its facilities being revoked. The

company is now taking the government to court for arbitration in the US. September

also saw the president announce out of the blue (even to the country’s Ministry of

Mining) that it was shutting down the majority of tin mines in the east of the country.

While this could, in part, have been viewed as reaction to the Dodd-Frank Act clause,

which forced the creation of a chain of custody auditing process in respect of conflict

minerals in the DRC, US State Department officials commented that it could equally be

due to the fact that Kabilla was unhappy with how revenues have been distributed.

Perhaps most worrying is that US State Department officials consider President Kabilato be at his most unpredictable, which does not bode well. In addition, with a general

election approaching in 2011, risks associated with political jostling and possible

populist campaigning with regard to the mining sector, are only likely to increase, in our

view. While recent debt-cancellation measures have offered the springboard of further

economic progress, the political backdrop and social instability in the Eastern DRC

remain heightened and maximum risk should be attached to the country in terms of

potential disruptions. Importantly for base metals, and copper in particular where the

supply picture will remain firmly constrained for the next two years at least, the

heightened political risk negates the potential investment which is vitally needed.

FocusNicholas Snowdon: +1 212 526 7279

Surveying the geopolitical risks currently facithe mining and metals sector, the DRC remathe greatest risk.

Oil – Amrita Sen

The revision to global oil demand growth in2010 since the start of the year stands at aphenomenal 0.62 mb/d, taking into accountIEA, EIA, OPEC and our own balances.

Natural Gas – James Crandell

Natural gas markets settled higher in the neapart of the curve, but gains faded toward the

end of 2011.

Base metals – Gayle Berry

Tin hits a fresh record high of $26,875/t in abroad base metals rally as positive LME Weesentiment translates into price gains.

Precious metals – Suki Cooper

Gold prices set yet another all-time high whisilver tests its highest level in over thirty yearas investor interest remains robust.

Agriculture – Sudakshina Unnikrishnan

The rally in corn remains intact, in our view,with further gains in the offing. The EPA

approves a higher ethanol blend of E-15 forcars model year 2007 and onwards.

Key commodity price changes

13 Oct chang

WTI Crude Oil (US$/bbl) 83.0 1.6%

Copper 3M (US$/t) 8362 0.2%

Gold (US$/oz) 1371.1 1.6%

Reuters/CRB TR 299.7 0.6%

S&P GSCITM TR 4531.6 1.0%

S&P GSCI TM Energy TR 955.9 1.5%

S&P GSCI TM Ind. Metals TR 1846.1 0.2%

S&P GSCI TM Prec. Metals TR 1795.3 2.0%

S&P GSCI TM Agriculture TR 722.8 -0.6%

S&P GSCI TM Livestock TR 2153.5 -0.9%

Source: EcoWin, Barclays Capital



Barclays Capital | Commodity Daily Briefing

14 October 2010 2

MARKET VIEWS AND COMMENTS

Oil

EIA revises its demand and non-OPEC supply growth for 2010 higher in the latest STEO,

while keeps demand for 2011 broadly unchanged.

The strike in France continues, halting production at six out of France’s 11 refineries,

crippling European product markets.

Oil prices rose strongly yesterday, buoyed by the incessant increase in global oil demand,

with front-month WTI prices rising by $1.34 to $83.01/bbl and the equivalent Brent

contract gaining $1.14 to $84.64/bbl. Following the release of the IEA Monthly Oil Market

report, which made some significant upwards revisions to global oil demand and the call on

OPEC crude for 2010, the EIA’s short-term energy outlook followed suit, with the agency

revising 2010 demand growth higher by 110 thousand b/d to 1.73 mb/d. Here too, the

recent strength of OECD oil demand was highlighted, along with that seen in China,

underlying a tremendous recovery seen in the oil market. Indeed, following on from the

upside surprise in Q2 (when oil demand that quarter was in fact higher than that in Q1 in areversal of the usual seasonal norm), Q3 oil demand may well be stronger than Q4, such

has been the strength in the recovery in the OECD. While not necessarily containing any

long-term messages about seasonal patterns, it does signify the different phases of the

economic recovery cycle that both OECD and non-OECD countries have witnessed, with the

global oil demand picture looking extremely healthy at present. Though the OPEC

Secretariat continues to take a more cautious view on proceedings, global oil demand

growth for 2010 has been revised higher by 0.62 mb/d since the start of the year, taking

into account of IEA, EIA, OPEC and our own balances. Stripping out the OPEC figures, the

upward revision is even starker at about 0.73 mb/d. With most of 2010 now behind us, the

underlying health of oil demand would signal to us that the often highlighted market

concerns of the lack of demand is quite a misnomer. While non-OPEC supply growth has

also outstripped expectations, the scale of y/y growth has not been nearly as strong as thatseen in demand, resulting in a rise on the call on OPEC crude through the year. In the EIA

report, non-OPEC supply was revised higher for both 2010 and 2011, though the agency

continues to expect a decline in supply growth next year. Elsewhere, the French strikes

continue to cripple European product markets, as the strike at the ports is now being

complemented by a nationwide strike, resulting in six of France’s 11 refineries shutting

production completely, and three have halted product deliveries, along with widespread run

cuts everywhere. France’s main northern port of Le Havre is also out of operation currently,

while the vessel queue at the Fos-Lavera port is creeping up to 60. With no clear end in

sight, the European product market is likely to remain crippled for quite some time now,

until these issues are resolved.

Natural Gas Natural gas markets settled higher in the near part of the curve, but gains faded toward

the end of 2011.

Natural gas markets settled higher in the near part of the curve, but gains faded toward the

end of 2011. The November contract added 7 cents to $3.70/MMBtu. Calendar 2011

finished higher by a cent, at $4.48. Warm temperature anomalies that have depressed

demand of late should revert in the week ahead, with more normal temperatures taking

hold. Still, this Thursday's EIA injection is expected to be large, with the midpoint of




14 October 2010 3

consensus around 90 Bcf, well above the 60 Bcf injected during the same week last year. For

next Thursday's EIA release, current temperatures are contributing to what should be

another above-seasonal injection. Inventories could well close October at or above parity

with last year's level after falling more than 200 Bcf below last year's trajectory at points

over the past couple of months. EIA released its Short Term Energy Outlook (STEO)

yesterday, which lowered its expectations for natural gas prices by 18 cents, to $4.58 for

2011. However, it is currently forecasting an annual decrease in supply, based on a fallinglevel of drilling activity, which we consider optimistic. We remain unconvinced that

producers can pull back fast and far enough to avoid another year of production growth.

Cash prices were universally higher, with Henry Hub up by 18 cents to $3.58, SoCal Boder

up by 22 cents to $3.68, and Transco Zone-6 NY up by 21 cents to $3.90.

Base metals

Rio Tinto copper mine output fell by 19% y/y owing mainly to a large drop in output at

Grasberg. Escondida output also lower.

Codelco reported to be offering European premiums of $98/t for 2011.

The base metals ended strongly again yesterday as bullish sentiment during LME week

translates into positive price action. All the metals ended higher on the day apart from

aluminium, which fell by 0.8%. Tin continues to soar and has hit a fresh three-month record

high of $26,875/t while copper has topped $8,400/t with the upward momentum

remaining strong. Rio Tinto’s Q3 10 production results are reflective of an industry that is

struggling to grow copper concentrate production. Rio’s results showed a 19% y/y drop in

total copper mine output as a result of lower production at Grasberg in Indonesia, the

company’s joint venture mine with Freeport-McMoRan. Freeport is due to release its 100%

operating data for the mine on 21 October. The mine is suffering from lower ore head

grades resulting in a massive drop in output of 91% y/y and 84% q/q. Production at

Escondida in Chile also fell, down by 6% y/y and 10% q/q. Refined copper production

meanwhile was up by 46% y/y due to greater efficiencies at Kennecott Utah Coppersmelter. Primary aluminium production fell by 2% y/y and 1% q/q due to lower production

at Laterriere smelter in Canada following a power outage in July. The smelter has now

returned to full production. Reuters has reported that major copper producer Codelco is

offering premiums of $98/t to its European buyers for 2011, up from $80/t in 2010. An

increase in premiums was to be expected, in our view, given the tightness in metal

availability, declining stocks and poor supply outlook

Precious metals

Gold prices set yet another all-time high while silver prices test their highest level in over

thirty years.

Aside from modest profit-taking across gold ETPs, holdings remain close to their peak

while silver ETP holdings rocket to a fresh all-time high.

Prices gained upward momentum across the board yesterday as equity markets extended

their gains and the dollar weakened further against the euro to levels not seen since January

this year. Gold prices closed 1.6% higher at a fresh record high at $1371.1/oz while silver

outperformed its sister metals to close 3.1% higher at a fresh thirty-year high of $23.98/oz.

Some very modest profit-taking has emerged from the physically-backed gold ETPs, with

total holdings falling by 1.6 tonnes yesterday, but overall, the longer-term interest remains




14 October 2010 4

sticky, with total metal held in trust just 10 tonnes shy of the peak set at the end of

September. Indian wholesale demand has started shy away with local benchmark gold

prices breaching 20,000INR/10g for the first time, but despite record prices, appetite

remains healthy. Silver prices continue to ride on gold’s coat-tails, but the ETP interest is

more impressive. Physically backed silver ETPs rose by 40 tonnes yesterday taking total

metal held to a staggering 14,148 tonnes, with inflows for the month already at 389 tonnes

as retail interest remains ripe. For now, the short-term investor interest remains supportiveof gold prices testing new highs with our technical analysts noting gold in USD terms needs

a sustained break of $1368/oz. Prices have extended their gains in early trade this morning

with gold hitting fresh all-time highs and silver trading to levels not seen since March 1980.

In supply news, data from Statistics South Africa shows August bucked the recent trend

and gold and PGM output in South Africa rose by 3.7% and 22.7% y/y, respectively.

However, output for the year is still weaker in comparison to the same period last year, and

gold output is down by 6.3% y/y, while PGM output is down by 0.6% y/y. Industrial action

is likely to weigh upon PGM output in September with the strike action at Northam Platinum

which commenced on 5 September (talks resumed on 11 October) and more recently,

workers at Lonmin downed tools for the day of mourning this Wednesday, following a

fatality at the Rustenburg mine. Despite recovering PGM prices, PGM mine supply growth

has been limited, and in our view, prices will need to remain close to recent levels to support

growth in output.

Agriculture

The EPA approves a higher ethanol blend of E-15 (from a previous E-10) for cars model

year 2007 and onwards.

Both German and European cocoa grindings data decline in Q3 2010, by 4% y/y and

5.67% y/y, respectively.

Agricultural commodities closed on a mixed note yesterday. After the ferocious pace of

recent gains and hitting an intra-day high of $5.88/bushel (a high since August 2008), cornprices took a breather to edge modestly lower on the day. Corn prices this morning are

trading higher as are soybeans with wheat in contrast with recent moves, posting more

muted gains. The US Environmental Protection Agency (EPA) late yesterday announced an

upward revision to the US ethanol blend rate to E-15 from the previous E-10 for cars

produced model year 2007 and onwards. The much-delayed decision (it was due to be

announced first in December last year) is supportive for corn market sentiment but it has

been widely anticipated and is unlikely to change market perception significantly (as last

week's WASDE report did). Beyond the grains, ICE cotton prices closed at a fresh 15-year

high of 110.9 cents/lb. Bloomberg cited the China Cotton Association as saying that the

commercial cotton inventory in China was 107Kt in September, 98Kt lower than the

previous month. Supply disappointments, tight inventories and an economic recovery led by

Asian demand provides a very constructive price backdrop. ICE cocoa prices edged up to

close at $2867/t. Data released this morning by the European Cocoa Association showed

that Q3 European cocoa grindings data posted a 4% y/y fall to 331.182Kt, in contrast to a

12.6% y/y rise in Q2. In a similar vein, German Q3 2010 cocoa grindings data released by

the association of German confectioners BDSI this morning showed a decline of 5.67% y/y

to 92.74Kt. This is in stark contrast to a 11.2% y/y rise in Q2 and of 10.31% y/y in Q1 this

year. However, BDSI did add that the Q3 grind number was up 4.9% from Q3 2008 when

the economic slowdown started (Reuters).




14 October 2010 5

COMMODITY PRICES

Asia prices: Today’s close

Commodity

Close Daily change Close Weekly change Close Monthly change

Energy (DME/TOCOM)DME Oman Crude oil (US$/bbl) 81.21 0.8% 81.23 0.0% 75.05 8.2%TOCOM Crude oil (yen/kiloliter) 42,280 0.7% 43,240 -2.2% 41,170 2.7%TOCOM Gasoline (yen/kiloliter) 55,080 0.9% 55,250 -0.3% 50,750 8.5%Base metals (SHFE/TOCOM)SHFE Aluminium (RMB/t) 16,440 -0.1% N/A N/A 15,615 5.3%SHFE/LME Aluminium spread (US$/t)* 63 182.6% N/A N/A 156 -59.5%SHFE Copper (RMB/t) 63,540 1.1% N/A N/A 59,050 7.6%SHFE/LME Coppper spread* 1,063 9.5% N/A N/A 1,080 -1.5%SHFE Zinc (RMB/t) 19,310 1.1% N/A N/A 17,605 9.7%SHFE/LME Zinc spread* 465 3.7% N/A N/A 470 -1.0%Precious metals (SHFE/TOCOM)TOCOM Gold (yen/g) 3,610 0.9% 3,619 -0.2% 3,478 3.8%TOCOM Silver (yen/10g) 64.2 3.2% 62.2 3.2% 56.4 13.8%TOCOM Platinum (yen/g) 4,500 0.3% 4,592 -2.0% 4,401 2.2%TOCOM Palladium (yen/g) 1,576 0.6% 1,578 -0.1% 1,507 4.6%SHFE Gold (RMB/g) 297 1.5% N/A N/A 276 7.5%Agriculturals (TGE)Corn (yen/1,000kg or 1 metric ton) 24,320 0.5% 22,530 7.9% 23,730 2.5%Soybeans (yen/1,000kg or 1 metric ton) 45,850 1.2% 42,930 6.8% 43,290 5.9%Arabica coffee (yen/69kg bag) 25,100 -1.1% 25,290 -0.8% 26,760 -6.2%Robusta coffee (yen/100kg) 15,000 0.0% 15,000 0.0% 14,980 0.1%Raw sugar (yen/1,000kg) 47,920 2.0% 44,220 8.4% 44,300 8.2%

14 Oct 2010 07 Oct 2010 16 Sep 2010

Note: Prices reflect the most liquid contracts, ie, SHFE metals are based on the 3-month contract; all TOCOM and TGE commodities are based on the day session official close of the furthest forward contracts, except oil, which is the 2nd month contract; *SHFE/LME spread is based on yesterday's closing 3-month prices on SHFE and LME. Week agoSHFE prices unavailable due to public holiday. Source: Reuters, EcoWin, Barclays Capital

US and London prices: Last trading session’s close

Commodity

Close Daily Change Close Weekly Change Close Monthly ChangeEnergy: Nymex/ICE Front Month Prices

NYMEX WTI 83.0 1.6% 83.2 -0.3% 76.0 9.2%NYMEX Gasoline RBOB (US¢/gln) 216.6 2.0% 215.6 0.5% 196.3 10.4%NYMEX Heating Oil (US¢/gln) 230.1 1.7% 230.8 -0.3% 213.3 7.9%NYMEX Natural Gas (US$/mmbtu) 3.7 1.8% 3.9 -4.4% 4.0 -7.5%ICE Brent 84.6 1.4% 85.1 -0.5% 78.9 7.3%ICE Gasoil (US$/t) 725.5 0.4% 733.5 -1.1% 673.5 7.7%ICE Natural Gas (pence/therm) 47.3 -0.1% 46.8 1.1% 42.7 10.8%ICE Carbon Emissions EUA Dec 2010 (€/tn) 15.6 -0.8% 15.6 0.4% 15.4 1.4%Base Metals: LME 3M Prices (US$/t)Aluminium 2417 -0.8% 2365 2.2% 2154 12.2%Copper 8362 0.2% 8259 1.2% 7620 9.7%Lead 2435 2.5% 2316 5.1% 2238 8.8%Nickel 24400 1.5% 24800 -1.6% 23205 5.1%Tin 26775 1.0% 26250 2.0% 23150 15.7%Zinc 2410 1.7% 2334 3.3% 2145 12.4%Precious Metals: Spot Prices (US$/oz)Gold 1371.1 1.6% 1348.4 1.7% 1267.6 8.2%

Silver 24.0 3.1% 23.1 3.7% 20.6 16.6%Platinum 1704.0 1.7% 1709.5 -0.3% 1605.0 6.2%Palladium 593.0 2.2% 587.5 0.9% 553.0 7.2%Agriculturals:CBOT/ICE Front Month PricesCBOT Corn (US¢/bushel) 569.3 -1.7% 488.5 16.5% 495.3 14.9%CBOT Soybeans (US¢/bushel) 1176.5 -0.2% 1062.0 10.8% 1042.5 12.9%CBOT Wheat (US¢/bushel) 702.8 -1.0% 658.3 6.8% 726.8 -3.3%ICE Cocoa (US$/t) 2867.0 0.6% 2744.0 4.5% 2655.0 8.0%ICE Coffee (US¢/lb) 186.2 0.2% 175.6 6.0% 192.7 -3.4%

ICE Cotton (US¢/lb) 110.9 1.2% 102.7 8.0% 92.8 19.5%

ICE Sugar (US¢/lb) 27.5 0.2% 23.5 16.8% 23.8 15.4%

13 October 10 06 October 10 15 September 10

Source: Ecowin, Barclays Capital




14 October 2010 6

COMMODITY FORWARD CURVES

Figure 1: Oil Figure 2: US natural gas

75

80

85

90

95

1 11 21 31 41 51 61

Current One day ago One month ago

Months forward

NYMEX WTI Futures Curve ($/ barrel)

3.50

4.00

4.50

5.00

5.50

6.00

1 4 7 10 13 16 19 22

Current One day ago One month agoMonths forward

NYMEX Henry Hub natural gas futures ($/mmbtu)

Figure 3: Aluminium Figure 4: Copper

2,050

2,150

2,250

2,350

2,450

2,550

2,650

1 11 21 31 41 51 61


LME Aluminium prices ($/ tonne)

Months forward

6,000

6,500

7,000

7,500

8,000

8,500

1 11 21 31 41 51 61


Months forward

LME Copper prices ($/ tonne)

Figure 5: Nickel Figure 6: Zinc

21,000

22,000

23,000

24,000

25,000

1 5 9 13 17 21 25


Months forward

LME Nickel prices ($/ tonne)

2,100

2,200

2,300

2,400

2,500

1 5 9 13 17 21 25


Months forward

LME Zinc prices ($/ tonne)

Source: Barclays Capital




14 October 2010 7

COMMODITIES RESEARCH ANALYSTS

Barclays Capital5 The North ColonnadeLondon E14 4BB

Gayle BerryCommodities Research+44 (0)20 3134 [email protected]

Xin Yi Chen Commodities Research+65 6308 [email protected]

Suki Cooper Commodities Research+44 (0)20 7773 [email protected]

James Crandell Commodities Research+1 212 412 2079

[email protected]

Helima Croft Commodities Research+1 212 526 [email protected]

Paul HorsnellCommodities Research+44 (0)20 7773 [email protected]

Costanza Jacazio Commodities Research+1 212 526 [email protected]

Kerri Maddock Commodities Research+44 (0)20 3134 [email protected]

Roxana Mohammadian-Molina Commodities Research+44 (0)20 7773 [email protected]

Kevin NorrishCommodities Research+44 (0)20 7773 [email protected]

Biliana PehlivanovaCommodities Research +1 212 526 [email protected]

Amrita SenCommodities Research+44 (0)20 3134 [email protected]

Trevor Sikorski Commodities Research+44 (0)20 3134 [email protected]

Nicholas SnowdonCommodities Research+1 212 526 [email protected]

Sudakshina Unnikrishnan Commodities Research+44 (0)20 7773 [email protected]

Shiyang WangCommodities Research+1 212 526 [email protected]

Yingxi YuCommodities Research

+65 6308 [email protected]

Michael ZenkerCommodities Research

+1 415 765 [email protected]

Commodities Sales

Craig ShapiroHead of Commodities Sales+1 212 412 [email protected]

Jonathan WhiteheadCommodities Sales, Europe+44 (0)20 3134 2928

[email protected]

Martin WoodhamsCommodity Structuring+44 (0)20 7773 [email protected]

Peter RozenauersCommodities Sales, Non Japan Asia+65 9114 [email protected]



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