COMMODITIES RESEARCH

8 July 2011

COMMODITIES WEEKLY
Sudakshina Unnikrishnan +44 (0) 20 7773 3797 sudakshina.unnikrishnan@barcap.com Kerri Maddock +44 (0) 20 3134 2300 kerri.maddock@barcap.com www.barcap.com

Commodity prices are mostly higher on the week. Oil prices have firmed and the latest weekly EIA data were very constructive on both the inventory and demand front. The surplus of US oil inventories (excluding 'other oils') has now fallen to its lowest level since December 2008 with the sharp reduction in products inventory the main contributing factor. Macro concerns continue to dominate base metals price action, although apparent progress in tackling the Greek debt crisis has offered the basis for a short-term relief rally. Corn prices, which came under significant pressure after last Thursdays USDA Acreage and Quarterly Stocks reports, have posted a modest recovery with recent price declines being met with an uptick in import demand especially from China with a key intent being to replenish domestic reserves.

Cross-commodities

Beijings central commitment to economic prosperity and high employment will continue to drive demand growth for commodities; Indian commodity demand growth is set to ease in the short term as economic activity slows, but supportive structural factors should limit the extent of the slowdown.

Energy

Diversion of drilling rigs to more lucrative oil opportunities is expected to pull gas-directed drilling low enough in late 2012 to cause natural gas supply to first plateau and then slide lower. This would mark a bullish turning point for gas; A carbon pricing scheme is due to be unveiled in Australia this week and could add to the mounting challenges faced by miners; our average annual price forecast for Brent in 2011 is unchanged at $112 per barrel, while our 2012 Brent forecast is increased by $10 to $115 per barrel; In a week when the price of carbon stabilised in a disappointingly low 13-13.50 /t range, the usual chorus of we need a central carbon bank rang through the air; The natural gas-directed rig count has fallen by 118 rigs since the peak of last year; Iraq Attacks on the rise as US departure looms.

Metals

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As miners respond to record levels of global demand, supply-side pressures are building leading to sharp increases in capital and operating costs.

Forecasts and data releases

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 21

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Commodity review
Commodity prices are mostly higher on the week. Oil prices have firmed and the latest weekly EIA data were very constructive on both the inventory and demand front. The surplus of US oil inventories (excluding 'other oils') has now fallen to its lowest level since December 2008 with the sharp reduction in products inventory the main contributing factor. Macro concerns continue to dominate base metals price action, although apparent progress in tackling the Greek debt crisis has offered the basis for a short-term relief rally. Corn prices, which came under significant pressure after last Thursdays USDA Acreage and Quarterly Stocks reports, have posted a modest recovery with recent price declines being met with an uptick in import demand especially from China with a key intent being to replenish domestic reserves. Our Energy Flash Oil market update: 2012 outlook released this week delineates our oil analysts detailed supply and demand forecasts for 2012 and changes to their oil price forecasts for 2011 and 2012. The 2011 price forecasts were last changed on 24 March, while the 2012 price forecasts have been unaltered since their initiation on 4 October 2010. The 2012 supply and demand forecasts show a continuation of robust emerging market demand. Global oil demand is expected to grow by 1.38 mb/d, with non-OECD demand rising by 1.57 mb/d. The main sources of demand growth in 2012 are expected to be China, India, Saudi Arabia and Brazil. Non-OPEC growth is expected to rise by 0.42 mb/d. Output growth is heavily concentrated in North and South America, and indeed outside the Americas non-OPEC output is set to fall in 2012. In terms of the global price level, our oil analysts leave their Brent forecast for 2011 unchanged at $112/barrel, while the 2012 forecast is increased by $10 to $115/barrel. The increase in the 2012 price forecast is based on a further narrowing of global spare capacity based on the balances, and by their view that the overall geopolitical context of the market is likely to become increasingly uncertain as 2012 progresses. The severe dislocation of WTI prices this year and the decoupling of WTI prices from both global prices and other US benchmarks has made the forecasting of the Brent-WTI differential fraught with difficulties and while our oil analysts still see the current size of differential as being exaggerated, they are now pricing in a far longer period of dislocation and a continuing lack of equilibrium relationships for WTI. As a result, their forecast for the average price of WTI in 2011 falls by $6 to $100/barrel. Those dislocations are also expected to hold back WTI relative to Brent next year, and their 2012 forecast for WTI lags that of Brent in rising by just $4 to $110/barrel. Price forecasts for later years are unchanged. Indeed, a key risk to the oil market remains tied to global geopolitical risks and in the latest Weekly Geopolitical Update we focus on rising violence in Iraq this summer, which is raising new concerns about the ability of local security services to maintain order when US troops depart at the end of the year. June was the deadliest month for civilians this year, with 340 killed while 14 US servicemen were killed in Iraq in June, making it the deadliest month for US troops in three years. A particularly worrying aspect of the latest unrest is that many of the attacks are occurring in Southern Iraq, which had been relatively peaceful in recent years. These incidents in the South have been linked to Shiite militias with ties to Iran. Several senior US officials have recently signaled a willingness to consider allowing some troops to remain if the Iraqi government requests that their stay be extended and even though Maliki reportedly wants to keep some US troops on hand, it will be politically challenging for him to get the approval of the Iraqi parliament. Moqtada al-Sadr has publicly warned that he will reactivate his Mahdi army and commence attacks on US troops if they remain on Iraqi soil next year. The current increase in violence comes at a time when Iraq has actually been experiencing a slow but steady increase in oil output. Having disappointed
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last year, when production remained largely flat y/y, Iraqi output has started 2011 on a reasonably strong footing. Nonetheless, Iraqs continued success depends largely on foreign companies which must operate in what is still a post-war conflict zone, and the lack of basic amenities and continuing militia violence keep the operating environment challenging. This weeks base metals piece highlights how capital and operating costs in the resources sector, and in particular in the metals and mining industry, are rising fast bringing back memories of the double-digit cost increases that characterised 2006-08; the financial crisis offered only a brief respite from structural supply-side pressures. As miners go full steam ahead to bring on new production in response to record levels of global demand these pressures are going to continue building, in our view. Cost drivers are diverse but the biggest effects have come from energy, exchange rate shifts, equipment costs and a shortage of skilled labour. The rising cost of meeting metals demand growth globally has implications for far forward metals prices, which arguably have already been demonstrated this year. Despite gyrations in front-end prices the far forwards have been more robust, with 63-month copper prices up by 8% since the beginning of the year, while 3-month prices are down by 3%. Focusing on emerging market demand implications for commodities, our cross-commodity pieces this week focus on developments in China and India. As Chinas economy continues its sustained advance and its society experiences rapid changes as a result, the social agenda facing policymakers has been in flux. In our view, the strong central commitment to economic prosperity and high employment, exemplified by plans to build massive infrastructural projects and cap unemployment, will continue to drive demand growth for commodities across the board. Here, we identify two elements of the socioeconomic background that impact on commodities: the rural-urban balance and the regional economic balance. In India, commodity demand is on a strong structural growth trend with the combination of urbanisation, industrialisation and rising incomes points to surging energy and industrial needs over the next few decades. Domestic commodity demand has accelerated markedly in recent years and, as India progresses along the path of economic development, this trend is set to continue. In the short term, however, the demand outlook is less unequivocally positive, as slower economic activity risks curbing the strong demand growth momentum. Tighter monetary conditions are beginning to be felt, particularly across ratesensitive segments of the economy such as discretionary consumption (eg, auto, consumer durables) and investments, which are all large commodities end-user sectors, particularly for metals. Yet, so far, there is little evidence in the data of any softening, suggesting structural dynamics might be outweighing cyclical ones. Aluminium consumption is growing at doubledigit rates, while copper demand bounced back in March following a subdued start to the year. In oil, domestic sales hit a new all-time high in April and y/y growth for the year to date is running in line with last years robust pace. Turning to the US natural gas market, our analysts take a detailed look at the current rig count. The natural gas-directed rig count has fallen by 118 rigs since the peak of last year. Although horizontal rigs have made up the majority of losses, on a percentage share basis horizontal rigs dominate the scene of natural gas production. Gas drilling continues to shift from the traditional shale plays to the newer and liquids-rich basins, such as the Eagle Ford and Marcellus. Natural gas supply growth could continue at lower rig count levels as rig efficiency keeps improving. Our US natural gas analysts continue to believe that at the current level (874 rigs), gas directed drilling should grow production incrementally. The turning point in North American natural gas supply, by their projection, is not expected to occur until Q4 12.

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COMMODITY SECTOR VIEWS

Energy
Oil
June was a month of two halves for the oil markets. The first half of the month focused on OPEC and the meeting that ended without a consensus on raising production. The second half saw the collective action by IEA member countries to release 60mb of SPR in 30 days. These events created significant volatility throughout the month with prices first buoyed in the aftermath of the failed OPEC meeting, and then a knee-jerk reaction downward following the IEA release, only to rebound in a week to pre-SPR levels. While the result of the OPEC meeting firms our fundamental views further, the SPR release does not alter our constructive view on oil markets as it is the equivalent of borrowing oil from the future to subsidise OECD demand. The IEA's action, we believe, puts pressure on producer consumer relationships. Possible implications of the release could include less keenness on increasing output by producers, a possible surge in prices when the 30 days are over and also artificially lowered prices further amplifying existing demand rather than toning it down. Given the noise at the front from uncertainties surrounding the IEA's actions in the coming months and possible continuing weak macroeconomic data, we expect prices further out on the curve to perform better.

US natural gas
Natural gas prices gained moderately over the past week supported by a warmer-thannormal weather outlook. This weeks EIA storage report showed a surprisingly high injection of 95 Bcf, much larger than the 78 Bcf consensus. The storage deficit to last year continues to narrow even with above-normal heat, a sign that North American natural gas production is still growing incrementally, adding downward pressure to the curve.

Coal
European coal prices were buoyed over the week, albeit trading in a narrow range, with API2 prices increasing by $1/t and API4 prices following suit though paring most of its gains by the end of the week. We believe planned strikes at South Africa's coal mines will not create any supply disruptions from RBCT as stocks are plenty. Supply issues are, however, seen developing in the Pacific Basin, with rainfall related production losses at Hunter Valley coal mines in June now resulting in longer vessel queues at Newcastle waiting to ship coal. On the demand front, Chinese stockpiles are ample and Chinese buyers will show greater resistance to higher prices. Rhine river levels are now closing in on seasonal averages and we expect German barges to pull coal from the ARA stocks more fluently if the river levels continue to improve at the current rate. We expect coal prices to be rangebound for most part of Q3 and to rebound in Q4.

Carbon
Carbon prices remain subdued after their hillside two weeks ago, with prices trading flat over the week around 13.50 /t. While we see little downside to prices at this point, there is also limited capacity for a significantly move up in carbon prices this year, in our view. With the key reason for the sell-off being the expected buoyant buy-side failing to materialise, it will be a big ask of prices to revert to the price levels seen in the past three months. With the market remaining structurally long, prices are likely to stand for some time at the bottom of the recent cliff wondering how to climb back up.
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Base metals
Macro concerns continue to dominate price action, although apparent progress in tackling the Greek debt crisis has offered the basis for a short-term relief rally across the complex. In terms of fundamentals, the supply side is shaping a more diverse picture across the base metals, and we expect this to lead to increasingly divergent price performances. We remain positive on copper and tin, and we expect these metals to recover strongly in H2 11. In the case of copper, we forecast weak mine supply growth this year with a risk of contraction due to an array of challenges reinforced by recent widespread disruptions at facilities. A pick-up in Chinese imports is the catalyst needed to take prices significantly higher and the draws in bonded warehouse stocks suggest to us this is an imminent effect. Aluminium prices remain well supported from strong global demand growth, energy-led cost inflation as well as from expectations of tightening long-term energy availability. In addition, the threat to Chinese production growth from power rationing offers a further upside risk. For lead, we expect the indefinite closure again of the worlds largest lead mine, Magellan, to provide support and for Chinese conditions to firm once battery manufacturing plants are reopened. We are neutral on nickel with the view that recent price weakness is overdone, but that recovering production will ease market tightness and lead to a moderate build in LME stocks. Zinc remains our least favoured metal, with continued deterioration in the fundamentals with big stock builds, a growing market surplus and sustained production growth.

Precious metals
Prices have extended their gains amid interest rate hikes, heightening in uncertainty surrounding European sovereign debt risks as well as weaker macro data. The external environment remains favourable for gold, and prices have sidelined the seasonal weakness in demand. If investor interest wanes, prices could be subject to a temporary correction before finding support from physical demand. Silver prices have struggled to retain upward momentum as weak underlying supply and demand dynamics coupled with hefty ETP outflows have trumped healthy coins demand from the retail sector. The PGMs are caught between potentially weaker supply and weaker demand. The biennial wage negotiations in South Africa and transfer of ownership highlight the potential for disruptions to mine supply and, in turn, pose an upside risk to prices; however, this is likely to be tempered by concerns over a slowdown in demand in Asia.

Agriculture
Corn prices came under significant pressure following the release of the 30 June USDA Acreage and Quarterly Stocks reports which were bearish, with 2011 US plantings estimated at 92.3mn acres, up from March's Prospective Plantings report and above market expectations while Q2 US corn stocks at 3.67bn bushels imply a very significant shrinking in feed demand. However, the recent correction in corn prices has been met with a slew of import demand especially from China with a key intent being to replenish domestic reserves. Further, scepticism has been growing over data findings in the USDA reports and the potential for downgrades in addition to strong import demand is providing prices with underlying support. The Acreage report was supportive for soybean, with acres pegged at 75.2mn acres - below both the 76.6mn acres in March's Prospective Plantings report and market expectations, and bodes well for new crop prices, in our view. ICE sugar prices have risen to four-month highs, with gains underpinned by production downgrades in Brazil and the long ship line-up there. In the short term, we expect sugar prices to gain further as while the market is still expecting a return to a surplus, recent concerns over the Brazilian crop on ageing cane and low sucrose content has seen continued mark-downs in supply estimates.
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CROSS COMMODITIES

Beijings central commitment to economic prosperity and high employment will continue to drive demand growth for commodities
This article is an excerpt from the Commodity Daily Briefing, 6 July 2011. As Chinas economy continues its sustained advance and its society experiences rapid changes as a result, the social agenda facing policymakers has been in flux. In our view, the strong central commitment to economic prosperity and high employment, exemplified by plans to build massive infrastructural projects and cap unemployment, will continue to drive demand growth for commodities across the board. Here, we identify two elements of the socioeconomic background that impact on commodities: the rural-urban balance and the regional economic balance. A key part of the socioeconomic agenda is the differing social and income dynamics between urban and the rural populations. The industrialisation occurring in major urban centers has long been drawing in surplus rural labour. However, there is regulation of that flow, mainly through the household registration system, which constrains the ability of rural migrant workers to permanently settle in urban areas. The flow of labour supply from rural areas has been capped as older migrant workers found they had to return to the countryside and some younger and better educated potential migrant workers have been less willing to move given their aspiration to better terms than were applied to previous generations of migrants. China is therefore experiencing shortages of younger and more educated migrant workers in some cases, for example for work on assembly lines in the eastern coastal cities. However, a structural shortage in specific locales does not imply an end to the labour surplus in rural areas. Since a significant proportion of the rural labour surplus is formed by middle-aged to elderly labourers who cannot fill the type of positions that require a slightly more educated workforce, the rural unemployment situation may not be fully flexible. According to a spokesperson for the Ministry of Human Resources and Social Security, last October, about 100mn surplus rural workers were waiting to be employed (Reuters). Beijing is set to resolve this dilemma, as well as remove any potential for rural concerns, by creating more training and employment opportunities, providing more benefits and reforming the household registration system. Another factor is the current position of the regional economic balance between the western and eastern regions of the country. As a result of the export-focused economic model, the more landlocked western regions, which account for roughly 70% of the land and 29% of the population, are significantly less developed than the coastal cities in the east. The authorities have therefore taken several initiatives to develop the west to resolve and alleviate some of the rural labour surplus by attracting more migrant workers into the western cities. As highlighted by Chinas 12th five-year plan, Beijing plans to continue to drive the development of the region through policies such as lower taxes, land credit and subsidies to attract manufacturers to relocate away from the coastal regions. Previous five-year plans have also shown that Beijing is set to increase government spending to build massive infrastructure projects and create more employment opportunities. All these endeavours will require huge inputs of commodities, and as a result we remain positive on the outlook for China as the key demand growth.

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CROSS COMMODITIES

Indian commodity demand growth is set to ease in the short term as economic activity slows, but supportive structural factors should limit the extent of the slowdown
This article is an excerpt from the Commodity Daily Briefing, 7 July 2011. Indias commodity demand is on a strong structural growth trend. As highlighted in our report, India: the next commodity power house, the combination of urbanisation, industrialisation and rising incomes points to surging energy and industrial needs over the next few decades. Domestic commodity demand has accelerated markedly in recent years (see chart) and, as India progresses along the path of economic development, this trend is set to continue. In the short term, however, the demand outlook is less unequivocally positive, as slower economic activity risks curbing the strong demand growth momentum. Tighter monetary conditions are beginning to be felt, particularly across rate-sensitive segments of the economy such as discretionary consumption (eg, auto, consumer durables) and investments, which are all large commodities end-user sectors, particularly for metals. Fixed capital formation grew by a mere 0.4% in Q1 11 compared with an increase of over 14% in 2010. Auto sales are also slowing and credit growth is projected to decelerate markedly in FY 11-12, according to our economists (for more details see The Emerging Markets Quarterly: Summer storms). In this context, commodity demand growth should start easing somewhat. Yet, so far, there is little evidence in the data of any softening, suggesting that structural dynamics might be outweighing cyclical ones. Aluminium consumption is growing at double-digit rates, while copper demand bounced back in March following a subdued start to the year. In oil, domestic sales hit a new all-time high in April and y/y growth for the year to date is running in line with last years robust pace. Indian coal imports remain well supported and beyond the summer when weather-related volatility tends to be high they should stay on a strong growth path, underpinned by robust demand growth in the power sector, partly on the back of capacity additions. Ahead, we expect softer economic activity to start chipping away at the recent strength in commodity demand, but in the absence of a pronounced economic pull-back, the magnitude of the impact will likely prove limited, in our view, as supportive structural factors should keep providing a strong basis for growth.

Figure 1: India commodity demand growth is accelerating (average %)

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Coal Aluminium Aluminium Nat Gas Copper Copper Oil Gold Gold 2006-10 2000-05

Source: BP Statistical Review, Brook Hunt, GFMS, Barclays Capital

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ENERGY

The diversion of drilling rigs to more lucrative oil opportunities is expected to pull gas-directed drilling low enough in late 2012 to cause natural gas supply to first plateau and then slide lower. This would mark a bullish turning point for gas
This article is an excerpt from the Commodity Daily Briefing, 1 July 2011. Do oil prices matter for North American natural gas? They do when the attraction of higher returns from oil pulls enough of the finite number of on-shore drilling rigs away from gasdirected service. To match the return opportunity from unconventional oil drilling, producers would need to receive $12-15/MMBtu for their gas, nearly triple current price levels. Given the wide disparity between oil and gas prices, one might wonder why E&P companies would drill for gas at all. But there are insufficient North American oil prospects to divert enough activity away from gas. Producers must still deliver the production growth their investors demand, and if that growth comes mainly from gains in gas supply, so be it. But by late 2012 we expect enough rigs to be directed toward oil service and away from gas to change the trajectory of gas supply. Indeed, this diversion has already begun, as shown in the figure below. A bigger diversion will require more good oil opportunities to exploit, and of course oil prices matter. Our view is that oil prices move higher than todays level, and that gas prices remain stagnant this year, which should provide the motivation for producers to continue searching for oil in North America. We expect that when the gas market realizes supply is no longer growing, it will mark a watershed event, causing gas prices to move higher, most likely for 2013 and beyond. We forecast this to occur at the very end of 2012. Aggregate North American supply is expected to grow 1.7 Bcf/d in 2011, led by 2.9 Bcf/d of growth in the U.S. that is somewhat offset by declines in Canadian production and LNG. In 2012, declining Canadian production, along with lower LNG imports, offset a smaller pace of U.S. supply growth, allowing for demand growth to outpace supply gains for the first time in some years. This is hardly a tight market, but does represent a shift to receding over-supply. Thus, we see a two-part market environment ahead: over-supply and a bearish sentiment in 2011 and for most of 2012, then a change in gas supply trajectory, and mood, toward the end of 2012.

Figure 2: Oil- and gas-directed U.S. rig count

1,400 1,200 1,000 800 600 400 200 0 Jan-09 Jan-10 Nov-09 Mar-09 Mar-10 Nov-10 Jan-11 May-09 May-10 Mar-11 Jul-09 Sep-09 Jul-10 Sep-10 May-11

Oil-directed rig count

Source: Baker Hughes, Barclays Capital

Gas-directed rig count

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ENERGY

A carbon pricing scheme is due to be unveiled in Australia this week and could add to the mounting challenges faced by miners
This article is an excerpt from the Commodity Daily Briefing, 4 July 2011. A carbon pricing scheme is due to be unveiled in Australia this week, roughly two years after the plan was shelved in the face of Senate opposition from the Greens Party. Legislation is expected to be brought into the lower House of Representatives in August, with a vote in the Senate expected two or three months later. The scheme is likely to start with a tax on carbon emissions from mid-2012, before transitioning into a carbon trading scheme around 2015. If approved, this will be the worlds second national emissions scheme outside Europe, and will inevitably bring about increased costs for the mining industry. A recent report commissioned by the Australian Coal Association painted a worrying picture for the coal mining industry. Two surveys were carried out on existing mines (accounting for over 85% of total coal production) and potential new mines, with an emissions pricing framework based on a targeted emissions reduction of 5% relative to 2000 level emissions by 2020 (with an initial price of A$20/t), and assumptions that no concessions would be given to any coal mining projects. As a result of the carbon scheme, the survey found that a cumulative 262mt of coal production could be lost by 2020 from existing mines (vs. Australias coal production of 424mt in 2010), while almost 380mt of production from potential mines could be lost over the same time period. Already, costs in Australia are among the highest in the world and have appreciated much faster than the global trend. Since 2000, average cash costs of copper production in Australia have surged by over 200%, compared with a 120% rise globally. Now, mines in Australia account for 20% of production in the top 10 percentile of costs, up from 4% in 2000. Anecdotal stories such as mining truck tyres costing more than a Mercedes in Australia and wages of mining workers exceeding that of Bernankes, all point to higher cost pressures. Added to that is the strength of AUD, which means that although copper prices are now 5% higher than the 2008 peaks in USD terms, they are around 7% lower in AUD terms. Because of the fast rising costs, the EBITDA/revenue ratio of major mining firms with a large Australian presence were lower in 2010 vs. 2006, even though revenues have increased. The carbon scheme will only add to the mounting challenges miners in Australia are grappling with.

Figure 3: Commodity prices have not appreciated by as much in AUD terms

12,000 10,000 8,000 6,000 4,000 2,000 0 Jun-03 Spot copper prices in USD and AUD

Oct-04

Feb-06

Jun-07

Oct-08

Feb-10

Jun-11

Spot copper (AUD/t)

Source: EcoWin, Barclays Capital

Spot copper (US$/t)

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ENERGY

Oil Market update: 2012 outlook

This article is an excerpt from the Energy Flash, 5 July 2011. We are adjusting some of our oil price forecasts. In the case of benchmark global crude oil prices, our average annual price forecast for Brent in 2011 is unchanged at $112 per barrel, while our 2012 Brent forecast is increased by $10 to $115 per barrel. The increase in expectations is due to a forecast further reduction in global spare capacity in 2012, together with a significant intensification of the geopolitical background to the oil market. WTI prices remain severely dislocated, and our price forecasts are being adjusted to reflect a longer period of WTI decoupling from not only Brent but also from other US oil benchmarks. Our forecast for WTI in 2011 is reduced by $6 to $100 per barrel, while our 2012 WTI forecast is increased by $4 to $110 per barrel. Our detailed 2012 supply and demand forecasts show a continuation of robust emerging market demand. Global oil demand is expected to grow by 1.38 mb/d, with non-OECD demand rising by 1.57 mb/d. The main sources of demand growth in 2012 are expected to be China, India, Saudi Arabia and Brazil. Non-OPEC growth is expected to rise by 0.42 mb/d. Output growth is heavily concentrated in North and South America, and indeed outside the Americas non-OPEC output is set to fall in 2012. In this report, we make some changes to our oil price forecasts for 2011 and 2012, as well as releasing our detailed supply and demand forecasts for 2012. Our 2011 price forecasts were last changed on 24 March, while our 2012 price forecasts have been unaltered since their initiation on 4 October 2010. In terms of the global price level, our Brent forecast for 2011 is unchanged at $112 per barrel. However, our Brent forecast for 2012 is increased by $10 to $115 per barrel. The increase in the 2012 is based on a further narrowing of global spare capacity based on the balances shown in Figure 1, and by our view that the overall geopolitical context of the market is likely to become increasingly uncertain as 2012 progresses. The severe dislocation of WTI prices this year and the decoupling of WTI prices from both global prices and other US benchmarks has made the forecasting of the BrentWTI differential fraught with difficulties. While we still see the current size of differential as being exaggerated, we are now pricing in a far longer period of dislocation and a continuing lack of equilibrium relationships for WTI. As a result, our forecast for the average price of WTI in 2011 falls by $6 to $100 per barrel. Those dislocations are also expected to hold back WTI relative to Brent next year, and our 2012 forecast for WTI lags that of Brent in rising by just $4 to $110 per barrel. Price forecasts for later years are unchanged. The global balances projected for 2012, remain supportive for prices, occasioning the increase in forecast average prices for 2012. Among the key macroeconomic assumptions shown in Figure 4, our demand forecasts are based on 4.3% global GDP growth in 2012, a little higher than the 4% forecast for this year. US GDP growth is forecast at 3.4% in 2012, a substantial improvement from the 2.5% in 2011, and Chinese growth is forecast at 8.7%, a deceleration from the 9.3% pace of the current year. In oil demand terms, we see growth of 1.38 mb/d, marginally down from the current 1.59 mb/d forecast for 2011, with the absolute level of global demand averaging 87.8 mb/d in 2011. The oil demand profile will continue to be dominated by non-OECD demand growth, which we expect to be 1.57 mb/d, while OECD oil demand growth slips back further into negative territory of -0.19 mb/d, following a fall of 0.09 mb/d this year.

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ENERGY

Central problem
This article is an excerpt from the Weekly Carbon and Energy Matters, 4 July 2011. In a week when the price of carbon stabilised in a disappointingly low 13-13.50 /t range, the usual chorus of we need a central carbon bank rang through the air (see Bloomberg for instance). Now, we will admit the last few weeks were a bit painful for the market, but let us not get carried away. The point of an emissions trading scheme is very simple. It is to keep the emissions of the sectors covered by the scheme within a given cap, and we would argue, it is very effective at doing this all on its own. Now, the environmental effectiveness of the EU ETS is purely a function of the cap and the resulting carbon price is just a reflection of the ambition of that cap. In a cap and trade scheme, the cap is everything while trade is there to allow greater efficiency in meeting that cap. Any attempt by a governmentbased body to intervene in the market will only introduce inefficiencies and will be ultimately doomed, in our view. If it maintains a high price when emissions are falling, all it will do is make the market longer allowances by encouraging greater emissions reductions. With a given cap, all this means is that future price reductions will have to be even greater for the market to balance. Furthermore, if anyone thinks direct intervention in markets is a good thing, the history of foreign exchange markets tells a different story (if anyone can provide us with a good example of when fixing a currency has had a utility maximising outcome, please let us know). What proponents of a carbon central bank actually want is a non-political body to have the power to change the cap to safeguard their investments. Why? Well, one, why pay for price protection (a forward) when the governments can give you a price floor for free. Two, and more pertinently, because democracy is proving to be an obstacle to actually increasing the ambition of the current cap (or even having a cap given policy failure in the US and Australia). Even in Europe, the phase 3 cap at the moment is not being changed because our elected officials are not in a mind to do so and hence the discussion about the set-aside that would allow a cap adjustment in the future. While the political economy of deriving targets are a lengthy discussion, to introduce a body just to deepen the cap whenever prices looked low, would remove price risk but only at the price of making the EU ETS both inefficient and undemocratic. Figure 4: EUA and CER prices (/t)
19 17 15 13 11 9 7 5 3 1 -1 Feb-11

Mar-11 EUA Front year (/t)

Apr-11

May-11

Jun-11 EUA-CER spread

sCER Front Year (/t)

Source: Barclays Capital

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ENERGY

An autopsy of gas rig count

This article is an excerpt from the Natural Gas Weekly Kaleidoscope, 5 July2011. The natural gas-directed rig count has fallen by 118 rigs since the peak of last year. However, we continue to believe that at the current level (874 rigs), gas directed drilling should grow production incrementally. The turning point in North American natural gas supply, by our projection, is not expected to occur until Q4 12. Although horizontal rigs have made up the majority of losses, on a percentage share basis horizontal rigs dominate the scene of natural gas production. Gas drilling continues to shift from the traditional shale plays to the newer and liquids-rich basins, such as the Eagle Ford and Marcellus. Natural gas supply growth could continue at lower rig count levels as rig efficiency keeps improving. Independent producers have shed 114 gas rigs from last years peak reached in September. By dissecting the Smith S.T.A.T.S data, we show some evidence of redirection toward oil targets. We expect small decreases in the gas rig count as oil opportunities remain limited. In the near term, independent producers have plenty of incentives to continue pursuing gas targets. Figure 5: Gas production (Bcf/d) versus rig count
67 65 63 61 59 57 55 53 51 49 47 Apr-06 1,800 1,600 1,400 1,200 1,000 800 600 400 200 Apr-07 Apr-08 Apr-09 Apr-10 0 Apr-11

US marketed lower-48 onshore gas production, Bcf/d total gas-directed rig count (RHS)
Source: EIA, Smiths S.T.A.T.S, Barclays Capital

In our view, the true turning point in natural gas balances can accurately be characterized as the moment production turns downward. Currently, the rig count is moving mostly sideways with a slight downward bias, as rigs are redirected toward oil drilling. Gas-directed drilling activity peaked last August near 1,000 rigs and currently stands at 874. We estimate that 825 rigs approximately keeps production flat that is, growth from new drilling offsets declines from existing wells. Still, production shows few signs of turning lower indeed, April EIA-914 data showed another sequential monthly increase. To fully understand the growth trajectory of US natural gas supply, we take another look at the Smith S.T.A.T.S. rig count data. The aggregate rig count is of critical importance to figuring out supply trends, but just as important are trends in drilling, in particular who is drilling, where they are drilling, and by what method. We attempt to answer these questions through a detailed analysis of the Smith data and shed light on trends in drilling efficiency.

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ENERGY

Iraq Attacks on the rise as US departure looms

This article is an excerpt from the Geopolitical Update, 7 July 2011. Rising violence in Iraq this summer is raising new concerns about the ability of local security services to maintain order when US troops depart at the end of the year. On Tuesday, two bomb blasts outside a municipal office north of Baghdad left 28 people dead and dozens wounded. The bombings came one day after a series of attacks across Iraq, including a rocket attack on Baghdads heavily fortified Green Zone, claimed at least 10 lives. June was the deadliest month for civilians this year, with 340 killed. In addition, 14 US servicemen were killed in Iraq in June, making it the deadliest month for US troops in three years. A particularly worrying aspect of the latest unrest is that many of the attacks are occurring in Southern Iraq, which had been relatively peaceful in recent years. The incidents in the South have been linked to Shiite militias with ties to Iran. There are concerns about Prime Minister Malikis willingness to take on these militias, particularly those linked to radical cleric Moqtada al Sadr. Several senior US officials have recently signaled a willingness to consider allowing some troops to remain if the Iraqi government requests that their stay be extended. Even though Maliki reportedly wants to keep some US troops on hand, it will be politically challenging for him to get the approval of the Iraqi parliament. Moqtada al-Sadr has publicly warned that he will reactivate his Mahdi army and commence attacks on US troops if they remain on Iraqi soil next year. The current increase in violence comes at a time when Iraq has actually been experiencing a slow but steady increase in oil output. Having disappointed last year, when production remained largely flat y/y at 2.4 mb/d, Iraqi output has started 2011 on a reasonably strong footing. Nonetheless, Iraqs continued success depends largely on foreign companies from the world's largest, which have signed 12 deals with Baghdad, to the smaller firms that have inked 40 deals with the Kurdistan region which must operate in what is still a post-war conflict zone, and the lack of basic amenities and continuing militia violence keep the operating environment challenging. Figure 6: Iraq oil production hit an all-time high in June
2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 06 07 08 09 10 11 Iraqi oil production, mb/d

Source: IEA, EIA, MESS, Platts, Reuters, Bloomberg, Barclays Capital

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METALS

As miners respond to record levels of global demand, supply-side pressures are building leading to sharp increases in capital and operating costs
This article is an excerpt from the Commodity Daily Briefing, 5 July 2011. Higher energy and agricultural prices have been the driving forces behind the kind of global inflationary pressures that have got central bankers worried, but cost pressures are also building in other areas of the global economy. Capital and operating costs in the resources sector, and in particular in the metals and mining industry, are rising fast. This brings back memories of the double-digit cost increases that characterised 2006-08; the financial crisis offered only a brief respite from structural supply-side pressures. As miners go full steam ahead to bring on new production in response to record levels of global demand these pressures are going to continue building, in our view. BHP Billiton recently announced a major capex increase at its Worsley Alumina operation in Australia with project costs having risen by 58% to US$3bn. Cost drivers are diverse but the biggest effects have come from energy, exchange rate shifts, equipment costs and a shortage skilled labour (Commodity Daily Briefing 18 April 2011). Resource companies in Australia in particular have faced significant increases in costs (Commodity Daily Briefing 4 July 2011) with labour playing a key part. There is now even evidence that skilled labour shortages are beginning to cause delays to bringing production to market with Woodside Petroleum, Australia's largest energy firm, partly blaming labour shortages for delays to its Pluto liquefied natural gas project, which is six months behind schedule and $1bn over budget. Iron ore miner Cliffs Natural Resources has highlighted that "If you add up all of the projects people want to bring online, there are not enough qualified workers to make it happen. In Australia, resource companies plan to increase investment spending by a massive 63% y/y this year, but that may prove challenging given the scarcity of key inputs. The rising cost of meeting metals demand growth globally has implications for far forward metals prices, which arguably has already been demonstrated this year. Despite the gyrations in front end prices the far forwards have been more robust, with 63-month copper prices up by 8% since the beginning of the year, while 3-month prices are down by 3%.

Figure 7: Capital costs for metals and mining projects are escalating rapidly
80% 70% 60% 50% 40% 30% 20% 10% 0% Constancia Ambatovy Sierra (Cu) (Ni) Gorda (Cu)
Source: Brook Hunt, Barclays Capital

Capital cost escalation announced in 2011 (nominal US$ cost increase from previous estimate)

Toromocho Kutcho (Cu) Pebble (cu) Andina (Cu) Expansion (Cu)

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FORECASTS AND DATA RELEASES

Commodity price comparisons

Commodity Rough Rice Wheat Tin Crude Oil Heating Oil Silver Gas Oil Rubber Feeder Cattle Sugar Palladium Corn Copper Crude Oil Soybeans Lean Hogs Gasoline Aluminium Wheat Oats Nickel Zinc Gold Live Cattle Lead Platinum Coffee German Power Cocoa Coal API2 Barley UK Natural Gas Carbon Azuki Beans Coal API4 Lumber Aluminium Alloy UK Power Carbon CER Carbon EUA US Natural Gas Cotton
Source: Barclays Capital

Price Change (%, Thurs/Thurs) CBOT CBOT LME ICE NYMEX OTC ICE Tocom CME ICE NYMEX CBOT LME NYMEX CBOT CME NYMEX LME KBOT CBOT LME LME OTC CME LME NYMEX ICE EEX ICE ICE WCE ICE ICE TGE ICE CME LME APX ECX ECX NYMEX ICE $/bushel $/bushel $/tonne $/barrel $/gallon $/oz $/tonne Y/kg $/lb $/lb $/oz $/bushel $/tonne $/barrel $/bushel $/lb $/gallon $/tonne $/bushel $/bushel $/tonne $/tonne $/oz $/lb $/tonne $/oz $/lb Euro/MWh $/tonne $/tonne C$/tonne /therm $/tonne JPY/30kg $/tonne $/1000 ft $/tonne $/tonne Euro/MWh Euro/tonne Euro/tonne $/mmbtu $/lb 9.8% 6.8% 5.7% 5.5% 5.3% 4.9% 4.7% 4.5% 4.2% 4.1% 3.4% 3.3% 3.3% 3.2% 3.0% 2.9% 2.8% 2.3% 2.1% 2.1% 2.0% 2.0% 1.9% 1.8% 1.4% 1.0% 0.9% 0.8% 0.8% 0.5% 0.0% -0.3% -0.5% -0.8% -0.9% -1.2% -1.8% -2.4% -2.6% -2.9% -3.9% -5.5% -14.8%

7-Jul-11 15.3 6.25 27,540 118.57 3.09 36.53 969.6 389.3 1.44 0.30 786.0 6.50 9,740 98.52 13.46 0.97 3.12 2,588 7.04 3.4 23,899 2,412 1,530.3 1.15 2,726 1,740 2.68 50.4 3,194 123.8 207.0 0.6 23.71 11,940 118.7 242.0 2,350 10.1 48.4 10.7 13.0 4.13 1.36

WeekPrice Change Month AgoPrice Change Ago Price (%, M/M) Price (%, Y/Y) 13.89 5.85 26,050 112.40 2.94 34.82 926.3 372.40 1.38 0.28 760.1 6.29 9,430 95.46 13.06 0.94 3.04 2,531 6.89 3.34 23,427 2,365 1,502.4 1.13 2,688 1,723 2.65 50.00 3,170 123.20 207.00 0.63 23.83 12,040 119.80 244.90 2,394 10.30 49.71 10.98 13.53 4.37 1.60 3.2% -14.9% 6.6% 1.5% 0.6% -1.4% 0.7% -7.7% 15.0% 21.2% -3.0% -11.7% 6.6% -0.6% -3.5% 8.4% 4.5% -3.5% -19.6% -8.1% 5.6% 6.2% -0.8% 28.9% 6.9% -4.8% 1.8% -11.7% 10.5% -1.6% 1.0% -3.2% 11.0% -2.9% -3.0% 5.9% -1.5% 1.5% -5.6% -14.9% -21.9% -14.3% -8.4% 14.8 7.34 25,825 116.85 3.08 37.06 962.8 422.0 1.25 0.24 810.5 7.37 9,140 99.15 13.94 0.90 2.99 2,683 8.75 3.7 22,621 2,272 1,543.1 0.89 2,549 1,829 2.63 57.1 2,891 125.8 205.0 0.7 21.36 12,300 122.4 228.5 2,385 9.9 51.3 12.5 16.7 4.82 1.49 53.7% 21.1% 56.0% 61.3% 56.4% 103.1% 53.5% 11.0% 26.7% 73.0% 77.7% 75.3% 46.6% 33.0% 35.5% 23.2% 54.2% 30.7% 30.9% 34.4% 24.9% 30.2% 27.7% 27% 52.2% 14.3% 66.7% 11.3% 8.6% 33.1% 20.3% 8.5% 32.0% 8.3% 30.8% 19.2% 22.1% -4.3% 10.5% -14.7% -12.5% -9.4% 64.7%

Year Ago Price 9.9 5.16 17,650 73.53 1.98 17.98 631.7 350.8 1.14 0.17 442.3 3.71 6,645 74.05 9.93 0.79 2.03 1,980 5.37 2.5 19,141 1,853 1,198.6 0.91 1,791 1,522 1.61 45.3 2,941 93.0 172.0 0.6 17.97 11,020 90.8 203.0 1,925 10.5 43.8 12.5 14.9 4.56 0.83

Freight Capesize C4 OTC

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Commodity price forecasts

Barclays Capital quarterly average commodity price forecasts
Q1 10 Base Metals (LME cash) Aluminium US$/t Copper US$/t Lead US$/t Nickel US$/t Tin US$/t Zinc US$/t Base Metal Index^ Precious metals Gold US$/oz Silver US$/oz Platinum US$/oz Palladium US$/oz Energy WTI US$/bbl Brent US$/bbl US Natural Gas US$/mmbtu UK Natural Gas p/therm Agriculture Cocoa US$/t Coffee Usc/lb Sugar Usc/lb Cotton Usc/lb Wheat Usc/bushel Corn Usc/bushel Soybeans Usc/bushel 2,165 7,243 2,219 20,078 17,225 2,288 199 1110 16.9 1562 440 78.9 77.4 5.0 35.6 3070 134 24.4 76 496 370 955 Q2 10 2,092 7,013 1,944 22,382 17,844 2,018 199 1196 18.3 1630 492 78.1 79.4 4.4 37.9 2987 140 16.0 81 467 355 957 Q3 10 2,088 7,243 2,031 21,178 20,559 2,013 203 1227 18.9 1550 493 76.2 77.0 4.2 43.0 2863 174 20.0 88 653 422 1035 Q4 10 2,343 8,634 2,390 23,598 26,001 2,315 238 1370 26.5 1697 678 85 87 4.0 52.5 2856 205 29.0 130 707 562 1245 Q1 11 2,503 9,646 2,605 26,899 29,950 2,393 266 1387 31.9 1789 788 95 106 4.2 57 3303 256 30.5 180 786 670 1379 Q2 11F 2,600 9,137 2,550 24,165 28,694 2,250 254 1508 38.4 1781 756 102 117 4.4 58 3043 271 24.5 168 745 731 1361 Q3 11F 2,650 10,500 2,750 25,000 33,000 2,400 280 1560 40.2 1840 825 99 110 4.3 50 2800 225 23.5 160 770 730 1430 Q4 11F 2,700 12,000 3,000 27,000 34,300 2,500 306 1520 28.3 1880 870 102 115 4.5 70 2900 195 21.5 138 715 660 1455

Barclays Capital annual average commodity price forecasts

2006 2007 2008 2009 2010 2011F 2012F Long Term Base Metals Aluminium US$/t 2,568 2,640 2,573 1,664 2,172 2,613 2,750 3,200 Copper US$/t 6,731 7,129 6,961 5,148 7,533 10,321 12,000 6,000 Lead US$/t 1,286 2,592 2,093 1,721 2,146 2,726 2,800 1,700 Nickel US$/t 24,271 37,276 21,115 14,604 21,809 25,766 30,000 17,500 Tin US$/t 8,761 14,542 18,500 13,579 20,407 31,486 37,000 18,000 Zinc US$/t 3,274 3,251 1,876 1,654 2,158 2,386 2,800 2,000 Base Metal Index^ 197.6 237.2 204.3 146.2 210 276 317 Precious Metals Gold US$/oz 604 697 872 972 1,226 1,494 1,300 850 Silver US$/oz 11.6 13.4 15.0 14.6 20.2 34.7 19.8 11.4 Platinum US$/oz 1,139 1,304 1,569 1,205 1,610 1,823 1,835 1,500 Palladium US$/oz 319 354 348 262 526 810 850 400 Energy WTI US$/bbl 66.2 72.3 99.7 62 80 100 110 137.0 Brent US$/bbl 66.1 72.7 98.4 63 80 112 115 135.0 US Natural Gas US$/mmbtu 6.98 7.12 8.90 4.16 4.39 4.35 4.55 5.25 UK Natural Gas p/therm 41.7 30.0 58.2 31.1 42.2 58.8 67.5 Coal API2 US$/t 63 87 144 71 93 123 Coal API4 US$/t 50 62 120 66 92 122 Coal Newcastle US$/t 49 66 128 72 99 131 Carbon (EUA) /t 18 20 23 13 15 19 28 40 Carbon (CER) /t na 16 17 12 12 14 20 25 Agriculture Cocoa US$/t 1503 1882 2555 2794 2944 3012 3050 na Coffee Usc/lb 108 117 132 125 163 237 190 na Sugar Usc/lb 14.7 9.9 12.1 17.7 22.3 25.0 23.0 na na Cotton Usc/lb 52 57 64 57 94 162 105 Wheat Usc/bushel 402 636 798 530 581 754 650 na Corn Usc/bushel 260 373 527 374 427 698 570 na Soybeans Usc/bushel 592 861 1234 1031 1048 1406 1290 na Note: ^Economist Intelligence Unit weight. Base metals prices are LME cash. Precious metals spot prices. WTI: front month NYMEX close. Brent: front-month IPE close. US natural gas: NYMEX front-month close. UK natural gas: NBP day ahead close. Cocoa, Coffee, Sugar, Cotton: front month ICE close. Wheat, Corn, Soybeans: front month CBOT close. Source: Barclays Capital

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Trade recommendations
Figure 8: Key recommendations
Contract Entry Date Entry price Current price (July-05-2011) Unit $ Gain/Loss % Open trades Rationale: Whilst we are wary of tighter US liquidity eventually bringing and end to the gold price rally we continue to see further price upside in the short-term. Long Comex gold Dec-11 26/11/2010 1376 1515 $/oz 277 21.3% Rationale: The market is pricing in a tighter medium-term outlook for crude and with our 2015 forecast for Brent pegged at $135/bbl we expect this trend to continue.Recent IEA stock release is also putting pressure on the back-end of the curve. Long Brent crude oil Dec-15 27/01/2011 98.2 104.4 $/bbl 6.3 6.4% Rationale: The reassessment of long-term energy market dynamics as a result of Japan's nuclear crisis supports a period of concerted strength at the back end of the aluminium curve. Moreover, China's rising capital and enegy costs suggest a production slowdown ahead. Long LME aluminium Dec-15 29/03/2011 2884 2791 $/t -93.5 -3.2% Rationale: We expect further corn price gains supported by weather concerns which have seen lagging US corn plantings compared to five year averages and concerns on acreage and yields; elevated US ethanol production, strong US export sales and extremely low US inventory levels. Long CBOT corn Dec-11 20/04/2011 656 613 c/Bsh -43.0 -6.6% Rationale: Stocks are declining and physical indicators point to a pick up in buying, especially in China. The picture for raw materials is further tightening, with a narrowing in scrap discounts and worse than expected mine output in Q1. Long LME copper Dec-11 26/05/2011 9035 9551 $/t 516.0 5.7%

Note: The long position on COMEX gold was originally opened on 11/05/2010 and includes losses/gains from the previous trade (Dec-2010) Source: Reuters, Barclays Capital

Figure 9: Closed trades

Closed Trades Contract Entry Date Exit Date Directional trades Long Carbon EUA Dec-11 24/02/2011 30/06/2011 Long KBOT wheat ** Dec-11 20/04/2011 30/06/2011 Long UK natural gas Q3-11 29/03/2011 26/05/2011 Long LME nickel Jun-11 24/02/2011 26/05/2011 Long European delivered coal (API2) ** Apr-11 27/01/2011 29/03/2011 Short Comex silver Dec-11 27/01/2011 24/02/2011 Long LME copper Jun-11 22/09/2010 24/02/2011 Long CBOT corn ** Mar-11 26/11/2010 24/02/2011 Short UK natural gas Summer 2011 19/10/2010 27/01/2011 Long NYMEX crude oil ** Dec-11 19/10/2010 27/01/2011 Short US natural gas Dec-11 13/08/2010 26/11/2010 Long ICE cotton Dec-10 14/04/2010 19/10/2010 Long LME lead Dec-10 21/06/2010 13/08/2010 Long LME copper ** Sep-10 10/12/2009 13/08/2010 Long NYMEX palladium Jun-10 22/02/2010 11/05/2010 Jul-10 18/03/2010 14/04/2010 Long ICE sugar Jun-10 10/12/2009 18/03/2010 Long LME Nickel Long NYMEX crude oil May-10 10/12/2009 18/02/2010 Mar-10 10/12/2009 18/02/2010 Long ICE sugar Spread trades Natural gas spread widening 15/12/2010 30/06/2011 Short forward Henry Hub Oct-11 Long forward Henry Hub Jan-12 Crude oil spread tightening ** 20/04/2011 26/05/2011 Long forward Brent crude Jul-11 Aug-11 Short forward Brent crude Gasoil spread tightening 22/09/2010 19/10/2010 Long nearby ICE gasoil Dec-10 Short further forward ICE gasoil Jun-11 21/06/2010 13/08/2010 US Henry Hub natgas Short position Oct-10 Jan-11 Long position 10/12/2009 18/02/2010 US Henry Hub natgas curve flattener Mar-10 Long position Short position Jan-11 Note: Entry and exit prices reference closing prices on the day of publication. ** These trades include gains/losses from previous trades. Source: Reuters, Barclays Capital Entry price 15.4 964 63.9 27501 114.5 27.1 7833.0 553.0 47.2 84.8 5.54 75.7 1851 7062 444 22.6 16331 75.4 23.3 0.63 4.49 5.12 -0.36 123.5 123.1 -16.8 669.75 686.50 0.66 5.01 5.67 1.47 5.38 6.9 Exit price 13.5 733 58.5 22821 125.7 33.1 9505 685.8 52.5 99.3 5.12 110.3 2065 7143 532 17.7 22760 79.1 26.5 0.41 4.43 4.84 -0.37 115.1 114.7 -15.3 705.50 720.75 0.65 4.35 5.00 1.20 5.17 6.375 Unit /t c/Bsh p/therm $/t $/t $/oz $/t c/Bsh p/therm c/bbl $/mmbtu c/lb $/t $/t $/oz c/lb $/t $/b c/lb $/mmbtu $/mmbtu $/mmbtu $/b $/b $/b $/t $/t $/t $/mmbtu $/mmbtu $/mmbtu $/mmbtu $/mmbtu $/mmbtu Gain/Loss $ % -1.9 -231.0 -5.4 -4680 16 -6 1672 245 -5 12.1 0.43 35 214 345 88 -5 6429 3.7 0.03 -0.22 0.05 -0.27 0.34 -8.45 8.46 1.50 35.75 -34.25 0.01 -0.66 0.67 0.27 -0.21 -0.48 -12.1% -26.4% -8.5% -17.0% 14.4% -22.4% 21.3% 55.1% -11.3% 14.2% 7.7% 45.7% 11.6% 5.0% 19.8% -21.6% 39.4% 4.9% 13.8% -

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Global economic forecasts

Real GDP % over previous period, saar Global Developed Emerging BRIC America United States Canada Latin America Argentina Brazil Chile Colombia Mexico Peru Venezuela Asia/Pacific Japan Australia Emerging Asia China Hong Kong India Indonesia South Korea Malaysia Philippines Singapore Taiwan Thailand Europe and Africa Euro area Belgium France Germany Greece Ireland Italy Netherlands Portugal Spain United Kingdom Switzerland EM Europe & Africa Czech Repub. Hungary Poland Russia Turkey Israel South Africa Real GDP % annual chg Consumer prices % over a year ago 2Q11 4.0 2.8 6.4 6.9 4.3 3.4 3.3 7.9 23.3 6.6 3.2 3.0 3.3 2.9 22.8 3.8 0.5 3.8 5.7 5.6 5.2 9.3 5.9 3.9 3.5 4.6 4.5 1.6 3.6 3.7 2.8 3.3 2.2 2.5 3.2 1.4 2.9 2.4 3.7 3.3 4.5 0.2 6.9 1.9 4.3 4.6 9.7 6.5 3.8 4.5 3Q11 4.0 3.0 6.4 6.7 4.5 3.6 3.2 8.2 22.6 7.1 3.5 3.2 3.7 3.0 23.0 3.6 0.5 4.1 5.3 5.2 6.1 9.2 5.0 3.3 3.7 5.1 3.4 1.7 4.1 3.8 2.8 3.7 2.5 2.6 2.8 1.5 2.7 2.8 3.3 3.3 4.8 0.7 7.3 2.2 4.0 4.8 9.1 9.0 3.8 5.7 Consumer prices % annual chg 4Q11 2010 3.7 2.6 2.8 1.4 5.7 5.3 5.4 5.0 4.4 2.8 3.5 1.6 3.1 1.8 8.2 7.5 22.9 21.5 6.6 5.0 4.0 1.4 3.2 2.3 3.6 4.2 3.6 1.5 24.3 28.2 2.8 2.3 0.0 -1.0 3.8 2.8 4.2 4.1 3.4 3.3 5.4 2.4 8.3 9.6 6.0 5.1 2.8 3.0 3.9 1.7 5.0 3.8 2.8 2.8 1.8 1.0 4.5 3.3 3.8 2.6 2.9 1.6 3.4 2.3 2.7 1.7 2.7 1.2 3.5 4.7 1.8 -1.6 2.9 1.6 2.9 0.9 3.6 1.4 3.1 2.0 4.9 3.3 0.8 0.7 6.8 5.8 2.3 1.4 3.9 4.9 4.6 2.7 8.2 6.9 8.5 8.6 3.7 2.6 6.0 4.3 2011 3.8 2.7 6.2 6.4 4.2 3.2 3.1 8.1 23.5 6.6 3.4 3.2 3.5 2.9 24.5 3.4 0.2 3.8 5.1 4.8 5.2 9.1 5.9 3.6 3.5 4.7 4.0 1.6 3.8 3.6 2.7 3.5 2.3 2.5 3.5 1.4 2.7 2.5 3.6 3.2 4.6 0.5 6.8 2.1 4.1 4.6 9.1 7.1 3.9 5.0 2012 3.0 1.9 5.3 5.1 3.5 2.5 2.2 7.9 26.1 5.7 3.0 3.3 4.0 3.1 21.9 2.7 0.1 2.7 4.1 4.0 4.7 6.7 6.0 2.1 2.2 3.8 1.8 1.9 2.7 2.6 1.8 2.6 1.7 1.7 2.5 1.4 1.7 2.6 2.4 2.0 2.8 1.1 5.9 2.3 3.6 3.5 7.1 7.1 3.2 6.0 1Q11 2Q11 3Q11 4Q11 1Q12 2010 2011 2012 1Q11 4.2 3.3 4.0 4.3 4.3 4.9 4.0 4.3 3.4 1.6 1.3 2.7 3.0 2.8 2.5 1.9 2.8 2.1 7.3 5.7 5.7 5.9 6.2 7.9 6.6 6.2 6.3 7.6 6.8 7.1 6.8 7.5 8.9 7.6 7.4 6.6 2.9 2.8 3.1 3.6 3.7 3.7 3.0 3.6 3.4 1.9 2.0 3.0 3.5 3.5 2.9 2.5 3.4 2.1 3.9 2.5 2.5 2.5 2.5 3.2 2.9 2.5 2.6 5.4 4.8 3.3 4.3 4.4 6.2 4.6 4.1 8.3 9.1 5.8 2.0 5.5 4.3 9.2 7.0 4.3 25.3 5.4 2.9 3.4 4.5 4.5 7.5 3.8 4.2 6.1 5.4 5.0 5.0 5.0 4.5 5.2 6.4 4.5 2.9 9.8 5.5 3.0 4.5 5.0 4.3 5.7 4.6 3.2 2.1 6.5 3.0 3.0 4.0 5.4 3.9 3.7 3.5 6.6 5.7 4.6 5.4 4.0 8.8 6.4 5.2 2.3 6.9 4.4 5.0 4.6 5.6 -1.4 4.3 3.5 28.2 6.3 4.7 6.5 6.8 6.7 8.1 6.0 6.5 3.4 -3.5 -2.3 3.7 5.0 4.4 4.0 -0.5 3.2 -0.2 -4.7 4.7 5.1 2.3 1.1 2.7 1.4 3.0 3.3 9.3 6.5 7.2 7.5 7.6 9.3 7.8 7.4 5.4 9.4 7.8 8.0 9.5 8.7 10.4 9.3 8.7 5.1 11.9 -1.2 4.1 4.7 5.1 7.0 5.5 4.5 4.0 8.4 7.6 9.1 5.0 8.8 9.0 7.7 7.9 9.5 4.0 6.0 5.8 9.6 4.4 6.1 6.5 6.4 6.8 5.4 4.5 6.2 6.3 3.6 6.2 4.4 4.1 4.5 7.0 4.9 2.5 4.1 5.8 7.3 5.0 5.5 2.8 15.0 4.8 4.0 -0.1 10.3 7.6 5.0 5.3 4.0 22.5 0.3 3.0 4.9 4.3 14.5 6.0 4.5 5.2 19.0 0.4 1.9 4.5 4.8 10.9 5.9 4.0 1.3 8.4 0.8 2.0 5.1 5.0 7.8 3.6 4.7 3.0 3.0 2.1 2.1 1.9 2.2 2.4 2.6 2.5 3.3 3.4 1.2 1.7 1.9 1.6 1.7 2.0 1.8 2.5 4.3 2.1 1.8 2.3 1.8 2.1 2.7 2.0 3.5 3.8 0.8 1.8 1.9 2.0 1.4 2.0 2.1 2.0 6.1 1.6 2.1 2.2 1.6 3.5 3.4 2.0 2.2 0.6 -0.4 -2.7 -0.5 0.4 -4.4 -3.5 0.1 4.5 5.1 -1.4 2.4 1.1 1.8 -0.4 0.4 1.8 0.8 0.5 1.3 2.0 2.3 0.7 1.2 1.1 1.3 2.3 3.6 2.6 2.0 1.9 1.8 1.6 2.4 2.0 2.0 -2.4 -2.6 -2.3 -1.7 -1.1 1.3 -1.7 -1.3 3.7 1.2 0.3 1.0 1.2 1.9 -0.1 0.8 1.7 3.2 1.9 2.2 2.1 2.3 2.4 1.3 1.6 2.2 4.1 1.0 1.6 1.6 1.2 1.6 2.6 2.0 1.4 0.2 2.8 3.9 3.0 1.9 3.4 4.6 4.4 4.2 6.3 3.6 2.6 2.4 2.4 3.8 2.2 2.8 3.3 2.0 6.2 1.7 1.4 1.2 2.9 1.1 2.6 3.2 4.1 4.1 3.6 3.7 3.7 3.7 3.8 3.9 3.7 3.8 0.9 5.0 3.3 0.9 3.3 4.0 4.3 4.6 9.6 3.7 2.3 1.7 1.2 2.9 9.0 5.8 4.1 4.3 4.7 4.0 4.0 4.0 4.8 4.9 5.0 4.2 3.9 4.8 3.5 3.7 3.9 4.1 2.8 3.9 4.1 3.8

Note: Weights used for real GDP are based on IMF PPP-based GDP (2008-2010 average). Weights used for consumer prices are based on IMF nominal GDP (2008-2010 average). Source: Barclays Capital

8 July 2011

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Barclays Capital | Commodities Weekly

FX forecasts
FX forecasts Spot G7 countries EUR JPY GBP CHF CAD AUD NZD Emerging Asia CNY HKD INR IDR KRW LKR MYR PHP SGD THB TWD VND Latin America ARS BRL CLP MXN COP PEN EEMEA EUR/CZK EUR/HUF EUR/PLN EUR/RON USD/RUB BSK/RUB USD/TRY USD/ZAR USD/ILS USD/EGP USD/UAH 24.32 266 3.98 4.23 27.85 33.53 1.62 6.76 3.40 5.96 7.98 23.95 265 3.90 4.25 28.0 34.0 1.60 6.74 3.36 5.96 7.97 23.50 265 3.85 4.20 27.9 34.2 1.60 7.03 3.36 5.98 7.98 23.75 265 3.85 4.15 28.5 34.7 1.60 7.13 3.35 6.00 7.97 23.60 265 3.80 4.10 28.5 34.1 1.60 7.23 3.35 6.15 8.09 -1.4% -0.5% -2.2% 0.3% 0.2% 1.2% -2.0% -0.7% -1.2% -0.6% -0.6% -3.1% -1.0% -3.8% -1.2% -0.8% 0.8% -3.1% 2.7% -1.5% -1.4% -2.1% -1.9% -1.7% -4.4% -3.1% 0.3% 1.4% -4.8% 2.7% -2.3% -2.9% -4.2% -2.2% -2.7% -6.5% -5.8% -1.7% -1.5% -8.2% 1.2% -3.1% -5.5% -6.7% 4.11 1.56 468 11.72 1,771 2.76 4.1 1.54 460 11.65 1,763 2.75 4.15 1.5 450 11.5 1,750 2.75 4.15 1.55 450 11.6 1,750 2.76 4.65 1.55 450 11.8 1,750 2.78 -0.7% -3.9% -3.5% -2.1% -1.6% -0.5% -1.1% -7.7% -6.3% -4.0% -2.5% -0.8% -3.9% -6.5% -7.2% -4.0% -2.8% -0.8% 0.6% -10.3% -9.1% -4.2% -3.7% -0.9% 6.46 7.78 44.70 8579 1068 109.5 3.02 43.39 1.23 30.71 28.72 20585 6.42 7.77 44.75 8500 1075 109.5 3.00 43.50 1.220 30.35 28.85 20600 6.36 7.77 45.25 8600 1050 109.0 2.94 42.80 1.210 30.00 28.20 20500 6.28 7.77 44.50 8700 1025 108.5 2.90 42.00 1.190 30.00 27.75 20500 6.11 7.77 44.00 8500 1025 107.8 2.84 41.50 1.190 29.50 27.00 20000 -0.7% -0.1% -0.2% -1.1% 0.4% -0.2% -0.8% 0.2% -0.7% -1.6% 0.7% -0.2% -1.4% -0.1% 0.0% -0.6% -2.3% -1.0% -3.1% -1.7% -1.5% -3.1% -1.1% -3.1% -2.3% 0.0% -3.0% -0.5% -5.1% -2.1% -4.7% -3.7% -3.1% -3.7% -2.1% -6.2% -4.3% 0.1% -6.4% -5.1% -5.7% -2.8% -7.3% -5.2% -3.0% -6.0% -3.4% -13.2% 1.45 80.7 1.61 0.84 0.96 1.07 0.83 1.48 80 1.66 0.91 0.93 1.07 0.78 1.50 82 1.72 0.90 0.93 1.04 0.76 1.48 83 1.74 0.95 0.93 1.00 0.74 1.44 85 1.76 0.98 0.97 0.95 0.72 2.1% -0.8% 3.4% 8.2% -3.6% 0.1% -5.6% 3.6% 1.7% 7.2% 7.1% -3.7% -1.9% -7.7% 2.5% 3.1% 8.6% 13.1% -3.9% -4.6% -9.5% 0.4% 5.9% 10.1% 16.9% -0.3% -7.3% -10.8% 1m 3m 6m 1y 1m Forecast vs outright forward 3m 6m 1y

Source: Barclays Capital

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Barclays Capital | Commodities Weekly

This weeks key data releases

The PBoC this week announced the third benchmark interest rate hike in 2011. The structure of the hike is symmetrical - a 25bp increase in lending and deposit rates. The timing of the move suggests that while the policy rate hikes look close to an end, we should not rule out the possibility of a fourth interest rate hike in Q3 11. The ISM manufacturing index rose to 55.3 in June from 53.5 in May, well above forecasts. The strengthening was broadbased, with new orders increasing to 51.6 from 51.0, production rising to 54.5 from 54.0, the supplier delivery index moving higher to 56.3 from 55.7, and employment improving to 59.9 from 58.2. The ISM non-manufacturing index fell to 53.3 from 54.6 in June, below our economists forecast (54.5) but close to consensus (53.7). The decline was driven by the new orders index and the supplier deliveries index. The business activity and employment indices struck a stronger tone, as both broadly were unchanged from May. The ECB raised interest rates by 25bp as expected. The euro area final manufacturing PMI was down 2.6 points from the May level and is thus at its lowest since December 2009. New orders component fell 3.5 points to 49.6, while the employment index fell 1.6 points to 52.7, pointing to a significantly reduced pace of manufacturing and employment expansion, as the adverse effects of what our economists consider a global growth soft patch filter through. Euro area retail sales (volumes) fell by 1.1% m/m (SA) in May, while the April gain was revised down to 0.9% from 0.7%.

Monday 04 Jul US Public Holiday euro area PPI

Tuesday 05 Jul euro area retail sales

Wednesday 06 Jul US ISM Services Index euro area GDP German manuf. orders

Thursday 07 Jul EIA Weekly Natural Gas Storage Dept of Energy Weekly Oil Data German IP ECB Rate Announcement 14 Jul EIA Weekly Natural Gas Storage USDA Feed Outlook USDA Wheat Outlook OECD Leading Economic Indicator euro area HICP US retail sales 21 Jul

Friday 08 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data US employment report

11 Jul Preliminary (June) China commodity data out this week (National Bureau of Statistics) OECD Main Economic Indicators

12 Jul USDA WASDE Report OPEC Monthly Oil Report EIA Short-Term Energy Outlook US Trade

13 Jul Dept of Energy Weekly Oil Data IEA Oil Market Report USDA Oil Crops Outlook USDA Cotton and Wool Outlook euro area IP 20 Jul

15 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data euro area trade US CPI US IP US consumer sentiment 22 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data

18 Jul US housing market index

19 Jul US Housing Starts German ZEW Survey US housing starts

Dept of Energy Weekly Oil EIA Weekly Natural Gas Data Storage US Existing Home Sales US FHFA housing price index US leading indicators US Philly Fed Index

25 Jul Detailed (June) China commodity data out this week (National Bureau of Statistics) US Chicago Fed Index

26 Jul US Case-Shiller HPI US consumer credit US new home sales

27 Jul

28 Jul

29 Jul CFTC Data SHFE Aluminium, Copper and Zinc Inventory Data Euro area HICP flash US GDP US Chicago PMI US consumer sentiment

Dept of Energy Weekly Oil EIA Weekly Natural Gas Data Storage US durable goods orders US pending home sales

8 July 2011

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Barclays Capital | Commodities Weekly

COMMODITIES RESEARCH ANALYSTS

Barclays Capital 5 The North Colonnade London E14 4BB Gayle Berry Commodities Research +44 (0)20 3134 1596 gayle.berry@barcap.com Helima Croft Commodities Research +1 212 526 0764 helima.croft@barcap.com Miswin Mahesh Commodities Research +44 (0)20 77734291 miswin.mahesh@barcap.com Amrita Sen Commodities Research +44 (0)20 3134 2266 amrita.sen@barcap.com Shiyang Wang Commodities Research +1 212 526 7464 shiyang.wang@barcap.com Commodities Sales Craig Shapiro Head of Commodities Sales +1 212 412 3845 craig.shapiro@barcap.com Martin Woodhams Commodity Structuring +44 (0)20 7773 8638 martin.woodhams@barcap.com Peter Rozenauers Commodities Sales, Non Japan Asia +65 9114 6994 peter.rozenauers@barcap.com Xin Yi Chen Commodities Research +65 6308 2813 xinyi.chen@barcap.com Paul Horsnell Commodities Research +44 (0)20 7773 1145 paul.horsnell@barcap.com Roxana Mohammadian-Molina Commodities Research +44 (0)20 7773 2117 roxana.mohammadian-molina@barcap.com Trevor Sikorski Commodities Research +44 (0)20 3134 0160 trevor.sikorski@barcap.com Yingxi Yu Commodities Research +65 6308 3294 yingxi.yu@barcap.com Suki Cooper Commodities Research +1 212 526 7896 suki.cooper@barcap.com Costanza Jacazio Commodities Research +1 212 526 2161 costanza.jacazio@barcap.com Kevin Norrish Commodities Research +44 (0)20 7773 0369 kevin.norrish@barcap.com Nicholas Snowdon Commodities Research +1 212 526 7279 nicholas.snowdon@barcap.com Michael Zenker Commodities Research +1 415 765 4743 michael.zenker@barcap.com James Crandell Commodities Research +1 212 412 2079 james.crandell@barcap.com Kerri Maddock Commodities Research +44 (0)20 3134 2300 kerri.maddock@barcap.com Biliana Pehlivanova Commodities Research +1 212 526 2492 biliana.pehlivanova@barcap.com Sudakshina Unnikrishnan Commodities Research +44 (0)20 7773 3797 sudakshina.unnikrishnan@barcap.com

8 July 2011

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