kicking aluminium (can) down the roadpg.jrj.com.cn/acc/res/cn_res/indus/2014/4/7/...kicking...

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Global Metals Weekly

Kicking aluminium (can) down the road

Commodities | Global 07 April 2014

Global Commodity Research MLPF&S Michael Widmer +44 20 7996 0694 Metals Strategist MLI (UK) [email protected] Francisco Blanch +1 646 855 6212 Commodity & Deriv Strategist MLPF&S [email protected] Peter Gross +1 646 855 2330 Commodity Strategist MLPF&S [email protected] Peter Helles +44 20 7996 8154 Commodity Strategist MLI (UK) [email protected] Kranthi Gade +1 646 855 4765 Commodity Strategist MLPF&S [email protected]

Chart 1: Disintermediation on LME is a serious issue: the physical market tightens, but LME prices fall

Source: Bloomberg, BofA Merrill Lynch Global Commodity Research

LME wants to do the right thing, but is not allowed for now

Aluminium inventories have been consolidated in largely two locations, which is an issue given warehouses have to deliver out only a minimum tonnage per day and location. The resulting queues led to a disintermediation on the London Metal Exchange (LME), i.e. rather than tapping the exchange’s stocks as a market of last resort, buyers are purchasing through traders. This is one reason behind the steady increases of physical premia at the same time as LME quotations have been trending lower. Acknowledging this is problematic, the LME was due to implement a new set of regulations that would have tackled the queues, but the exchange was stopped by the UK High Court of Justice.

New set of regulations could be even stricter In our view, there is no alternative to updating the regulatory framework for the LME. Hence, we believe the exchange could be exploring whether to appeal the court’s decision or to start a new consultation with market participants, either of which suggests the current status quo may persist for another 6-12 months. In its judgement, the High Court objected to a procedural issue, not necessarily the envisaged framework as such. Hence, we believe there is a probability that the revised framework could ultimately still be implemented, even if adjustments are made. There is now the added risk that a revised proposal may be more strict, touching on issues like rents payable while metal is held in queues, which would have a host of implications in our view.

Aluminium deficits in both 2014 and 2015 The ruling by the High Court means the current status quo on the aluminium market persists. This implies that disintermediation on LME remains an issue, which may limit upside to prices. By the same token, in an arbitrage-free market, premia should not trade meaningfully above essentially the product of queue length in days * rent per day; acknowledging this, physical premia are trading up to 50% above fair value at present, which is not sustainable, in our view. While LME warehousing problems have dominated aluminium trading in recent months, the physical market has been rebalancing and we forecast deficits for both 2014/15. Therefore, if it weren’t for the issues around the LME, we believe aluminium would be a very investable commodity.

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CR [email protected] Barbara Tong 04/07/14 09:47:13 AM CITIC Bank International

Globa l Meta ls Week ly 07 Apr i l 2014

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Kicking aluminium (can) down the road LME would have changed market for the better The London Metal Exchange (LME) is a key venue for aluminium trading. Yet, dealing on the LME has been distorted meaningfully since 2009, a point we have made in previous notes. Of course, these issues started when demand collapsed during the financial crisis and producers were looking to dispose of excess stocks (Chart 1 and Chart 2).

Chart 2: Producers have been reducing stocks…

Source: IAI, BofA Merrill Lynch Global Commodity Research

Chart 3: … which now hover at multi-year lows

Source: IAI, BofA Merrill Lynch Global Commodity Research

A substantial part of the excess aluminium was then delivered into LME warehouses, where market participants including financial institutions and traders financed these stocks. In financing deals, the buyer, typically a financial institution or trader purchases metal for instance at cash prices and simultaneously sells forward for instance at 3-months prices. If forward curves are in contango1, returns from these transactions can be positive, especially if reduced warehouse rents (aluminium needs to be stored) can be negotiated; of course, as the position needs to be funded, interest rates matter as well.

Inventory finance is an essential function of working capital management and as such the bread and butter of the London Metal Exchange. Chart 3 shows that the economics of inventory financing have stacked up well in recent years, which may explain the popularity of these deals.

Yet, financing deals have been hijacked when inventories were accumulated at the two locations of Detroit and Vlissingen (Chart 4).

1 Forward prices can be calculated through a cost-of-carry model, i.e. the cash price is the starting point, and holding costs (such as expenses for storage in warehouses or interest) are added. Holding benefits (e.g. from lending a metal) are deducted. Forward curves are normally in contango, i.e. future prices are higher than the cash price. However, future prices can fall below cash prices when markets are extremely tight. In such a situation, metal consumers are prepared to pay a convenience yield, i.e. spend more to have metal available immediately.

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Chart 4: Financing inventories remains a profitable business

Source: LME, Bloomberg, BofA Merrill Lynch Global Commodity Research

Chart 5: Inventories at Detroit and Vlissingen have risen sharply…


This is an issue because under current LME regulations, warehouses have to deliver out only a minimum of 3,000 tonnes per location and day if stocks stand above 900,000 tonnes. Given warehouses comply with the rule, consumers need to wait for 1.5 years to get hold of aluminium (Chart 5).

Chart 6: … and so have queues at these locations


Chart 7: Cancelled warrants have moved in line with premia

Note: A warrant is a bearer document reflecting ownership of metal in an LME warehouse. If an owner intends to remove metal from an LME warehouse, the warrant is cancelled. Source: Bloomberg, BofA Merrill Lynch Global Commodity Research

Warehouses benefit from the queues The queues have various implications, including those discussed in the following paragraphs.

Warehousing is also about premia, not just rents The traders who own warehouses (the supply chain has consolidated, so some market participants trade forwards on LME, own warehouses and deal in physical metal as well) can maximise their revenues along the supply chain:

Warehouses earn rents for every tonne of metal they store.

Queues have led to a significant tightening of the aluminium market, reflected

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in steady increases of physical premia2. Hence, if a trader/ warehouse owner delivers aluminium to consumers, rents may be forgone, but physical premia can be earned.

Warehouses with queues can pay incentives Meanwhile, market participants who hold aluminium in LME storage have to pay rent even if metal is in a queue. Hence, these queues have given warehouses especially in Detroit and Vlissingen some predictability over their likely rental income. In turn, this has enabled warehouse companies to pay incentives to attract even more metal, thereby exacerbating the existing problem (Chart 8; in essence, warehouses stand in direct competition with consumers bidding for aluminium; meanwhile, producers have an incentive to deliver into warehouses and lock up metal as this keeps the physical market tight and premia high).

Chart 8: LME inventories in Europe and the US remain high


Chart 9: The queues enable warehouse to pay incentives, which attracts even more metal and thus sustains the queues


Disintermediation on LME Switching tack slightly, rising queues have also led to disintermediation on LME, making it somewhat less interesting for consumers to tap the exchange as a market of last resort for material, but rather approach physical traders directly.

This is a key reason a gap between LME prices and physical premia has opened up in recent months (Chart 9 and Chart 10).

2 Physical premia have to be paid on top of the quoted LME price; they can include items such as transportation cost and insurance. However, they are also an indicator for the tightness of regional markets.

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Chart 10: Aluminium prices have been trending lower…


Chart 11: … with premia have taken most of the pressure from physical market tightness


Proposed LME regulations would have tackled issues at core Acknowledging this is problematic, the LME envisaged introducing a new set of regulations, which would have been phased in gradually (Table 1 and Table 2). Acknowledging that queues at LME warehouses are the core of the problem on the exchange at present, the new rules would have focused on linking load-out with load-in rates, or put differently, warehouses with a queue of more than 50 days would have been forced to ship more metal than they were receiving.

Table 1: Key dates under proposed LME regulations Period Timing Preliminary Calculation Period 01 July 2013 to 31 March 2014 First Calculation Period 01 April 2014 to 30 June 2014 Following Calculation Periods Quarterly after the end of the preceding calculation period Preliminary Discharge Period 01 May 2014 to 31 July 2014 First Discharge Period 01 August 2014 to 31 October 2014 Following Discharge Periods Quarterly after the end of the preceding Discharge Period Source: LME, BofA Merrill Lynch Global Commodity Research

Table 2: The LME would have gradually increased deliveries out of affected warehouses Preliminary Calculation Period Incremental load-out requirement is 0 at the beginning of the Preliminary Calculation Period. On each business day, the following will be added to the Cumulative Incremental Load-Out Requirement: Less the higher of either the Normal Daily Minimum Load-Out rate (3,000 tonnes) on the business and the

amount of metal loaded-out of the warehouse on the business day During the Preliminary Discharge Period, warehouses will need to load out the Cumulative Incremental

Load-Out Requirement in addition to the Minimum Load-Out Rate of 3,000 tonnes. First Calculation Period Incremental load-out requirement is 0 at the beginning of the First Calculation Period. On each business day, the following will be added to the Cumulative Incremental Load-Out Requirement: Amount of new metal placed on-warrant on the Business day in question above the minimum load-out-

rate During the First Discharge Period, warehouses will need to load out the Cumulative Incremental Load-Out

Requirement calculated during the First Calculation Period in addition to the Minimum Load-Out Rate of 3,000 tonnes.

Source: LME, BofA Merrill Lynch Global Commodity Research

In our view, these rules would have led to a gradual normalisation of the aluminium market. In particular, they would have closed the gap between LME prices and physical premia. Further to genuine market tightness (see below), this

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dynamic was one of the reasons behind our bullish view on aluminium for 2014/15.

UK High Court of Justice throws out implementation of new rules Yet, the rules were challenged and the UK High Court of Justice has decided to uphold certain aspects of the complaint, maintaining the current status quo on LME and delaying the implementation of a much needed improved regulatory framework.

Justifying its decision, the court highlighted it had found in favour of the complaint on a particular issue: when the LME engaged with market participants, the consultation should have encompassed or made reference to the option of banning or capping rents in queues (see above). Meanwhile, the judges did not take an explicit issue with the LME’s intention of increasing metal flow out of warehouses by linking load-in with load-out rates.

In reaction to the judgement, the LME highlighted that it has always been its intention to assess the viability of banning or capping rents in queues. The exchange added that there are a number of difficulties inherent in banning or capping rents in queues. Most notably perhaps, the warehouses are independent and not owned by the LME, which makes it challenging for competitive reasons to impose rents on stockists, especially in Europe. Acknowledging this is problematic, the LME also added that the Court has not expressed any opinion on the viability of banning or capping rents in queues, suggesting that there can be no assurance at this time that this would be achievable.

The London Metal Exchange is now exploring various options, including an appeal to the Court’s decision or a fresh round of consultations with market participants. In our view, this process could last 6-12 months. The outcome of another review is somewhat uncertain, but the revised rules may still be implemented, albeit with slight adjustments. This suggests that aluminium trading on LME will eventually normalise.

In addition to implementing the bulk or all of the original rules, we also see a small risk that the exchange may re-consider capping or banning rents under a new regulatory framework. While this would help create a level playing field among warehouses in attracting aluminium (stockists in Detroit and Vlissingen may no longer be able to pay incentives, see above), it could potentially affect revenues of traders and warehouses.

Base case for 2014: premia should fall, while prices may stabilise With normalisation of trading on the LME postponed, we see the following trajectory for premia and prices:

Premia spiked in recent months, partially because consumers delayed purchases in 2013, anticipating that new LME rules would reduce the tightness on physical markets. Yet, this did not materialise through 1Q and as users ran out of aluminium, the market saw some panic buying. Looking ahead and acknowledging that consumers can procure metal through a trader or the LME, a trader should not be able to charge more for metal on a sustained basis than the consumer would essentially have to pay booking metal through the LME, paying rent while the metal is slowly moving to the front of the queue. Chart 8 picks up on this, suggesting that a fundamentally justified premia is around $200/t, roughly 50% below current levels on the physical market.



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Prices may not break out of recent ranges, but should overall be supported given genuine supply shortfalls.

Market in deficit after a raft of output cuts The operating environment has been challenging for many aluminium smelters, who often survived only because high physical premia offset weak prices. As a result, many smelters in World ex-China have cut production especially at higher cost operations.

This is mirrored by Table 3, which shows production losses in North America, Asia, Europe and Oceania. China’s continued output increases are not necessarily a concern, given taxes make primary aluminium exports uneconomic.

Table 3: Producers in World ex-China have curtailed production (‘000 tonnes) Jan-Feb Jan-Feb YoY Annualised Annualised YoY Annualised MoM 2014 2013 change Feb-14 Feb-13 change Jan-14 change Africa 294 278 5.8% 1,799 1,799 0.0 1,837 -2.1% North America 759 789 -3.8% 4,706 5,019 -312.9 4,686 0.4% Latin America 298 343 -13.1% 1,825 2,008 -182.5 1,860 -1.9% Asia 385 420 -8.3% 2,386 2,555 -169.5 2,378 0.3% West Europe 558 609 -8.4% 3,507 3,468 39.1 3,403 3.1% East/Central Europe 605 721 -16.1% 3,741 4,211 -469.3 3,744 -0.1% Oceania 335 377 -11.1% 2,073 2,099 -26.1 2,072 0.0% Middle East 685 602 13.8% 4,328 3,819 508.4 4,156 4.1% China 4,171 3,465 20.4% 26,502 25,146 1,355.7 25,173 5.3% Other non-IAI nations 130 130 0.0% 847 847 0.0 765 10.7% IAI ex-China 4,049 4,269 -5.2% 25,211 25,824 -612.7 24,902 1.2% IAI Total 8,220 7,734 6.3% 51,713 50,970 743.0 50,076 3.3% Source: IAI, BofA Merrill Lynch Global Commodity Research

Picking up on these market dynamics, we now forecast a global market deficit in both 2014 and 2015. Hence, in our view these supply shortfalls make the aluminium industry very investable and once the LME has updated regulations, we believe prices should rally on a sustained basis.

Chart 12: The global aluminium market is shifting into deficits

Source: Woodmac, CRU, IAI, Bloomberg, Metal Bulletin, company reports, BofA Merrill Lynch Global Commodity Research

Chart 13: Many industrial nations are substantial aluminium importers

Source: Woodmac, CRU, IAI, Bloomberg, Metal Bulletin, company reports, BofA Merrill Lynch Global Commodity Research

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Appendix Table 4: Commodity prices, exchange rates, equity indices, yields and inventories

Base metals Cash, $/t 3-month, $/t Cash, WoW change 3-month, WoW

change Aluminium 1,786 1,822 4.1% 3.6% Copper 6,619 6,619 -1.0% -0.8% Lead 2,039 2,059 -0.3% -0.4% Nickel 16,342 16,385 4.3% 4.3% Tin 23,154 23,150 1.0% 1.2% Zinc 1,999 2,004 1.8% 1.4% LMEX 3,015 0.7% Cash, c/lb 3-month, c/lb Aluminium 81 83 Copper 300 300 Lead 92 93 Nickel 741 743 Tin 1,050 1,050 Zinc 91 91 Other commodities, freight, exchange rates, equities and yields Spot WoW change Gold, $/oz 1,305 0.9% Silver, $/oz 20.07 1.5% Platinum, $/oz 1,450 2.9% Palladium, $/oz 790 2.0% Iron ore, China fines cfr $/dmt 115.7 3.0% Molybdenum, canned molybdic oxide, $/lb 11.20 7.4% Brent, $/bbl 106.72 -1.2% Baltic Dry Index 1,205 -12.2% EUR/USD 1.3705 -0.3% Dow Jones Industrial Average 16,413 0.5% 10-year US Treasury yield 2.722 0.0% ML Commodity index, ER 455.996 -1.0% ML Commodity index Industrial Metals, ER 155.996 1.5% ML Commodity index Precious Metals, ER 173.910 -0.6% ML Commodity index Energy, ER 670.679 -1.6%

Exchange stocks and cancelled warrants Stocks, tonnes WoW change Canc. warrants,

tonnes Canc. warr., of

stocks Aluminium

LME 5,354,900 -0.6% 2,862,450 53.5% Shanghai 381,349 2.8%

Total aluminium 5,736,249 -0.4% Copper

LME 257,775 -3.5% 120,525 46.8% Comex 18,481 3.2% Shanghai 172,370 -11.0%

Total copper 448,626 -6.3% Lead

LME 6,619 -0.8% 375 5.7% Shanghai 0 -1.3%

Total lead 6,619 -91.8% Nickel 2,059 -0.4% -990 -48.1% Tin 16,385 4.3% 0 0.0% Zinc

LME 23,150 1.2% -3,000 -13.0% Shanghai 0 12.5%

Total zinc 23,150 1.2% Source: BofA Merrill Lynch Global Commodity Research



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Price forecasts Table 5: Base and precious metal price forecasts Current 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 2013E 2014E 2015E 2016E LT price Base metals Aluminium US$/t 1,786 1,720 1,750 1,720 1,900 2,000 1,940 1,847 1,772 2,010 2,200 2,730 USc/lb 81 78 79 78 86 91 88 84 80 91 100 124 Copper US$/t 6,619 7,054 6,500 6,750 7,000 6,750 7,050 7,332 6,826 6,903 7,013 7,122 USc/lb 300 320 295 306 318 306 320 333 310 313 318 323 Lead US$/t 2,039 2,094 2,006 2,249 2,480 2,535 2,250 2,139 2,207 2,446 2,632 2,398 USc/lb 92 95 91 102 113 115 102 97 100 111 119 109 Nickel US$/t 16,342 14,616 16,250 16,500 17,000 17,636 17,085 15,034 16,091 17,839 18,000 22,003 USc/lb 741 663 737 748 771 800 775 682 730 809 817 998 Zinc US$/t 1,999 2,028 1,950 2,100 2,400 2,100 2,535 1,910 2,120 2,407 2,500 2,232 USc/lb 91 92 88 95 109 95 115 87 96 109 113 101 Precious metals Current 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 2013E 2014E 2015E 2016E LT price Gold, nominal US$/oz 1,304 1,300 1,350 1,250 1,300 1,350 1,300 1,413 1,300 1,375 1,500 1,508 Gold, real US$/oz 1,300 1,350 1,250 1,300 1,317 1,268 1,413 1,300 1,341 1,428 1,300 Silver, nominal US$/oz 19.96 20.70 21.00 19.00 22.50 21.50 21.00 23.89 20.80 21.25 23.50 24.93 Silver, real US$/oz 20.70 21.00 19.00 22.50 20.98 20.49 23.89 20.80 20.73 22.37 21.50 Platinum US$/oz 1,450 1,440 1,475 1,600 1,700 1,700 1,700 1,488 1,554 1,775 1,899 2,064 Palladium US$/oz 790 750 800 800 817 850 850 726 792 850 900 1,032 Source: BofA Merrill Lynch Global Commodity Research

Table 6: Bulk commodities, exotic commodities and steel price forecasts Current 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 2013E 2014E 2015E 2016E LT price Bulk Commodities Hard coking coal US$/t fob 143 125 130 130 145 145 159 132 145 150 165 Low vol PCI US$/t fob 116 96 100 100 109 109 125 103 109 113 120 Semi-soft US$/t fob 104 85 88 88 96 96 114 91 96 98 104 Thermal Coal US$/t fob 76.50 78 70 72 75 90 90 82 74 90 90 105 Iron ore fines, spot US$/t CIF 116 120 110 105 105 105 105 135 110 105 100 100 Exotic commodities Uranium $/lb 34.00 35.00 40.00 50.00 55.00 60.00 65.00 39.30 45.00 63.75 70.00 67.85 Molybdenum $/lb 11.35 9.93 10.50 11.00 11.25 11.25 11.00 10.51 10.67 11.06 11.00 11.28 Ilmenite US$/t 208 226 271 260 251 Rutile US$/t 1,100 1,100 1,300 1,560 1,261 Zircon US$/t 1,250 1,350 1,500 1,500 1,156 Steel, HRC HRC, Europe US$/t 625 640 590 610 608 608 617 616 608 605 HRC, US US$/t 689 661 639 656 645 623 686 661 639 661 HRC, China US$/t 569 569 569 569 556 556 602 569 556 548 Source: BofA Merrill Lynch Global Commodity Research

Table 7: Energy price forecasts Energy Current 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 2013E 2014E 2015E 2016E LT price Brent US$/bbl 106.72 101.00 103.00 107.00 109.00 103.00 103.00 108.93 105.00 103.00 100.00 105.00 WTI US$/bbl 101.14 90.00 90.00 94.00 94.00 91.00 91.00 97.92 92.00 91.00 90.00 105.00 Henry Hub US$/MMBtu 4.44 3.90 3.70 3.80 4.20 4.50 4.50 3.73 3.90 4.50 4.50 4.92 Source: BofA Merrill Lynch Global Commodity Research



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Table 8: Fundamental rationale and risk 2014E 2015E Rationale Risks (U=Upside, D=Downside) Aluminium $1,772/t

80c/lb $2,010/t 91c/lb

Changes to LME regulations will be effective from 1 April 2014, with increased meta flow from 1 August 2014. Ultimately, this should reduce premia and increase prices.

Lengthening queues at LME warehouses, together with tight physical markets have led to spiking premia. This is a temporary phenomenon.

Producers continue to curtail production, which should prevent surpluses. We forecast a small deficit for 2014 and 2015.

D: Metal held released from financing deals, swamping the market. U: Traders play their cards well and keep the physical market tight. U: Stronger than anticipated demand growth.

Copper $6,826/t 310c/lb

$6,903/t 313c/lb

With global growth accelerating, demand is set to strengthen in 2014. Demand growth to be more balanced between China and World ex-China; events in the

US and Europe to remain market relevant. Whilst we anticipate increased mine supply, a glut is unlikely, in part because of supply

problems. We forecast a balanced market in 2014 and surplus for 2015.

D: China’s economy decelerates faster than anticipated for instance because problems on the money market escalate.

D: China’s financing deals unwind. U: Strong restocking through the supply chain on improved confidence. U: Production disruptions.

Lead $2,207/t 100c/lb

$2,446/t 111c/lb

Scrap market has been tight, although supply squeezes normalised in the US. A meaningful reversal of the structural tightening in the scrap market is unlikely.

Demand to hold up and expand at a steady pace in 2014 on the auto industry. Cold winter weather may add a kick to demand and prices.

We forecast a deficit in 2014


D: Destocking in China or higher lead exports from the country. U: Supply squeeze continues especially on the scrap market.

Nickel $16,091/t 730c/lb

$17,839/t 809c/lb

Producers in World ex-China have started to cut production on continued oversupplies and technological challenges.

Indonesia has implemented an export ban. While NPI producers have some ore stocks, they are unlikely to last for more than one year. Hence, we believe the market is rebalancing.

We anticipate a surplus in 2014 and a deficit in 2015.


D: Indonesia eases export ban. U: With the nickel market more consolidated now, producers could show

restraint in boosting output.

Zinc $2,120/t 96c/lb

$2,407/t 109c/lb

The zinc market has been oversupplied. However, surpluses have fallen consistently since 2009. Prices are close to production costs and long-term prices, suggesting limited downside from here onwards.

China’s zinc smelters have been under pressure; higher refined zinc imports supported the market in World ex-China.

The zinc market should move into deficit in 2014. Supply shortfalls to become more pronounced as several large mines come to end-of-life.


D: Unreported inventories exist on the zinc market. D: Miners, e.g. in China, could switch on mines. U: Subdued mine production increases; pressure on Chinese smelters.

Gold $1,300/oz

$1,375/oz

The business cycle puts gold in an uncomfortable position. Higher growth, rising nominal yields and subdued inflationary pressure have all limited investor buying.

Headwinds to EM to support gold price. Investors to lose their clout in the medium-term, as more affluent buyers in developing

nations are set to boost their gold purchases.

D: Real rates turn less negative still; strong equity markets. D: High gold prices deter buyers of physical gold; increased scrap

supply. U: Macro environment in EM continues to deteriorate. Gold may become

a safe haven asset again. Eurozone crises break out again. Platinum Palladium

$1,554/oz $792/oz

$1,775/oz $850/oz

Production in South Africa remains challenged; miners are affected by S54 stoppages and margin pressures. Russian production not to increase substantially in the coming decade.

Sustained rallies purely on supply issues are rare. Yet, we see scope for strengthening European and continued strong Chinese demand.

Rebound of demand from jewellers and auto catalyst producers to drive prices in 2013. We forecast a deficit in PT and PD for 2013.

D: Jewellery demand suffers due to rising prices. D: Chinese economy is affected by problems on money markets; Europe

does not emerge from recession. D: In palladium, the risk of deliveries from Russian stockpiles has not

gone away. U: Production disruptions reduce availability of PT and PD.

Iron Ore $110/t CIF

$105/t CIF

Iron ore benefitted from restocking by Chinese mills, which may put an end to further purchases. Relatively tight monetary policies may further exacerbate lower Chinese purchases post CNY.

Supply increases from the Big-4 to become more visible from 3Q14. We forecast a surplus in 2014.

D: China’s steel production slowing sharply. U: Stronger Chinese demand, for instance due to restocking. U: Mine closures.

HCC Thermal coal

$132/t $74/t

$145/t $90/t

Continued crippling oversupply and subdued demand. The solution to the oversupplied market is to inflict further pain on producers via lower

prices, forcing them to curtail output. We expect Newcastle thermal coal prices to average $82/mt in 2014..

D: Lack of supply discipline U: Chinese steel production stronger (HCC) U: mine closures

WTI and Brent crude oil

$92/bbl $105/bbl

$91/bbl $103/bbl

We hold a moderately negative stance on global oil for 2014 as the market moves from being relatively balanced to slightly oversupplied. Further price strength in Brent crude oil may be limited given a big rebound in non-OPEC output, improved prospects for OPEC supplies and no acceleration in global

oil demand growth. We see Brent prices averaging $105/bbl in 2014, dipping to $90/bbl at some point. US crude oil markets will likely remain oversupplied next year. Strong shale oil production growth spells regional pipeline, refining and storage bottlenecks. We forecast

average WTI crude oil prices of $92/bbl in 2014 and still see a risk of $50 WTI in the next 12-24 months. The Middle East creates both upside and downside risks to prices. We see limited impact of the Iranian deal on global oil prices for now, and a partial removal of Saudi

barrels could limit any blow to prices to $5-8/bbl once Iranian barrels return to the market. Beyond 2014, we see less of a structural oil market deficit on softer EM activity and a rise in non-conventional oil supply. We see a growing risk that Brent moves down

structurally to a $90-100/bbl band. Source: BofA Merrill Lynch Global Commodity Research



11

Macro, momentum and market indicators Chart 14: Global cycle dial

Source: Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research

Chart 15: Copper prices relative to cycle stage


Chart 16: Pressure Indicator


Chart 17: Signal strength of Pressure Indicator


Chart 18: Global Financial Stress Index and sub-index


Chart 19: GFSI and copper Prices


9898.5

9999.5100

100.5101

101.5102

102.5

-0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5

Current Current - 1 month

Current - 12 months Current - 6 months Current - 2 months

Leading indicator OECD + major 6 non-member economies

Leading indicator OECD + major 6 non-member economies, MoM change

Downturn Expansion

Recession Recovery

-100%

-50%

0%

50%

100%

150%

200%

Expansion Downturn Recession Recovery

-30%

-20%

-10%

0%

10%

20%

30%

-1

0

1

Dec-99 Dec-02 Dec-05 Dec-08 Dec-11Investment signal; Buy = 1, Hold = 0, Sell = -1

-7-6-4-3-1124578

-1

0

1

Dec-99 Dec-02 Dec-05 Dec-08 Dec-11Investment signal; Buy = 1, Hold = 0, Sell = -1

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

03-Jan-14 24-Jan-14 14-Feb-14 07-Mar-14 28-Mar-14GFSI RISK FLOW SKEW

-0.5

-0.3

-0.1

0.1

0.3

0.56400

6800

7200

7600

8000

Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14Copper, US$/t (lhs)

Global Financial Stress Index (rhs, axis is inverted)



12

Cancelled warrants, % of LME stocks Chart 20: Aluminium

Source: Bloomberg

Chart 21: Copper

Source: Bloomberg

Chart 22: Lead

Source: Bloomberg

Chart 23: Nickel

Source: Bloomberg

Chart 24: Tin

Source: Bloomberg

Chart 25: Zinc

Source: Bloomberg

33%

35%

37%

39%

41%

43%

45%

47%

49%

07/2013 09/2013 11/2013 01/2014 03/201430%

35%

40%

45%

50%

55%

60%

65%

70%

07/2013 09/2013 11/2013 01/2014 03/2014

0%

10%

20%

30%

40%

50%

60%

07/2013 09/2013 11/2013 01/2014 03/201410%14%18%22%26%30%34%38%42%46%50%54%

07/2013 09/2013 11/2013 01/2014 03/2014

0%5%

10%15%20%25%30%35%40%45%50%

07/2013 09/2013 11/2013 01/2014 03/201410%

20%

30%

40%

50%

60%

70%

07/2013 09/2013 11/2013 01/2014 03/2014



13

Forward curves Chart 26: Aluminum, $/t


Chart 27: Copper, $/t


Chart 28: Lead, $/t


Chart 29: Nickel, $/t


Chart 30: Zinc, $/t


Chart 31: Gold. S$/oz


1,6001,7001,8001,9002,0002,1002,2002,300

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 6104-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

$/t

6,500

6,700

6,900

7,100

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 6104-Apr-14 03-Apr-1428-Mar-14 05-Mar-14

$/t

2,000

2,050

2,100

2,150

2,200

1 4 7 10 13 16 19 22 25 28 31 3404-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

$/t

15,20015,40015,60015,80016,00016,20016,40016,600

1 4 7 10 13 16 19 22 25 2804-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

$/t

1950

2000

2050

2100

2150

1 4 7 10 13 16 19 22 25 2804-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

$/t

1,300

1,350

1,400

1,450

1,500

1 2 3 4 5 6 7 8 9 101112131415161718192017-Mar-14 14-Mar-1410-Mar-14 15-Feb-14

$/oz



14

Arbitrage domestic CHina and LME prices, $/t Note: arbitrage includes adjustments for VAT and import/export taxes/duties

Chart 32: Aluminium, imports


Chart 33: Aluminium, exports


Chart 34: Aluminium, trading band


Chart 35: Copper, imports


Chart 36: Copper, trading band


Chart 37: Zinc, exports


-200

-100

0

100

200

300

400

Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14

Imports by China not benefitial: LME price higher than domestic Chinese price

$/t Imports by China benefitial: LME price lower than domestic Chinese price

-100

0

100

200

300

400

500

600

700


Exports from China benefitial: LME price higher than domestic Chinese price

Exports from China not benefitial: LME price lower than domestic Chinese price

$/t

140015001600170018001900200021002200


Incentive price channel

Imports incentivised

Exports incentivised

$/t

-500

-300

-100

100

300

500

700


Imports by China benefitial: LME price lower than domestic Chinese price

Imports by China not benefitial: LME price higher than domestic Chinese price

$/t

5500

6000

6500

7000

7500

8000


Incentive price channel

Imports incentivised

Exports incentivised

$/t

-200

-150

-100

-50

0

50

100

150

200


Exports from China not benefitial: LME price lower than domestic Chinese price

Exports from China benefitial: LME price higher than domestic Chinese price

`

$/t



15

Implied and realised ATM volatility Chart 38: Aluminium


Chart 39: Copper


Chart 40: Nickel


Chart 41: Zinc


Chart 42: Gold


Chart 43: Silver


-5

0

5

10

15

20

25

May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14Implied Realised Implied - Realised

3M ATM implied and historic 3M realised volatilities

Percent

-5

0

5

10

15

20

25

30


3M ATM implied and historic 3M realised volatilities Percent

-505

1015202530



Percent

0

5

10

15

20

25



Percent

-20

-10

0

10

20

30

40


-30-20-10

0102030405060




16

Term structure implied ATM volatility Chart 44: Aluminium


Chart 45: Copper


Chart 46: Nickel


+ Chart 47: Zinc


Chart 48: Gold


Chart 49: Silver


15%

16%

17%

18%

1M 3M 15M 27M 63M04-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

11%

13%

15%

17%

19%

21%

23%

1M 3M 15M 27M 63M04-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

21%

22%

23%

24%

25%

1M 3M 15M 27M04-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

15%

16%

17%

1M 3M 15M 27M04-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

13%

15%

17%

19%

21%

23%

1M 3M 1Y 2Y 3Y04-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14

21%

22%

23%

24%

25%

26%

27%

1M 3M 1Y 2Y04-Apr-14 03-Apr-14

28-Mar-14 05-Mar-14



17

Metal skews Chart 50: Aluminium


Chart 51: Copper


Chart 52: Lead


Chart 53: Nickel


Chart 54:Zinc


Chart 55:Risk reversals during the past 2 years


15%

16%

17%

18%

19%

-10 -25 50 25 1004-Apr-14 03-Apr-1428-Mar-14 05-Mar-14

12%14%16%18%20%22%24%26%

-10 -25 50 25 1004-Apr-14 03-Apr-1428-Mar-14 05-Mar-14

16%

17%

18%

19%

-10 -25 50 25 1004-Apr-14 03-Apr-1428-Mar-14 05-Mar-14

21%

22%

23%

24%

25%

26%

-10 -25 50 25 1004-Apr-14 03-Apr-1428-Mar-14 05-Mar-14

16%

17%

18%

19%

-10 -25 50 25 1004-Apr-14 03-Apr-1428-Mar-14 05-Mar-14

0.5%

-3.5%

0.0% 0.6% 0.4% -1.2%

0.1%

-8%

-6%

-4%

-2%

0%

2%

4%

AL CU PB NI ZN XAU XAG

Max 3rd quartile Current Mean 1st quartile Min



18

Table 9: Global Commodity Research Publications - Past Topics* Date Publication Title 31-Mar-14 Global Metals Weekly Taking stock on China's copper and iron ore inventories 27-Mar-14 Global Energy Weekly Solid Gas 20-Mar-14 Global Metals Weekly China gets serious about reforms 20-Mar-14 Global Energy Weekly Another bad year for king coal 14-Mar-14 Global Metals Weekly Mining: going back to the roots 14-Mar-14 Global Energy Weekly One last year of LNG tightness 04-Mar-14 Global Metals Weekly Hedging China trust default with copper 04-Mar-14 Global Energy Weekly The Ukraine energy face off 03-Mar-14 Commodity Portfolio Monthly Curve Alpha Carry 26-Feb-14 Global Energy Weekly Heat up the World Cup 21-Feb-14 Global Metals Weekly Gold rises as the world stumbles 17-Feb-14 Global Energy Paper Medium term oil outlook 12-Feb-14 Global Energy Weely The end of US gasoline 11-Feb-14 Global Metals Weekly Lead rebalancing, but time spreads hae moved too early 05-Feb-14 Global Energy Weekly North American oil reigns supreme 03-Feb-14 Commodity Portfolio Monthly Hedging inflation under a strong USD 03-Feb-14 Global Metals Weekly Aluminium at critical crossroads 29-Jan-14 Commodity Derivatives Insights Natural Convesity 27-Jan-14 Global Energy Weekly US nat gas at crucial juncture 23-Jan-14 Global Metals Weekly Indonesia's export ban: impact on copper… 22-Jan-14 Global Energy Weekly WTI set to test $100 17-Jan-14 Global Metals Weekly China New Year: bullish copper 15-Jan-14 Global Energy Weekly All eyes on Saudi 09-Jan-14 Global Metals Weekly Gold and silver: headwinds persist for now 08-Jan-14 Global Energy Weekly Polar pig leaves US nat gas cold 02-Jan-14 Commodity Portfolio Monthly Commodities lag equities by most in 15 years 20-Dec-13 Commodity Derivatives Insights Delta-hedged strangle selling 20-Dec-13 Global Metals Weekly No silver lining as Fed tapers 18-Dec-13 Global Energy Weekly A ray of hope in German power 11-Dec-13 Global Energy Weekly Gasoline is a dog 04-Dec-13 Global Metals Weekly Switching iron ore into copper 04-Dec-13 Global Energy Weekly De-bottlenecking the Marcellus 02-Dec-13 Commodity Portfolio Monthly 2014 Commodity Index rebalancing 26-Nov-13 Commodity Strategist 2014 Commodity Outlook 26-Nov-13 Energy strategist 2014 Energy Outlook 26-Nov-13 Metals Strategist Metals & Bulks Outlook 20-Nov-13 Global Energy Weekly Tapering oil 19-Nov-13 Commodity Derivatives Insights Complacent commodities 13-Nov-13 Global Energy Weekly Another tight year ahead for LNG 07-Nov-13 Global Metals Weekly Zinc on a slow burner 06-Nov-13 Global Energy Weekly Brent set for shale aftershock 05-Nov-13 Commodity Portfolio Monthly Adding vol signals to momentum 30-Oct-13 Global Energy Weekly Jet fuel flying low 28-Oct-13 Commodity Derivatives Insights Commodity vol in futures vs. ETF options 28-Oct-13 Global Metals Weekly Turning point in vols? 23-Oct-13 Global Energy Weekly Light oil independence 16-Oct-13 Global Energy Weekly Another range-bound year ahead for US nat gas 13-Oct-13 Global Metals Weekly LME Week: stars are aligning for nickel 09-Oct-13 Global Energy Weekly WTI heading below $100 07-Oct-13 Global Metals Weekly Platinum inventories: rally inhibitor? 02-Oct-13 Global Energy Weekly From Russia with little love 01-Oct-13 Commodity Portfolio Monthly Price Momentum Reloaded 27-Sep-13 Global Metals Weekly Updating price forecasts: turning gold into zinc 25-Sep-13 Global Energy Weekly Iran unlikely to upset oil prices 23-Sep-13 Commodity Derivatives Insights Hedging inflation via options 19-Sep-13 Global Metals Weekly Nickel waiting for Indonesia 18-Sep-13 Global Energy Weekly A dismal outlook for refining 11-Sep-13 Global Energy Weekly Combating coal overcapacity 09-Sep-13 Global Metals Weekly How the Fed and Syria affect gold 04-Sep-13 Commodity Portfolio Monthly Signal-based call overwriting 02-Sep-13 Global Metals Weekly What drives iron ore prices? 30-Aug-13 Commodity Derivatives Insights Systematic strangle selling



19

Table 9: Global Commodity Research Publications - Past Topics* Date Publication Title 28-Aug-13 Global Energy Weekly Syria sets oil on fire 28-Aug-13 Global Energy Weekly Dry bulk freight turning the corner 21-Aug-13 Global Energy Weekly Still choking in natural gas 15-Aug-13 Global Metals Weekly Aluminium: shelter lost 13-Aug-13 Global Energy Weekly Oil interruptus 07-Aug-13 Global Energy Weekly Gasoil over gasoline 02-Aug-13 Global Metals Weekly Buy Europe, Sell Australia 01-Aug-13 Commodity Portfolio Monthly Commodity returns under rising rates 30-Jul-13 Global Energy Weely Limited upside to WTI 29-Jul-13 Commodity Derivatives Insights Commodity vols show no fear 26-Jul-13 Global Metals Weekly Nickel is not a trade on China only 24-Jul-13 Global Energy Weekly No relief this winter for European nat gas consumers 18-Jul-13 Global Metals Weekly From Feeding the dragon to feeble dragon? 17-Jul-13 Global Energy Weekly US propane over ethane, again 11-Jul-13 Global Energy Weekly Superbackwardation and the collapse of long-dated oil 09-Jul-13 Global Metals Weekly It is getting colder for aluminium producers 02-Jul-13 Global Energy Weekly US nat gas set to bottom out 01-Jul-13 Global Metals Weekly Gold: fear or greed 01-Jul-13 Commodity Portfolio Monthly Sector curve momentum 25-Jun-13 Global Energy Weekly EM slowdown set to hurt oil 19-Jun-13 Global Energy Weekly Winter gasoline to weaken despite RINs 19-Jun-13 Metals Strategist From growth to return and income 17-Jun-13 Commodity Portfolio Monthly Enharcing US nat gas returns 12-Jun-13 Global Energy Weekly No support for coal 10-Jun-13 Global Metals Weekly Survival of the fittest in lead 05-Jun-13 Global Energy Weekly A short revival for diesel 28-May-13 Global Energy Weekly Downgrading oil 28-May-13 Global Metals Weekly Bringing gold forecast in line with target 24-May-13 Commodity Derivatives Insights Manic gold 22-May-13 Global Energy Weekly Exporting the shale revolution 20-May-13 Global Metals Weekly Mining: steady state or steady growth? 15-May-13 Global Energy Weekly Asia to pull on Europe's LNG supplies 10-May-13 Global Metals Weekly Buying zinc with gold 07-May-13 Global Energy Weekly The Mexican standoff 01-May-13 Commodity Portfolio monthly Dynamic inflation hedging 01-May-13 Global Energy Weekly Europe's growing gasoline surplus 30-Apr-13 Global Metals Weekly Sustained disinflation or temporary metal weakness? 29-Apr-13 Commodity Derivatives Insights Transparent call overwriting 24-Apr-13 Global Energy Weekly Fade the rally in US natural gas 17-Apr-13 Global Energy Weekly Is oil re-pricing growth expectations? 16-Apr-13 Global Metals Weekly Gold capitulation 09-Apr-13 Global Energy Weekly Europe: Back to the dark ages 08-Apr-13 Global Metals Weekly Investors: more involved or less? 01-Apr-13 Commodity Portfolio Monthly Commodities for the long run 26-Mar-13 Global Energy Weekly Unbroken back 26-Mar-13 Global Metals Weekly Not a super-cycle, but still a cycle 22-Mar-13 Commodity Derivatives Insights Currency wars and commodity volatility 19-Mar-13 Global Energy Weekly Coal under pressure 15-Mar-13 Global Metals Weekly The big bang: CEO changes and capex reductions 11-Mar-13 Global Energy Weekly UK nat gas on the edge 05-Mar-13 Global Metals Weekly Headwinds to gold, delaying target 04-Mar-13 Global Energy Weekly Baltic Dry Index on a sustained recovery path 04-Mar-13 Global Metals Weekly Copper is still a cyclical asset 01-Mar-13 Commodity portfolio monthly Seasonal risks to curve alpha 26-Feb-13 Commodity Derivatives Insights A history of vol violence 25-Feb-13 Global Energy Weekly Gasoline on fire 20-Feb-13 Global Metals Weekly Shorting lead 18-Feb-13 Global Energy Paper Medium term oil outlook 17-Feb-13 Global Energy Weekly Can Iraq save the oil market? 10-Feb-13 Global Energy Weekly The great oil rotation 08-Feb-13 Global Metals Weekly Inventory finance: clean versus convoluted metals Bulk commodities, exotic commodities and steel price forecasts *Please contact us if you would like to receive copies of any of the above



20

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21

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