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11 January 2008
Commodity As An Asset Class: Like the Sirens in Greek mythology, commodities have been singing an alluring melody for global investors as financial market dislocation has enveloped more traditional asset classes. Instead of destruction, we anticipate another year of strong commodity price gains in 2008, most notably in the agricultural sector. Oil: We believe the run-up in oil prices during the fourth quarter of 2007 goes beyond what can be explained by the decline in the US dollar and the level of global growth. We see prices averaging USD85/bbl this year. Natural Gas: We expect prices will eventually benefit from inadequate capacity additions from proposed coal projects and wind power, which are required to meet electricity generation needs. Precious Metals: The risk of further dollar weakness has not been exhausted, in our view. Consequently we see the gold price overshooting this year and expect fundamentals in platinum will remain tight into 2009. Industrial Metals: We expect this sector to recover in 2008 as US recession risk fades, the Fed stops easing, equity markets stabilise and Chinese demand returns. We are particularly constructive towards aluminium and copper. Agriculture: Global land and water constraints as well as the need to feed people, cattle and cars are expected to deliver new price highs this year We favour corn, cotton and soybeans. Commodities: Siren Or Beacon?
Table of Contents Commodity Views ..................................... 2 #1 Executive Summary .............................. 3 #2 Trade Recommendations...................... 6 #3 Trade Review ........................................ 7 #4 Commodity Indices............................... 9 #5 Global Macro....................................... 13 #6 Commodity Cycles.............................. 16 #7 Crude Oil & US Natural Gas ................ 17 #8 Markets vs. Analysts........................... 22 #9 US Power............................................ 23 #10 Commodity Term Structures ............ 24 #11 Commodity Volatility......................... 33 #12 Skew View & Spike Risk ................... 37 #13 Precious Metals ................................ 42 #14 PGMs ................................................ 47 #15 Industrial Metals ............................... 49 #16 Agriculture ....................................... 61 #17 Emissions.......................................... 66 #18 US Carbon Trading............................ 71 #19 Uranium ............................................ 73 #20 Bulk Commodities............................. 77 Commodities Chartbook ......................... 86 Price Forecasts ........................................ 95
Global Markets Research
Research Team London Michael Lewis 44 20 7545 2166 Jude Brhanavan 44 20 7547 1558 Hong Kong Amanda Lee, CFA 852 2203 8376 Paris Mark Lewis 33 1 4495 6761 Isabelle Curien 33 1 4495 6616 New York Joel Crane 1 212 250 5253 Washington Adam Sieminski, CFA 1 202 662 1624
Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
11 January 2008
Energy USD Level 96.33 95.54 2.64 2.47 7.97 130.00 90.00 24.48 Δ wk -3.30% -2.35% -3.80% -3.70% 1.49% 4.84% 0.00% 2.01% Δ wk 2.58% 3.72% 0.62% 0.87% Δ ytd 0.36% 1.80% -0.31% -0.08% 6.47% 4.84% 0.00% 4.85% Δ ytd 5.52% 4.91% 1.57% 1.28% 12M Low 50.48 51.70 1.47 1.36 5.43 65.80 72.00 12.92 12M High 99.62 97.84 2.74 2.57 8.64 133.00 138.00 26.01 5Y Avg 53.75 52.40 1.50 1.54 6.97 65.66 41.02 20.98 View
Brent Heating oil Gasoline (RBOB/gallon) US natural gas (/mmBtu) Coal (API#2/tonne) Uranium (/lb) EUR Emissions Cal'10 Precious Metals Spot (USD/oz) Gold Silver Platinum Palladium Industrial Metals 3M Fwd (USD/tonne) Aluminium Copper Lead Nickel Tin Zinc Agriculture 1 nearby (USD) Corn Cotton Soybeans Sugar Wheat
Level 879.05 15.49 1550.00 376.25
12M Low 607.92 11.67 1117.50 320.75
12M High 879.05 15.82 1550.00 386.00
5Y Avg 505.54 8.79 979.88 262.79
Level 2505 7230 2660 29895 16500 2580
Δ wk 2.75% 7.03% 1.72% 9.91% 0.76% 5.26%
Δ ytd 3.99% 8.31% 4.31% 13.67% 0.46% 8.86%
12M Low 2395 5340 1550 25100 10100 2220
12M High 2895 8320 3890 51600 17575 4170
5Y Avg 2066 4394 1237 19512 8807 1966
Level 4.79 0.68 12.67 0.11 9.08
Δ wk 3.51% 0.80% 1.46% 5.96% -0.82%
Δ ytd 5.10% 2.09% 5.67% 5.08% 2.54%
12M Low 3.10 0.46 6.65 0.08 4.19
12M High 4.79 0.69 12.68 0.11 9.80
5Y Avg 2.68 0.55 6.91 0.10
Source: DB Global Markets Research, Bloomberg (Prices as of close of business Tuesday)
Deutsche Bank AG/London
11 January 2008
#1 Executive Summary
Commodities: Singing Seductively
• China and US monetary policy are expected to remain key drivers of commodity markets during 2008. Consequently agriculture and precious metals are our favourite sector calls for 2008. We believe rallies in the agricultural sector are still in their infancy and as the fight between feeding people, cattle and cars intensifies we expect new price highs to be achieved across the sector. We are particularly constructive towards corn, cotton and soybeans. We believe 2008 will be the year that G3 central banks intervene to rescue the US dollar. We are therefore positioning for new all time highs across the precious metal complex, particularly in an environment of declining real interest rates in the US. However, we are wary that the recent run-up in gold prices may be moving temporarily into over-extended territory, particularly if the US dollar its seasonal tendency to strengthen in January. Recessionary winds in the US pose the greatest risks to the industrial metals sector, in our view. If the economy enters recession then we would look for a further 20% decline in the S&P500 and for equity markets to stabilise around July 2008. At that point we would start to reinstate bullish front-end strategies to accompany our bullish assessment towards long-dated metal prices. If, on the other hand, rapid US rate cuts avert a growth dip, the central scenario of DB’s US Economics team, we believe rallies in the sector will occur sooner. We are particularly constructive towards aluminium. A reflection of high energy prices and China’s move to become a net importer of aluminium. We believe the run-up in oil prices during the fourth quarter of 2007 goes beyond what can be explained by the decline in the US dollar and the level of global growth. However, refinery capacity, oil production constraints and geopolitical issues continue to play a very important role in boosting prices. We believe it will require some normalising of these factors to achieve our average crude oil price forecast of USD85/barrel.
Like the sirens in Greek mythology, commodities have been singing an increasingly alluring song for global investors as extreme financial market dislocation has enveloped more traditional asset classes during 2007. However, instead of destruction, we anticipate another year of strong commodity price gains in 2008, most notably in the agricultural sector. Aside from underlying supply and demand fundamentals, which we believe remain bullish in a number of commodity markets, we expect the ebb and flow of new risk capital entering commodities will also be a function of two opposing forces. The first is the tendency of global investors to be overly optimistic about asset classes that have been past winners and to commit more capital to these markets. We expect the second, and countervailing force, will be investor concerns towards the increasing maturing of the current commodity price and the possibility of a cyclical downturn in commodity returns. The role of China We remain constructive to the ability of commodity prices to sustain recent gains and in certain markets to hit new price highs this year. We expect the main trade balance shifts this year will be the country moving to become a net importer of corn and aluminium for the first time in this decade. We also expect the strength in underlying GDP and income growth across China will remain a major factor supporting commodity prices over the next few years. Indeed, the steady increase in Chinese GDP per capita since 1995 is remarkably similar to the improvement in living standards that unfolded in South Korea and Taiwan from 1980, Figure 1. On this basis, Chinese GDP per capita will reach approximately USD20,000 soon after 2020.
Figure 1: A comparison of GDP per capita income in South Korea, Taiwan and China
40,000 35,000 Taiwan (Year 0 = 1980) GDP per capita USD 30,000 25,000 20,000 15,000 10,000 5,000 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Number of years from 1980 for SK & Taiwan & from 1995 for China China (Year 0 = 1995) GDP per capita based on PPP South Korea (Year 0 = 1980)
Source: Deutsche Bank, IMF
Like per capita income, China’s urbanisation ratio has also been increasing for the past twenty years, by roughly 1 percentage point per annum. By 2006 the urbanisation ratio had reached 43.9% compared to 23.7% in the mid-1980s, or equivalent to over 13 million people being urbanised every year. We expect China’s
Deutsche Bank AG/London
We disagree. However. In contrast. arable land per head per person has been on the decline for the past 30 years.11 0. roughly similar to US oil consumption today. Tex Reports.11 January 2008 Commodities Outlook urban population to rise to 55% by 2020. the urbanisation trends is generating a sustained period of strong energy demand. there has also been concern that the conclusion of the Olympic Games in Beijing this summer could have a negative effect on overall economic activity. Olympic related investments have accounted for only 0. Although there has been a recovery in agricultural land loss over the past few years. Figure 2. Figure 5. between 1% and 4% of total investments. UNCTAD. iron ore and lead over the 2007-08 will come from China.15 0. Seoul. Games hosted in Sydney. Deutsche Bank Source: China Statistical Bureau Just as there have been fears of the US expansion running out of steam from December 2007 onwards.14 0. London East Research Institute. per capita meat consumption in China is just 60kg annually. We also believe another major trend driving global commodity markets will be increasing shortages of agricultural commodities most notably in China. Currently. AME. Figure 3: Contribution of Chinese demand growth to global demand growth Copper Zinc Nickel Steel Lead Iron ore Aluminium 0 20 40 60 80 100 2007-08E Figure 5: China’s arable land per person is on the decline 0. We believe these trends will lead to a further deterioration in the country’s agricultural trade balance. or 4 to 12 times more important than is the case of China today. Figure 2: Asia’s march towards increased levels of urbanisation 100 Figure 4: Olympic related investments 5 Olympic-related investments as a % of total investments during the five years prior to the event 80 4 60 3 40 2 20 0 1 Th ia al ia n Pa d ki st an Af r ic a C hi na In do ne si a W or Ph ld illi pp in M es al ay si a Ja pa n H ng K ap or e m In d Ko re a EU U S Vi e tn a Si 0 2004 Athens 1992 Barcelona 1998 Seoul 2000 Sydney 2008 Beijing 1996 Atlanta Source: CEIC (2007). Indeed we estimate that over 80% of global demand for aluminium. Figure 3.5 times more than that in rural areas. meat consumption still remains low by international standards. Indeed assuming no change in energy efficiency and per capita income of USD20. Deutsche Bank AG/London .1 1978 1985 1990 1992 1994 1996 1998 2000 2002 2004 2006 140 150 Hectares of arable land per capita (lhs) Total area under cultivation (million hectares. This represents just 60% of the world average and 20% of per capita meat consumption in North America. bringing the urbanisation ratio towards those prevailing currently in Malaysia and the Philippines. Deutsche Bank Since per capita energy consumption in urban areas is 3. rhs) 155 160 Source: Brook Hunt.16 0. Indeed rising incomes and declining levels of arable land per head of population in China are leading to a surge in agricultural imports. in our view. National sources Source: Haver.12 145 0. Barcelona and Athens represented Page 4 Rising meat consumption is increasing the requirements for cattle feed.3% of China’s total fixed asset investment over the past five years. Rapid urbanisation is likely to sustain this trend.000 by 2020 it would imply Chinese oil consumption of 20 million barrels per day. It is also sustaining strong consumption growth for industrial metals.13 0.
Michael Lewis. For more details see our commodity Index article on page 9. Conclusion We believe the credibility of commodities as a distinct asset class was enhanced last year. The strong performance of commodity index returns during extreme financial market dislocation demonstrated by the negative correlation of commodity returns with more traditional asset classes. with a recovery in certain industrial metals also taking hold during the course of the year. Consequently. we believe the commodity bull run. For those investors concerned towards a potential cyclical downturn in commodity index returns over the next 12-18 months we recommend a long position in the DBLCI-MR ‘Plus’. If the US authorities are successful in averting a recession then we believe this will lift bearish forces that have been depressing industrial metal prices over the past few months.11 January 2008 Commodities Outlook The role of the US We believe a falling real interest rate environment in the US will help to sustain a bullish outlook for precious metal prices. has further legs to run.com Deutsche Bank AG/London Page 5 . alongside tight supply-demand fundamentals in a number of markets.lewis@db. We expect this will only encourage further inflows into the complex. Agricultural and precious metals are our favourite sector call this year. (44) 20 7545 2166 Michael. which began at the end of 2001.
short Dec’10 WTI Short Jan’08 & long Feb’08 NG contract. short DBLCI-OY-CL Long DBLCI-OY-NG vs. short Dec’09 • Long wheat curve flattening at the front-end 4. Long Dec’08 corn vs. short July’09 Long Dec’08 vs. Long Dec’08 or Short Mar’08 vs.11 January 2008 Commodities Outlook #2 Trade Recommendations Commodity sector Index • • • Energy • • • • Directional Trades • • • • Alpha RV Plays Long DBLCI-MR Long DBLCI-MR “Plus” Long Commodities Booster Fund Bullish uranium Long Mar’09 WTI variance swap Long Mar’09 US NG variance swap Long Sep’09 US NG variance swap Long DBLCI-MR vs. short S&PGSCI Long DBLCI-CL vs. short S&P GSCI-NG sub-indices • Precious Metals • • Long gold & platinum Take profit on long gold vol via variance swap • Scale up sell gold vol • Short Feb’09 and long Apr’09 contract Long back-end copper vs. buy zinc • Long back-end industrial metals Grains • • • • • Long grains basket Long corn Long cotton Long soybeans Long Dec’08 wheat • Long corn curve backwardation 1. Short Mar’08 vs. Long Dec’08 vs. 3. and keep rolling the positions every month • Long DBLCI-OY-NG vs. sell Dec’09 corn • Long wheat curve backwardation 2. short SPGSCI-NG Long DBLCI-CL crude oil index vs. short Dec’08 WTI Long Dec’09 vs. position to go long • • Long curve flattening Sell copper vs. 5. short back-end gold Industrial Metals • Short front-end industrial metals in the near term. short OIX oil equity index • • • Long Jun’08 vs. Long Jul’08 Source: DB Global Markets Research Page 6 Deutsche Bank AG/London .
However. given Asian exchange rate strength.11 January 2008 Commodities Outlook #3 Trade Review Date Nov 2 2007 Commodity Trades Dry Freight: Time to Take Breath. we also recommended a relative value trade on different freight indices to take advantage of the significant divergence in performance between the various vessel types. discourage inventory restocking and therefore a good sell. We believe the significant out-performance of Panamax over Handsize vessels is unsustainable. Bearish Freight Equities The Baltic Dry Index rallied approximately 150% in the first 10 months of 2007. was also at risk from a downturn in US business confidence. Sep 14 2007 Wheat Term Structure Trade We believed the high spread between this year and next year wheat was unsustainable. Maintain short. Maintain short. Long Handysize Index In addition to our directional bearish trade on freight rates and freight equities. Trade Performance Nov 2 2007 RV Dry Freight: Short Panamax vs. The worst three performing commodities over the past month are all LME metals. We continue to believe wheat might be pressured in the near term on weakening fundamentals: more water in Australia. Bloomberg Deutsche Bank AG/London Page 7 . Despite the recent rally. China now a small net exporter of wheat. but. hurt this sector more than others. The spread has widened on supporting weather and tender announcement which was subsequently withdrawn. Front end remain defensive. This trade exploited this fact and further equity market weakness would. In addition. since it was wide enough to encourage immediate substitution. Maintain long. which has been an important driver of dry freight rates in the past. Asian export growth. signs of easing port congestion and a moderation in the degree of backwardation in the freight curve we position for the freight rally to take breath. Oct 5 2007 Playing Grains Seasonality: Long Mar’08 Corn We are bullish corn but given the contango term structure we preferred to go long a dated futures contract. look to go long into Q1 Source: DB Global Markets Research. Maintain position. industrial metal returns have displayed the strongest positive correlation with the S&P500. Aug 3 2007 Industrial metals were identified as the expected biggest losers on lower equity markets In the last five years. we believe there is more upside potential going into 2008. India's wheat trade deficit shrinking. in our view.
Feb 16 2007 Bullish Back-end Copper We believe copper was over-sold and was likely to recover. inventory re-stocking in China and rising production cost. Bloomberg Trade Performance Page 8 Deutsche Bank AG/London . given the high level of above ground stocks in gold compared to a copper inventory-to-consumption ratio which had fallen to a matter of days. the strong rally and subsequent attack of USD100 has kept this trade in profit. This RV play weathered the storm of the sub-prime triggered sell-off as well as the 28% oil rally over the past few months relatively well. We recommended going long the back-end of the copper curve. Short Gold Forward We recommended a long copper position and funded this via gold where we were short term bearish. We have been bullish backend industrial metals and there was no exception to this trade. Given the extreme positioning currently in the gold market as well as seasonal trade in the EURUSD. Given the consistent trinity: record high oil prices. Maintain long. we would recommend taking profit and prepare to scale up sell. Since then the gold price has broaken above USD800/oz which has pushed gold vol higher despite a recovery in risk appetites. not only oil did not sell-off. Source: DB Global Markets Research. gold prices traded USD20 lower and implied vol rose. Maintain position. Take profit and scale up sell.11 January 2008 Commodities Outlook #3 Trade Review Date July 20 2007 Commodity Trades RV Oil Index vs. either as a directional long or a curve flattening trade. we adopted a curve steepening trade based on our belief that the move from USD75/bbl to USD60/bbl between August and September 2006 will not be repeated. Maintain position. July 20 2007 WTI Curve Play: Backwardation To Stay The WTI curve had a roller coaster ride in 2007. from steep contango earlier the year and then suddenly flipped back into backwardation in the middle of the year. We believe a RV trading strategy is best positioned to extract alpha from the oil market. During the period of extreme VIX and USDJPY volatility. This trade has performed as contagion from equity and FX markets spread into the commodities complex and specifically gold. Oil Equities We found that crude oil index tends to outperform oil equity index when the oil term structure is trading in backwardation. Maintain long. Feb 16 2007 RV metals: Long Copper Forward vs. falling OECD inventories and backwardation. June 8 2007 Calm Before The Storm? Long Gold Variance Swap June marked the low point in gold implied vol. This position also benefited from selling contango and buying backwardation and therefore gaining positive carry on both legs of the trade. easing China SRB metal release. This trade has proved to be extremely well timed we got in just after the copper price has bottomed. In fact. in our view. with a stabilizing US housing market. Despite the sub-prime related sell-off the back-end copper price has remained extremely resilient. We believed forward copper was undervalued while forward gold was overvalued. and underform in contango.
We find that since the end of 2001. We expect the DBLCI-MR to post 20% returns in 2008.2 Source: DB Global Markets Research. which specific futures contracts are used for each individual commodity. Figure 2. 350 Total returns since the end of 2001 300 Figure 1: Asset class returns compared 35 30 25 20 15 10 5 0 Bonds EM FX Equity Commodities 4. which is able to allocate between commodities and T-bills according to prevailing market conditions. the universe of commodity indices can be classified according to three broad categories: a) fixed weight and fixed roll index. what is the selection process.1% and 49. in our view. For those investors concerned about a possible cyclical downturn in commodity index returns.4 5. The DBLCI-MR expects aluminium will become the engine room for index returns this year. Figure 1. The major determining features of a commodity index are how many commodities are included and in what proportion. is therefore increasingly likely in our view. It also introduces a greater probability of an eventual cyclical downturn in commodity index returns. Bloomberg (as of end 2007) 12. • • • Figure 2: Commodity index returns since 2002 400 Last year proved to be another strong year in terms of commodity index returns particularly when compared with more traditional asset classes. While the majority of commodity indices has posted positive returns since 2001. We believe this resilient index performance during extreme financial market dislocation has only enhanced the appeal of commodities as an event risk hedging asset class. The risk of overshooting in Deutsche Bank AG/London Page 9 . Commodity returns have performed strongly despite the US sub-prime crisis and the increasing probability of a US recession. which posted negative returns in 2006. certain commodity markets. total returns on the Dow Jones-AIG commodity index have risen 145% compared to 370% on the DBLCI-Mean Reversion. Consequently this represents one of the most durable rallies in commodity index returns on record. Aside from the S&PGSCI. for example gold. Bloomberg This divergence in part reflects the rapid development of the commodity index space over the past five years with at least 12 new commodity indices being launch over this period. Investors therefore need to be acutely aware of the characteristics that distinguish the numerous commodity indices in the marketplace.0 5. b) fixed weight and dynamic roll index and c) dynamic weight and fixed roll index.11 January 2008 Commodities Outlook #4 Commodity Indices DBLCI-MR: Another Strong Year • We believe the appeal of commodities as a distinct asset class has been enhanced in the aftermath of the US sub-prime crisis. in our view. The tendency of investors to be overly optimistic about asset classes which have been past winners and overly pessimistic about asset classes which have been past losers will encourage a new wave of risk capital to enter the complex. This follows gains of 46.6 250 200 150 100 DJAIGCI S&PGSCI LBCI RJ/CRB RICI DBLCI DBLCI-MR Source: DB Global Markets Research. the universe of commodity indices has therefore posted positive returns on an annual basis since the end of 2001. how are these futures contracts rolled and are the commodities reset to base weights periodically? Consequently. we have launched the DBLCIMR ‘Plus’. such as the Deutsche Bank Liquid Commodity Index-Mean Reversion.0% respectively in 2006 and 2007. this masks a significant divergence of index performance between the incumbent indices such as the S&PGSCI and Dow Jones-AIG and younger commodity indices.4 2007 returns (%) Bonds: DBIQ Global IG Sovereign Emerging Markets: DBIQ EMLE Foreign Exchange:DB Currency Returns Index Equity:MSCI Global Commodities: DBLCI-OY 32. We believe this will prove to be a rewarding strategy as China becomes a net importer of aluminium.
this situation is changing as the Chinese authorities take steps to close inefficient smelters and restrict the level of aluminium exports. This strategy has proved rewarding over the past two years as total returns on the DBLCI-MR have risen 46. the DBLCI-MR is indicating downside risks to energy returns are mounting while aluminium returns will perform strongly. Figure 4: Historical weights of the DBLCI-MR and expected change in allocations by June 2008 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1989 1991 WTI 1993 1995 1997 Gold 1999 2001 2003 Wheat 2005 Corn 2007 Heating Oil Aluminium Source: DB Global Markets Research. China is also the fastest growing market for aluminium demand. Source: DB Global Markets Research. the Chinese aluminium market has been persistently oversupplied in recent years. Figure 3. By the beginning of 2007 the DBLC-MR had switched tack and had begun to build an aggressive energy position ahead of crude oil prices were hitting triple digits. with consumption increasing by 20% and 24% in 2005 and 2006 respectively. This has seen the energy allocation collapse to 5% by the beginning of 2006 and the DBLCI-MR migrating aggressively into corn and wheat. Figure 3: Agricultural commodity rallies compared Rebalancing Index Rolling frequency frequency Fixed weight. fixed roll index: Energy: monthly DBLCI DJ-AIG S&P GSCI RJ/CRB RICI LBCI MLCX UBS CMCI All others: annual Six times per annum Monthly Monthly Monthly Monthly Monthly Daily rolling at constant maturity Monthly Jan-07 Fixed weight. with the level 2007 registering nearly 39%.0% in 2006 and 2007 respectively. China plays a critical role in the outlook for global aluminium prices. As a result of significant smelter capacity growth. This would represent its largest allocation to this commodity since May 1992.1% and 49. fixed roll index: Energy: monthly DBLCI-MR DBLCI-MR ‘Plus’ All others: annual Energy: monthly All others: annual No rebalancing Jun-07 No rebalancing Feb-03 Dynamic Annual Jan-07 Dynamic Annual May-06 Annual Annual Annual Monthly Annual Annual Monthly Feb-03 Jul-98 Jan-91 Jun-05 Jul-98 Dec-00 Jun-06 Launch date We estimate that by the middle of this year. China is the world’s largest producer of both primary aluminium and alumina. Bloomberg Reweighting events on the DBLCI-MR take place when the one-year moving average price of a commodity is a whole multiple of 5% away from the five-year moving average. Page 10 Deutsche Bank AG/London . However. dynamic roll index DBLCI-OY DBLCI-OY Broad DBLCI-OY Balanced Dynamic Annual Jan-07 Dynamic weight.11 January 2008 Commodities Outlook The DBLCI-Mean Reversion and the DBLCI-MR ‘Plus’ are therefore the only commodity indices not to adopt a fixed commodity weight allocation. the DBLCIMR will have increased its allocation to aluminium from 15% to approximately 45%. with an estimated market share of 33% and 26% respectively in 2007. At the same time. we expect the allocation to crude oil and heating oil will be reduced from 65% to 35%. This has led the country to become a net exporter of primary aluminium since the beginning of 2001. Instead commodity weights on the DBLCI-MR are changed over time such that the index ‘over-weights’ cheap commodities and ‘under-weights’ expensive ones according to a pre-defined mechanistic formula. Bloomberg We believe this rising allocation to aluminium may prove a rewarding strategy during 2008 given tightening fundamentals in the Chinese aluminium market. Accordingly. Consequently.
11 January 2008
These steps have included: • January 2005: The withdrawal of an 8% export tax rebate and the imposition of 5% export tariff • November 2006: An increase in the export tariff to 15%. In addition, the tax exemption for tolling of primary aluminium (importing alumina duty free) and exporting with a rebate was withdrawn. • August 2007: The removal of a 5% import tax on primary imports, the imposition of 15% tax on aluminium bars and rods, and the elimination of an 8% export rebate from aluminium extrusion and which became effective at the beginning of August. • December 2007: imposed new industrial production guidelines setting minimum capacity requirements for primary aluminium and alumina producers. These measures have been successful in reducing aluminium exports since September 2006 such that net exports in 2007 will be the lowest since 2001, at under 100K tonnes. Moreover, in 2008 steps to discourage exports as well as strong domestic aluminium consumption point to the possibility of China becoming a net importer of aluminium, Figure 5. Indeed on our estimates, China is set to constitute more than 80% of global aluminium demand growth between 2007 and 2008 and in our view supports the bullish outlook for aluminium spot prices.
In terms of roll returns, forward curves are pointing to a divergent outlook for this year. On the one hand, roll returns for wheat, crude oil and heating oil are positive, which we expect to be sustained throughout 2008. Meanwhile roll returns are negative for gold, corn and aluminium, a reflection of the contango term structure in these markets. Figure 6 estimates the implied roll return for the coming year assuming the forward curve is unchanged from current levels. It also illustrates how moving to a dynamic rolling futures schedule and adopting the Optimum Yield technology can help boost roll returns.
Figure 6: Implied roll return for components of the DBLCI with & without the OY technology
15% Implied roll return for 2008 on current shape of the forward curve Implied roll return for 2008 using the Optimum Yield tecnologiy
-10% Wheat Crude oil Heating oil Gold Corn Aluminium
Source: DB Global Markets Research
Figure 5: China’s move to become a net aluminium importer
China's net trade balance in aluminium (tonnes, 000s)
We present our expectations for spot, roll and total returns for 2008 for the six components of the DBLCI and DBLCI-MR in Figure 7. The possibility of the roll return in corn and aluminium contributing positively to overall returns reflects our belief that fundamentals in these markets are tightening, which will flip these commodity forward curves from contango to backwardation.
-300 1996 1998 2000 2002 2004 2006 2008?
Figure 7: Expected composition of returns for the six components of the DBLCI in 2008
Commodity Spot Return Roll Return Total Return
Source: DB Global Markets Research, CEIC
To assess the outlook for commodity index returns we estimate both spot and roll returns for the individual components of a commodity index. In terms of spot returns, we expect these will be positive for aluminium, gold, corn and wheat. We recognise the upside price risks for crude oil, the WTI options market skews currently attaches a 10% probability of the Dec’09 WT contract expiring above USD149/barrel. However, on our forecasts we are assuming crude oil and heating oil spot returns will be slightly lower compared to current levels.
Source: DB Global Markets Research
Deutsche Bank AG/London
11 January 2008
On this basis, we expect total returns on the DBLCI-MR to rise 20% this year. However, given the increasing maturing of the current bull run in commodity prices we believe it is increasingly prudent to consider the possibility of a period where commodity index returns turn negative over the next 24 month period. The DBLCI-MR ‘Plus’ To address the risk of a cyclical downturn in commodity index returns we launched the DBLCI-MR ‘Plus’ index in June 2007. Its strategy is to achieve an optimal asset allocation between a commodity index, in this case the DBLCI-MR, and T-bills (cash) by detecting cyclical upswings and cyclical downturns in global commodity markets. It achieves this by rebalancing between cash and commodities according to their relative performance over the previous 12 month period. Such that if the DBLCI-MR has outperformed cash in all 12 months then the index will be fully allocation to commodities and if cash has out-performed commodities over the past year it will have eliminated all exposure to commodities.
Figure 8 illustrates the performance of various alpha, beta and enhanced beta commodity allocation strategies. We find that since August 1997, there have been only four months were monthly returns of the DBLCI-MR ‘Plus’ has been -5% or less. This compares with 15 and 18 months for the DBLCI-MR and the S&P GSCI respectively.
Conclusion In our view, the rapid development of the commodity index space over the past five years is a sign of the building credibility of commodities as a distinct asset class. However, it also introduces challenges for investors in terms of selecting the correct index for their investment objectives.
Michael Lewis, (44) 20 7545 2166 email@example.com
Figure 8: The comparative performance of various alpha and beta commodity allocation strategies
Total Return* Beta allocation strategies
DBLCI TM S&P GSCI TM DJ-AIGCI SM 14.65% 7.66% 8.07% 20.75% 21.13% 14.24% 10.60% 3.83% 4.23% 51.08% 18.12% 29.68% -11.21% -14.41% -7.54% 19 23 13
Sharpe Ratio #
Monthly drawdown ##
no. of m onths < -5%
Enhanced beta allocation strategies
DBLCI-MR TM DBLCI-MR TM 'Plus' DBLCI-OY Balanced DB Commodity Booster Index - S&P GSCI TM S&P GSCI TM DJ-AIGCI
15.05% 15.06% 14.96% 16.60% 7.66% 8.07%
16.97% 12.61% 13.16% 17.01% 21.13% 14.24%
10.99% 11.00% 10.90% 12.48% 3.83% 4.23%
64.77% 87.20% 82.81% 73.36% 18.12% 29.68%
-14.73% -7.25% -7.05% -9.18% -14.41% -7.54%
15 4 5 9 18 11
Alpha-Lite allocation strategies
DB Commodity Havest Index DB Commodity Havest Index - S&P GSCI TM
Other asset classes
SPTR (S&P 500 Total Return) USGATR (US Govt. All Total Return) 5.85% 6.40% 17.77% 4.65% 1.79% 2.33% 10.08% 50.09% -14.46% -3.93% 13 0
* annualised return based on total return and excess return; ** annualised vol of the daily lognormal returns # calculated as a quotient of excess return and the volatility: ## based on total return; Data from August 1997 to 7 January 2008 Source: DB Global Markets Research, Bloomberg
Deutsche Bank AG/London
11 January 2008
#5 Global Macro
The US Recession
In January 2005 we stated that the next US recession would begin in December 2007. This reflected the fact that the duration of every US expansion since 1954 has been directly proportional to the time the US Federal Reserve has given monetary stimulus to the economy. Consequently, the fuel tank was running close to dry when the US sub-prime crisis struck six months ago. Since then economic indicators have been pointing to the increasing recessionary risk enveloping the US economy. We expect the rapid programme of rate cuts by the Fed over the past few months will avert recession (just). This is because real interest rates today are around 200 basis points lower than the average real fed funds rate at the start of the last five US recessions. However, in this article we examine the likely commodity winners and losers if financial markets start to raise the probability of a US recession even further. We find that industrial metals will be most exposed over the coming six months. Meanwhile we expect a falling US real interest rate environment will be bullish precious metal prices, with the euro and the gold price at risk of overshooting this year. Although a US downturn may depress the oil price, for as long as world GDP growth remains above 3%, we expect OPEC will be in a powerful position to defend any short term price weakness. We expect OPEC will be quick to act to defend oil prices particularly in an environment of US dollar overshooting to the downside. We see few contagion effects of a US recession on the agricultural complex and consequently we believe this sector possesses good diversification properties for investors.
Over the past five years, industrial metals have displayed a strong positive correlation with the S&P500, Figure 1. Since the start of the US sub-prime crisis, copper and zinc prices have been particularly mesmerised by the performance of US equity markets. The possibility of the US entering recession therefore poses extreme dangers for the industrial metals complex given the tendency of the S&P500 to perform badly during US downturns.
Figure 1: Long & short-run commodity correlations versus the S&P500
0.6 0.4 0.2 0 -0.2 Since December 1982 -0.4 -0.6 Energy Precious Metals Livestock Agricultural Industrial Metals Last 5 Years Correlation of various sub-sectors of the S&P GSCI to the S&P500
Source: DB Global Markets Research, IMF, Bloomberg
Figure 2 examines the performance of the S&P500 around US recessions since 1948. We find that on average US equity markets decline approximately 10% from their peak to the onset of recession and an average of 18% once the US has entered recession. If the US enters recession this month, then the S&P500 will have fallen by 10% since the October 2007 peak and consequently in line with historical averages. Moreover if this cycle conforms to historical averages then the S&P500 will decline a further 18% from current levels and hit this trough in July 2008, or seven months after the economy has entered recession. Of the group of industrial metals we believe copper is most vulnerable in the event of a US recession. Figure 3 highlights the average change in inventories of the six LME metals in the 25 weeks before and the 75 weeks after the last three US recessions. We find that copper inventories have been the most sensitive to a slowdown in US economy activity, with inventories doubling within three months of the US entering recession. Meanwhile, lead, nickel and zinc inventories have tended to be relatively unaffected in the months following recession.
Deutsche Bank AG/London
2% -9. Page 14 Deutsche Bank AG/London . July 1990 & March 2001 = 100 Figure 4: A pre-emptive Fed should help forestall recession % 6 5 4 3 2 1 Real fed funds* (average of last 5 business cycles) Real fed funds* (current) % 6 5 4 3 2 1 * deflated by core CPI 0 0 (months) -12 -10 -8 "0" represents historical onset of recession -6 -4 -2 0 2 4 6 8 10 12 14 16 18 -1 100 50 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 -1 Number of weeks before/after the US enters recession Source: DB Global Markets Research.3% -13.0% -10. Figure 5 illustrates total year-on-year returns for gold as a function of the real fed funds rate since 1970. it implies a further moderation in real interest rates.1% -27. Indeed the real fed funds rate peaked at 3% in June 2007 and has subsequently fallen to 2%.7% -42.8% -18. We find that there is a loose positive correlation between the level of real short-term US interest rates and gold returns.3% -8.6% -25.1% -19.4% Source: DB Global Markets Research.3% -36.3% -5.6% -14. Meanwhile.9% -36.11 January 2008 Commodities Outlook Figure 2: The performance of the S&P500 around US recessions since 1948 Recession period Start Jun-48 Jul-53 Apr-57 Apr-60 Dec-69 Nov-73 Jan-80 Jul-81 Jul-90 Mar-01 Average Jan-08? End Oct-49 May-54 Apr-58 Feb-61 Nov-70 Mar-75 Jul-80 Nov-82 Mar-91 Nov-01 Months 16 10 12 10 11 16 6 16 8 8 11 9-Oct-07 Today S&P500 peak 15-Jun-48 5-Jan-53 2-Aug-56 3-Aug-59 29-Nov-68 11-Jan-73 13-Feb-80 28-Nov-80 12-Jun-90 24-Mar-00 S&P500 trough 13-Jun-49 21-Sep-53 21-Oct-57 25-Oct-60 26-May-70 4-Oct-74 27-Mar-80 12-Aug-82 11-Oct-90 21-Sep-01 Peak to recession start # of months 6 8 8 12 10 7 1 11 8 3 % decline -9.1% -11.1% -48.8% From recession start to trough # of months 13 3 7 7 6 12 3 14 4 7 7 % decline -19. NBER Figure 3: The average change in LME inventories in the past three US recessions 400 350 Aluminium 300 250 200 150 Copper Lead Nickel Tin Zinc The average change in LME inventories in the weeks before and after the 1981.6% -11. or 200 basis points below where the real fed funds rate peaked in the current cycle.1% -17. Since we expect a further 25 basis points off the Fed funds rate at the end of this month. LME Source: DB Global Markets Research.8% -25.7% -1. Specifically gold returns tend to perform strongly in low or negative real interest rate environments.2% -21. 1990 and 2001 US recessions July 1981.9% Total decline from peak to trough -20.8% -22.7% -10. Indeed the threat of inflation shocks ahead provides further scope for real interest rates to be even lower over the coming year.4% -7.2% -17.1% -5. there is still a good chance that the US can avert recession. BLS Despite the risks. FRB.1% -9. We believe precious metals and in particular gold prices will be a major beneficiary of a declining real interest rate environment in the US.0% -21.2% -17. the average real fed funds rate at the start of the past five US recessions has been 5%.7% -14.
Indeed if the US economy did fall into recession during the current quarter then it would. periods where world GDP growth fell below 3%. Look to go long front end aluminium and copper prices as US recession risks start to fade. We find that OPEC have a very good track record in defending the oil price. Bloomberg Deutsche Bank AG/London Page 15 . On current forecasts we expect world GDP growth to rise 4. (44) 20 7545 2166 michael. in our view. be wary of a pocket of US dollar strength in the first four weeks of this year.com Number of trading days before and after OPEC quota reduction Source: DB Global Markets Research. However. we expect OPEC would only struggle to defend the oil price if global growth falls below 3%. we believe OPEC will also aim to keep oil prices as high as possible in order to preserve their purchasing power. Long back-end industrial metals. We expect it would also encourage a further rise in copper inventories on the LME. the cartel has a 7080% success rate in defending the oil price. if our US economists are correct and the US can avert recession then we believe underlying industrial metals demand remains strong. Consequently we expect a strong recovery in these metal prices during 2008-09 We expect oil demand fundamentals will only start to deteriorate if world growth falls below 4%. we see little downside risks to our current oil price forecasts. We expect the precious metals complex will benefit from a falling US real interest rate environment and the threat of an overshooting in the EURUSD exchange rate. However. Source: DB Global Markets Research.lewis@db. However. The two years here the cartel has failed were in 1998 and 2001.11 January 2008 Commodities Outlook Figure 5: Gold returns in different US real interest rate environments 100 80 Gold yoy returns (%) 60 40 20 0 -20 -40 -5 -4 -3 -2 -1 0 1 2 3 4 5 Real short-term Fed funds rate (%) 6 7 8 9 Year-on-year returns 1970-2007 Conclusion We believe the outlook for metals prices is bullish during 2008. Figure 6 examines the performance of the crude oil price in the two weeks before and two to three months after the cartel have agreed production cuts to defend the oil price. We find that since the early 1990s. However. we remain cautious to adopting long front-end metal strategies at the moment since US recession risks still remain close to the surface. Trade recommendations: • Long gold. Bloomberg In an environment where the euro is overshooting and central banks are poised to intervene to rescue the US dollar. We believe the prospects for the industrial metals complex are improving. Figure 6: The performance of the WTI crude oil price before and after an OPEC quota reduction WTI oil price=100 in the day before quota reduction 150 140 130 Mar-93 Feb-01 Nov-03 Apr-98 Apr-01 Apr-04 Jul-98 Sep-01 Apr-99 Jan-02 • 120 110 100 90 80 70 60 -14 -7 0 7 14 21 28 35 42 49 56 63 70 2001 1 998 Michael Lewis. Consequently. imply a further 18% decline in the S&P500 and equity markets not stabilising until July 2008.5% in 2008 and consequently from a demand perspective indicated few bearish forces for the oil price. most notably from China.
Bloomberg. then it would imply wheat. they have been the most durable on record as the cycle approaches its seventh year. The rally in many agricultural commodity prices during this cycle is only still close to historical averages in both magnitude and duration. cattle feed and biofuels is increasing rapidly. Bloomberg. cotton. Michael Lewis. 175%. rallies in gold and silver prices have on average tended to be 300% in magnitude and around three years in duration. If agricultural prices hit all time highs in real terms as has occurred in the energy and industrial metals complex. rallies in the agricultural sector have. For example. • While the rally in gold and silver prices has not yet surpassed the rallies of the late 1970s in percentage terms.lewis@db. Historically oil price rallies have had a peak to trough rise of 225% and lasted for just over two years.5/bushel and USD20. the current upswing in commodity prices is distinctive because it is proving to be either the most powerful or the most durable on record. a trough to peak rise of 160% and a typical duration of approximately 18 months.30/bushel respectively and cotton and soybean prices rising to USD3. We consequently believe the price rallies in corn. Soybeans and cotton prices would have to rise 70% and 105% with price peaks occurring at the end of this year and the first half of 2012 respectively. corn. A similar distinction is held by copper which had a trough to peak rise of 570% between November 2001 and May 2006. rallies in the agricultural sector have tended to be less pronounced and shorter in duration than upswings in the energy and metals’ sectors. In our view. The tendency for agricultural price rallies to be shorter and less powerful is possibly a reflection of the faster supply response in this sector compared to other parts of the commodity complex. However. IMF Page 16 W Zi nc W he at C oc oa N ic Deutsche Bank AG/London Su ga r G .22/lb and USD41/bushel respectively. • • • Figure 2: The duration of the current commodity price rally compared to historical averages 90 80 70 60 Months 50 40 30 20 10 0 These are amongst the most durable rallies on record These price rallies are still in their infancy • Average duration of price rally since 1970 Duration of current rally ke l C op pe Al r um in iu m C ot to n So yb ea ns ol d C ru de oi l Si lv er C or n • Source: DB Global Markets Research. (44) 20 7545 2166 michael. Consequently the current upswing in oil prices which began in November 2001 has been the most powerful and durable on record. the crude oil price has risen just over 450% so far in this cycle with the rally now more than six years old. IMF • Figure 1: The magnitude of the current commodity price rally compared to historical averages 1400 1200 Magnitude of current rally (%) 1000 800 600 400 200 0 ke l Co pp er Cr ud e oi l Si lv er Co rn So yb ea ns d C oc oa he a Al um t in iu m C ot to n Su ga r Zi nc N ic G ol Indeed for the current rally in corn and wheat prices to be the most powerful and durable in history would require grain prices to rise a further 30-40% from here and price peaks to occur in the first half of 2009. this degree of price appreciation may prove too conservative as it fails to take into account that agricultural commodity prices in real terms are still cheap. This would imply corn and wheat prices hitting USD12. Yet inventories in a number of agricultural commodities have now fallen to critically low levels at a time when global demand for food. on average.com Average magnitude of price rally since 1970 (%) • The magnitude of the current rally is measured from the trough to the peak. soybeans and wheat are still in their infancy. For example. soybeans and cotton appreciating by another 130%.11 January 2008 Commodities Outlook • #6 Commodity Cycles Breaking New Records • We find that over the past forty years. 240% and 375% respectively. Consequently. which for many industrial metals occurred in 2006 Source: DB Global Markets Research.
50 9.00 7. GDP changes. but a worldwide recession does not seem likely.75 10.00 75.00 85. difficult geopolitics.00 80.53 72. Demand remains relatively unresponsive to higher energy prices due to the growth in real incomes. horizontal drilling.00 81.00 85. but we did not feel compelled to change our midUSD60s price forecasts for the "long-term" or "midcycle" in the 2012-2013 time frame that were set in July 2007.75 7.39 7. the “equilibrium” oil price is not necessarily a constant.00 83.25 58.00 8. Moreover.25 10. and subsea completions) of the last two decades.00 85. resource nationalism. We understand that causality tends to run from prices to costs and not the other way around. gas-to-liquids. but does not appear to be on the verge of the enormous breakthroughs (3-D seismic. Access to the areas of the highest geologic potential seems to be decreasing as “resource nationalism” moves Deutsche Bank AG/London Page 17 . A repeat of this confluence of events is certainly possible.98 7. one key factor that offers compelling new evidence that our longer-term energy price forecasts need to be revised higher is rapidly increasing finding & development costs. soaring from USD11. This compares with our prior “mid-cycle” estimates nearer USD65/bbl. and slow elasticity responses that might bring about lower prices. environmental rules.66 90. and greater access to reserves (aperatura & perestroika).62 68. and geopolitical challenges to supply are also impacting prices.00 85. On the consumption side.00 80. That said.55 88.00 79.00 80. technology may foster efficiency gains or offer up alternate fuels.00 77.66 74. changes in fiscal terms.75 8.50 7. But as we mentioned in July. Figure 1: DB’s energy price forecasts WTI (USD/bbl) 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 2007 Q1 2008E Q2 2008E Q3 2008E Q4 2008E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 66. Prior down-cycles in oil prices were generated by a combination of lower oil products demand. we think that costs are unlikely to soften much. We believe there is a price where oil demand will induce changes in producer and consumer behaviour.00 75. Our prior assumption was that per barrel F&D costs would rise toward USD20 in 2010.38/bbl to USD17.00 79. We expect nominal WTI and Brent oil prices to average USD75/bbl in 2010 and USD80/bbl in 2012-13.00 85. up from a prior USD8/mmBtu. The shocking rise in per barrel costs highlighted by the US DOE reflects a combination of higher total finding and development costs (bonuses.00 77. taxation. Prices could be impacted by a global slowdown in GDP. Technology is obviously improving. The US Department of Energy has just published data from the large energy companies showing that average worldwide F&D costs averaged over the three-year period 2004-2006 to have risen by over 50% from the prior 2003-2005 period.66 6. materials etc) and poor reserves replacement.11 58. heavy oil. royalties.75 7. and we still think this price is below USD100/bbl. biofuels among others. but unless some outside factor can forces oil prices down.36 90.27 65. regions not immediately susceptible to economic downturns in the US or Europe.11 January 2008 Commodities Outlook #7 Crude Oil & US Natural Gas • Oil markets continue to be characterized by tight fundamentals. Finding & development costs have risen much more rapidly than we expected when we last changed our long-term energy price deck in July 2007.00 81.23/bbl.50 72.00 US Gas (USD/mmBtu) 6. but seems improbable over the course of the next few years. Oil demand growth is increasingly being driven out of Asia and the Middle-East. dramatic improvements in seismic and drilling technology. geopolitics.02 75. DB Global Markets Research 2008-10 and mid-cycle oil and gas prices In mid-November we raised our near-term oil price forecasts to reflect the reality of very high oil prices and the continuing tightness in global supply and demand.24 7. labour.00 10. Higher oil prices are being supported by rising costs in a self-reinforcing loop.75 9.18 7.00 80. but the new data for 2006 and continuing cost increases being reported by companies for 2007 along with spotty reserve additions suggest that F&D costs could quickly be headed toward USD25/bbl.00 Brent (USD/bbl) 66.00 85.75/mmBtu in 2010. US natural gas prices are forecast to average USD8.50 • • • • • Note: Nominal prices Source: Bloomberg.00 83.15 90. technology. etc.12 8. On the supply side there are the competitive costs of tar sands.00 85. it can change up and down because of currency fluctuations.00 85.
doe. 5% in 2010. particularly in the offshore sector where rising global demand has driven drilling. and various energy industry data sets. with 40% of the majors’ net investment located abroad. 25 20 15 10 5 Figure 3: Oil prices and F&D costs are related 1987-89 1994-96 2001-03 2008-10E 0 1980-82 90 80 Real Oil Price (USD/bbl) 2007E .6x F&D costs + 7.2015E 1980-2006 y = 2.gov/emeu/perfpro/ A majority of the companies surveyed are multinational.5% per year for 2011-15. Using EIA data on F&D costs over the period to 1980-2006. Demand appears less sensitive to price now because incomes are higher. This would push F&D costs over USD20/bbl now. over UDS25/bbl by 2010. A decline in reserve additions over the past few years has been an important part of the overall increase in finding costs. the same cost/price principles discussed above can be applied to US natural gas.62x + 7. How we got to USD100/bbl oil In view of the potential problems associated with causality between costs and prices (some research suggests that costs follow prices) we do not want to rely on cost alone as a guide to our oil and gas price forecasts. and toward USD30/bbl by 2015. DB Global Markets Research 70 60 50 40 30 20 10 0 4 6 The historical costs in Figure 2 are based on detailed financial and operating data and information submitted each year to the US DOE/EIA by the major US-based energy-producing companies under the “Financial Reporting System (FRS). DB Global Markets Research Figure 3 illustrates the relationship between oil prices and finding & development costs. disclosures to the US SEC.53 2 R = 0. The emergence of China and India as new super-commodity consumers along with a huge underlying base of Deutsche Bank AG/London Page 18 . the regression equation is: Oil Price = 2. In our view. we have increased our US natural gas price forecasts for 2010 from USD8. http://www. As we see it. there are four broad categories of drivers responsible for high oil prices: Fundamentals. Figure 2: Global F&D costs headed to USD30 30 USD per boe (constant 2006 dollars) aggressively for rights to explore. In 2006. and 2. According to the DOE/EIA. driven by large downward revisions of natural gas reserves and lower extensions and discoveries of oil. as the price of exploration licences for new acreage in prospective basins has surged. Wood Mackenzie also gave warning that exploration costs could rise even further. One reason for this has been the greater use of public bidding rounds. subsea and production facilities costs steeply upwards. in which some oil companies have bid 8 10 12 14 16 18 20 22 24 26 28 30 Real F&D Costs (USD/bbl) Source: DOE/EIA. the fourth time in the past five years that the reserve replacement rate for oil among FRS companies fell short of par. news reports and articles.5 From a cost perspective.75/mmBtu and forecast US gas prices over USD10/mmBtu by 2015. this suggests our new nominal oil price deck would be easily supported at USD75/bbl in 2010 and near USD85/bbl in 2015. Governments have also driven up costs according to WoodMac. Bloomberg. Our projections for real 2007-2015 F&D costs assume 15% rises in 2007 and 2008. 10% in 2009.95 Source: DOE/EIA. the FRS companies’ reserve replacement rate for natural gas was 88% in 2006. .eia. the first time since 1992 that the FRS companies failed to add sufficient reserves to replace natural gas production. In line with our higher oil price forecasts.00 to USD8. as the most recent activity was still benefiting from substantially better terms negotiated in the late 1990s. The EIA supplements this data with information from company annual reports and press releases. the FRS companies’ reserve additions through drilling (excluding purchases and sales of reserves) fell 27% from 2005 to 4 billion barrels of oil equivalent (boe). Our colleagues at Wood Mackenzie recently completed a study pointing to rising development costs. The reserve replacement rate for oil was 59%. Per barrel costs come from the interaction of absolute costs and reserve changes. High oil prices are encouraging host governments to further tighten fiscal terms. The EIA data on F&D costs is based on combined oil and natural gas data calculated on a barrel of oil equivalent (boe) basis.11 January 2008 Commodities Outlook steadily into the mainstream of geopolitical discourse in the producing nations.
5mmb/d each year over that period. Supply. The shape of the futures curve can change rapidly and dramatically. downstream analysts at the IEA in Paris have compiled a data set of 2008-2010 refinery projects suggesting that capacity growth is likely to exceed 1. We expect that in the 2008-09 timeframe. energy resources are increasingly concentrated in countries that have a mixed record of cooperation with traditional international energy companies. There is significant risk of US dollar overshooting to the downside (bullish for oil) but this is most likely in an environment of more tepid global growth. significant NGL additions are expected. Getting this back has proved to be an enormous struggle. The threat of a military confrontation (with the potential for enormous impacts in the energy markets) between Iran and the US rises and falls with diplomatic setbacks and successes. it seems hard to believe that Asia could completely escape the impact of a slowdown in US GDP. it is worth noting that historically bear US dollar cycles have tended to persist for longer than bull runs with the 1985 downtrend enduring for 10 years. Our economic forecasting teams expect a contraction in the US but not a severe recession. Lower supply and demand elasticities have lengthened the time needed to rebalance. Geopolitics.as Peter Davies at BP has written. Market Structure. the potential exists for growth in spare refinery capacity. and a shift toward a flatter curve could result is a rebuilding of inventories and less apparent upward pressure on oil prices. especially in Asia have further to rise against the dollar according to Deutsche Bank's FX strategists. non-OPEC annual production growth could approach the 0. US Dollar. On the supply side. Angola is streaming new output and in Saudi Arabia. Commodities (including energy) are increasingly being viewed as a standard asset class by investors.8-1. With global demand likely to grow below that rate over the same time frame. Non-OPEC supply growth over the period 2005-07 was significantly lower than the rates achieved from 2000-04. oil production has shifted towards more technically challenging projects and less marketoriented economies. Despite evidence that China and other Asian nations are less tied to economic conditions in the OECD countries. More restrictive trade practices have limited the ability of industry to respond to these forces. Disappointments in reaching output goals seem to have become the rule rather than the exception. Some of the losses were economic in nature. The excess capacity in both production and refining during the 1980s and 1990s has been eliminated. The upswing and subsequent downswing in the US Deutsche Bank AG/London Page 19 . This would imply continued upward pressures on oil prices but likely less than recently from the slide in the dollar against the major currencies. We expect that higher prices and more sluggish economies are likely to result in a tempering of the growth rates seen over the last few years that dramatically reduced spare production capacity. US oil demand has gone flat but the rest of the world is still growing. Financial/ Trade.11 January 2008 Commodities Outlook consumption in the US has added a strong amount of rising demand momentum into the markets. The years 2008-09 should show better production response than what has been delivered over the last few years. However. the "declines in Iraq and Venezuela were unforeseen and almost certainly unforeseeable" while in our own opinion the same could be said for the refinery accidents and weather interruptions that have plagued the downstream sector. The decline in the US dollar has likely encouraged demand while simultaneously reducing producers’ revenue. Refining. Within OPEC. a doubling of the yearly volumetric growth in 2005-07. We believe that a large part of the inventory drop over the second half of 2007 can be attributed to the shift in the futures curve into backwardation. The rate of production growth in Russia appears to have been slowed by that country's move to reassert central control over its resources. How we might get back to USD75/bbl The case for weakening oil prices ultimately must rest on a reversal or slowing in the drivers that took oil to USD100/bbl. implying the current US dollar downtrend will start to become long in the tooth during 2008. Many EM currencies. The flow of funds into the sector has made it more prone to volatility. capacity enhancing oil projects are well underway. The financial incentive for the companies to reduce stocks is high. Virtually all of the Angola and Saudi projects are light crude. Iraq has not managed to return to pre-war production levels nor has Venezuela returned to pre-strike levels. Demand. Some of it was political. Geopolitical flare-ups in countries like Nigeria have reduced production.0mmb/d range. and they see few signs of significant slowdown in China/Asia in the near term. From the perspective of the OECD nations. The emerging market currencies could be the more relevant forward-looking driver of the dollar as purchasing power transfers to them. Inventories. On average these cycles last for seven years. The US dollar has displayed a tendency to rise and fall for extended periods of time.the low oil prices of the late 1990s led to a period of low capital investment. Although the potential for slippage and accidents is still very high. and natural gas developments could free up oil for export.
3 87.7 15.4 9.7 3.3 0.5 9. and biofuels) will characterize the period out to 2010.6 19.7 82.7 5.5 Source: IEA.7 20.a. we estimate about 2.6 4. Low interest rates and a low dollar have encouraged speculative activity in oil.5 4.1 12.9 2.2 5. Assuming that global GDP averages about 4% p.1 7.2 4.4 14. We view the enormous move of funds into commodities in somewhat the same way as demand growth in Asia.1 7. The IMF is estimating even stronger worldwide GDP growth at 4.8 12.0 8. Global oil demand from 1980-2006 grew at 1.6 13.4 87. The attempt of the new government to restore stability in the Niger Delta has had some positive impact (fewer instances of violence. Geopolitics. However.6 15. could enter a period of intense new negotiations after the new US president takes office in January 2009.8 12.7 19.3 49.8 15.5% per annum. but output losses do not seem to be getting worse.0mmb/b in August to over 2.1 12.4 21.7 20.4 30.6 4.8 15.0% per annum.0 91.2 7.1 49.1 8.2 7. which is likely to remain unresolved (and thus supportive for oil prices) in 2008. The most likely timeframe for such a development would be 2009. over the period to 2015.2 3.6 13.5 50. How high could oil prices go? Figure 5 examines the purchasing power of an average G7 consumer in terms of the oil price.7 90.8 51.4 4.7 28.6 4.9 2.8 10. The secular element to this is large.0 12.7 89. From 1995-2006 the rate was 4. "Commodities as an asset class" is bringing investment-grade money into the complex.2 50.3 4.2 15. condensate.8 85.9 7.2 15. Funds Flow. Over this 3-year period.4 19.4 5.6 13. Above-ground risk are greater threats to this performance than the problems posed by resource limits or other belowground issues. but could then return to a period of strength (and lower oil prices) in the 2011-13 time period.5 7.6 14.0 91. From 1995-2006 it accelerated to 1.9 7.3 9.2 8.0 85. Our estimates for average growth in 2007-08 for oil average circa 1.6 4.11 January 2008 Commodities Outlook dollar between 1995 and today bears a striking resemblance to the 1978-1995 US dollar cycle.6 7. in our view.3 30.1 7.0 15.4 4.2 10. minor improvements in oil output). The average number of barrels an average G7 consumer was able to buy over the entire time span shown is circa 1000 barrels of oil and in 2007 stood at 566 barrels. for Page 20 Deutsche Bank AG/London .0 49. DB Global Markets Research Global oil demand Our demand forecasts are based on the assumption that global GDP does not stumble badly.a. Figure 4: Oil demand and supply (mmb/d) 2006 DEMAND United States OECD Europe Other OECD Total OECD USSR (former) China Non-OECD Asia ex-China Other Non-OECD TOTAL DEMAND SUPPLY United States OECD Europe Other OECD Total OECD USSR (former) Other Non-OECD Processing & Biofuels Total Non-OPEC OPEC CRUDE OIL OPEC NGLs TOTAL SUPPLY Implied Stk Chng 2007 2008E 2009E 2010E 2015E 20. we would expect oil demand to grow approximately 1.8 52. According to the IMF. The Iranian nuclear standoff. Rebuilding the 500kb/d of production lost in Nigeria is proving massively difficult.0 5. real growth in global GDP over the period 1980-2006 grew at 3.3mmb/d in November. If history repeats itself then it implies the US dollar could remain under pressure in 2008 and 2009.9 4.7 13.3 21.9 2.6 33.9 52.3 15. Our country and regional non-OPEC supply forecast suggest that output could peak sometime between 2010 and 2015 unless “not in my backyard” restrictions in many countries are relaxed. but a turn upward in the dollar could easily reverse the flow of hedge fund investments in oil.6 32.3 15.8 19.a.1 7.0mmb/d of growth.3 2.4 88. There are many who believe that a fresh diplomatic push from the US might encourage the emergence of a "grand bargain" that would satisfy everybody.2 7. The years after 2010 are murkier.3 13.5 88.2 49. including Israel.5 -2.8% p.7% each year.1 49.6 13.6%. Global oil supply Relatively strong non-OPEC liquids (crude oil.4 7.4 20.5 13.2 8.7 15.8 21.5 7.6 4.7 0.0 52.9% pa in 2007-08. Since the beginning of this decade the price of oil relative to per capita incomes has risen dramatically and so oil purchasing power has declined.5 19.9 11.5 0.3 13. but the speculative element exists as well. NGLs.0 9.3 7.2 15.0% p.4 12.1 84.1 6. Oil production had jumped from 2.2 31.1 4. The situation in Iraq has also improved marginally over the last several months.1 49. The potential for this to change substantially for the better by 2009 is good.3 2.9 0.7 15.6 13.6 -0.
1 0.8 0.7 16.1 7.11 January 2008 Commodities Outlook purchasing power into deteriorate to the 1980-81 low of 325 barrels.6 52.8 1.6 4.7 0.2 7.3 51.1 7.3 8.1 4.7 14.1 4.9 7. LNG will have to serve as a balancing item.3 68.4 18. Source: DOE/EIA.5 1.4 firstname.lastname@example.org 8. perhaps) . The potential to substitute coal.9 1.0 11. It is possible to imagine a period of slower global economic growth (driven by an increasing drift towards protectionism.5 8. gas and nuclear power for expensive oil is now seriously limited by environmental regulations.1 16.7 1.2 4.6 64.4 8.5 60.0 0. and voter opposition.9 4.com Deutsche Bank AG/London Page 21 .8 15.2 8.3 0. This could be a problem in as much as investment decisions on upstream LNG projects around the globe are being slowed as producers struggle with the same material and labour shortages that are being experienced in virtually every area of engineering construction.9 18.7 -1.8 62.5 18.5 42. as it was by “high” oil prices.7 0.6 1.8 13.0 7.8 42.2 11. Adam Sieminski (202) 662-1624 adam.3 Number of barrels of oil 1.8 8.4 42.8 13.0 51.3 40. rising costs and accelerating decline rates (especially in newer projects) will likely constrain gas output growth in the coming years. resource problems.3 1. The use of natural gas in the electric power markets and the growth in natural gas as the preferred fuel in housing markets is likely to boost overall gas consumption despite weakness in the industrial and “other” categories.4 1. DB Global Markets Research Conclusions There is no obvious “tipping point” price that quickly forces demand lower and supply higher.8 8.7 8.8 1.0 13. and the possibility that supplies would not be available at any cost.0 50. if one assumes G7 purchasing power will eventually move higher.0 0.8 11. Even with strong upstream investment.6 18. US natural gas supply and demand outlook The main challenge in the US natural gas markets over the next few years will be dealing with the prospects for demand growth in the face of declining domestic US production.5 18.5 18.7 63.0 7.4 18.0 51.9 2.8 6.9 10.1 50.7 1.8 6.9 51.8 11.5 42.7 5.0 53.7 8.4 2. elevated geopolitical risk. we would need to see oil at circa USD130/bbl in 2008 or USD150/bbl in 2012.8 9.7 40.0 20.8 59.3 53. We have set our midcycle (2012-13) oil price forecast at USD80/bbl (nominal).1 49. not be surprised to see a period of oil price strength extending into the middle of next decade. Eventually.3 Higher oil prices cut the purchasing power of a G7 consumer Net Storage Withdraw Other & Balance Total Domestic Supply Exports IMPORTS Canada LNG Source: DB Global Markets Research. We can also envision a USD100/bbl world characterized by rapid economic progress in China and India combined with the failure of OPEC’s and other countries’ state-directed oil companies to invest in capacity.9 4.7 13.9 8.7 1.2 8.2 7. Consequently.8 1. in our view. The demand shock of 1980-81 was caused at least as much by fear of war.7 64.0 51.3 17.3 13. Canadian natural gas production is suffering the same problems and new frontier supplies are years away.0 0.or technological innovations on supply or demand) that could result in a USD60/barrel world.4 50.1 17. The massive scale of the global oil and gas system and the long lead-times needed to make changes suggest that rapid “reversion to mean” scenarios are now artefacts of history. then it is unlikely that oil prices will be sustained over USD100/bbl.8 4. However.2 1.8 14.8 4.8 6.6 0. IMF In an environment of a weak US dollar.3 0. Consumers and producers should.3 1.7 18.3 19.1 50. strong world growth and persisting concerns that non-OPEC oil production may be peaking we expect oil prices will continue to trade expensively when measured in real terms and relative to per capita incomes.0 9.7 43.9 0. Figure 6: US natural gas balances (bcf/d) 2005 CONSUMPTION 2006 2007 2008E 2009E 2010E 2015E Figure 5: Oil cost relative to G7 income G7 per capita income divided by the price of oil 3000 2500 2000 1500 1000 500 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 Oil price decline helps to boost the purchasing power of a G7 consumer Residential Commercial Industrial Electric Utilities Other Total Demand DOMESTIC SUPPLY Alaska Gulf of Mexico Offshore Other US Total Dry Gas Production 13. we see US natural gas prices re-connecting with oil prices as these global LNG and labour issues outweigh domestic considerations.5 50.1 1.0 0.
The futures markets’ forecasting error is lower at +18%. (44) 20 7545 2166 michael. If the average analyst forecasting error between 1999 and 2007 persists into this year.31). Tracking the futures market’s forecasting error Another route to assess the likely oil price for the coming year is to examine the Calendar Brent swap price at the start of the year and compare it with the final outturn.11 January 2008 Commodities Outlook #8 Markets vs. Since 2004 we have advised commodity consumers. Reuters Page 22 Deutsche Bank AG/London . However. the analyst community has consistently under-estimated the crude oil price. the oil price would still be cheaper relative to per capita income than it was at the beginning of the 1980s. The report examined the consensus price forecast for crude oil at the start of the year with the eventual outturn. Figure 1.lewis@db. We fid that like analysts the futures market has also consistently under-estimated the strength in crude oil prices.9 x 1. To be consistent with earlier years we need to apply the 30% rule to January survey which will be published after we go to press. If the average forecasting error of the futures market between 1999 and 2007 persists into 2008. Michael Lewis. then it implies the Brent crude oil price averaging USD110/barrel. Figure 2: The futures market has tended to be a more reliable predictor of oil prices in the year ahead 120 110 100 90 80 70 60 50 40 30 20 10 22% 39% 22% -11% 22% 0% Calendar Brent swap price at the start of the year Outturn Average absolute forecasting error 1999-2007 = 18% 0% 18% 18% 24% Figure 1: Analysts have systematically underestimated the strength in crude oil prices since 1999 100 Brent forecast at the start of the year 90 80 70 USD/barrel 60 50 40 30 20 10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008f 43% 54% 2% 29% 25% 53% 43% Outturn Average forecasting error 1999-2007 = 31% 15% 18% 31% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008f Source: DB Global Markets Research. in line with higher spot prices since Christmas then it assumes oil prices are likely to average just over USD98/bbl. then it implies Brent crude oil prices averaging USD96/barrel. Their forecasting error over this period has been +31%. • • • • USD/barrel In January 2004 we published the report “Tracking The Forecasting Error Of Commodity Analysts”. We find that applying this rule today yields an average Brent crude oil price of USD95. Since 1999. the futures market has been a better predictor than analysts on seven out of the past nine occasions. Even at these levels. In the subsequent four year period the forecasting error has not improved.com Source: DB Global Markets Research.5/barrel (USD72. We find that since 1999. Reuters Consequently if we apply this forecasting error to the current Cal’08 Brent swap price yields an expected average oil price for 2008 of USD110/barrel. Analysts Mud Wrestling: Bout 10 • The contest between markets and analysts as to who is the superior crude oil price forecaster during this commodity price rally is now in its tenth year. the most recent consensus price forecast is from Reuters December poll. producers and investors alike that a more reliable forecast for crude oil in the coming year is to take the Reuters consensus price forecast at the start of the year and add 31%. For the entire 1999 to 2007 period the analyst community has always under-estimated the final oil price and by an average of 31%. However. the forecasting error is lower at 18%. If we assume the consensus oil price has risen to USD75/bbl. We found that the analyst community had consistently under-estimated the oil price by an average of 30% between 1999 and 2003.
3% per year in the new Annual Energy Outlook 2008 which leads to lower projections of electricity generation. plans for new coal plants in Kansas. • Wind is another 31% of the mix (40 GW). 29% Source: Wood Mackenzie. installed wind power is often discounted much further.9. Southeast. but over shorter periods of time.4. respectively according to data from the US DOE/EIA.6. • Figure 1: US electric power capacity growth 2008-2013 (GW) Other Renew able. Typical annual average power capacity factors are 20-40% for wind. Oklahoma.11 January 2008 Commodities Outlook #9 US Power A Moratorium on Coal? • With electricity demand growing at 1. Speeding up “other renewable fuel” projects and nuclear is not practical. natural gas futures prices for the period after 2010 do not reflect this problem. but this comes too late to meet demand requirements to 2013-14. More intensive use of existing natural gas fired generation and more gas new-build may be required to avoid electricity shortfalls. 28% • Wind. 14.7. although this may be improving as geographic diversity and grid inter-connections are improving. Conservation (or less demand) would help. 11% • Coal.2.2%. and Midwest regions could fall below their target capacity margins within two or three years if additional supply-side and demand-side resources are not brought into service. New York.7% annually. Wind power is typically de-rated by 85%to 90% for purposes of calculation peak load needs. Wyoming. If there is any slippage in delivery on the renewable projects (another 15 GW). and 2. DB Global Markets Research US electricity consumption grew by annual rates of 4. Permits for coal power plant projects are being denied by state public utility and environmental commissions that find themselves under serious pressure to respond to climate change warnings. is more gas-fired combined cycle gas turbine (CCGT) cogeneration projects. The EIA is assuming a long-term growth rate of about 1. North Dakota. A total of 12 GW of new-build nuclear capacity has been proposed for 2015–2016. 31% • Nuclear. There are a number of regions in the US that soon will fall short of the generation capacity levels required to maintain a 15% reserve margin for electricity. but for peak availability purposes. In our view. the only answer. but acceptance of the climate change message in the US appears to have placed an effective moratorium on new coal projects.com Deutsche Bank AG/London Page 23 . 35. Capacity factors are determined by dividing actual energy produced in a given period by the maximum possible output running full time at rated power.sieminski@db. 2. in our view.3% in the 1970s. 36.0% annually to 2010 and 1. this implies a need for 15-20 GW per year of growth. Since mid-2007. only 10-15% (4-6 GW) of that can be reliably counted.8% for electricity use in 2009. Florida. the reliability problem gets worse. 1980s. 1% Natural Gas.7% per year thereafter. Texas and Florida have been rejected by state utility and environment commissions or cancelled due to regulatory uncertainties. Besides turning out the lights. and significant portions of the Mid-Atlantic. 1. and 1990s. but probably not soon enough to have a significant impact. This will be the only way to add the capacity that can be put in service between now and 2013. the EIA is assuming a “normal” growth rate of 1. It is almost impossible to get a public utility commission to grant a permit for a new coal plant that is not carbon capture and sequestration (CCS) "capable". Nearly 60% of the 130 GW of capacity additions planned for the US over the next five years are coal and wind projects. On a base of circa 975 GW of installed net summer capacity. There are approximately 130 GW of electric power currently under development or proposed in the US out to the year 2013 according to estimates by WoodMac (see Figure 1). 40. Recent forecasts by Wood Mackenzie put US electricity sales growth at 2. Adam Sieminski (1) 212 250 2928 adam.6%. Because of relatively strong near-term GDP assumptions. we believe approximately 75GW of capacity must be added to the system between 2008 and 2013. however. Coal plants are 28% of the mix (36 GW).
look to go long into Q1 Page 24 Deutsche Bank AG/London . sell Dec’09 corn Consequently we adopted a curve steepening trade based on our belief that the move from USD75/bbl to USD60/bbl between August and September 2006 would not be repeated in 2007. Poised to flip back to contango? The WTI curve had a roller coaster ride in 2007. USD78 oil was occurring with OECD inventories rising and the WRI forward curve in contango forward curve. but. what’s next? Will the US Fed come to the rescue? o o o Aluminium: Steep backwardation to replace the current steep contango? Copper: Will contango steepen? Nickel & Zinc: From flat to flatter? 19 Ju ly 2007 Trade recommendations: Crude oil • • Long Jun-08 vs. and keep rolling the positions every month Long DBLCI-OY-NG vs. The rally in oil prices in the second half of last year was therefore more fundamentally based it was occurring at a time when OECD inventories were declining and the market was in backwardation. At that time. Long Dec’08 or Short Mar’08 vs. Figure 2. but the strong rally and subsequent attack of the USD100 level has kept this curve trade in profit. Industrial metals Maintain long back-end Front end remain defensive. short Dec’10 WTI 20 June 2007 US natural gas: • Short Jan’08 and long Feb’08 future contract. which we dubbed the inconsistent trinity. Figure 1. short Dec’10 WTI US Natural Gas: Sticky contango o o The world has turned upside down. again Will backwardation ever return? • Wheat: How deep is your love? o Moderating level of backwardation. from steep contango earlier in the year to sudden backwardation by the middle of 2007. short S&P GSCING sub-indices Short Feb’09 and long Apr’09 contract Source: DB Global Markets Research • • Wheat • • Corn • • • • Short Mar’08 vs. In fact. not only did WTI crude oil not sell-off like it did in 2006. short Dec’08 WTI Long Dec’09 vs. short Dec’08 WTI Long Dec’09 vs. Long Jul’08 The strength in oil prices over last summer was in stark contrast to the environment of record high oil prices in 2006.11 January 2008 Commodities Outlook #10 Commodity Term Structures Winners & Losers • Oil: Backwardation Returns o • And here to stay? Oil: Backwardation Returns o And here to stay? Trade recommendation: • • Long Jun-08 vs. but. • Corn: Good News or Bad News? o Will backwardation finally arrive? • Figure 1: WTI forward curve flipped from steep contango to steep backwardation in just one month Industrial Metals: Curves flatten. Long Mar’08 corn Long Dec’08 corn vs.
the sudden flattening of the forward curve seems not to be warranted especially since the Deutsche Bank AG/London Page 25 . Figure 5: Total US crude oil inventory has been falling 380 365 350 335 320 305 US Crude Oil Stocks (million bbl) 5-Year Range (2001-2005) 5-Year Average (2001-2005) 2006(monthly data) 2007(monthly data) 2007(weekly data) Figure 3: Historical WTI prices vs.0 -2. For new longs.11 January 2008 Commodities Outlook Figure 2: Why USD75 oil in 2006 was different from USD75 oil in 2007? This chart shows why: the oil market supply-demand balance was tight in 2007. With OPEC’s decision to leave production unchanged at the end of last year.0 -1.0 30 M2-M4 Nymex WTI spread ($/bbl. rhs) 17 July 2006 25 -3. but. lhs) -4. we believe a curve play offers better risk adjusted returns than an outright long. inverted scale. 2005 and 2006 were the exceptions as OPEC engineered steep contango by flooding markets with crude oil to safeguard long term oil demand growth and fight off geopolitical fears. we would recommend travelling down the curve and going long the spread at the deferred part of the curve. we expect backwardation to remain in the crude oil market given still tight market fundamentals. Figure 4: WTI term structure vs. Dec’10. Source: DB Global Markets Research Looking into 2008. the WTI curve always trades in backwardation in a bull run and in contango in a bear run. although Cushing inventory has increased over the past few weeks.0 Source: DB Global Markets Research Source: DB Global Markets Research Historically. we believe the WTI curve is likely to steepen again.0 20 contango 0.0 1. Cushing crude oil inventory level Cushing Crude Stocks (million bbls. Indeed.0 15 18 July 2007 10 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 2.0 3. forward curve Historic WTI Price versus Forward Curve (USD/bbl) 100 90 80 70 60 50 40 30 20 10 Aug-84 Aug-85 Aug-86 Aug-87 Aug-88 Aug-89 Aug-90 Aug-91 Aug-92 Aug-93 Aug-94 Aug-95 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 290 275 260 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: DB Global Markets Research For the oil bulls. it was not in 2006 absolute inventory level at Cushing remains low and the aggregate US crude oil inventory level keeps on falling. more complex refineries coming back online and demand remaining extremely robust despite high prices. such as Dec’09 vs.
0 Dec-10 88. Indeed. again Will backwardation ever return? WTI forward curve (8 Jan 2006) 96.0 91.11 January 2008 Commodities Outlook Figure 6: WTI term structure 97.0 93. US natural gas has spent 82% of the time trading in contango (M01-M02). US natural gas has spent most of the time trading in contago 4.0 2. and keep rolling the position every month Long DBLCI-OY-NG vs.0 87. short S&P GSCING sub-indices Short Feb’09 and long Apr’09 contract • • Source: DB Global Markets Research Trade recommendations: • • Long Jun-08 vs. Figure 7: Since 1995. However. from Winter 2002 onwards. in our view.0 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Jun-08 Trade recommendations: • Short Jan’08 and long Feb’08 future contract. Indeed. the seasonality predicted by the forward curve seldom turns into reality.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: DB Global Markets Research Since January 1995. the US natural gas M01M02 spread has traded in contango 90% of the time.0 94.0 NatGas contango (M01-M02) backwardation NatGas backwardation (M01-M02) 3.0 0. the strong seasonality that was once a common feature of the US natural gas market is evaporating.0 -2. Page 26 Deutsche Bank AG/London .0 contango -3.0 Dec-08 92. the percentage has risen to 98%. However. over the past 12 years. short Dec’08 WTI Long Dec’09 vs.0 90. natural gas has spent more time trading in contango than in backwardation and this trend is only getting worse.0 95.0 1. a result of both weaker winter heating demand and stronger summer cooling demand. short Dec’10 WTI The US natural gas forward curve is characterised with a strong seasonal pattern with the forward winter price trading substantially higher than the forward summer price. and from Winter 2004 onwards.0 -1.0 US Natural Gas: Sticky Contango o o The world has turned upside down.0 Dec-09 89.
2008 with 1600bcf of gas in storage. Deutsche Bank AG/London Page 27 . and long-dated gas is now trading in contango to the front-end The first strategy is to go short the Jan’08 and long Feb’08 NG futures contract. However. Given normal weather we would expect to end the current heating season on March 1. short S&P GSCING sub-indices Short Feb’09 and long Apr’09 contract Jul Aug Sep Oct Nov Dec • • 5-Yr Normal 2006 2008 Actual 2008 Projected Source: DOE/EIA. If it stays warm this winter. this expresses our view that the winter premium will narrow further. In a contango environment this becomes a losing strategy as it leads to a substantial negative roll return. We believe the OY technology will outperform a pre-defined fixed rolling strategy implemented by the S&P GSCI which rolls the front-line contract every month. short SPGSCI NG index -150% Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Source: DB Global Markets Research Figure 9: US natural gas inventory level billion cubic feet 3500 3100 2700 2300 1900 1500 1100 700 Jan Feb Mar Apr May Jun 2007 The third strategy is to go short the Feb’09 and long the Apr’09 NG contract. almost zero winter premium 2006 2007 Source: DB Global Markets Research Figure 10: Term structure play via commodity sub-indices 200% Currently the forward curve is pricing in an almost zero winter premium for 2008 and a drastically lower winter premium from 2009 onwards. we prefer to implement this strategy via indices to save us from the trouble of rolling the futures every month. Trade recommendations: • Short Jan’08 and long Feb’08 future contract.11 January 2008 Commodities Outlook Figure 8: Dwindling seasonality in the US natural gas market 2005 strong winter premium over summer winter premium across the whole term structure has declined since 2004. Cumulative returns 150% 100% 50% Over the winter 07/08 period we expect record high levels of storage to persist. we would expect to see even more gas in storage. 0% -50% Long SPGSCI NG index -100% Long DBLCI-OY-NG index Long DBLCI-OY-NG vs. The second strategy is to go long the DBLCI-OY-NG sub-indices and go short the S&P-GSCI-NG subindices. DB Global Markets Research We are therefore recommending a few strategies to express our view that contango is likely to stay in the US nat gas market. similar to what has happened over the past few winters. and keep rolling these positions every month. and keep rolling the positions every month Long DBLCI-OY-NG vs.
11 January 2008 Commodities Outlook Wheat: How deep is your love? o Moderating level of backwardation. Long Jul’08 Wheat Mar'08-Dec'08 time spread (USD/Bu) 200 Wheat Dec'07-Dec'08 time spread (USD/Bu) Trade entry: 14-Sep-07 Current level: 08-Jan-08 (plus positive roll returns) profit 150 100 50 backwardation In September this year we outlined why we believed the high spread between this year and next year wheat was unsustainable. some of which however were subsequently withdrawn. We continue to believe wheat might be pressured in the near term on weakening fundamentals: for example. discourage inventory re-stocking and therefore a good sell. 0 contango -50 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Source: DB Global Markets Research Since then the spread has narrowed substantially from USc247 when we instigated the trade to a mere USc83 as of Dec 7. Long Dec’08 or Short Mar’08 vs. Figure 12: Wheat term structure has flattened over the past four months. China is now a small net exporter of wheat and the possibility that after tow years of drought sufficient water levels will arrive in Australia. since it was wide enough to encourage immediate substitution. poised to flip back to contango? Figure 11: Wheat December time spread closed with profit 300 250 Trade recommendations: • • Short Mar’08 vs. We are therefore maintaining our curve flattening view in wheat. We expect it to flatten further 950 900 Wheat forward curve During the last few weeks of 2008 the spread has widened on supporting weather and tender announcements. 2007. 850 800 750 700 650 600 550 Jan 2008 Dec 2007 Sep 2007 500 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Source: DB Global Markets Research Page 28 Deutsche Bank AG/London . India's wheat trade deficit is shrinking.
Trade recommendations: • • Long Mar’08 corn Figure 15: Area harvested for US major crops 100 Hectares (million) Long Dec’08 corn vs. together with the increasingly tight market in China which we believe is set to become a net importer in corn over the next year.11 January 2008 Commodities Outlook Corn: Good News or Bad News? o Will backwardation finally arrive? Indeed the total area harvested in the US for corn. 300 250 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Source: DB Global Markets Research Figure 16: US crop plantings: a game of musical chairs: A crop’s gain is another’s loss. 8 Corn 6 4 2 0 -2 larger area harvested Soybean Wheat Figure 14: US corn production by year 13. we are positioning for the corn price to rally further and the corn curve to flip into backwardation. Figure 15. we believe the game of musical chairs is likely to continue but this time corn acreage is cut and plantings recover in soybeans and wheat. Indeed corn has staged an impressive rally during the last few months of 2007 and has finally managed to post positive returns on the year. wheat and soybean production has intensified over the past few years due to the substantial divergence in price trends in these markets.8 11. DB Global Markets Research 2005-06 Source: USDA. Consequently any increases in one crop tend to occur at the expense of another. 60 50 40 30 20 10 0 Figure 13: Mar’08 corn prices 500 1980 1985 1990 1995 2000 2005 Source: USDA. However in 2007.2 M J J A S O N D J F M M J J Month US corn production estimate by the USDA w as made 2006-07 2004-05 2007-08 US corn production -4 -6 smaller area harvested 2004 2005 2006 2007 Source: USDA. as indicated by the changes in area harvested each year 10 Hectares (million) Year-on-year changes in area harvested In our view. DB Global Markets Research Corn Mar'08 (USD/Bu) 450 Trade entry: 05-Oct-07 Current level: 08-Jan-08 400 350 The game of musical chairs between US corn.0 10. DB Global Markets Research Going into 2008.2 11. Deutsche Bank AG/London Page 29 .4 11.6 Bushels (billions) 12. For example. in 2006 soybean acreage gained at the expense of wheat and corn acreage. soybeans and wheat has stayed relatively stable since 1990.6 10. Therefore. one of our favourite crops for 2008 is corn.0 12. the weakness in corn prices during the second quarter of 2007 was mainly driven by a surge in US corn production. sell Dec’09 corn 90 80 70 Corn Soybean Wheat As discussed in the agricultural article. the strong rally in corn prices during the previous year (81%) opposed to the disappointing gains in soybean prices (+14%) led to US farmers to shift plantings our of soybeans and into corn.4 13. Figure 14 which had been triggered by US farmers switching out of certain crop production such as soybeans and into corn.
industrial metal curves have flattened substantially in both periods of rising and falling markets.900 2. steep contango 3.800 2.200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month Source: DB Global Markets Research Metal curves have flattened. but.900 2. represented by the orange line in Figure 17. Figure 19. We have examined the aluminium curves in greater detail over the H107 period.700 2. each chart plots the forward curve of each metal at a 5 business day intervals. We have traded around this theme mainly by either going long the backend of the curve or via curve plays.700 2.500 2.700 2. flattest? to Figure 17: Aluminium forward curves in 2007 3.300 2.500 11-Sep-2007 2. the blue line. From Figure 17 to Figure 24.300 2. but.400 • • Maintain long back-end Front end remain defensive. in this section we are outlining our expectation for metal curves during 2008.800 11-May-2007 2.300 2007 review To celebrate the start of 2008 we have designed a new set of charts to track the journey of the term structure of industrial metals during the course of 2007.400 2. and finished the year in a steep contango. Page 30 6-Nov-2007 2.000 Aluminium forward curves (Sep'07-Dec'07) 2.900 Aluminum The most dramatic curve moves have taken place in the aluminium market as shown in Figure 17.11 January 2008 Commodities Outlook Industrial Metals: Curve has flattened.200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month 28-Dec-2007 Source: DB Global Markets Research Deutsche Bank AG/London .400 2. look to go long into Q1 on stronger signs of the US economy 28-Dec-2007 2.200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month Source: DB Global Markets Research Figure 19: Aluminium forward curves Sep-Dec 2007. but. what’s next? Over the past two years we have been convinced that industrial metal curves would flatten.600 2. and for the last four months of 2007. flatter.800 2. Indeed. steep backwardation 3.000 2-Jan-2007 2. 2.000 Aluminium forward curves (Jan'07-Jun'07) 2. Front-end would have meant losses and back-end profit. Aluminum started 2007 trading in a steep backwardation. Figure 18. Figure 18: Aluminum forward curve in H107.500 Aluminium forward curves (2007) Trade recommendations: 2. Now that the curve has flattened. Aluminium spent the first half of 2007 trading in backwardation and the last four months in contango.600 16-Jan-2007 2. will the Fed come to the rescue? o o o Aluminium: Steep backwardation replace the current steep contango? Copper: Will contango steepen? Nickel & Zinc: Flat. Whether a long position in aluminium in 2007 makes money or not is largely dependent on which part of the curve the long position has been adopted.600 2. with each line representing the metal term structure on a particular day.
it fell even harder to lose lost more than half of its peak value and at one point touching the low of USD25. 7.500 18-Dec-2007 6.000 5. but. Figure 22.000 40. albeit at a slower pace.000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month 50.000 50. Nickel prices surged during the first part of 2007 peaking at USD51.100/tonne. at a different time.000 7.000 25.500 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month 45. Nickel The same trend has occurred. backwardation was the norm 60.000 6-Feb-2007 4. Jan-Oct 2007 8. Figure 20.000 Jul .000 Nickel forward curves (Jun'07-Dec'07) 6.11 January 2008 Commodities Outlook Copper Copper was also no exception to this curve flattening trend.500 Copper forward curves (Jan'07-Oct'07) 8.000 40.000 6.000 6. The nickel curve has consequently flattened together with the sell-off and is currently trading in a small contango at the frontend.000 9-Jan-2007 20.000 Figure 21: Copper forward curves.500 7.500 11-May-2007 5.000 Source: DB Global Markets Research 35.000 30.000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month Copper forward curves (Oct'07-Dec'07) Source: DB Global Markets Research 8.600/tonne.000 the nickel forwad curve has stayed flat for the second half of 2007 28-Dec-2007 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month Source: DB Global Markets Research Deutsche Bank AG/London Page 31 .Dec 2007 20.000 30.000 Nickel forward curves (Jan'07-May'07) 55.500 2-Oct-2007 7. Subsequent to the October sell-off the copper curve had flattened substantially and currently front-end copper is trading in a very small contango. Copper spent the first 10 months of 2007 trading in backwardation.000 Source: DB Global Markets Research 35. Figure 20: Copper forward curves. It is was therefore no surprise that the nickel curve steepened during this rally.000 Figure 23: Nickel forward curve Jun-Dec 2007.500 Figure 22: Nickel forward curves Jan-May 2007.500 2-Oct-2007 25. curve has flattened since the sell-off in June and has never turned back 55. Oct-Dec 2007.000 June 2007 45. copper finally joined the curve flattening camp during the last three months of 2007 8.000 Just as nickel rallied hard.
(852) 2203 8376 amanda-ps. we believe the market is over pessimistic regarding the US economy and it is underplaying the strength in Chinese metals demand.500 18-Dec-2007 2. In terms of nickel. Page 32 Deutsche Bank AG/London .email@example.com 2-Jan-2007 0 0 100 200 300 400 500 600 700 800 900 1000 1100 1199 1299 1399 Number of days after LME inventories peaked Zinc forward curves (2007) Source: DB Global Markets Research 4. as outlined in the Global Macro article. Just as the over-riding trend in zinc prices last year was down.com However. but. A final look at the inventory level of the metals suggest to us that zinc has the strongest potential to deliver surprises in both price appreciation and curve moves given inventory levels on the LME close to their 5-year low and the proximity of current prices to production cost and which may temporarily over-power the threat of looming capacity expansion in China. we believe this market has the least potential to surprise to the upside given inventory is currently sitting at a 7-year high. Amanda Lee. it was also the worst performing commodity across the five broad commodity sectors last year.000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 forward month Source: DB Global Markets Research Curve outlook In the near term we expect curve flattening remains the central theme in the industrial metals market. namely curve flattening.11 January 2008 Commodities Outlook Zinc Zinc was not only the worst performing industrial metals in 2007 in terms of spot price performance. but. We maintain our belief that back-end metal prices will outperform and the front-end will continue to suffer given its strong sensitivity towards the Fed funds cycle and the US equity market. zinc is the only metal under investigation were trends were one-way.000 • 2. so the same story applies to zinc forward curve: flat. Figure 25.000 3. Figure 25: Inventories on the LME 140 120 100 80 60 40 20 Inventory peak=100 Copper peak 3-May-02 Supassed the last peak on 31-Oct 2007 Lead peak 7-Aug-02 Tin peak 9-Aug-02 Nickel peak 2-Feb-06 Aluminium peak 23-Jan-04 Zinc peak 13-Apr-04 Figure 24: Zinc forward curves in 2007 4. Consequently we are positioning to go long front-end metals on signs of stronger US economic growth.500 Trade recommendations: • Maintain long back-end Front end remain defensive. look to go long on stronger signs of the US economy and an end to Fed easing 3. Indeed.
back-end vol has barely participated in this rally and is currently trading close to the lower quartile. in our view. With longer dated implied vol trading at lower 20% we believe it offers good value such as via a variance swap trade. Figure 3: WTI dated contracts realised vol WTI 260 day realised volatility 30.5 Oil implied vol cone: current curve vs. copper and nickel vol Source: DB Global Markets Research Crude oil: long back-end vol via variance swap The WIT crude oil implied vol curve seems to have taken its lead from the flat price term structure. this gap has been closing. Figure 3 summarises the realized volatility of fix dated contracts. Currently Mar’09 implied vol is trading at roughly at 23% and consequently we believe it offers good value to go long the variance swap. Figure 1.0 45% 12.0 Figure 1: Crude oil volatility level 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Forward month 27. past 6-year distribution The blue boxplot for each month shows: i) the interquartile range (blue box) ii) the 5-95 percentile range (whisker) iii) the median of the 6-year history (dashed line) 65% 60% 55% 25. The assault of triple digit oil has pulled up front-end crude oil implied vol which is trading close to the 6-year average. Curve flattening is not unique to the crude oil flat price. Figure 2. Figure 2: WTI 12M implied vs.5 20.0 35% 7.5 40% 10.0 22. realised vol Trade recommendations: Crude oil • • • Gold • • • Take profit on long gold variance swap Scale up sell Long Mar’09 variance swap US natural gas: Long Mar’09 variance swap Long Sep’09 variance swap Industrial metals Aluminium vol offers good value vs. However.5 Oct-03 Apr-04 Dec-03 Sep-06 Nov-07 Oct-04 Dec-04 Dec-06 Dec-07 Apr-05 Sep-05 Jan-07 Jan-08 Oct-05 Dec-05 Mar-07 Dec-08 Apr-06 Jan-06 Jun-07 Jun-09 Oct-06 Apr-07 Mar-06 Sep-07 Dec-09 Oct-07 Jun-06 Oct-07 30% 25% 20% 15% Source: DB Global Markets Research Source: DB Global Markets Research Deutsche Bank AG/London Page 33 . Given the tight oil market supplydemand fundamentals we believe volatility will remain a constant feature of the crude oil market in 2008. The vol curve was trading in contango two years ago and is now currently in backwardation. Starting from the Dec’03 contract each contract in Figure 3 has realized vol finishing somewhere between 23% and 29%.11 January 2008 Commodities Outlook #11 Commodity Volatility A Mixed View While the longer dated implied vol remains higher than the realised vol.5 Median 09-Jan-06 09-Jan-07 09-Jan-08 50% 15.0 17.
year-ago Source: DB Global Markets Research Page 34 Deutsche Bank AG/London . Figure 6: US NG dated contracts realised vol Natural gas 260 day realised volatility 50. However.0 30. Figure 5 shows that the current vol term structure is substantially lower than the year-ago one.0 15. Figure 5: US natural gas implied vol forward curve. We expect weather will remain a key driver and with the dwindling seasonality we believe going long variance swap offers good potential for vol pickups.11 January 2008 Commodities Outlook US natural gas: Like WTI. go long back-end vol via variance swap. current vs. Although the natural gas market has been lacklustre for the past two years we believe spike risk has not been totally eliminated. while Mar’06 at 42% and Mar’07 at 40%. as discussed in the next article . this compares to Sep’09 trading at 30% which might also benefit from summer hurricanes activity.0 45.0 35. Other than the occasional swings natural gas prices have been kept prisoner in the USD6-8/mmBtu range for two years despite the historical tendency for natural gas to be the most volatile commodity and the market characterised with extreme overshooting both to the upside and downside. All contracts except one has realised vol finished above 30%. After the spike to USD15/mmBtu in December 2005 natural gas has spent the last two years trading in a very tight range. Among the contracts we believe the Mar’09 and Sep’09 variance swap offers best value. The realised vol of a range of fixed dated nat gas contract is summarised in Figure 6. Figure 4.0 20.0 25.0 Figure 4: US natural gas price 16 Natural Gas price 14 12 10 8 6 4 2 0 1990 40. Realized vol of the September contract is the highest with Sep’06 finishing at 49% and Sep’07 at 38%.0 USD/mmBtu 10.0 Jul-05 Dec-05 Oct-07 Jan-06 Mar-06 Nov-07 Jun-06 Dec-07 Jul-06 Sep-06 Mar-08 Jan-07 Dec-06 Jun-08 Mar-07 Dec-08 Jul-07 Jun-07 Mar-09 Sep-07 Sep-09 Source: DB Global Markets Research 1993 1996 1999 2002 2005 Source: DB Global Markets Research Range bound trading naturally leads to a decline of the realized volatility and in tandem the implied vol. There is a substantial upward journey of each contract as it approaches its expiry date. the nat gas vol skew currently shows a substantial bias to upside price risk. In fact. the nat gas vol term structure remains steeply backwardated despite front-end trading substantially lower. Mar’09 contract includes next winter which is a plus but implied vol is trading higher at 36%.
zinc. only aluminium implied vol is trading within the box which represents the interquartile range of 6-year worth of data. 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% M01 M02 6-year median M03 M06 M09 07-Dec-07 M12 M24 M27 10% 09-Jan-08 Figure 8: Gold implied volatility level 30% 30% Source: DB Global Markets Research Gold implied vol cone: current curve vs. This trade has performed as contagion from equity and FX markets spread into the commodities complex and specifically gold. we would recommend taking profit and prepare to scale up selling. past distribution 34% 31% 28% 25% 22% 19% 16% 13% 10% Figure 7: 12M gold vol 30% Gold 12M implied vol 28% 28% 25% Trade Opened 22% 19% 16% 13% 10% M01 M02 M03 6-year median M06 M09 07-Dec-07 M12 M24 M27 09-Jan-08 26% 24% 22% 20% Source: DB Global Markets Research 18% 16% Figure 10: Copper volatility level 50% Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 14% Copper implied vol cone: current curve vs. gold prices traded lower and implied vol rose subsequently. Base metals: Aluminium vol offers good value vs. Figure 8.11 January 2008 Commodities Outlook Gold vol: take profit and scale up sell We bought gold vol in June 2007 close to the low and therefore we were well positioned for the risk aversion that swept through global financial markets over the summer and the contagion effects that ensued on precious metals volatility. Given the extreme positioning currently in the gold market as well as potential seasonal strengthen in the EURUSD during the first four weeks of the year. Copper. Figure 9: Aluminium volatility level 34% 31% Aluminium implied vol cone: current curve vs. Indeed. past distribution 12% Aug-05 50% Source: DB Global Markets Research 45% 45% 40% 40% Subsequently with the gold price breaking the USD800/oz level gold vol has rallied further despite a recovery in risk appetites. copper and nickel vol Among the base metals complex. past distribution 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 1M 2M 3M 6M 1Y 04-Dec-07 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 2Y 3Y 4Y 04-Jan-08 6-year median Source: DB Global Markets Research Deutsche Bank AG/London Page 35 . During the period of extreme VIX and USDJPY volatility. the entire gold vol term structure is trading well above historic levels. and nickel vol are all trading at or above the interquartile range.
lee@db. past distribution 55% 55% Amanda Lee.com 50% 50% 45% 45% 40% 40% 35% 35% 30% 30% 25% 25% 20% M01 M02 6-year median M03 M06 M09 07-Dec-07 M12 M24 9-Jan-08 M27 20% Source: DB Global Markets Research Page 36 Deutsche Bank AG/London . copper and nickel vol Source: DB Global Markets Research Figure 12: Nickel volatility level 60% 60% Nickel implied vol cone: current curve vs. past distribution 50% 45% 40% 35% 30% 25% 20% 15% 10% M01 M02 M03 M06 M09 M12 M24 9-Jan-08 M27 6-year median 07-Dec-07 50% 45% 40% 35% 30% 25% 20% 15% 10% US natural gas: Long Mar’09 variance swap Long Sep’09 variance swap Industrial metals Aluminium vol offers good value vs. (852) 2203 8376 amanda-ps.11 January 2008 Commodities Outlook Figure 11: Zinc volatility level 55% 55% Trade recommendations: Crude oil • • • Gold • • • Take profit on long gold variance swap Scale up sell Long Mar’09 variance swap Zinc implied vol cone: current curve vs.
• Figure 1: Speculative EUR Positions 140 120 100 80 60 40 20 0 -20 -40 1999 2000 2001 2002 2003 2004 2005 2006 2007 0. The very first stop for market positioning is always the positioning data reported by the CFTC. our model indicates that the Dec’09 NG contract has a 10% chance that it might expire below USD5.9/mmBtu. currently speculators are net long EUR according to the IMM data while the EURUSD options skew has shown the strongest favour towards EUR put options (USD call options) since November 2000.28 1. in the gold market.11 January 2008 Commodities Outlook #12 Skew View & Spike Risk What Are Option Markets Saying? A.7/mmBtu or above USD18. On the other hand. We believe combining the vol skew with the speculative positioning data provide a more comprehensive indication of the overall market positioning and sentiment.88 0. In the crude oil market. To take the currency market as an example. • • • A. • • • Alternatively. for US natural gas.6/mmBtu. the speculative community is extremely bearish while the options skew has shown a strong bullish bias. DB Global Markets Research Deutsche Bank AG/London Page 37 . in our view. Market Positioning Risks Assessing market sentiment and positioning is very crucial to any investment or hedging decision because while it is nice to ride on the trend but risk also increases substantially for over-crowded trade. B.96 0. Market Positioning Risks • Net speculative positioning data provide a good indication of market sentiment and directional views among the speculative community. Alternatively. Similarly. currently speculators are net long EUR and indeed the long position has been intact since early 2006. (rhs) 1.12 1. If a correction were to occur we believe this would simply deliver another opportunity to buy given our medium term bullish view towards the precious metals sector. against the futures price of USD92/bbl. possibly indicating gas bears are hedging with gas calls.20 1. euro bulls are buying puts to hedge their directional long position in our view. futures reference at USD9. as shown in Figure 1. Commodity Futures Trading Commission.80 Net long Net non-commercial positions on IMM. the market bias of a particular commodity can also be inferred from the options volatility skew. the market bias of a particular commodity can also be inferred from the options volatility skew. We believe combining the vol skew with the speculative positioning data provide a more comprehensive indication of the overall market positioning and sentiment. That is.36 1. For example. (lhs) EUR/USD. IMM bulls plus options bears mean the market is more balanced in our view and therefore not as one-sided as implied by the IMM data alone. there is a 10% chance that the Dec’09 WTI contract will expire below USD61/bbl or above USD149/bbl. speculators are mildly long while the options market has a strong favour on calls. Spike Risk for Oil & Gas • According to the options market skew.04 • • Source: CFTC. Extreme one-sided bullishness combined with the tendency of the USD to strengthen in the first four weeks of January suggests to us that the gold price is most vulnerable to a sell-off currently. In the US natural gas market. both the CFTC net speculative positioning and options skew are overtly bullish gold and so helping to propel the gold price to new highs and possibly above what is implied by the current level of the US dollar.
We use IMM. Figure 4: DB Positioning Indices (DB PI*) Figure 2: EURUSD 12M skew favours puts 2.00 Jan-99 Dec-99 Nov-00 Oct-01 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07 Source: DB Global Markets Research IMM bulls plus options bears mean the market is more balanced in our view and therefore not as one-sided as implied by the IMM data alone.0 stronger put skew 0. 2008.11 January 2008 Commodities Outlook However.50 -1. option risk reversals and weekly analyst survey results as measures of sentiment. where +10 is the most bullish that segment has been and -10 the most bearish. Figure 6. and the correlation between gold and EURUSD remains firm. our DB Positioning Indices.5 10P 25P ATMF 25C 10C Source: DB Global Markets Research Source: as of January 7. Indeed. the EURUSD options skew is showing the strongest favour towards EUR put options (USD call options) since November 2000 as indicated by the 12month 25-delta risk reversal trading at the lowest level in 7-years as shown in Figure 3.0 deviation from ATMF (vols) 07-Jan-08 30-Jul-07 1.5 0. In fact. In July 2007 the vol skew is relatively balanced between calls and puts option reflecting the then range bound market during the first half of 2007. there has been a big divergence between EURUSD risk reversal and gold risk reversal. skew view This balanced view however is not shared by the gold market despite the currency move is a big driver of the gold price in our view. CTA and real-money investor positions as indicators of positioning. Each of the five inputs is ranked on a scale of -10 and +10. This is particularly remarkable given the ATMF implied volatility of gold and EURUSD has stayed relatively inline over the past 18 months. Page 38 Deutsche Bank AG/London . CTA. which take account of the IMM. is showing an overall short position in the euros.00 -0. EURUSD and gold RR largely tracks each other and the current divergence is the biggest seen in years. The DBFX PI is then simply the average of these inputs.5 EURUSD 12M vol skew 2.00 0. 0. Gold: CFTC vs. The current vol skew has shown a strong favour towards put option.0 -0. That is. Over the past four years. option risk reversals and weekly analyst survey data. Figure 3: EURUSD 12M 25 Risk Reversal is trading at 7-year low 1. Figure 2 compares the latest vol skew of the EURUSD 12-month option with the one six months ago. Figure 5. real-money investor positions.50 EUR 12m 25 Risk Reversal 1. DB Global Markets Research *The DB PI comprises of positioning and sentiment data from five key segments of the FX markets. euro bulls are buying puts to hedge their directional long in our view.50 In fact.5 1. this bullishness is not shared by the currency options market.
4 0 -1 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 -0.0 4. Therefore. both the CFTC net speculative positioning and options skew are overtly bullish gold and so helping to propel the gold price to new highs and possibly above what is implied by the current level of the US dollar.0 0.0 0. We believe gold options are being purchased to express a bullish view on gold.0 Gold 12M vol skew stronger call skew 8.0 -0. Deutsche Bank AG/London Page 39 . rather than a hedge against any potential sell-off. Conclusion : Buy on dips in gold Extreme one-sided bullishness combined with the tendency of the USD to strengthen in the first four weeks of January suggests to us that the gold price is most vulnerable to a sell-off currently.8 0.0 Gold 12m 25 Risk Reversal EUR 12m 25 Risk Reversal (rhs) 1.6 4 3 2 1 -0.2 1.11 January 2008 Commodities Outlook Figure 5: EURUSD Risk-Reversal and Gold RR normally tracks each other – biggest divergence seen in years 7 6 5 0.2 0. Figure 8.0 2.6 -0. DB Global Markets Research Source: DB Global Markets Research The gold 12M skew is currently showing a very strong call skew as shown in Figure 7 while CFTC data is also indicating a massive net long position among the speculative community.8 Figure 7: Gold 12M skew favours calls 10.0 10P 25P ATMF 25C 10C Source: DB Global Markets Research Source: DB Global Markets Research Figure 8: Gold speculative positions 240 210 180 150 120 90 550 60 30 0 -30 -60 -90 J an-00 J an-01 J an-02 J an-03 J an-04 J an-05 J an-06 J an-07 450 650 K C o nt rac ts US $ /o z 850 Figure 6: EURUSD 12M vol vs.0 deviation from ATMF (vols) 07-Jan-08 30-Jul-07 6. If a correction were to occur we believe this would simply deliver another opportunity to buy given our medium term bullish view towards the precious metals sector.4 0. gold 12M vol Long 750 S hor t 350 250 J an-08 N o n-C o m m erc ial N et P o s it io ns (LH S) G o ld P ric e (R H S) Source: CFTC.2 -2.
0% 4. Figure 11: US natural gas speculative positions 70 50 30 K Co ntracts 1 7 US$ /mmB tu 1 5 Long 1 3 1 1 9 7 5 Figure 9: WTI speculative positions 1 60 1 30 1 00 70 40 1 0 -20 -50 -80 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 80 K Co ntracts US$ /bbl 1 20 1 0 -1 0 -30 -50 1 00 Long -70 -90 -1 0 1 60 Short 3 1 -1 30 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Natural Gas P rice (RHS) 40 No n-Co mmercial Net P o sitio ns (LHS) Shor t 20 Source: CFTC. a more balanced market positioning in our view. Again. Figure 10 possibly reflecting the strong demand of “lottery ticket” type of far out of the money calls.0% 4P 15P 28P ATMF 36C 19C 5C Source: DB Global Markets Research US Natural gas: CFTC vs. speculators are mildly long while the options market has a strong favour on calls.0% -2.0% 10P 20P 30P ATM 30C 20C 10C WTI vol skew (Dec'08) 24-Aug-07 8.0% deviation from ATMF Source: DB Global Markets Research 6. DB Global Markets Research 0 Jan-08 Figure 12: Natural Gas vol skew 10.0% 2.0% -4. skew view In the US natural gas market.0% No n-Co mmercial N et P o sitio ns (LH S) C rude Oil P rice (R HS) Source: CFTC. DB Global Markets Research NatGas vol skew (Dec'08) 8. 6.11 January 2008 Commodities Outlook Crude oil: CFTC vs.0% Figure 10: WTI vol skew 10. skew view In the crude oil market. Page 40 Deutsche Bank AG/London .0% 0.0% 07-Jan-08 -2.0% 0. the speculative community is extremely bearish while the options skew has shown a strong bullish bias.0% 2. possibly indicating gas bears are hedging with gas calls.0% 07-Jan-08 24-Aug-07 deviation from ATMF The crude oil skew in fact has moved from a strong put skew to a strong call skew over the past few months.0% 4.
USD149 oil seems far too high in our opinion. the skew surface is compared to the Black-Scholes surface (a flat vol skew is assumed in the Black-Scholes world implying a constant vol across strikes).9/mmBtu. We do not believe triple digit oil is sustainable and longer term we are expecting the crude oil price heading back to USD80 in 2008-09.lee@db. our model indicates that the Dec’09 NG contract has a 10% chance that it might expire below USD5. and in particular the fatness of the tails. Spike Risk for Oil & Gas Other than position bias. The 10% left and right tails are also highlighted in Figure 13. futures reference at USD9. 2 4 6 8 10 12 14 16 18 20 22 24 Skew surface right tail .7/mmBtu or above USD18.6/mmBtu.10% Black-Scholes Source: DB Global Markets Research Similarly.10% left tail . According to the options market skew. Amanda Lee. (852) 2203 8376 amanda-ps.10% Black-Scholes Source: DB Global Markets Research While we believe upside price risk remains in the crude oil market on geopolitics. weather. Figure 14: US Natural gas probability density function –very fat right tail as well Probability Density Function: US Natural Gas The probability density function of WTI crude oil is shown in Figure 13.com Figure 13: WTI probability density function – very fat right tail Probability Density Function: WTI 30 50 70 90 110 130 150 170 190 210 Skew surface right tail . also provides useful information on price spike risk.11 January 2008 Commodities Outlook B. there is a 10% chance that the Dec’09 WTI contract will expire below USD61/bbl or above USD149/bbl. escalating cost and tight market fundamentals. Deutsche Bank AG/London Page 41 . the vol skew.10% left tail . for US natural gas. against the futures price of USD92/bbl. USD overshooting.
80 -37% 0. EURUSD 20% Band PPP EURUSD -25% 0. As a result.00 0. To address this theory we examine the cumulative Black-Scholes knockout probabilities for various levels of EURUSD over various time horizons. and in particular exchange rates.260/oz.4% -43.25 20% 10% 0% 3M 6M 9M 12M 18M 2Y 3Y * Average percentage change is in absolute terms.60 1. stands at 18% in one year and 30% in two years. the exchange rate has hit levels of misalignment of around +/-40% versus Purchasing Power Parity.60 1. a falling US real interest rate environment.8 Change -14.11 January 2008 Commodities Outlook #13 Precious Metals & The US Dollar The Threat Of Overshooting • We believe exchange rate and precious metal markets are at serious risk of overshooting in 2008. On average. we attach a high probability of the US dollar hitting even higher levels of undervaluation against the euro. This reflects Fed easing. US dollar cycles are measured by the US broad trade-weighted index Source: DB Global Markets Research.80 0. it would imply the gold price hitting USD1. DB’s PPP estimate.2 6.6 4.30 level.55 1. For gold to surpass its all time high in real terms.1% 40.2% -24.35 1.62.50 level being reached is 78% in one year and 83% in two years time. • Figure 2: EURUSD vs.50 80% 70% 60% 50% 40% 30% 1.30 1. Figure 1: Magnitude & duration of past US dollar cycles USD Cycle Bear Bull Bear Bull Average* Bear 28-Feb-2002 Current Start 1-Jan-73 11-Jul-80 26-Feb-85 9-May-95 End 10-Jul-80 25-Feb-85 8-May-95 27-Feb-02 Years 6. these alternative targets give an indication of how far the gold price rally could run. If this were to occur during this cycle it would imply EURUSD rising to 1.40 39% Numbers refer 28% to the scale of PPP mislignment 1.60 41% 1. We find that the implied probability of EURUSD trading the 1. Conversely the probability of the 1. In previous turning points of the US dollar. US dollar cycles Since the birth of floating exchange rates in 1972 the US dollar has displayed long-run cycles of rising and falling for extended periods of time. Given the increasing maturity of the current cycle and the tendency of the US dollar to overshoot during the latter stages of a cycle. Figure 1.00 1.20 1.60 2001 2005 1993 1997 Source: DB Global Markets Research While we expect new lows in the US dollar it is understandable that some market participants may be looking for a bigger picture turn in EURUSD given the over 20% undervaluation of the US dollar vs.40 • 1. US Federal Reserve Source: DB Global Markets Research Page 42 Deutsche Bank AG/London . the current US dollar cycle becoming increasingly long in the tooth and the non-linear relationship between the gold price and the US dollar.2% -40. cycles in the US dollar trade-weighted index and against the euro have lasted for seven years.1 5.8 7.20 1.0% Figure 3: Cumulative Black-Scholes EURUSD knockout probabilities 90% 1. this often leads asset prices. as has occurred in crude oil. which would be equivalent to a 10% correction from current levels. We believe we will enter a period of exchange rate and commodity price overshooting over the coming year.7 10.60 1973 1977 1981 1985 1989 Behavioural finance theory tells us that investors often tend to be overly optimistic about asset markets which have been past winners and overly pessimistic about asset markets which have been past losers. Purchasing Power Parity 1. to overshoot relative to fair value.1% 63. While our price objectives are more cautious.
Consequently ongoing stress in the US credit and housing sectors are expected to hinder a turnaround in US capital flows in the near term. The start of a new uptrend in the US dollar has tended to coincide with a turn in interest rate differentials in favour of the US dollar. This is therefore lowering the pressures for a reversal in the US dollar currently. US dollar bear cycles tend to be more durable than bull cycles. To assess the likely timing of such an event we examined past turning points in the US dollar and find six valuable lessons. We find that current levels of implied EURUSD volatility suggest a range of 15%. However. Figure 5.5 years. Alternatively. Figure 4. or EURUSD fluctuating between 1. Assuming this dollar bear cycle conforms to historical averages then it would imply the US dollar will not embark on a new long term uptrend until August 2010. while the dollar is cheap against the euro.1% of GDP in 2008. which reflects the fact that the US dollar is still expensive against the Japanese yen and most Asian emerging market currencies. investors need to consider at what point the US dollar will embark on a new long-term uptrend. while it helps cushion the slowdown in the US economy. Although the US current account deficit has fallen from 6. on a trade-weighted basis the US dollar has not yet overshot. we believe investors should only position for dollar strength or at the very least stability in the US dollar exchange rate when central banks start intervening and buying the US dollar.2% in 2006 to an estimated 5. As a result. in a rising commodity price environment. Since the current US dollar cycle is becoming increasingly long in the tooth. US credit markets have been the primary channel of capital inflows into the US in recent years. A trend reversal in the US dollar has historically been associated with longer-term turns in capital flows. or 8. (ii) Bull cycles have typically been preceded by a significant narrowing in the US trade deficit. if one assumes the current US dollar cycle will continue to track the 19851995 US dollar cycle. all of which suggest an imminent turn in the US dollar is unlikely: (i) Turning points in the US dollar have been asymmetric such that downturns from upcycles have been inverted (V-shaped) while upturns from down cycles have tended to be preceded by an extended bottoming-out period. This would imply that a new long-term uptrend in the US dollar may be several years away.11 January 2008 Commodities Outlook These probabilities would assume market players anticipate an extended period of US dollar weakness similar to the early 1990s when the US dollar was trading around 20% undervalued against the synthetic euro for a number of years. we expect rate differentials between the US and Euroland will continue to shift against the US dollar during 2008. Put another way. IT assists in dampening inflationary pressure s in Europe. Every turn in the US dollar since 1978 has coincided with aggressive rounds of G3 foreign exchange intervention. We believe this will constrain a turnaround in the US dollar’s fortunes for the time being.38 and 1. then it implies the US dollar only hitting rock bottom in September 2011. the deficit still remains large.58. (iii) (iv) (v) (vi) Figure 4: The 1985 and 2000 US dollar bubbles compared 200 180 160 140 120 100 80 60 0 24 48 72 96 120 144 168 192 216 Oct 1978-Dec 1987 Jun 1995-Current USD hits rock bottom in September 2011 1985 & 2000 US dollar bubbles burst USDDEM: October 1978 & June 1995 rebased to 100 Months after trough Source: DB Global Markets Research Deutsche Bank AG/London Page 43 . At the moment. For the time being dollar weakness is not yet a policy headache for public sector authorities. The pressure for adjustment from valuation extremes is greater when the US dollar is uniformly cheap rather than unevenly so. However.
we take this as the start point for this rally since it marks the date the US government informed the IMF that the US dollar would no longer be convertible into gold. FX invention rounds are conducted in USDDEM Source: DB Global Markets Research 40 The threat of an overshooting in the US dollar poses considerable contagion risks to the commodities complex.9 850. 600 30 400 200 0 1970 20 10 0 1974 1978 1982 1986 1990 1994 1998 2002 2006 Source: DB Global Markets Research Figure 6: The non-linear relationship between the gold price & the DXY dollar index DXY 170 In terms of duration.70 Plaza Accord (1985) to push the dollar lower 81 84 87 90 93 96 G3 action to stop the euro falling 99 02 05 08 0.50 0.10 1.9 90 70 Gold price (USD/oz) Feb-85 to Dec-87 Apr-01 to present Source: DB Global Markets Research. gold price would need to rise an additional 40% from current levels to surpass the all time high in real terms hit at the beginning of the 1990s while silver prices would have to rise an additional 350%. Bloomberg Page 44 Deutsche Bank AG/London .4 103.8 284. gold and certain agricultural commodities to the US dollar. Figure 6.8% 238% Duration (months) 42 41 8 34 81 130 USD/oz USD/oz Aug-71 to Feb-75 Aug-76 to Jan-80 Jun-82 to Feb-83 0 100 200 300 400 500 600 700 800 900 110 35.50 G3 action to stop the dollar falling Louvre Accord (1987) to stabilise the dollar EUR selling EURUSD EUR buying 1. DXY vs gold price.6 183. This would be equivalent to gold hitting USD1. in terms of magnitude. Indeed over the past three months we have witnessed a sudden increase in the correlation between crude oil. We believe overshooting risks are most acute in the precious metals markets and in particular gold. Highs and lows in the gold price relate to closing prices Source: DB Global Markets Research. the gold price would need to surpass USD1.5 296.90 Figure 7: Gold & silver prices in real terms 0. 0.50 1. Figure 7.8 864.11 January 2008 Commodities Outlook Figure 5: EURUSD central bank intervention since 1980 1.320/oz to be comparable to the rally in gold prices that occurred in the first half of the 1970s.0 509.3 255.30 1. This reflects the historically non-linear relationship between the US dollar and the gold price such that since 1980 the gold price has tended to react more to incremental changes in the US dollar when the US dollar is trading at depressed levels.25 499. lhs) Real silver price (2005 US dollars.70 1. Bloomberg Although the gold price had been rising before August 1971. 1980-2007 Figure 8: Gold rallies in comparison 150 Low High Magnitude (% change) 419% 721% 71.250/oz.50 Real gold price (2005 US dollars. This consequently leads to the collapse of one of the main pillars of the 1944 Bretton Woods system. However.10 The assess the extent to which the precious metal prices could overshoot we examine prices in real terms. We find that despite the rapid real price appreciation that has already occurred in this cycle.30 1.70 1400 Deflated by US PPI 0. rhs) 80 70 60 50 1200 1000 800 Before 1999. the current gold price rally has been the longest since the gold price became freely floating in August 1971.70 1.90 0.6% 75.
522 tonnes. we expect producer dehedging and investment demand will support the gold price. DB Global Markets Research estimates Deutsche Bank AG/London Page 45 . Producer de-hedging has continued in 2007. We find that the market is attaching a 48% and 63% probability of the gold price hitting USD1. Investment demand remains strong Investment demand remains one of the important sources of physical gold demand and a key price driver. During 2007 and despite a number of new mines coming online and record high gold price global mine production rose slightly in 2007 to 2. The launch of a new gold futures contract on the Shanghai Futures Exchange this month may also attract a new layer of investment demand into the market. We expect global gold mine production will recover further in 2008 helped by increasing production from Australia and China. The popularity of gold ETFS has increased dramatically since their launch in March 2003. reflecting the strong gold price outlook and strong shareholder opposition towards hedging.11 January 2008 Commodities Outlook To assess the options market probabilities to the gold price outlook. reducing the global hedge book to 995 tonnes from 1. Figure 10: Producer de-hedging is expected to slow 600 400 200 Tonnes Figure 9: Cumulative Black-Scholes gold knockout probabilities 100 0 -200 % 900 -400 90 80 70 60 50 40 30 20 10 0 3M 6M 12M 850 950 800 1000 1050 750 -600 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E Source: DB Global Markets Research estimates 24M Source: DB Global Markets Research. Rising production in Russia. the total amount of physical gold held by the eight ETFs we track rose an additional 40%. Figure 12.050/oz in one and two years’ time respectively. we examine cumulative Black-Scholes knockout probabilities. In 2007. China and Australia was offset to some degree by falling production in South Africa and North America. at least over the next two years. We believe producer de-hedging will remain a main theme in the gold market. Spot reference USD888/oz Demand-supply fundamentals While we expect production levels to recover further this year. Figure 11: ETF physical gold holdings since 2003 1000 ETF securities ZKB (Zurich) 800 IAU (AMEX) GLD (JSE) GLD NYSE) 600 Tonnes GBS (LSE) GOLD (ASX) CEF (TSX) 400 200 0 2003 2004 2005 2006 2007 Source: CPM.368 tonnes in 2006.
6 705.0 39. and catalyst use.1 167.2 Source: CPM.0 39.7 127.0 37.6 169.0 5.0 181.0 217. DB Global Markets Research Figure 13: Producer de-hedging is expected to slow Trade recommendations: • Long gold in February given the overextended nature of the rally and the risk of seasonal strength in the US dollar the Long silver • Silver trades cheap to gold Michael Lewis.0 116.3 63.0 244.5 241. coins & medallions Pr oduce r De -he dging 3889 3.7 31.1 -53.7 182.9 114.5 215.1 205.0 502.3 707.4 773.3 112.0 242.972 2.8 137.3 102.9 38. (44) 20 7545 2166 michael.550 886 674 2.8 807.8 185. Figure 14.0 551.0 8.0 16.5 26.9 209. DB Global Markets Research Total Demand Fabrication 807.7 136.901 2.0 215.742 2.522 887 480 3.0 3.1 110.0 521.0 108.5 101.com Source: DB Global Markets Research Jude Brhanavan.8 101.585 927 460 4.0 25.039 2.5 67.5 198.0 705.0 515.0 226.7 242.7 93.0 36.6 96.1 189.774 2.138 firstname.lastname@example.org 2.536 503 1.1 788. Partly offsetting this reduction in silver’s industrial use has been the growth in other areas such as electronics.284 458 673 260 413 336 3949 2.0 4. Today photographic demand as a percent of total fabrication demand has fallen from 32% in 2003 to an estimated 21% this year.3 797.9 58.5 36.0 7.5 4.0 27.5 245.5 66.7 179.8 705.0 23.11 January 2008 Commodities Outlook Figure 12: Gold supply-demand balance T o nn e s Figure 14: Silver supply-demand balance M illio n T ro y O unc e s 2005 2006 2007E 2008E 2009E 4.4 244.707 431 620 208 412 131 3751 2.0 26.070 560 510 93 Market Balance 221 -76.0 6. (44) 20 7547 1558 jude.0 24.4 The silver price has been trading cheap relative to gold price for the past few months.5 121.5 91.674 2.3 207.3 714.7 241.7 111.1 35.0 5.650 964 440 Total Supply M ine Production Peru Mexico A ustralia United States Canada Other Se condary Supply Old Scrap Coin Melt Indian Scrap Gove rnm e nt Sale s Total Demand Fabr ication Jew ellery Industrial Inve s tm e nt ETF and similar Bars.0 538.com Page 46 Deutsche Bank AG/London . CPM.0 106.5 26.473 849 352 2005 2006 2007E 2008E 2009E 776.8 162.8 149.2 82. The advent of digital cameras has removed one of the main industrial uses for silver.0 email@example.com 486 938 468 470 187 4202 3.6 288.0 714.4 -148 Source: World Gold Council.110 3.0 77.0 22.4 65.300 474 802 360 442 373 4026 2.2 774.9 -60.8 705.7 707. Photography Jew ellery & Silverw are Electronics and Batteries Other Industrial A pplications Market Balance (excluding investm ent dem and) -30.0 Total Supply M ine Pr oduction Se condar y Supply Official Se ctor Sale s 3.5 57.7 177.0 212.6 242.889 2.
rhs) Market balance ('000 oz. The prospect of a structurally strong rand strengthens this case. most significantly in autocatalysis. Vehicle manufacturers switched aggressively from platinum into palladium in the mid. the palladium market fundamentals will improve. Deutsche Bank AG/London Page 47 .11 January 2008 Commodities Outlook #14 PGMs Strong Fundamentals Continue • We believe the case for robust platinum group metals demand and higher prices remains firmly intact. Palladium We believe that in time. industry figures suggest that this could be as high as 5-8% within the next five years. but more importantly. and a 214k deficit in 2008.5m ounces p. lhs) Platinum price (USD/oz. we believe consumers have absorbed a fair amount of the high levels of manufacturing purchases seen in 2005. This could result in additional demand of around 300k500k ounces per annum. this could just as easily be a deficit if production issues at the major producers are not rectified. we are also concerned that autocat scrap will increase considerably over the next few years. While the market typically expects a penetration rate of around 3% in the US over the next few years. Johnson Matthey • Platinum We believe the platinum market will continue to be in deficit for the foreseeable future. Continued high oil prices have also the potential to accelerate research into fuel cell technology. rhs) 200 1500 1300 0 1100 -200 900 700 -400 500 -600 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008e 300 Forecast 1700 • Source: Deutsche Bank. We believe the basis for the strength in the PGM prices continues to be founded in accelera ting consumer demand. thus we believe markets are likely to continue attracting speculative involvement.a. the US as the authorities there have been showing increasing support for dieselpowered vehicles of late. although our assumptions include minimal demand from this sector for years to come Source: Deutsche Bank. lhs) Forecast 750 650 550 450 400 350 -100 250 -600 -1100 -1600 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008e 150 50 -50 We expect continued penetration of diesel vehicles into Europe. especially for long-term prices. we believe the risks to our platinum forecasts are balanced. Figure 1: Platinum supply-demand balance 400 Market balance ('000 oz. it is with just cause. we could see autocat recycling increase to as much as 1. in the absence of a substantial shift in the USD. with symptomatic evidence of reverse substitution in autocats as well as improved jewellery off-take. The fundamentals of these markets are strong. While our official forecast is for a marginal surplus in 2009. Figure 2: Palladium supply-demand balance 1900 1400 900 Palladium price (USD/oz. we expect the overhang of above-ground stocks at around 6m ounces in Zurich and anywhere between 2m ounces and 10m ounces in Russian stock may limit price advances.to late-1990s and with the average vehicle’s lifespan being around 12 years. Johnson Matthey Aside from the above-ground stocks. which bodes well for the future. Although there has been elevated speculative involvement in the PGM markets in the few years. over the next few years. Although the last two years have seen declines in off-take. Unfortunately. Although higher platinum prices may well accelerate palladium substitution in autocats. We are forecasting a 414k ounce deficit for 2007.
Also. we would expect an increase in the population of “lean-burn” engines. The metals have highly unique and desirable physical characteristics. is that significant price spikes perhaps worsened by the growth in Exchange Traded Funds permanently damage certain PGM demand categories. As manufacturers continue to strive for efficiency in gasoline engines. we have experienced persistent smelting accidents in the industry over the last few years. requiring the use of more catalytic material. Trade recommendations: • Long platinum Figure 3: Rhodium supply-demand balance 300 Market balance ('000oz. Rhodium is particularly important in reducing NOx emissions that occur predominantly in diesel vehicles and in a “leanburn” environment.11 January 2008 Commodities Outlook Our final concern is that the private and public sector in Russia may attempt to “manage the palladium market” if prices move much higher than spot to provide peace of mind to vehicle manufacturers in an attempt to ensure that the price spikes at the beginning of the decade that resulted in massive write-downs of stock will not be repeated. lhs) Rhodium price (USD/oz. making them useable in a number of industrial applications. the SA government and the SA PGM industry’s tougher stance against mine accidents has further contributed to lower than anticipated production levels. (27) 11 775 7247 gary. Although small in the context of the overall market. consumption by the glass manufacturing industries (particularly LCD glass) should remain supportive from the current base. illiquid market will likely result in the current high prices being sustained for at least the next few years and have amended our forecasts accordingly. we have recognised that the impact of continued supply shocks such as production issues at AngloPlat and Lonmin in particular in a tight. the case for PGMs is easily explained. we expect the long-term price to settle at levels substantially below spot as mining operations in South Africa continue to migrate to the UG2 and Eastern Limb reef horizons. in our view.com 200 0 Source: Deutsche Bank. PGMs have the unique ability to catalyse reactions. We have consequently raised our 2008 and 2009 forecasts significantly. which would create more secular problems for the business as a whole. however. If repeated. On the supply-side. legislation has tightened to such an extent that it has become a strategic and “critical path” item for automotive manufacturers. Johnson Matthey Page 48 Deutsche Bank AG/London . Conclusion In our view.pearson-sa@db. Rhodium We expect the rhodium market will remain extremely volatile given the relative illiquidity of the market. which account for more than 50% of the consumption of all PGMs. These carry significantly higher rhodium content than the traditional Merensky reef horizon. in the case of autocats. In the short to medium-term. More recently. rhs) 7000 6000 5000 100 4000 3000 2000 -100 1000 Forecast -200 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008e 0 Gary Pearson. we expect this would keep PGM prices higher for longer. While it seems that the days of continued delays and project cancellations have passed. many of which have desirable environmental consequences. Ultimately. however. This enables producers to essentially design their own returns by controlling the rate of new supply. reserves are highly concentrated and barriers to entry very high. Many of these applications happen to be in areas that face increasingly strenuous environmental legislation. Rhodium is heavily exposed to autocats (85% of demand) and we expect demand from this sector to remain strong given tightening regulatory environment for the various forms of nitrous oxides (NOxs). The biggest industry risk.
Market trends in the last half of 2007 served as a reminder of the influence that macroeconomic shocks hold over the industrial metals complex. We expect prices to ease to a more sustainable level in 2008 as a key mine in Australia restarts shipments although strong battery demand in China will continue to support demand.65/lb).44/lb) and our 2009 numbers by 2% to USD27.326/t (USc105. however.11 January 2008 Commodities Outlook #15 Industrial Metals Longer Life on Stronger Fundamentals • Summary: Although industrial metals prices may struggle in the first half of the year against US economic jitters. we maintain a favourable medium-term outlook across the complex. However.5/lb). and in collusion with the impact of China’s eventual shift to a net importer. largely as a result of a surge in Chinese smelting capacity in the second half of the year.3/lb).625/t (USD13. In our view.5/lb). metals markets will remain strong.684/t (USc121. respectively.5/lb) and the 2009 forecast by 7% to USD2105/t (USc96. The steep rise in energy costs will pressure global smelter growth. Despite cyclical highs in inventories. While global inventories remain low. We remain convinced that trends in China will continue to have a substantial impact on the metal price outlook. DB Global Markets Research • • Last year the industrial metals sector was the worst performing across the commodities complex. but raised the 2009 forecast to USD6. given the recent shift in the Chinese • • tariff regime among other base metals to discourage exports. Deutsche Bank AG/London Page 49 . we remain positive on the mediumterm outlook. This view does not. and particularly as long as the developing markets make up an increasingly larger proportion of that growth. We have moderately decreased our forecast in 2008 to USD2.165/t (USc325. Aluminium: Although aluminium continued to under perform versus other metals in the complex in 2007.8/lb). by historical standards. We moderately increased our 2008 forecast to USD2. This year’s vigorous M&A activity in the sector demonstrates the conviction producers hold over the on-going strength of this cycle. Lead: The impressive lead price performance last year occurred as a result of an unexpected reduction in concentrate and refined supply. Copper: We expect that copper price weakness seen in the back half of last year will continue while concerns over the US economy persist. we believe the metal has one of the most optimistic price outlooks. In our view. we increase our 2010 and 2011 forecasts by 14% and 22%. Figure 1: Industrial metals prices rebased 250 225 200 175 150 125 100 75 50 Jan-07 Aluminium Copper Nickel Zinc Lead Tin • Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Source: Reuters. the global market balance will remain tight in 2008 against below trend concentrate production and robust demand from the key emerging markets. but increased our 2009 estimated by 11% to USD2. often leaving fundamentals ignored. the primary nickel market balance is set to record a market deficit in 2008.888/t (USD12. providing the world continues to realise sustainable growth.304/t (USc104. We reduced our 2008 forecast by 10% to USD29. avoiding a reversion to mean averages. We dropped our 2008 price forecast by 21% to USD2. we recognise a degree of risk that such a move in the zinc market has the potential to tighten supply.679/t (USc121. largely as a result of the credit crisis the ensuing poor performance of global financial markets.752/t (USc306. these conditions will continue at least in the medium-term. Nevertheless. we think the complex will see more pressure in the first half of 2008 against global market jitters. However. We revised our 2008 forecast down 2% to USD7.8/lb). Nickel: We expect nickel prices will remain stable as the global stainless steel market ramps up production in the beginning of the year as well as from Asian producers re-entering the market after the Chinese New Year holiday. Zinc: Although zinc consumption trends remain robust in 2008. However. we expect the global market balance will head toward deficit in 2008 and 2009. exclude the existence of price volatility or cyclicality.0/lb). we are expecting the global zinc market to record its first market surplus since 2003.5/lb) and left our 2009 estimation unchanged at USD1. in our view. We also believe substitution risks will not become a major threat this year. prices across the complex remain at elevated levels compared to their long-term mean as a result of supportive supply and demand fundamentals.692/t (USc76. Thus in the shorter-term.
the outlook for most developing economies is less dire.0 18 8.0 USA Japan EU China (6m m a) 12.0 5. Consumption growth in 2008 is likely to be highly resilient given rapid income growth. and progress in social sector reforms.400 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 320 340 13. We believe this is still a conservative estimate. DB Global Markets Research 0.0 20. DB forecasts that the GDP growth of OECD economies will slow to 1.4% for the region in 2007.2% in 2007 to 1.2% in 2008.200 460 440 420 13. we find that a 1ppt deceleration in the US will likely result in a reduction less than 1ppt (on average at only 0. China: The driver of growth We remain convinced that trends in China will continue to have a substantial impact on metals prices.5ppt) in China’s GDP growth. Figure 4: China’s macro indicators remain strong 45 % % 24.0 27 36 Figure 3: Global industrial production (yoy %chg) remain resilient – thus far 20. DB Global Markets Research Cr u A de m Deutsche Bank AG/London N . We agree – recent research found that a 1% decline in US GDP translates into a 0.900 exports.0 -10. Providing the world continues to realise sustainable growth.0 15. While our global economics team rates the chances of avoiding a recession is greater than entering one. We expect investment growth to sustain at the current pace (about 25% yoy).0 Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Source: CHR Metals.0 Oct-07 0 Oct-97 Source: Reuters.0 -5. DB Global Markets Research A consequence of this continued strong growth profile is an increase to the contribution of China to global growth of demand for commodities. UNCTAD. import demand and a resulting slowdown in the region's Page 50 Figure 5: China’s contribution of Chinese growth to global demand growth. it is clear the US economy is headed for a downturn.300 380 13.9% in 2008 from 2. Source: Reuters. and particularly as long as the developing markets make up an increasingly larger proportion of that growth. metals markets will remain strong. as risks to Chinese growth appear to be biased to the upside.2% in 2007.700 Dow Jones Industrial Index (lhs) M GM I (rhs) 12. rising wealth effect from the assets market.0 10. In terms of the magnitude of the impact of a US slowdown on China. the World Bank recently lifted its economic growth estimate for East Asia in 2007 and 2008. predicting growth would reach a decade high of 8. At the same time.11 January 2008 Commodities Outlook Figure 2: Metallgesellschaft Metals Index vs Dow Jones Industrial avg 14.S. DB Global Markets Research Macro signals outside of the US point to strong demand which we expect will be good for metals Our favourable view of the metals complex in the medium term is based on a supportive global macroeconomic outlook. The upgrades were mainly due to the unexpected and large domestic demand-led acceleration of growth in China which occurred despite a weakening in U. the Chinese economy should continue to grow at around 10. Thus far in 2008. For example.4%. much of the market’s focus remains on the global implications of a possible US recession.0 9 Chinese FAIG 6mma (lhs) Chinese Industrial Production 6mma (rhs) Chinese Retail Sales 6mma (rhs) Oct-99 Oct-01 Oct-03 Oct-05 4.0 -15. 2007-08 100% 80% 60% 40% 20% 0% re nc Le ad St ee l ic ke l O iu Zi Co p pe r m in n Ir o lu Source: Brook Hunt.2% decline in emerging markets exports. which we forecast will reach 74% in 2008.600 400 13. This implies that even if the US GDP growth falls from 2.000 360 12. IISI.0 16.0 0.
copper and galvanised steel projects. has made significant changes to trade tariffs in attempt to ease trade friction by curbing the country’s growing trade surplus. Copper The copper market is set to remain tight over the next two years. these policy changes have serious implications on global market balances in many key commodities.020t over the second half of the year as the temporary surplus arising from strong imports in Q2 was steadily worked off. these particular policies will be taken more seriously as they are headline issues.000 20.000 Shaghai Futures Exchange. the National Development and Reform Commission (NDRC). market surpluses have been forecast but failed to eventuate. essentially weeding out the least efficient and dirtiest plants. we have identified several measures Chinese authorities are undertaking that will have a significant impact on commodities prices in 2008 and beyond.000 90. tonnes (rhs) 50. At the same time. They fell by 65. The NDRC hopes that reducing exports and increasing imports may solidify the purchasing power of the yuan and help treat the overheated economy.000 15. By the end of the year. Given that 2008 is China’s “coming out” party with the Beijing Olympics. they were close to the 20. More recently. tonnes (lhs) LM E stocks.11 January 2008 Commodities Outlook Chinese trends will influence metals markets China’s public profile in 2007 was not always positive with headline-grabbing issues such as lead in toys. copper prices remain high while (also by historical standards) global stocks remain low.000 50.000 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 210. particularly in the year of the Olympics. Either scenario will have a material effect on international prices across the sector. Indeed this is a primary factor in our confidence that Chinese refined imports will re-accelerating in the coming months. LME. As an illustration.000 10. the rise in LME stocks was accompanied by falling Chinese exchange stocks over the same period. While many measures have been announced but largely unsuccessful in the past. Further pressuring the copper price was a steady build in LME inventories. By historical standards. The cumulative effect of the these policy changes as well as others which are sure to come effectively increases exporters costs of production and will either force domestic prices higher or trim production growth rates.000 45. chemicals in seafood. in our view. China’s top economic planning body.000t level that has tended to define the floor of Shanghai Metals Exchange stocks over the last few years.000 130.000 40. and Comex copper stocks 250. the NDRC in December issued new industrial production stipulations as part of a drive to increase scale and efficiency and reduce wasteful use of resources.000 10. an overvalued currency and unfair trade practices. a strike at Southern Copper’s Cananea mine is now well over four months old. zinc and steel. this is due to the delay and lack of any large-scale mine commencement as well as persistent supply disruptions.000 35. concentrate production has not been able to keep up with demand growth. However. Lead and zinc mines with a lifespan of less than 15 years or annual output of less than 30Kt were also restricted. leaving copper-in-concentrate production at one of the world’s largest mines down 33% in 2007 over the previous year. In terms of concentrates. Prices came under pressure last year from October in line with global market concerns over the health of the US economy and the possible spillover effects. The guidelines sets minimum capacity requirements for a number of metals production such as alumina.000 Dec-06 Source: Reuters Supply Over the last several years. the central government is understandably keen to paint an improved picture. tonnes (lhs) Com ex. Essentially. particularly in terms of issues such as the environment. Over the last two years.000 30. but also to further strengthen its control over the growing metals industries which consume vast amounts of energy and are highly polluting. As such. Deutsche Bank AG/London Page 51 . Figure 6: SFE.000 25. namely aluminium.000 170. New secondary aluminium plants must have a minimum capacity of 50Ktpy and new aluminium fabrication plants one of 100Ktpy. energy use and trade practices.
8% 3.2% 14.126 18.4% 4.7% 18.0% 9.3% 8.6% 2124 1.1% 5.2% 1728 0.4% 1926 1.6% 9. In China.0% 7.3% 7.0% 0.4% 3568 4. Figure 10: Primary copper demand by region 2005 2006 2007 2008 2009 2010 3815 3967 4570 5027 5630 6137 Demand growth 7.8% 0.656 Total Primary Demand Demand growth -0.1% 9.0% 6.0% 2. rapid expansion of smelter capacity has triggered a deficit in the global concentrates market.7% 21.2% 26.0% 42. when significant new concentrate capacity comes on line.4% 9.0% 4.684 22.3% 14.943 % change 141% 99% 38% 36% 35% 30% 16% 1947% 33% 21% 30% 19% Congo Zambia USA Kazakhstan Indonesia Australia Total SxEw Production Capacity Demand On the demand side. As a consequence.8% 2069 3. DB Global Markets Research Refined supply growth has struggled primarily as a result of the unequal growth rates between concentrates capacity and smelter capacity.1% 3075 3.4% 2009 5264 11.9% 2.7% 2. India plans to vastly expand its power infrastructure to meet surging demand.7% 1605 3.2% 3620 1.2% 41.2% 10.2% 43.2% -6.6% 7.0% % of global demand 22.2% 14.8% 9.0% 12. Wire and cable manufacturers continue to report full order books against strong demand in the power sector.983 17.2% 15. Figure 8: Comparison of DB mined production estimates in 2007 and 2008 Concentrate Production Capacity 2007 150 340 723 452 775 820 12.9% 1900 -1. refiners must enter into low treatment and refining charges (TC/RCs).7% 16.6% 1728 -1.9% 18.5% 1728 0.11 January 2008 Commodities Outlook Figure 7: Brook Hunt copper market balance forecast vs outcome 600 400 200 107% 0 -200 -400 -600 -800 -1000 2003 2004 2005 2006 2007 2008E 125.040 2010 363 675 999 613 1.590 307 283 612 3.4% 8.7% 10.9% 2267 1. pressuring the least efficient smelters to reduce output or even shut down for this reason we expect China’s refined output will grow at a slower pace in 2008.899 20.5% 0.3% 29. Against the backdrop of constant supply disruptions and a lack of any unused idled mine capacity.1% 11.535 18. we expect the situation to begin turning around only in 2010.5% 22.547 15 213 507 3.5% 5. a very different scenario is playing out. According to government data.2% 0.4% 2004 4.6% 10.2% 9.8% 7. computers.4% % of global demand 20.1% 10. air conditioners. Similarly.2% 1630 1.219 24.6% 10.6% 16.5% 2093 0.7% 1750 7.8% 21.3% 20.7% EU 3537 3864 3678 3733 3771 3786 Demand growth -6.3% 3.209 23.1% 2010 5519 4. ICSG.4% 2979 -1.3% 9.3% USA 2270 2130 2083 2094 2110 2121 Demand growth -6.5% 14. the US housing and construction downturn continues to reduce consumption levels and a recovery is not expected to occur until the end of the year at the earliest.5% 9.5% 28.9% 3.6% 2242 2.5% 11. The Japanese construction sector is also likely to suffer this year in light of new stricter building regulations.2% 3.9% 3.2% 14.4% Total World Smelting Production 19.9% 1927 -1. DB Global Markets Research Capacity growth 5. Fabricators in the US are reporting slow order books in the first quarter as the residential housing decline is showing no signs of recovery.226 Source: Brook Hunt.050 1.18% -81% Figure 9: Copper refined capacity by region Kt China Capacity growth % of global supply W Europe Capacity growth % of global supply Chile -2% Capacity growth % of global supply -138% Forecast Actual USA Capacity growth % of global supply Japan Capacity growth % of global supply 2005 2921 16. India’s power production needs to grow by 15-20% annually to meet demand.0% 3615 -0.6% 3418 11.4% 12.7% 8.2% 3.929 20. ICSG. In the industrialising world.4% 8.3% Rest of World 7362 7574 7795 8090 8388 8612 Demand growth 1.4% 4.533 capacity Source: Brook Hunt.9% 2007 4124 21.8% 1.0% 8.7% 42. motor vehicles and refrigeration remains robust and shows no signs of slowing down.1% 2006 3406 16.1% 18.0% 20. DB Global Markets Research China Kt Page 52 Deutsche Bank AG/London .4% 7.2% -2.8% Source: Brook Hunt. demand for copper intensive products such as electric motors.7% % of global demand 43.6% 25.4% 15.2% -4.588 18.0% 15. DB Global Markets Research However.3% 43.403 25.5% % of global demand 13.9% 2008 4712 14. Congo Zambia USA Total Total world production 15.7% 2081 -0.0% 3.064 14.5% 1.3% 2061 -0.3% 2180 2.943 19.5% Source: Brook Hunt.3% 19.8% 22.
0 5.000 Stock to consum ption ratio (RHS) 12 4.54 16. much of it is proving to be uneconomical because of energy costs. profile and wire made of primary aluminium Aug-07 Imposed a 15% tax on exports of rod and bar made of primary aluminium Aug-07 Cancelled a 5% tariff on imports of primary aluminium Source: Bloomberg. WBMS. For example.000 Source: Reuters. production growth is expected to come in at only 18% in 2008 and just 11% in 2009.000 10 8 6 4 1. According to a recent study by industry consultant CRU.export/import) 130 100 70 40 12-month moving average Figure 12: Aluminium stock-to-consumption ratio 6.0 6.8 250.11 January 2008 Commodities Outlook Figure 11: DB Copper Supply/Demand Model Mt World refined production 2005 16. bar.8 310.682 2006 17. which also threatened aluminium production in Sichuan province where producers are also making output cuts. making exports unattractive. ICSG. DB Global Markets Research Aluminium While aluminium maintained its status as the laggard of the industrials metals complex in 2007.21 2.01 2. extrusion. Chalco recently announced it has shut 160Kt of capacity at a plant in southern China due to power shortages because of lower production of hydropower.0 3. Furthermore.98 -0. DB Global Markets Research Meanwhile. Supply Although global exchange stocks of primary aluminium are at a relatively high level by historical standards. Production growth is also at risk as a result of China’s attempt to curb production in energy intensive industries.16 3.834 2010 21.32 17. DB Global Markets Research Figure 14: China’s net primary aluminium trade 160 Net visible trade balance. input costs for primary aluminium are set to climb dramatically as a consequence of the steep rise in energy costs.90 0.000 2 0 3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07 16 14 10 -20 -50 -80 Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 3.8 321.725 2007 18. However. consumption growth is outpacing supply.22 19. A decline in Chinese domestic aluminium production would drive up domestic prices. As energy costs make up around a third of total smelting costs. DB Global Markets Research - Source: Brook Hunt.45 2.11 20.000 Kt Total com m ercial stocks (LHS)Weeks Long-term equillibrium ratio 5. The primary reason for the sharp production growth in 2007 was better availability of domestic alumina at lower prices which encouraged idled capacity to be reactivated. Kt (+/. Figure 13: Changes to the Chinese aluminium tariff regime Nov-06 Raised tax on exports of primary aluminium to from 5% to 15% Nov-06 Removal of tax exemption for tolling of primary aluminium (importing alumina duty free) and exporting with a rebate Jul-07 Cancelled 8-11% tax rebates on exports of rod.66 0.512 World refined consumption Market balance Stk-to-Consptn ratio (wks) Average cash price (USc/lb) Average cash price (USD/t) smelting capacity in North America and Europe. While there is some spare Other factors have also conspired to pressure Chinese aluminium output. It takes around 15.1 6. we find several market fundamentals suggesting 2008 may prove to be different. the stock-to-consumption ratio is at all-time lows.10 18.13 18.0 7. we expect China will become a net importer of aluminium this year Source: Brook Hunt.165 2009 20.13 0. Deutsche Bank AG/London Page 53 . at 35/t CO2.46 4. aluminium is extraordinarily sensitive to energy price shocks. After surging by 34% in 2007.94 0. the imminent greenhouse gas emissions legislation has serious implications on smelting. This conclusion comes from two factors: Chinese efforts to curb production and higher energy costs.53 -0.000 kilowatts per hour to produce one tonne of the metal.000 2. indicating that despite strong production growth. it is expected those smelters that were likely to restart in a more economically favourable environment will have already done so.6 7.1 325.32 3. The country’s trade governing body has instituted a series of policies aimed at reducing exports and encouraging imports of primary aluminium. a smelter using 100% coal fired electricity would need to add USD500/t (aluminium equivalent) to its costs.6 167. WBMS. Consequently.090 2008 19.8 305.
6% 33.3% 24. Russia and the Middle East.98 0.5% 1.4% 16.17 38.5% Source: Brook Hunt.0% 1.861 6.056 2012 42. any increase in input costs will certainly exert upward pressure on prices.0% Total global mine production Production growth 7.5% 24.1% 0.3% -2.11 3.2% 3. Stainless steel producers in the US and Europe will ramp up production in the beginning of the year and we expect upward demand pressure once Asian producers re-enter the market after the Chinese New Year holiday.5 31.84 -0.0% 12.0% 10.0 95.9% 5.9% -0.0% 37.8% 26.4% 3.0% 32.684 2010 47.3% % of global demand 20. the primary nickel balance shifted to surplus in 2007 after demand dried up on the back of the steep H1 price appreciation and subsequent stainless steel production cutbacks. DB Global Markets Research Outlook Given that aluminium has been trading near the cost of production.1% 4.4% 11.752 Total Demand growth 6.2% 25.8% 6.2% 31.4% 30.3% 6.3% 11.054 -1.029 2011 40.0% -0.7% 13.8 2.8% 9. these new plants would certainly have comparative cost advantage and would force the small smelters in North America and Western Europe to shut down as they creep up the cost curve. Given the rapid reduction of lateritic imports against the sharp correction of the nickel price in June 2007.8% 6.38 -0.0% 0.382 38.0 58.0 43.3% 12.0% 15.3% 33. The primary risk for the metal this year is that it is more exposed to US weakness as its more of a developed world metal because of its use in packaging.0 60.6% 12. a substitute for primary nickel.8% 13.3% 10.0 58.6 2.3% WBMS.4% -7.0 49.4% 37. WBMS.425 World refined consumption Market balance Stk-to-Consptn ratio (wks) Average cash price (USc/lb) Average cash price (USD/t) Source: Brook Hunt.71 119.0% 14.4% 3.9 60.8% 15.060 41.0% 16.5% 4. Although cheaper to produce than purchasing primary nickel at LME prices. 2005 2006 2007 2008 2009 2010 7806 9375 12600 14868 16503 17741 16.0 109.0 58.0 49.04 41.0% 12.7 over 2006. Nickel pig iron update China began importing laterite ores in 2005 in order to produce a low nickel bearing product called pig iron.0% 7.0 109.11 2.967 33.4% 36.9% 16.3 1.etc (Philippines) Onca Puma (Brazil) Ravensthorpe (Australia) Goro (New Caledonia) Koniambo (New Caledonia) Jinchuan (China) 2008 14.948 2010 37. the production of pig iron is clearly sensitive to Page 54 Deutsche Bank AG/London .2% -3.8% 13.3% 12.912 34.7% 31.2% 13.06 0.75 0. DB Global Markets Research Demand Despite concerns over the US economy toward the end of 2007.7% 33.3% 10.045 44.23 2.8 2.95 121.641 2008 42. At the same time. DB Global Markets Research China Kt Figure 18: Major new nickel production Kt nickel contained in ores & concentrates Talvivaara (Finland) RTuba/Tag'ito/Hina. Supply Following a sizeable market deficit in 2006. precisely when the LME nickel price began an unprecedented rise to an all time high fourteen months later.0% 35.0 112.97 31.0 14.0 60.7% % of global demand 37. particularly in regions with access to lower energy costs such as in Africa.2% 1.9% Source: Brook Hunt.41 3. high-end car manufacturing and aerospace.167 42.1% 4345 4174 4334 4763 4749 4663 1.570 2007 38.073 2013 42.7% 10.2% 34.0 46.1% 11.61 44.1% 7.5% 8.792 2009 33.3% 10.44 121.1% 9. significant levels of imports did not commence until March 2006.0% 11. the more announcements we’ll see of new smelter projects.899 2006 33.5% 7.91 86.0 0.9 60.5% 11.0 109. pig iron is also characterised as labour intensive.1% Rest of World 11942 12445 12957 13546 14025 14407 Demand growth 6.3% -0.2% 4.0 103.7% 2.6% 39.5 122.6% USA 6375 6347 5900 5976 5815 5795 Demand growth 2.5% 2. Nevertheless.7% -0.8% 6.6% 32.976 38.5% 14.6% 9.1% 38.7% 3662 3729 3945 4245 4338 4473 1.3% -1.2% 0.06 3.0% 18. Nickel We expect nickel prices to remain stable in 2008 as supply remains ample against a healthy increase in demand.86 47.8 2.0% % of global demand 22. energy inefficient and pollutive process However.1% 5382 5334 5622 5790 5802 5802 5.7% 20.6% 29. INSG.679 2009 44.7% 14.8 2.8 2.1% W Europe 6512 6801 7003 7087 7165 7222 Demand growth -1.2% 6.5% 15.8 154.4% 29. WBMS.91 0. DB Global Markets Research 2005 31.6% 2.8% % of global demand 20.5% 3. WBMS.0 35.1% 7.0 60.0 114.982 44.6 144.3% 31.05 4.1% 0.4% 19.89 110.607 47.8% 18.8 2.6% 31.94 116.837 47.8 1.9 60.2% 6.0% 1.8% 42.4% 18.3% 30. primary aluminium consumption growth recorded a robust 10. emerging market consumption trends – led of course by China are set to continue at a robust pace with automobile ownership growing at vast rates and high urban investment levels supporting aluminium intensive construction and consumer goods products.0 49. The major risk in this scenario is that the longer forward prices remain at elevated levels.7% 10. In 2009 we are forecasting a return to deficit conditions as global mine production growth with struggle to meet the sharp demand profile.9% 5.98 34.0 58.0 58.9% 3.1% 36.0 2.6 60.0 80.4% 27.1% 34.5% 4.8% 7.3% 10.3% 10771 11364 11666 12378 13215 15182 6.1 1. Figure 16: Primary aluminium demand by region 2005 2006 2007 2008 2009 2010 7083 8790 12200 15372 17832 20328 Demand growth 20.4% 0.11 January 2008 Commodities Outlook Figure 15: Primary aluminium production by region Kt China Production growth % of global production Figure 17: DB Aluminium Supply/Demand Model Mt World refined production North America Production growth % of global production W Europe Production growth % of global production Russia Production growth % of global production Rest of World Production growth % of global production Total Production growth Source: Brook Hunt.5 2.9 60.0% 16.7% 9.0 73.
1% 27.9% 647 6.0 3. the rainy season in top importer the Philippines will likely limit ore shipments to China between January and March. Deutsche Bank AG/London Page 55 . DB Global Markets Research China Kt Source: INSG. INSG.5% USA 135 142 151 153 154 Demand growth 4.0 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 10. In Asia.842 Average cash price (USD/t) 6.4% 31. we estimate the average cost in 2008 to be around USD22.429 1. these particular policies will be taken more seriously as environmental destruction becomes a top headline issue.5% 18.99 16.4 4. Perhaps more importantly.4 5.3% 37. From our last review in early September.787 7.3% European Region 410 439 433 455 472 Demand growth -7.11 January 2008 Commodities Outlook Figure 19: DB Nickel Supply/Demand Model Kt World refined production 2005 1288 1264 23.8% 5.90 9.1% -1.000 50.8% 5.2% 1.0 1400.5% 0. WBMS. though the US mills did not appear to want to commit to large scale production increases until more orders were received. WBMS.0% 22.8USc/lb) and the 2009 expectation by 2% to USD27.0 600.7% 9.3% 4.8% 3.88 12. production of the higher qualities of pig iron requires blast furnaces.3% 25.751 24.7 2009 1674 1659 14. where the market initially appeared to recover more quickly than in Europe and the US.69 10.000 40.440 19.3% 4.6% 9.000 20. Following these cutbacks.0 200. though some producers are using electric arc furnaces to make higher grades that can be used in the higher quality 300 series stainless.2% 25.1% 4.3 World refined consumption Market balance Stk-to-Consptn ratio (wks) stepped up regulation of its policies of upgrading and improving the efficiency of the country’s highest polluters.0% 36. DB Global Markets Research the price.0USc/lb).237 37. we have reduced our 2008 forecast by 10% to USD29.5 5.9 2010 1809 1787 21.2% 11.2% % of global demand 10. As we noted above. INSG. Although it is estimated greater production of higher quality pig iron for use in 300 series stainless will occur in 2008.3% -2.3% 9.208 32.5% Rest of World 524 546 534 583 610 Demand growth -5.9% % of global demand 32. While many such measures have been announced but largely unsuccessful in the past.4% 39. most mills depleted their expensive depot stock and service centres reduced most of their inventories and orders increased in the last half of Q4.9% 9. Pig iron producers took over obsolete blast furnaces that were no longer producing steel because of a National Development and Reform Council (NDRC) directive requiring the closure of all furnaces smaller than 300 cubic meters.888/t (1265. Also.0 0.000 Kt The Philippines (lhs) Indonesia (lhs) New Caledonia (lhs) LM E nickel price (rhs) USD/t 60. DB Global Markets Research So far. we think prevailing market fundamentals are colluding to provide a more stable nickel price in 2008.9% 30. Stainless steel producers require a certain level of price consistency. Demand Stainless steel production fell by almost 17% yoy in the third quarter of 2007 as a result of high nickel prices and a concerted de-stocking phase of global stainless steel inventories.2 3.88 14. in our view.9% 3.10/lb). In.0 2008 1542 1570 -28.7% 8.200/t (USD10.6% 8.625/t (1343. most pig iron produced has only really been suitable for utilisation in the lower grade 200 series of stainless steel.8% 1.0 1000.7% 37. Figure 20: Chinese imports of lateritic ore used in nickel pig iron production 1600.1% 7.659 Total -1. Through discussion with producers and independent consultants. It is expected that a major upturn in Asian demand for stainless steel will not occur until after the Chinese New Year.7% 498 5.000 30. Europe.7% 10.00 Source: Brook Hunt.8% % of global demand 41. the situation deteriorated in December and Chinese producers were forced to cut prices for the first time in four months against slower than expected demand and a sharp drop in the LME nickel price in November/December. there are a few caveats that help minimise the potential for considerable substitution from primary nickel.0 1200.264 1.3% 10. we expect production will recover this year. Like European producers. Average cash price (USc/lb) 14. First is the sensitivity to the LME nickel price which in the last quarter of 2007 showed more stability than any other period in the year. probably reflecting apprehension over housing market and economic worries.570 1.000 0 Figure 21: Primary nickel demand by region 2005 2006 2007 2008 2009 195 249 311 380 422 Demand growth 21.7 2006 1361 1376 -15.4 4. though supply-side risks always have the potential to shock a market which is delicately balanced. many of which are small-scale and significant polluters.3% 29. China’s NDRC has 2010 486 15.8% 1. The key to understanding the degree of threat to substitution of primary nickel is the cost of nickel pig iron production.0 800.7% 24.2% % of global demand 15.1% 21.0% 28.0 400.0 2007 1463 1429 33.7% Demand growth Source: Brook Hunt.2% 155 0.2% 6. production began to ramp up in December.7% Outlook In summary.1% 36. many of whom are in the steel industry.5% 27.4% 27.794 28.376 1.
1000 500 0 2003 2005 2007 2009 2011 2013 Source: Brook Hunt.2 3. it is also used in electrical and electronic devices such as many high temperature heating elements.5 -6.0 600 120. This increasingly negative market balance. radiation shields. global exchange inventories remained at very low levels as the expected surplus has yet to materialise and we estimate the global zinc market was 260Kt in deficit in 2007. The risk remains that the stainless steel market doesn’t recover as early as expected.9 434. prices fell off their highs. the demand for molybdenum was revived at the end of the year and we expect that dynamic to provide significant support to the molybdenum market. WBMS. DB Global Markets Research 0 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 0. Molybdenum is predominantly bought and sold through long-term contracts.0 11. primarily as corrosion resistance and strength in stainless steel and in wrought and super alloys. While the molybdenum market balance moved negative in 2006 and even further negative in 2007. Western mine output remained flat in 2007.0 2003 345. Figure 24: Molybdenum price 40 30 20 10 Molybdenum price (USD/lb) 0 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Source: Reuters Zinc The decline in the zinc price that started at the end of 2006 on fund-based technical selling and as the market anticipated a move to a market surplus continued in 2007.1 2007 440.9 -0. USc/lb (rhs) 200. ILZSG.4 426. future supply from China may be affected by expectations that China may raise its export tax on ferromolybdenum to 15%. Chinese molybdenum output was up 50% this year. Despite the sharp fall. Figure 25: Zinc global exchange stocks 800 Global Exchange Stocks. With one of the highest melting points of all the elements. prices found new strength in the first quarter of 2007 and remained at their highs for the remainer of the year.0 Figure 23: Primary molybdenum supply and demand. Supply While primary supply remained tight at the end of 2007. mean that molybdenum prices are poised to rise in H108. However. Adding to the uncertainty. After a remarkable run in which molybdenum prices saw an over-80% increase from the end of 2003 until June 2005.11 January 2008 Commodities Outlook Figure 22: Nickel supply analysis 2500 Kt Possible Projects Probable Projects Highly Probable Projects 2000 Actual/Projected Refined Production World nickel dem and 1500 Demand Stainless steel production cutbacks in the second half of 2007 weighed on demand for molybdenum.9 389.4 2005 388. 2005-2007 Millions lb Global Consumption Global Supply Global Market Balance 200 40. and worries about Chinese supply. the spot price of molybdenum has been relatively stable for the last three quarters of 2007.3 400.0 160. as stainless steel mill orders improve.9 2004 385. or unexpectedly high molybdenum supply from China or other sources. it is not clear how much of this increase will be matched by increased domestic consumption. as reported by CRU. However. Not long after large-scale producer Thomas Creek Metals cut its 2008 production forecast. Kt (lhs) LM E Cash Price.7 2006 426. coupled with the bullish outlook for stainless steel pointing to increased demand.3 -0. INSG. However.4 Source: Brook Hunt. a landslide at one of its key assets will likely bring the year’s total down further.0 400 80.8 344. DB Global Markets Research Molybdenum Molybdenum is a unique alloy which is used in a variety of applications. increased year-end stock sales lifted upward pressure on prices. glass melting furnace electrodes and heat sinks for matching silicon for semiconductor chip mounts.0 Dec-07 Source: CRU Page 56 Deutsche Bank AG/London .
This trend has also been reflected in recent annual zinc treatment charge (TC) negotiations which are expected to swing in favour of smelters as a consequence of an anticipated concentrate surplus and lower zinc prices.2% 2. Deutsche Bank AG/London Page 57 . in the shorter-term.4% 9.7% 0. China leads total global growth patterns and with fixed asset investment representing >50% of GDP. Evidence of this is starting to manifest as exchange stocks in China are rising and are currently at an all-time high of 55. consumption trends remain robust. in mid-2006. the export duties could prompt a slowdown in Chinese refined production growth and begin to tip the global market balance in the other direction.128 10.995% purity (the grade of metal traded on the international market). this was also the period in which the zinc price soared to all-time nominal price highs. now representing over 30% of demand for zinc.5Kt.0% Production growth 2072 1971 2023 2106 2091 2063 Western Europe -5. we believe the strength in emerging market demand will more than offset those losses. largely as a result of a surge in Chinese smelting capacity in the second half of the year.1% 4.258 13. Figure 26: Refined zinc production by region 2005 2006 2007 2008 2009 2010 2761 3163 3726 4448 5068 5278 9.418 13. DB Global Markets Research However. ILZSG. ILZSG.625 -0.555 11.2% -0. Figure 28: Changes to the Chinese zinc tariff regime Jan-04 Cut export rebate to 11% of 17% VAT Jan-05 Cut export rebate to 8% of 17% VAT Jan-06 Cut export rebate to 5% of 17% VAT Sep-06 Cancelled a 5% tax rebate on exports of HG (lower quality) zinc Jan-07 Imposed a 5% tax on exports of HG zinc Jun-07 Increase tax on exports of HG zinc to 10% mid-08 Considering imposing a 5 or 10% tax on SHG (high quality) zinc exports Figure 27: China’s net refined zinc trade balance vs price 600 450 300 150 0 -150 -300 1996 1998 2000 2002 2004 2006 2008* Kt Annual net visiible trade balance USD/t. China brought more metal to the party. the Chinese government is stepping up its efforts on restricting the export of high energy consumption and polluting industries. The country recorded a small net export balance in 2006 and according to our estimates. While the rest of the Demand Meanwhile. China will remain a net exporter for the foreseeable future.9% 2. In 2007 the treatment charge benchmark was USD300/t. Not incidentally. The effect was immediate and imports began in earnest. Chinese exports began to increase from 2006 as a consequence of the attractive LME price and a sharp increase in Chinese concentrate mining and smelting capacity.3% Production growth 2243 2355 2405 2699 2766 2861 Australia and Asia -0.5% 14.8% 2. sending China well into net import territory in 2004 and especially 2005. we are expecting the global zinc market to record its first market surplus since 2003.1% 12. First.7% -1.4% 2. As detailed above.8% Production growth Source: Brook Hunt. we expect terms to be settled around the USD340/t level. As a result of this year’s weakness. we continue to see upside risk to Chinese zinc demand estimates (11.8% 19.2% 7. We expect authorities will eventually scrap the 5% export rebate on Special High Grade (SHG) zinc with 99. The second implication is less bearish – in the longer term. Zinc demand is driven by galvanized steel production and ultimately construction. There is one important caveat to this scenario which has only recently developed. There are two important implications to the tariff changes. It would require a substantial rise in zinc prices before exports would again become attractive. Trends in Chinese consumption dominate global zinc consumption growth.11 January 2008 Commodities Outlook Supply In 2008. WBMS.6% 17.8% -4.1% Production growth 1056 1079 1072 1120 1195 1195 North America -7.335 12.6% 4. The country had traditionally been a large net exporter of refined zinc until 2004 when the government began tinkering with the tariff regime to discourage exports and encourage greater imports. as soon as mid-2008 as well as imposing an export duty later in the year.7% 4. A flood of metal will tip the global market balance deeper into surplus territory than we are currently forecasting.2% 5.4% 13.5% 6.0% in 2008). DB Global Markets Research China Kt Any swing factor in the zinc market in 2008 will come from production and exporting trends in China. world was unable to fill the zinc market supply gap evident from 2003.6% 6.9% 4. exporters will likely rush to get as much material out on the market before the changes are made which will affect their bottom line.1% -0.4% Production growth Total 10.5% 3.0% 2. (rhs) mid-08 Considering removing a 5% tax rebate on exports of SHG zinc Source: Bloomberg 3500 3000 2500 2000 1500 1000 500 *2008 estimate Source: Brook Hunt.5% in 2007 and 11. While consumption growth in the United States fell in 2007 and will likely drop even sharper in 2008.
lead joined the real price all-time high club in 2007.2% 12.36 12.1 105.3% 15.6% 0.11 January 2008 Commodities Outlook Figure 29: Refined zinc consumption by region 2005 2006 2007 2008 2009 2010 2853 3166 3531 3919 4370 4872 18.2% -10.6% Production growth 2052 2437 2761 2907 2820 2731 L America 2.22 4. peaking in October at USD3989/t (180. DB Global Markets Research While we remain relatively bearish on the price outlook in 2008 and 2009. coupled with an already tight market balance against low supply and resilient demand – particularly out of China – made lead an attractive investment destination.7% 4. Next.5% 9.7% 6.5% 11.7 1. it is expected that export duty could be increased to 15% in mid-2008.0% 11.0 62.2% Demand growth Source: Brook Hunt.592 12.7% 1.9USc/lb).4% 9.5% 0. ILZSG.9% % of global demand 2233 2323 2346 2382 2441 2442 Western Europe -4.1% -2. our supply and demand model shows that market conditions are set to improve in 2010 against a forecast concentrate deficit that will tighten the market.8 105.9% 3.0% 20.6% -12.8% 16.87 0.0% 5.61 -0. largely as a result of two factors – a change in Chinese export taxes and the termination of exports from a mine in Western Australia which prevented around 3% of global concentrates from entering the market.53 4.277 2007 11. Mine supply is actually set to record negative growth in 2010 and 2011.407 2008 12.9% 0.7% 3.094 2010 13.51 4. an export tax of 10% was imposed on refined lead which took effect from June 1.866 13.0% 5.0% 9.1% 16.578 13.1% 4.5% Demand growth 26.9% 5.4% 14.226 4.0% 18.5% 2.59 2. We therefore remain positive on the longer-term outlook for zinc.3% 5.2% 18.0 2.0% 36.610 11.5% 4.9% 6.0% 0.0% 10.315 2009 13.8% 13.0% 2.10 10.6% 19.7% -4.9% 28.5% Production growth Source: Brook Hunt. DB Global Markets Research China Figure 32: DB Zinc Supply/Demand Model Mt World refined production Kt 2005 10.1% 1. ILZSG.0% -1.0% 11.181 12. The first change came in December 2006 after the Ministry of Finance removed the 13% export rebate on refined lead exports as well as scrapping the 13% lead-acid battery rebate and reducing the rebate on some lead alloy products to 5%.0% Production growth 1331 1448 1708 1819 1591 1471 N America -3.8% 17.5% -5.5 3. Lead Lead had one of the most remarkable price runs of the year.0% 1.370 11. Between January and November 2007.2% % of global demand 1980 1991 2025 2103 2180 2211 Asia (excl Japan & China) 4.409 3. DB Global Markets Research Kt Australia Figure 33: LME lead price vs stocks 120 100 80 Kt LME total stock (lhs) LME 3-month closing price (rhs) USD/t 4000 3500 3000 2500 60 2000 40 20 0 Jan-06 Jul-06 Jan-07 Jul-07 Figure 31: Zinc supply analysis 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2004 2006 2008 2010 2012 Kt Possible Expansions Probable Expansions Base Case M ine Capacity World refined zinc consum ption 1500 1000 500 Jan-08 Source: Reuters.3% % of global demand 1182 1224 1163 1151 1181 1187 USA -5.383 2006 10.764 13.48 12.7% 17.2% 8.3% 8.1% Production growth 2937 3200 3440 3610 3610 3610 China 13.5% 1.6% 4.6% 8.2% 19.0 148.8% % of global demand Total 10.5% Demand growth 11.0% -3.328 12.3% 13.8% 17.2 95.571 13. Chinese lead exports fell over 80% mom in January 2007.9% 7.5% 11. ILZSG. Figure 30: Mined zinc production by region (Zn in zinc and bulk concentrate) 2006 2007 2008 2009 2010 2011 1341 1526 1785 1886 1807 1616 -0.0% Demand growth 21.15 -0. 136% above where prices began the year.1% 5.4% -0.0% 11. Furthermore.18 0.6% Production growth Total 10.315 World refined consumption Market balance Stk-to-Consptn ratio (wks) Average cash price (USc/lb) Average cash price (USD/t) Source: Brook Hunt.3% -3. DB Global Markets Research Source: Brook Hunt. DB Global Markets Research Supply One major factor affecting the lead market in 2007 was changes in the Chinese tariff regime. ILZSG.0 2. Chinese refined lead exports were down 54% yoy as producers obviously favour higher domestic lead prices as opposed to increased exporting Page 58 Deutsche Bank AG/London .5% 32.53 11. like nickel. Those factors.0 2.4% Demand growth 18.31 11.1% 0.59 -0.1% 11.6 3.8% 20.41 0. As a consequence.26 0.4% 30.33 2.60 13.5% -7.1% 3.8 154.2% 34.150 11.
which is responsible for around 3% of global concentrate supply has been unable to make shipments to its customers since then.0% Source: Brook Hunt. Demand On the demand side.3% 29.0% 34. though that risk profile of lower demand growth is clearly skewed toward the upside.9% 1610 -0.2% USA 1598 1605 1613 1621 Demand growth 6.6% 17.2% 16.713 Total 7. Figure 35: Primary lead demand by region 2005 2006 2007 2008 1850 2169 2516 2893 Demand growth 32. We moderately increased our 2008 forecast to USD2326/t (105.657 7.5% 9.2 2584 2008 8.4 1287 2007 8. light vehicles and electric bicycles reflect the continuing social and economic transformation occurring in china (as well other emerging market economies).21 1. consumption levels remain robust.9% 29.0 105. This news had an immediate effect on lead prices and we expect there will be a further correction once those exports resume.3% 0. It also investigated excessive levels of nickel dust during loading.9% 4.2% 19. ILZSG. Ivernia announced it expects to get permission to ship lead in concentrate via Fremantle port in March-April 2008. However.8 1692 2010 9.96 -0.12 0.09 2.04 8.7% -1.27 -0.48 0.958 8.7% 17.56 7.72 8.1 44.01 0. Outlook We expect lead prices to ease to a more sustainable level in 2008 as Ivernia restarts concentrate shipments.10 0.9% 20. Prices have staged a modest rebound since midDecember after news of the temporary closure of refined capacity in Yunnan province in China that producers blamed on high production costs as the result of the removal of a local tax break and the sharp decline in international and domestic prices.6% W Europe 1662 1639 1639 1613 Demand growth -0.7 65.2% % of global demand 33.3 977 2006 7.23 0. DB Global Markets Research China Kt Figure 34: China’s net refined lead trade 70 60 50 40 30 20 10 0 Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Net visible trade balance.7% 7.6% % of global demand 21.66 -0.4% 1620 0.3% 30.9% 1635 0. The plants are not expected to resume operations before late February.3% Demand growth Source: Brook Hunt.1% -1.2% 27.6% 2010 3437 8.1% 2774 3. Ivernia’s Magellan mine.0% % of global demand 24. Growing demand for cars. Kt (+/.275 8.7% 2688 3.3% 1646 0.2% 17. ILZSG.0 117.9% 17.2% 29.5% 3.5 2326 2009 9.6% -0. DB Global Markets Research The other major factor affecting supply-side dynamics occurred in March when the Australian Department of Environment and Conservation suspended the lead export license from the Western Australian port of Esperance in March 2007 after thousands of birds died due to lead dust poisoning at and around the port.0% 36.2% 3.4% 33.5% Rest of World 2547 2545 2507 2586 Demand growth -0. Figure 36: DB Lead Supply/Demand Model Mt World refined production 2005 7. We expect demand levels to ease against governmental efforts to control monetary policy.3% 32.21 9.6 76.477 4.07 1.69 9.0% 5.5% % of global demand 20.8% 18.5% 0.4% 0.4% 0. in early December. The level of Chinese demand growth in 2007 was slightly lower than in 2006 as a result of the spike in price and the removal of the export rebate for lead-acid batteries.115 4. Given that China accounts for roughly 30% of global lead exports.0% 30.export/import) 12 month moving average Removal of export rebate 2009 3183 10.11 January 2008 Commodities Outlook costs. largely on the back of battery demand in China.5USc/lb) and left our 2009 estimation unchanged at USD1692/t (76.0% 15. the physical manifestation of this development is a tightening of refined metal supply in industrialized countries.3% 9.7% 20.8USc/lb).0 1433 World refined consumption Market balance Stk-to-Consptn ratio (wks) Average cash price (USc/lb) Average cash price (USD/t) Source: Brook Hunt.5% 18. These two supply constraints highlight the biggest risk lead prices face in 2008 against a tight market balance. DB Global Markets Research Deutsche Bank AG/London Page 59 .89 7.0% -1. but China still remains by far the largest lead consumer.0% 17. ILZSG.6% 19.71 0.5 58.
behind China.716/t (667. and closed the year up 67%.0 200.11 January 2008 Commodities Outlook Tin While most metals across the LME complex were choppy in 2007. the most likely scenario is that worldwide supply will likely remain depressed in 2008 with continued Indonesian regulatory uncertainty and the newly introduced Chinese tin export tax. Indonesian supply issues continued to dominate supply-side fundamentals in 2007. Indonesia would likely continue to strictly implement its existing export licensing system. the primary source of demand. Also.0 30 600. While consumption stagnated throughout the first three quarters of 2007. tin prices rose steadily throughout the year. We have increased our forecast in 2008 by 21% to USD14. world refined tin production fell 2% in 2007. a surge in tin supply could enter the global market. A US recession or a slowdown in global growth could undercut tin demand. 2008 in an apparent push to keep more for its own rampant demand. during which China actually became a net importer of refined tin.0 2. this led to an annual supply deficit of approximately 8.0 Dec-07 800. Indonesia is the world’s second largest producer of refined tin. The electronic solder business. DB Global Markets Research Outlook There are a number of factors that could weaken tin prices in 2008.0 Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Net visible trade balance.0 0 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 100. Figure 38: Chinese refined tin net trade balance 8. continues to increase demand for tin as the growing trend for lead-free solder persists. as the government continued its efforts to consolidate refined and concentrate tin production. consumption was flat in 2007.976/t (452. Meanwhile. The Indonesian Trade Minister recently announced that there was no plan to enact official supply quotas to limit exports. Figure 37: Global tin exchange stocks vs price 40 Global Exchange Stocks.0 10 Source: Reuters. This strength follows a similarly robust 2006. top producer China introduced a 10% tax on refined tin exports from January 1.5USc/lb).0 300. Coupled with falling supply.0 4.export/im port) 12 m onth m oving average Source: Reuters. Supply According to CRU estimates. suggesting that a price correction might be in order. USc/lb (rhs) 700. DB Global Markets Research Joel Crane.0 0.000t. (1) 212 250 5253 joel. This tax will likely dent exports. Annual average prices are at their highest since 1980. Q4 consumption picked up in every major market.0 -2. Kt (+/. and in turn reduce global supply. which caused the supply and demand balance to tighten at the end of the year. along with the strong consumption outlook. the current price of tin relative to current stock levels is unprecedented in the last two decades. if Indonesia loosens its grip on its tin production.0 20 400.0 Kt 6. However. Chinese refined tin demand was exceptionally strong in Q407.0 500. causing further balance pressure. At the same time. Kt (lhs) LM E Cash Price. and continued Indonesian supply uncertainty is expected in 2008. This shift.0 -4. Page 60 Deutsche Bank AG/London .firstname.lastname@example.org Demand According to CRU estimates. Consumption is expected to continue to be strong in the first half of 2008.5USc/lb) and by 7% in 2009 to USD9. The politics of tin supply control have confounded outside observers. This weak supply outlook. coupled with strong 1H07 consumption expectations and an already tight supply and demand balance all point to continued gains for tin prices in 2008. In the place of quotas. likely drove China to levy the tin export tax described above. which saw prices increase by almost 70% as well.
For the current rallies in soybeans and cotton to become the most powerful and durable on record it would require price appreciation of a further 70% and 105% and price peaks to occur in June 2012 and October 2008 respectively. For prices to hit all time highs in real terms would require price gains of a further 170% and 100% respectively. This deteriorating in China’s agricultural trade position reflects improving living standards and hence a shift to more high protein diets. Figure 2: US & world exports of a selection of agricultural commodities 120 • 100 80 • 60 40 20 0 Wheat • Source: USDA • The United States and China dominate in terms of the production of the four main agricultural commodities: corn. For prices to surpass their all time highs in real terms would require an additional 240% and 375% respectively. In contrast. This reflects improving living standards and hence a shift to more high protein diets. Figure 1: The world’s Top 13 commodity producers* 500 450 400 350 300 250 200 150 100 50 0 Br az il Ar ge nt in a R us si a In do ne si a C an ad a Pa ki st an M ex ic o Th ai la nd Vi et na m Rest of world exports (million tonnes) US exports (million tonnes) Corn Soybeans Sugar Rice (milled) Agricultural output in 2007-08 (million tonnes) Sugar Soybean Rice Wheat Corn • * We rank countries according to the combined output of corn. it also holds a similarly dominant position in terms of world exports. For example. rice. Currently per capita meat consumption in China amounts to just 60kg annually. wheat. While there has been some reversal in agricultural land loss over the past few years. Deutsche Bank AG/London In di a EU -2 7 U S C hi na Page 61 . Their production is more than double their nearest rivals. 43% and 22% of world exports for corn. soybeans and sugar (cane & beet) production Source: USDA • • What distinguishes the US and China apart is that the US is not only among the top two producers of many agricultural commodities (with the exception of rice). We expect the expansion in world ethanol and biodiesel production will sustain strong demand for corn and soybeans as well as pushing inventory-to-use ratios to critically low levels. what distinguishes the two counties apart is their role on global export markets. India and the EU. This process is still in its infancy since China currently consumes just 60kg of meat per annum or 60% of the world average and 20% of per capita meat consumption in North America. Figure 3. Even so there is significant scope for this to rise further since Chinese meat consumption remains low by international standards. Land constraints are also a cause for concern. soybeans and wheat respectively. China is becoming increasingly reliant on agricultural imports. wheat. The most significant deterioration in China’s agricultural trade position has been in soybeans while the country is now in danger of becoming a net importer of corn for the first time since the mid-1990s. agricultural land per head of population has been on a declining trend for the past 30 years. but. in 2006-07 the US accounted for 60%. While the US is consistently among the top two exporters of many agricultural commodities. Moreover agricultural land per head of population has been falling for the past 30 years in China. rice and soybeans. Figure 1. However. China is becoming increasingly dependent on agricultural imports.11 January 2008 Commodities Outlook #16 Agriculture The Global Fight For Food • The United States and China dominate in terms of global agricultural production. For the current rallies in corn and wheat to become the most powerful and durable on record it would require price appreciation of a further 30-50% and price peaks to occur in the first half of 2009. This represents 60% of the world average and 20% of per capita meat consumption in North America. We are therefore maintaining agricultural as our favourite commodity sector during 2008.
1 1978 1985 1990 1992 1994 1996 1998 2000 2002 2004 2006 140 150 Hectares of arable land per capita (lhs) Total area under cultivation (million hectares. In the US. Figure 6.11 0. with the most noticeable deterioration in the country’s net trade balance in soybeans.12 145 0. China is now the world’s largest importer of soybeans in the world. The dramatic increase in soybean oilseed imports has stemmed from rising demand for higher protein foods and hence increased animal feed demand. We believe such a shift in the country’s trade position will propel the corn price to all time highs as it is coinciding with the increasing use of ethanol production in the US. Figure 7. Figures 4. world ethanol production continues to be concentrated in the US and Brazil. Figure 5.16 0. an estimated 60% of corn consumption growth globally last year was attributable to the US ethanol industry. Moreover the country’s dominance in the global textile sector has also meant that the country is also the world’s largest cotton importer.14 0. rhs) 155 160 Figure 5: China is moving to become a net importer of corn and sustaining its high trade deficit in cotton 20000 15000 10000 5000 0 -5000 -10000 -15000 -20000 -25000 1960 Tonnes (000s) 1965 1970 1975 1980 1985 1990 1995 2000 2005 China's net trade balance in: Sugar Wheat Corn Cotton Source: China Statistical Bureau Source: USDA These trends are leading to a sharp deterioration in the country’s agricultural trade balance. corn remains the primary feedstock for ethanol production and has been an important source of the increase in global corn consumption during 2007. Figure 6: Global ethanol and biodiesel production 20 World ethanol production World biodiesel production 15 Gallons (billion) Figure 4: The past few years has seen a dramatic increase in Chinese net soybean imports 5000 0 -5000 -10000 -15000 -20000 -25000 -30000 -35000 -40000 1960 China's net trade balance in: Tonnes (000s) 10 5 0 2006 2007 2008 2009 2010 Soybean oil Palm oil Rapeseed oil Soybean oilseed Source: Potash Corp 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: USDA Aside form the rising trade deficit in soybeans and cotton. with approximately 40% of the world’s soybean exports heading to China.13 0. However. China may soon become a net importer of corn for the first time in more than a decade. Global ethanol and biodiesel production is forecast to grow rapidly over the next few years. According to the USDA.15 0.11 January 2008 Commodities Outlook Figure 3: China’s arable land per head of population is on the decline 0. Page 62 Deutsche Bank AG/London .
Source: DB Global Markets Research. Figure 8: Contribution to the increase in global soybean consumption 10 U.11 January 2008 Commodities Outlook Figure 7: Contribution to the increase in global corn consumption (%) 8 US ethanol production China Rest of the world 6 Figure 9: Global inventory to use ratios for corn. and EU biofuels China Rest of the world 8 6 4 Figure 10: Agricultural commodity rallies compared Duration Cycle type Magnitude 131% 237% 150% 113% 204% 49% 118% 300% 137% 244% 910% 34% 139% 353% 218% (months) 20 41 24 22 59 18 15 26 16 25 32 7 26 39 24 Corn 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2 0 Average Most powerful Current -2 Source: USDA.S. IMF Similarly the use of soybeans as a feedstock in the US and European biodiesel sector has been responsible for just over 50% of global soybean consumption growth between 2005 and 2007. The most powerful rally in terms of magnitude and duration are not necessarily occurring at the same time. also with the most powerful rally that has taken place over the past 40 years. which illustrate how quickly (in days) the world would exhaust available supplies if production in these commodities ceased today. but. IMF Cotton Average Most powerful The rising demand for agricultural commodities for human and animal consumption as well as ethanol and biodiesel purposes has contributed to a significant drawdown in inventories for these commodities. Indeed price rallies appear to be still in their infancy in both magnitude and duration terms. Figure 10 compares rallies across a variety of agricultural commodities and examines the average duration and magnitude of each rally since 1970. We track inventory-to-use ratios. Indeed price appreciation for many agricultural commodities so far in this cycle is still close to historical averages. Current Soybean Average Most powerful Current Sugar Average Most powerful Current Wheat Average Most powerful Current The average rally excludes the current cycle. Bloomberg Deutsche Bank AG/London Page 63 . We compare what has happened today not only versus historical averages. It shows that corn and wheat inventory-to-use ratios have been declining for the past six years and have now reached multi-decade lows. Figure 8. wheat and soybeans 180 160 140 120 Corn stock-to-use ratio Wheat stock-to-use ratio Soybean stock-to-use ratio Total available stocks divided by daily consumption 4 Days of use 100 80 60 40 2 0 20 0 -2 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: USDA Source: USDA. Despite the significant tightening in fundamentals across the agricultural sectors as well as recent price appreciation we believe prices have significant upside potential.
5 Al um Yara International YAR NO Le Source: DB Global Markets Research. Figure 12 examines the degree of price appreciation form current levels that would be required for a selection of commodities to hit their all time highs in real terms reached over the past 40 years.10 13. 474 439 375 240 174 156 145 129 128 101 POT CN CHF307.9 Agrium Inc. Figure 11: What prices have to do in this cycle to become the most durable and powerful rallies in history Current USD Sugar Cotton price 0.49 Wheat Corn 9.11 January 2008 Commodities Outlook We find that soybean prices would need to rise a further 69% and the rally to extend beyond October 2008 for it to be the most durable and powerful rally on record while cotton prices would need to double and the rally to extend beyond 2012 for it to be the most powerful and durable rally on record.32 4.27 Price gain (%) 165% 104% 69% 43% 34% Peak date February 2012 June 2012 October 2008 March 2009 June 2009 Soybeans 12. Aside from index and futures plays to express a bullish agricultural view. soya processing.67 Source: DB Global Markets Research Figure 13: Possible companies that would benefit form higher agricultural prices Price & Company Ticker USD67. Figure 13 outlines a selection of equity routes. Page 64 Deutsche Bank AG/London . IMF.0 ADM US USD127.0 K+S AG SDF GR USD120. Conclusion We believe fundamentals across the agricultural sector are set to tighten further this year.11 0. cotton and corn. crude oil is currently the most expensive commodity if priced on this basis while sugar is the cheapest. these targets may still be too conservative in our view. We are therefore maintaining our bullish outlook for this sector. Corn. mainly wheat and oilseeds. soya and cotton exposed NR World leader in potash fertilizer NR Global wheat/corn agrochemical and seed play Buy Global leader in nitrogen fertilizer Buy However.0 Potash Corp.30 6. Indeed of the 10 cheapest commodities valued on this basis. Buy EUR171. Bloomberg Prices as of cob January 8.69 Target price 0. in our view.8 68 63 56 Syngenta AG 0 SYNN VX NOK278. AGU US USD45.0 Bunge Limited BG UN DB Comment & View US nitrogen fertilizer. seeds and traits. One of the lessons from the energy and industrial metals complex has been that at some point during the current cycle prices in real terms have hit all time highs. Hold Leader in US/Latam agribusinesses. We believe the rapid increase in agricultural imports in China is particularly bullish for soybeans.40 21. MON US CAD138. NR Leader in agribusiness and grain processing. Figure 11. Figure 12: How far prices today are from their all time highs in real terms 1600 1400 1200 1000 816 800 600 400 200 0 Si lv er C ot to So n yb ea ns C op pe C ru r de oi l Su ga r Co ffe e C oc oa n Ti n N ic ke l Zi nc in iu m W he at C or G ol ad d 1510 Difference between the current price and the all time high in real terms (%) Cheap Expensive Monsanto Co.0 European potash fertilizer Hold Global leader in biotech. seven are in the agricultural complex. 2008 Source: DB Global Markets Research Not surprisingly. Moreover land and water constraints globally as well as the expected growth in world ethanol and biodiesel production at a time when global grain inventory-to-use ratios are falling to critically low levels are mixing a cocktail of substantial upside price shocks in this sector. Archer-DanielsMidland Co. For example corn and soybeans would need to rise approximately 170% and 240% from current levels to surpass their all time highs in real terms hit during the 1970s.30 1.
11 January 2008 Commodities Outlook Figure 14: Equity routes to gain agricultural exposure 500 450 400 350 300 250 200 150 100 50 0 Jan-06 30 December 2005=100 May-06 Sep-06 Jan-07 May-07 Sep-07 Sygenta Agrium Bunge Mosanto Potash Source: DB Global Markets Research. water resources. beer and food industry. GM crop tech Theme 3: Farming economies • Long the agricultural exports such as Brazil and Argentina Theme 4: Margins squeezed • Short the grain users: bakert. short Jul’08 corn time spread to position for the curve to flip into backwardation Michael Lewis.com Deutsche Bank AG/London Page 65 . distilleries. ethanol producers Theme 5: Cattle time spread • Short the nearby and long the far forward of the cattle future on any drought These 6: RV curve play • Long May’08 vs. grain elevators Theme 2: Farming services • Long faming machinery. cotton. soybeans &wheat Long corn farms. fertilizers. soft drinks companies. Bloomberg Trade recommendations: Theme 1: Farmland • • Long corn. farmland REITS.lewis@db. (44) 20 7545 2166 michael.
consuming 20% of all primary energy by 2020 from renewable sources.000 4. then on current projections the EU will have to achieve a reduction in emissions over 2010-20 of almost the same absolute magnitude as that expected over 1990-2010. we then need to factor in the BAU emissions growth that would occur as the EU economy grows over 2010-20. These policy targets imply a very tough ETS cap for Phase-3 of the scheme. The main factors here are (i) the step reduction in eastern European emissions in the 1990s that occurred as a result of the collapse of the Soviet system and the ensuing industrial recession in these countries (including the former East German). • • • Figure 1: EU GHG emissions targets 1990-2020 (Mt) 7. (1) EU Target: A 20% reduction in GHG emissions by 2020 The EU is now committed to achieving a reduction in its GHG emissions of 20% relative to 1990 levels (Figure 1). DB Global Markets Research • • Second. First. we nonetheless think that the aviation industry will be a significant net buyer of EUAs from 2011.000 5. the fact that EUAs are bankable between Phases 2 and 3 of the ETS means that arbitrage should ensure a common price (adjusted for the cost of carry) over 2008-20. the reduction over 2010-20 will have to occur without the one-off factors that largely explain the actual reduction in emissions projected to be achieved by the EU over 1990-2010 .or 366Mt per year – to the EU-wide cap from 2013. and.11 January 2008 Commodities Outlook #17 Emissions Banking on Higher Prices: We See EUAs at EUR35/tonne over 2008-20 • The EU has a very ambitious energy-policy package out to 2020 which we think points to significantly higher carbon prices over 2008-20.157 • 1. Third. The package comprises three main pillars: First. Furthermore.000 2. the EU Parliament’s proposals for regulating the emissions of the aviation industry from 2011 are very tough. and building 12 large-scale carbon-capture and storage (CCS) plants in the EU by 2015. and although we do not think that these proposals will be implemented in full. and this is for three main reasons. after adjusting for the cost of carry. Potential catalyst: Of key importance will be the European Commission’s announcement on 23 January 2008 concerning its plans for improving the ETS from 2013.039 1. Third. and (ii) the so-called “dash for gas” in the UK in the 1990s.196 Expected reduction achieved -614 4.225 • Source: European Environment Agency. Although this is not a commitment to an absolute cut – the target allows for the continuing use of credits from CDM/JI projects as offsets against excess emissions – it is nonetheless an extremely ambitious target.531 5. we are forecasting an EUA price of E35/t for 2008. thereby reducing primary-energy consumption by 20% against business-as-usual (BAU) assumptions.279 4.000 6.648 Reduction required -548 3. taking 2010 as the mid-point of the Kyoto compliance period and hence the baseline for calculating the “effort required” to the new target of 20% below 1990 levels.000 0 1990 Kyoto Baseline eastern Europe 2010E Projected levels 2020E Target EU 15 1. the same price over both Phase 2 and Phase 3.000 1. and we estimate a cut of 17% -. This reinforces our price target for EUAs. Page 66 Deutsche Bank AG/London .423 • 4.000 3. Second achieving a 20% improvement in the EU’s energy efficiency by 2020.810 5. achieving a 20% reduction in the EU’s greenhouse-gas (GHG) emissions against 1990 levels by 2020. As a result. Moreover.
037 Gap against BAU 904 746 Average Gap Source: European Environment Agency.000 900 800 700 600 500 400 300 200 100 0 -100 -200 -186 EU 15 -133 eastern Europe 734 548 1.000 2.279 Expected reduction achieved -614 5.500 2. This policy comprises three main elements: (i) a target to improve energy efficiency in the EU by 20% by 2020.552 Figure 4: EU projected “effort required” by 2020 after efficiency savings (Mt) 800 700 600 500 400 300 200 100 0 Assumed BAU Emissions by 2020E Assumed "Effort Required" 746 -197 Assumed average reduction from Efficiency Target by 2020 549 4.500 3. (ii) a target stipulating that 20% of the EU’s primaryenergy consumption by 2020 should come from renewable sources. and 33% by the non-ETS sectors of the EU economy.092 4. DB Global Markets Research Source: DB Global Markets Research We assume annual emissions growth of 0. We assume that the demand-side target of reducing primary-energy consumption by 20% by 2020 will reduce the average annual “effort required” over 201020 by 197Mt (Figure 4). we assume that 67% of the burden for meeting the “effort required” over 2010-20 will be assumed by the ETS. and (iii) a target to develop 12 largescale CCS plants by 2015.531 1. Deutsche Bank AG/London Page 67 . which means that by 2020 annual emissions would be 904Mt above the EU’s target on a BAU basis (Figures 2 and 3). Figure 3: EU gap between 2020 BAU emissions and 2020 target (Mt) Gap against 2010 1.460 5. the Commission has developed a much more coherent energy policy than it had in the past to help meet this objective. In terms of the impact this has on the size of the ETS cap over Phase 3 of the scheme. we assume that the EU’s other policy measures will have to reduce emissions by an average of 549Mt per year over 201120 if the target of a 20% reduction in GHG emissions by 2020 is to be achieved. a disproportionately large burden of the “effort required” to reach the 2020 emissions target will be placed on the ETS in general.157 Source: European Environment Agency.500 5.7% over 2010-20. and that even with the full addition of the aviation sector from 2012 it will still only account for about 50% of total emissions. Figure 5.000 5. As a result. notwithstanding the very ambitious scale of the EU’s 20% emissions-reduction target by 2020.500 4.Adding the implied effort required in each year over 2011-20 together and then dividing by ten gives us an average “effort required” over 2010-20 of 746Mt. Figure 3.11 January 2008 Commodities Outlook Figure 2: Projected EU emissions to 2010 and 2020 (Mt) 6.039 1.000 1. DB Global Markets Research As a result.000 3.500 1. and the power-generation sector in particular. then on our estimates it would imply a reduction of 366Mt per year relative to the Phase-2 cap over 200812. However.196 Expected BAU increase +356 4.000 500 0 EU 27 Kyoto Baseline eastern Europe 2010E 2020E BAU EU 15 1.000 4.810 5. (2) We expect a much tougher ETS cap from 2013… We assume that although the ETS currently accounts for only about 45% of total EU emissions.
13 October 2003.3 (which relates to banking arrangements between Phases 2 and 3). We therefore assume the Commission will allow only 45% of each Member State’s “effort required” to be met via the use of CDM/JI credits over 2013-20. a range of 80100Mt per year for the residual abatement required within the ETS seems a reasonable assumption to make. Since we have assumed a total annual CER/ERU limit of 247Mt (Figure 5). To do this. Moreover. assuming that the full renewable-energy target were met by 2020. (ii) How many CERs/ERUs will be available to the ETS sector? We assume that Member States will use 106Mt of CERs/ERUs per year over 2008-12. Phases 2 and 3 of the ETS are linked via the bankability of Phase-2 EUAs into Phase 3. The relevant paragraphs of this article are 13. In turn. any EUAs that are not used in Phase 2 are carried over as a matter of course into Phase 3. 143Mt would be expected to be achieved through the Commission’s renewable-energy targets. The big difference in these arrangements is that the Directive states that banking of surplus Phase-1 permits into Phase 2 is at the Page 68 Deutsche Bank AG/London . And crucially. there is mandatory 100% banking of surplus permits between Phase 2 and Phase 3. we need to answer two questions: (i) What will be the impact of the policy measures relating to the target for sourcing 20% of all primary-energy consumption from renewable sources by 2020? If we assume that this full saving is achieved by 2020.11 January 2008 Commodities Outlook Figure 5: ETS assumed sectoral burden sharing. leaving a gap of 223Mt to cover. 2013-20 (Mt) 400 350 300 250 200 150 100 50 0 143 from Renewables/ CHP 141 366 Assumed use of CERs/ERUs Remaining gap to cover 82 ETS reduction required 549 Source: DB Global Markets Research Source: DB Global Markets Research At the same time. this means that the remaining amount available for the ETS sector on our estimates would be 141Mt per year.int/comm/environment/_en. available at http://europa. As a result. As a result. (3) and this is bullish for EUA prices in both Phase 2 & Phase 3 In order to work out the EUA price implied by our assumed “effort required”. the 82Mt number is conservative to the extent that we have above assumed that the target for achieving 20% of primary-energy consumption from renewable sources by 2020 is achieved in full. In other words. we think that the Commission will interpret the supplementarity criterion governing the use of CDM/JI credits in the ETS more strictly beyond 2010 in order to reflect the increased reliance on its supply-side targets for renewable energy and the construction of CCS plants laid down in its energy policy out to 2020. this would mean that of the 366Mt average annual “effort required” for the ETS sector. assumed average residual abatement required. we do not think it will be possible for ETS installations to cover their entire EUA shortfall over Phase 2 from CERs/ERUs either. In other words. Figure 6. and 13. then other things being equal the emissions savings will be lower and the residual abatement required by the ETS sector correspondingly higher.htm). as is clear from Article 13 of Directive that governs the ETS (Directive 2003/87/EC. and that up to 30Mt per year of abatement will have to be achieved via fuel switching in the power-generation sector over 2008-12. the ETS sector would have a remaining gap to cover via domestic abatement measures within the ETS of 82Mt per year over 200812. 2013-20 (Mt) 600 500 400 300 200 100 0 Total CERs/ERUs allowed 2/3 ETS 366 247 57% 43% Assumed CERs/ERUs allowed Non-ETS 106 ETS 141 Assumed Annual average "Effort Required" Burden-Sharing 1/3 Non -ETS 183 Assumed Supplementarity Criterion of 45% Figure 6: ETS.2 (which relates to banking arrangements between Phases 1 and 2).eu. if the target is not achieved in full. Indeed. then this translates into average annual emissions savings over 201120 of 143Mt if we further assume that this is achieved in linear fashion over this period. we need to calculate the residual amount of abatement required within the ETS. Evidently. Figure 6.
allowances which are no longer valid and have not been surrendered and cancelled in accordance with Article 12(3) shall be cancelled by the competent authority.72/therm) and the Troll index price (Euro 0. and fuel switching would therefore start to happen at this level. and a £/Euro exchange rate of 1. A gas price of Euro 0. and hence an average annual residual abatement requirement over 2008-20 of 73Mt. we believe gas would start to look economic against coal in the UK. At $60/boe this represents the average of the thermal equivalent gas price (Euro 0. In reviewing the Commission’s draft legislation for the Aviation Trading Scheme (ATS) that will exist in parallel to the ETS from 2011. where we estimate that up to 25Mt per year of abatement can be achieved via switching to gas plant from coal plant. this being the long-term forecast of DB’s Commodities Research team. A coal price of $60/t with transportation costs of $20/t A carbon price of EUR35/tonne Thermal efficiency of 57% for UK gas plant. it has voted to allocate European Aviation Allowances (EAAs) to the industry at only 90% of its average emissions over 2004-06 rather than (ii) (iii) We have set out these estimates in much more detail in a previous research report (What If? The risk of much higher carbon and power prices. 1 November 2005.64/therm. Four months after the beginning of each subsequent five year period referred to in Article 11(2). Most notably. however. we project the same price over the rest of Phases 2 and 3. see especially pages 35-41). our assumption that the ETS will have to achieve residual abatement of 30Mt per year over 2008-12. This results in a total expected residual abatement requirement in the ETS of 950Mt over the 13-year period. and 80-100Mt per year over 2013-20 implies a price for 2008 EUA allowances of EUR35/tonne. Adjusted for the cost of carry. Member States shall issue allowances to persons for the current period to replace any allowances held by them which are cancelled in accordance with the first subparagraph.) (ii) (iii) (iv) (v) (vi) What this means is that we effectively need to consider the entire 13 years covered by Phases 2 and 3 as one period. and that it will largely have to be achieved via fuel switching in the power-generation sector. Member States may issue allowances to persons for the current period to replace any allowances held by them which are cancelled in accordance with the first subparagraph.” (Our emphasis. 13§3. Four months after the beginning of the first five-year period referred to in Article 11(2). In short. allowances which are no longer valid and have not been surrendered and cancelled in accordance with Article 12(3) shall be cancelled by the competent authority. and hence the implications for carbon prices in the ETS over Phase 3? To answer this question we make the following assumptions on the key variables: (i) An average oil price over 2013-20 of $60/boe. (4) The impact of including the aviation industry With emissions from aviation growing faster than those of any other industry in the EU. We think a residual abatement requirement over this period of 73Mt is a very material amount of emissions to be abated each year. 37-43% for coal. the European th Parliament voted on the 13 of November to tighten up the proposals made by the Commission to regulate the industry. so we would argue that it is reasonable to assume that the full residual abatement required by the ETS sector over 2013-20 will be achievable via fuel switching.56/therm). where we estimate that up to 40Mt per year of abatement can be achieved via switching to coal plant (and to. and thus to average our projected annual deficit over 2008-20.11 January 2008 Commodities Outlook discretion of Member States between Phases 1 and 2. the EU Parliament has been very radical. this number will increase. the point being that switching Deutsche Bank AG/London Page 69 . On our assumption of a carbon price of EUR35/tonne. The UK. as more gas plant is built across Europe. Spain. Over time. a lesser extent to older gas plant) from lignite plant. We estimate that the opportunities for large-scale fuel switching are limited in the EU at the moment to three main markets: (i) Germany. where we estimate that up to 30Mt per year of abatement can be achieved via switching to gas plant from coal plant.38. So what are the economics of fuel switching. and 37% for lignite A Euro/$ exchange rate of 1. but is mandatory between Phases 2 and 3: opportunities at the moment would allow for nearly 100Mt per year of emissions abatement per year.48 “13§2.
longer term. and assume in particular that the idea of capping the use of EUAs in the ATS will be rejected.lewis@db. we now assume an increase of 60Mt in the average annual abatement required within the ETS over 2013-20. Page 70 Deutsche Bank AG/London . but also of EUAs. this results in a total expected residual abatement requirement in the ETS of 1. and. Moreover.5/t for 2008 delivery and we think they are worth Euro 35/t on fundamentals Mark Lewis. We think this level of abatement implies that in the short term the marginal cost of carbon will be set by fuel switching to gas from coal in the UK. gas. We do not expect Parliament’s proposals to be accepted in full. bankability means that we have to consider the expected residual abatement requirement in Phases 2 and 3 together rather than separately. with Parliament clearly signalling that aviation’s emissions will have to be aggressively limited over Phase 3 as well.11 January 2008 Commodities Outlook 100%. Trade Recommendation: • We are bullish on Phase-2 EUAs. On our assumptions. the bankability of Phase-2 EUAs means that the more drastic shortage of EUAs foreseen by the market in Phase 3 will already be anticipated in Phase 2. the demand from airlines for EUAs will increase the average annual residual abatement requirement in the ETS over 2008-12 to 60Mt from 30Mt. Based on our assumptions for long-term oil. In other words. and to cap the use not only of CERs/ERUs.com (5) Conclusion: Banking on higher prices Expectations about a much tighter cap in Phase 3 will make Phase-2 allowances more valuable given that they can be carried over into Phase 3. Overall. this means we now project an average annual abatement requirement within the ETS over 2008-20 of 122Mt. In effect. (33) 1 4495 6761 mark-c. as they currently trade at around E23. and an average abatement requirement of 122Mt per year. to 160Mt from 100Mt. compared with the 73Mt we project for the other industries covered by the scheme before taking aviation into account. by the carbon price required to incentivise new gas and/or carbon-capture and storage (CCS) coal plant to be built ahead of conventional coal.580Mt over the 13-year period 2008-20. and coal prices this implies a carbon price of EUR35/tonne. On our estimates.
and per-fluorocarbons L-W would set caps on CO2 equivalent emissions in the electric power. During the course of 2007. a number of state governments began to implement their own individual (and regional) GHG emission initiatives and the opposition of many industrial and commercial firms to federal GHG regulation began to turn in favor of Congressional action in order to avoid the potential chaos of numerous and conflicting state mandates. the vulnerability of economic. The US did agree to language that approves "measurable. the European Union wanted reductions of 25% to 40% by 2020. methane. Senators Joseph Lieberman (I-CT) and John Warner (R-VA) released a detailed outline for a federal GHG cap-and-trade system. and require reductions in demand growth. increase energy-related costs. the Intergovernmental Panel on Climate Change (IPCC) issued four reports that assessed the scientific aspects of the climate system and climate change. The Lieberman-Warner bill was debated and fine-tuned over the course of • • A political consensus is forming in the US around a central set of climate law provisions that include federally-enforced caps on GHGs and “traded” markets in carbon dioxide (CO2) and equivalents (CO2e). We believe that curbing CO2 emissions will alter the energy mix. • • • Bali Roadmap The Kyoto Protocol binds virtually every industrialized country (but not the US due to its refusal to ratify) to reduce their collective emissions of greenhouse gases by 5. Kyoto expires in 2012. sulfur hexafluoride. and options for limiting or mitigating GHGs. nitrous oxide. Nevertheless. in time to provide key conclusions for policy makers attending the UNFCCC conference in Bali. Bali marked the first such international negotiation at which the US did not rule out accepting binding limits in the future. Canada. Gore’s documentary film An Inconvenient Truth popularized the scientific message of the IPCC. a national system to regulate emissions of GHGs is likely to take effect in the US by the start of year 2012. and politicians in Washington and industry executives were taking note. industrial.2% compared to the year 1990. Deutsche Bank AG/London Page 71 . The Bali meeting was intended to work out the details of an agreement with a goal of having a new protocol in place by 2009. The Lieberman-Warner (L-W) proposal for a US carbon cap-and-trade system is the likely template for final US legislation on this topic. Indonesia. the US Supreme Court ruled that “the harms associated with climate change are serious and well recognized” in a case involving the refusal of the US Environmental Protection Agency (EPA) to regulate GHG emissions from motor vehicles. as well as hydro. and allows some use of both domestic and international GHG allowances. reportable and verifiable nationally appropriate mitigation commitments or actions" and calls for "quantified emission limitation and reduction objectives.11 January 2008 Commodities Outlook #18 US Carbon Trading Climate Legislation Outlook • Despite the US failure to ratify the Kyoto Protocol. by all developed country Parties". The consensus view in Washington is that “final” law on this topic is likely to be signed by the new President in 2010. The lack of binding targets for developing countries persuaded representatives from the US. and transportation sectors. It covers six primary GHGs: CO2. Although the US never ratified the Kyoto Protocol. Australia and Japan to object to text that included any direct reference to the 25% to 40% reduction. Based on a recommendation in the IPCC synthesis report. commercial. It provides for partial auctioning of entitlements. and a recalcitrant role at the recent Bali Conference. former US vice president Al Gore and the IPCC were jointly awarded the Nobel Peace Prize. The LiebermanWarner proposal drew ideas from other climate change bills. Earlier in the year (April 2007). Congressional Activity In August 2007. social and natural systems. public pressure for the US to actively participate in the UN Framework Convention on Climate Change (UNFCCC) is growing rapidly. the timetable for the negotiating process is set to culminate in 2009 when a new President will be sitting in the White House. During the course of 2007. Spurs to US Action In October 2007. L-W was approved by a key US Senate committee in December 2007 and is likely to be scheduled for a full Senate vote in 2008. Despite the continued foot-dragging of the current Administration. The Supreme Court found that GHGs fit well within the Clean Air Act’s definition of an “air pollutant” and that the EPA has a statutory mandate to regulate such emissions from new motor vehicles. A synthesis report was published in November 2007. including the Bingaman-Specter bill introduced earlier in the year by Senators Jeff Bingaman (D-NM) and Arlen Specter (R-PA).
The legislation also directs the US EPA to establish a clear legal and regulatory framework for carbon capture and sequestration (CCS). methane. During the 38 intervening years. and certain byproduct HFCs. or any entity that in any year imports. ACSA provides for a combination of allocation and auctions for distributing allowances. Each year. total emissions attributable to covered facilities would be capped at 2005 levels. the cap would be set at 1990 levels. with the proceeds to be devoted to funding energy technology deployment. the cap would decline by 106 million tons each year. aluminum. A separate cap applies to HFCs produced in. The bill would establish a Carbon Market Efficiency Board to oversee the carbon trading market and make adjustments to the emissions cap and borrowing terms if the price of emission allowances exceeds expectations.sieminski@db. chemicals and such other products as EPA may specify). a Climate Change Worker Training Program. an adaptation program. The remainder are allocated to the Climate Change Credit Corporation to be auctioned. Natural gas and petroleum fuels (and coal-based liquid or gaseous fuels) would be regulated upstream. chaired by Senator Barbara Boxer (D-CA). and on December 5 was approved by the full Senate Committee on Environment and Public Works (EPW). individual states. ACSA would place a declining cap on US emissions of the six primary greenhouse gases. By 2050. A general cap applies to certain emissions of CO2. In 2020. for a number of purposes. cement. energy intensive manufacturers (iron. According to experts at Van Ness Feldman.000 CO2 equivalents of HFCs.732 billion tons in 2050. According to attorneys at VanNess Feldman.or coal-based liquid or gaseous fuel. petroleum. nitrous oxide. including advanced vehicle technologies and advanced coal and sequestration technologies. Carbon constraints could dramatically alter the energy mix – favoring gas at the expense of coal – and CCS) is deemed necessary by virtually all economists to preserve some balance in the existing global infrastructure for energy supply and delivery. low-income electricity and natural gas consumers. energy assistance to consumers. Adam Sieminski (1) 212 250 2928 adam. Coal combustion is regulated downstream. although the consensus view in Washington is that “final” law on this topic is unlikely to be signed ahead of the US elections in 2008. pulp. perfluorocarbon. We believe that curbing CO2 emissions will alter the energy fuels mix in the US.and others. is currently seen as the most likely vehicle for any federal legislation on climate change in the US and the preferred template for further Congressional action. America’s Climate Security Act (“ACSA”). carbon capture and sequestration. power plants. at no cost. a share of the allowances are allocated. and could require reductions in demand growth if carbon technology is slow in being developed.000 CO2 equivalents of chemicals that are GHGs. sulfur hexafluoride.775 billion tons in 2012 to 1. or imported into. it appears that only European Union (EU) allowances would be eligible. based on the CO2 emissions of the coal-burning facility. the cap would drop to 70% below 2005 levels. increase energy-related costs. the cap declines from 5. It is becoming increasingly likely that a national system to regulate emissions of GHGs will take effect in the US by the start of year 2012. In 2012. or any entity that in any year imports. It would impose direct allowance surrender requirements on the owners and operators of the following facilities and entities: (1) that uses more than 5.com Page 72 Deutsche Bank AG/London . including through the Clean Development Mechanism (CDM). or any entity that imports natural gas (including liquefied natural gas. The legislation provides for “International Trading” via a mechanism to allow up to 15% of emission allowances to be obtained on a foreign GHG emissions trading market certified by EPA. and the shape of that system is being moulded now.000 tons of coal in a year. landfill and coal mine methane reduction projects. more than 10. The direct allocation provision of ACSA provides for issuance of allowances each year in a total amount that equals the cap for that year. including a long and complicated list that includes allocations for early adopters. (4) that in any year produces for sale or distribution. Conclusions The momentum behind US climate legislation has built rapidly. (2) that is a natural gas processing plant or that produces natural gas in the State of Alaska. the United States. and sustainable energy programs. paper. steel. Between 2012 and 2050. ACSA provides for limited offsets and international trading. and (5) that in any year emits as a byproduct of the production of hydrochlorofluorocarbons (HCFCs) more than 10. “Domestic Offsets” under which a covered facility would be able to satisfy up to 15% of a given year’s compliance obligation with domestically generated offset allowances. agricultural and forestry programs. The cap is expressed in metric tons of CO2 equivalents (CO2e). as the bill is titled. (3) that in any year produces. This provision would foreclose use of credits from project-based reductions from developing countries.11 January 2008 Commodities Outlook September and October.
935 -7.6Mlbs).273 49.462 44. we estimated primary mine supply for the year to be at 47. nuclear generated electricity – which emits almost none – is currently undergoing a resurgence in popularity. Since the late 1980s.6% Source: WNA. There are also several other technical assessments that need to be made before the company receives regulatory approval to dewater the mine and Cameco is targeting the second half of 2008 for completion and does not expect Cigar Lake to begin production until 2011 – at the earliest.450 44. The strong demand outlook and sharp price appreciation piloted a resurrection of the uranium mining sector.306 -6. Producers in Kazakhstan have also faced difficulty getting material to the market as scheduled.276 -823 -5. due to producer production revisions we have adjusted our primary mine supply estimates every year. with prices reaching an all-time nominal high of USD136.11 January 2008 Commodities Outlook #19 Uranium More Excitement In 2008 • Uranium delivered an unprecedented performance in 2007.450 44.00/lb and USD116/lb in 2009. • • • • Supply: Production disruptions and delays remain the greatest risk Much like in 2006. Given secondary supply is finite. the water has yet to be removed. a rock fall caused the mine to flood and due to environmental sensitivities. Figure 2: New mines are coming – but will it be enough? 100 90 80 70 60 KtU 50 40 30 New M ines Other Secondary Supply HEU Feed Prim ary m ine supply Dem and Figure 1: Comparison of DB production estimates in 2007 and 2008 tU Estimate in 2007 Estimate in 2008 Difference tU Difference % 20 10 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 52. more and more energy policy makers will look to nuclear power as an alternative. Toronto-listed Uranium One.450 44. There are multiple economic. political. we are mindful of the potential of more delays to new mine production and supply disruptions. secondary supply (ie recycled material and downgraded highly enriched uranium) has filled the gap between primary mined supply of U3O8 and demand.9% 47. production disruptions were one of the primary drivers of price volatility and dominated uranium market headlines.9% -1.7% -13. mined Deutsche Bank AG/London Page 73 . UxC.727 45. Given the multiple complexities surrounding this large-scale project.450 44. Deutsche Bank Global Markets Research Source: WNA. supply will have to increasing become a greater source and there are several players in the market vying to take that position. supply-side developments represent the most significant sensitivity to uranium prices as production disruptions and new mine delays have been the primary drivers of price volatility over the past two years. In 2008 we are forecasting an average U3O8 spot price of USD119. Although spot volumes tend to be lower in the first quarter of the year and often pressure prices lower. In our view. we expect more delays will be eventually announced which will continue have a serious effect on the global market balance. we expect discretionary purchasing to become as robust as volumes in 2007. cut its 2008 production estimate by 38%.1Mlbs) but have now revised that figure to 44.8% -10.012 -6. but has fallen well behind schedule.756 51. Although prices have since fallen below USD100/lb. The global clamour over greenhouse gas emissions has bred a mounting interest in nuclear generated electricity which is likely to makeup an increasingly larger proportion of new power capacity.450 -7. DB Global Markets Research Demand – The growing popularity of nuclear power Amid the global clamour over greenhouse gas emissions. The bulk of new mine supply will come from Canada and Kazakhstan.224 44. citing a shortage of sulfuric acid needed to process ore in Kazakhstan.5Ktu (115.7KtU (124. We expect that as the world progressively turns to placing a price on carbon emissions.450 -3. we believe market fundamentals in 2008 could provide another exciting price performance and test the 2007 highs. In fact. In October 2006. One of the world’s top producers. While we are forecasting the global market balance to revert to a surplus between 2009 and 2013.00/lb in June.385 51. Cameco’s Cigar Lake project in Saskatchewan province in Canada was expected to fill a large proportion of the gap from 2007 and ramp up to providing around 10% of total world mined production by 2008.774 -14. UxC.5% -13. In the first quarter of 2007.
DB Global Markets Research In 2007. While North America and Europe have the highest concentration of current installed capacity. the US nuclear Regulatory Authority has received applications for new builds. The growing popularity of nuclear power is highlighted by the recent decision by Russian aluminium giant Rusal to use two nuclear reactors to power a new aluminium smelter. Currently. no company had applied to build a new reactor in the USA since the Three Mile Island nuclear accident in Pennsylvania in 1979. DB Global Markets Research Figure 4: Distribution of nuclear power plant new builds. WNA. Deutsche Bank Global Markets Research South Am erica & Africa 3% Source: UxC. Many studies (including our own) have shown that in the absence of financial penalties for emitting pollutants. nuclear power plants are not economically competitive to other electricity generating technologies. 2007-2015 2015 Total Current New Reactor Capaci % Chg MWe reactors Builds Shutdown ty by MWe s 2015 Asia China India Japan Korea Pakistan Taiwan Total South America Argentina Brazil South Africa Total Eastern Europe Armenia Czech Rep Bulgaria Hungary Lithuania Romania Russia Slovakia Slovenia Ukraine Total Western Europe Belgium Finland France Germany Netherlands Spain Sweden Switzerland United Kingdom Total North America Canada Mexico USA Total 11 19 55 20 2 6 113 8828 4183 47591 17606 425 4884 83517 16 5 10 7 1 2 42 0 0 0 0 0 4 4 24888 8755 60099 25456 725 10840 125166 50% 2 2 2 6 935 1901 1842 4678 1 1 5 7 0 0 0 0 1635 3125 2667 7427 59% 1 6 4 4 1 2 31 6 1 15 71 376 3472 2722 1755 1185 1361 21743 2442 686 13330 49072 0 2 2 0 1 0 17 2 0 3 27 1 0 2 0 1 0 2 2 0 0 8 752 3524 5538 1755 3370 1361 37530 4098 686 16330 68514 40% Figure 3: Distribution of current nuclear capacity Asia 22% North Am erica 30% South Am erica & Africa 1% Eastern Europe & Russia 13% Western Europe 34% 7 4 59 17 1 8 10 5 23 134 5761 2656 63363 20384 452 7430 8933 3220 12062 124261 1 1 1 0 1 1 1 0 1 7 3 0 0 7 0 1 1 0 16 28 7508 4256 64963 28750 452 7876 9700 3220 20286 108511 -13% Source: UxC. Reuters. WNA. 2008-2015 North Am erica 10% Western Europe 4% 18 2 104 124 12606 1364 100466 114436 2 2 8 12 0 0 0 0 14144 1626 107246 123016 7% Eastern Europe & Russia 27% Asia 56% 448 375964 95 40 15% Global Total 432 634 Source: DOE. particularly in China and India – as well as in the US. Bloomberg. Ux. Before 2007. the real growth story is in Eastern Europe and Asia. there are 95 new reactors with regulatory approval scheduled to come on-line between now and 2015 with dozens more planned and/or waiting for approval.11 January 2008 Commodities Outlook social and environmental dimensions to this discourse and we believe that greater awareness of the effects of pollutants emitted from the traditional sources of energy generation is a positive development for the prospects of greater uptake of nuclear generated electricity. we think nuclear power will become more economically attractive. The Nuclear Regulatory Commission says it expects to receive Deutsche Bank AG/London Page 74 . EIA. five reactors began commercial operation and ten started construction. WNA. Significantly. Figure 5: Existing and projected nuclear power plants. However. given the increasing acceptance and eventual adoption of carbon taxes and international carbon trading schemes.
While the two funds over the last three years secured around 3. GBP (lhs) 140. The World Nuclear Association (WNA) in September released its biennale Global Fuel Market Report which provides the industry standard demand projections for all of the world’s nuclear reactors. DB Global Markets Research Deutsche Bank AG/London Page 75 . we account for demand of U3O8 from utilities and investors. So far. New build programs in provisional stages were not considered. American energy policy planners have created a very amenable environment for new nuclear power generation. Although this assumption is broad.00 4.11 January 2008 Commodities Outlook applications for 25 more reactors from 13 additional companies by the end of 2009. The US Energy Information Administration's 2008 Outlook reference case expects 20 GWe of newly-built US nuclear capacity on line by 2030. there are two Exchange Traded Funds (ETFs) – Nufcor Uranium and Uranium Participation Corporation – which provide an opportunity for investors to leverage the uranium price. Both of these tasks are subject to a significant degree of uncertainty. GBP (lhs) NU. essentially exploiting legal channels previously used only by utilities and suppliers. In our model.00 1. offset by 4300 MWe retirements. and estimating when and where old reactors will be decommissioned. which makes no distinction between financial investors and end users when auctioning the fuel. thus this category of demand is only viewed as an upside risk to the market balance. While this new element of demand is difficult to estimate.00 80. there have been other parties who have secured material to gain exposure. we think the growing popularity of commodities as an asset class will only increase investor interest in uranium.00 120. there is 2700 MWe in nuclear plant uprates. were under construction and/or guaranteed to be constructed. Alternative energy sources available. we believe this is a reasonable estimate as it inherently accounts for every reactor currently operating around the world. (rhs) M onth-end NU. even in their upper case scenarios. Outside of the ETFs. We note. where and size of new builds over the outlook period.00 100. the US Department of Energy will guarantee the full amount of loans covering up to 80% of the cost of new clean energy projects including nuclear power. and Political atmosphere and public support. Under the 2005 Energy Policy Act.00 90.00 Im plied U3O8 price. This is 63% above previous estimates. they have secured ownership rights of material stored at licensed repositories in North America and Europe. almost half of it supported by production tax credits at the same level as for wind generation.00 130. The most significant change to our model during this review is an expectation of a market surplus between 2009 and 2013. a program that was recently extended. We only assessed nuclear electricity programs in which reactors already existed.00 Source: UxC. particularly given it has one of the most favourable market outlooks among the other mainstream commodities.00 2.00 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 60. Model review We have undertaken a detailed review of our supply and demand model that has resulted in some significant changes to our global market balance and therefore to our price forecasts.00 3.00 0.L NAV. When evaluating the prospects for nuclear power we have considered the following factors: • • • The prospects for energy demand in the region. Investment demand Investor interest in the uranium market continues to gain momentum. In addition. What tipped this estimation away from our previously forecast deficit was a trimmed down demand scenario by the WNA from their previous projection in 2005.00 110. USD/lb.00 70. The key assumption we have made to determine demand by tonnes of uranium was to take the total wattage of all reactors in our database and use a conversion factor to convert capacity into physical volumes. The exercise of forecasting uranium demand is an exercise in estimating when. that the WNA consistently underestimates demand.5% of annual uranium consumption. We have considered these factors on a country by country basis for the 31 countries currently using nuclear power or seriously considering new build in our outlook period. primarily caused by volatile political situations. nor did we attempt to model probable cases in our demand scenario.L share price. That conversion factor is determined by calculating the ratio between an average of the WNA’s reference and upper case scenarios in their annual projections of demand by MWe and tonnage. Therefore we believe the risk in this outlook lies to the upside. most fund controlled material has derived from the US DOE. however. Figure 6: Nufcor NAV and implied uranium price 5. Although financial investors can not obtain the proper license requirements to actually hold uranium.
what remains to be seen is if the price can stay high for a longer period of time. USD/lb (rhs) -8500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20.00 80. Joel Crane (1) 212 250 5253 joel.00 20.00 USD/lb Nom inal Real (2006 constant) LT Real Average Price Period above LT Real Average Price 1974 .00 140.00/lb and the 2009 forecast by 11% to USD116/lb. Figure XX.com Figure 8: Real vs nominal U3O8 prices. persistent delays on the supply-side will keep the market balance tight. Conclusion Given the profile of new reactor builds already announced and the prospects for an even greater resurgence in atomic power’s popularity. it lasted for 10 years. we expect spot prices could easily re-test the highs of 2007. DB Global Markets Research Source: UxC.00 1971 1975 1979 1983 1987 1991 1995 1999 2006 .???? 2003 2007 Source: UxC. this cycle is only in its infancy. USD/lb) Dec-06 Dec-07 Dec-08 Source: WNA. USD/lb M onth-end LT price.11 January 2008 Commodities Outlook Figure 7: DB U3O8 market balance vs price 7500 140. we expect that prices will eventually head back down closer to long-term average as a result of increased investment in exploration and production. DB Global Markets Research Page 76 Deutsche Bank AG/London . DB Global Markets Research Price outlook Akin to the past two years.00 80 60 -4500 M arket Balance. tU (lhs) U3O8 Price. the demand for U3O8 will remain strong in the coming years. We have argued in the past that the last time prices tracked above the longterm real price average. prospects in the uranium market certainly remain positive. we are unlikely to see a sharp move upward.00 40 20 0 Dec-04 Dec-05 M onth-end spot. annual 160.00 Figure 9: Prices will continue upward trajectory 160 140 DB Forecast 3500 110. The uranium price certainly has the propensity to rise sharply. If history is to repeat itself. In the longer-term.00 60.00 100. production trends will continue to have significant impact on prices in 2008.00 120 100 -500 80. We have moderately decreased our price forecast from our previous update last September. However until then. If the current primary mined supply comes to market as guided by the world’s producers.1984 40. dropping the 2008 expectation by 8% to USD119.00 120. UxC. However. USD/lb Linear (M onth-end spot.crane@db. if production again ends up falling short of target in 2008 similar to the past two years. At the same time.00 50.
11 January 2008
#20 Bulk Commodities
• Bulk commodities like iron ore, coking coal and thermal coal are making new price highs driven by shortages in supply, infrastructure bottlenecks and strong demand. This pattern of rising bulk commodity even after the peak in industrial metal prices may have been reached has been evident in preceding cycles. We believe the iron ore market will continue to tighten over the next two years. We have adjusted both short and medium term prices upwards to reflect both the tightness in the iron ore market, cost pressures and also rising capital costs. We expect that JFY2010 will be the year that the supply side catches up to demand and expect to see prices declining at that point, but, remaining at elevated levels by historical standards. Coke prices are also on the rise reflecting strong underlying demand for carbon units in key Asian markets. As a result of the continuing tightening in coking coal market dynamics we are now forecasting a +60% increase for premium hard coking coal prices in JFY 2008 (prev +25%) to USD150/t and for JFY2009.
Figure 1: Iron ore and the base metal cycle
450 400 350 300 250 200 150 100 50 0 37 m onths 44 m onths 30 44 m onths m onths Base m etal index w eightings: Al 42.6%, Cu 25.4%, Zn 16%, Pb 13.6%, Ni 1.9%, Sn 0.5%.
Base M etal Index
Australian iron ore fines
Source: Datastream, TEX Report, CRU, Deutsche Bank estimates. *Prices referenced to October 2001 (the base metal trough)
We believe that this delay is driven by two key factors, 1) the bulk commodity contract prices are negotiated annually so this can lead to up a year lag and 2) The bulk commodities are not screen traded like the base metals and not subject to as much speculation or anticipation. That is, if the market anticipates a loosening in one of the base metals, it will be sold off early (zinc is a prime example of this, in early 2007 the market expected that 2008 would bring a surplus and the price decline right through 2007 despite continued low inventory levels). The negotiated outcomes for the bulk commodities tend to more readily reflect the supply demand balance of the bulk commodities at the time of the negotiations in our opinion. In Figure 2 we track the value of the seaborne bulk commodity markets including the significant price increases we have put through in this review. We expect that the continuing demand for the bulk commodities combined with continuing impediments to producer growth will mean that bulk consumers will need to pay even more for the products over the coming years. It is worth noting that these figures perhaps understate the total value as we have assumed all trades are priced on contract pricing terms.
The bulk commodities of iron ore and coal are taking centre stage in this commodity review. While we believe that base metal prices have generally seen the peak this cycle, bulk commodities like iron ore, coking coal and thermal coal are making new price highs driven by shortages in supply, infrastructure bottlenecks and strong demand. This pattern of rising bulk commodity prices after peaks in base metal prices has been evident in preceding cycles and we believe will also be the case in this cycle. The chart below highlights this case with the Australian fines iron ore price used as the example. We see here that it took between 30 and 44 months from the downturn in base metal prices to reach the downturn in iron ore prices.
Figure 2: Global seaborne bulks market and value, 2000 -2009
180 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E US$bn
Seaborne iron ore
Seaborne metallurgical coal
Seaborne thermal coal
Source: CRU, TEX, UNCTAD, McCloskey, AME, DB estimates
Deutsche Bank AG/London
11 January 2008
The spot/ short-term contract prices remain significantly above the 2007 term contract prices and provide a ready barometer of the short-term supply demand status for the markets…ie. A high pressure zone! This difference provides a positive bargaining chip for the producers in the current price negotiations. We expect that the ongoing market tightness into the medium term will mean that the steel producers and utilities will be required to pay up for raw materials in 2008 and into 2009.
Figure 4: Baltic capesize freight rates on key routes
100 Australia to China Brazil to China Freight Differential
Figure 3: Spot prices vs 2007 contract prices
200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Iron ore fines Coking coal Thermal coal
Source: Reuters, Deutsche Bank estimates
Source: CRU, McCloskey, DB estimates
Shipping rates also continue to pressure prices. Bulk commodities are by definition “bulky” and require large amounts of shipping capacity to move around. Increasing demand for bulk commodities globally and a shipping industry that has not been able to increase capacity as rapidly as needed has driven shipping rates up by as much as 16x over the last 5 years as shown in the chart below. In this decade, the capesize freight rates from Brazil to China have risen from below US$6/t in September 2001 to over US$95/t in November of 2007. These rates are comparable with the bulk commodity prices themselves. Increases in shipping rates have not been equal across regions and has led to some key rate differential increases – in particular the freight rate differential between the Brazil/China route and the WA/China route, which blew out to >US$55/t in November 2007 and has generated a significant landed price disparity between iron ore from Brazil and Iron ore from Australia that currently remains unresolved.
Direct tightness in shipping capacity is not the only driver of the higher freight rates. Infrastructure congestion globally has meant that ships are often unable to be loaded in planned timetable resulting in many ships being held up at port – reducing the effective shipping capacity even further. The export coal port of Newcastle in Australia is a prime example of the impacts of infrastructure congestion with the vessel queue reaching ~80 ships in June of 2007 and still well above long-term levels with the queue sitting at 52 ships in mid December as shown in the chart below.
Figure 5: Newcastle vessel queue size
90 80 70 60 50 40 30 20 10 0 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07
Source: Hunter Valley coal chain logistics team, Deutsche Bank estimates
Newcastle is not the only port seeing the tightness in the market. Richard’s Bay Coal Terminal (RBCT) exported its largest monthly volume of coal for the 2007 calendar year in December (6.77mt) but problems in the interface between the rail and the port meant port stocks had to be drawn down to the lowest level in 15 years and pushed short term steaming coal prices from RBCT to USD99.35/t (compared with a 2007 contract price of USD55/t) Clearly we see upcoming price increases for the bulk commodities and in the next section we review the three major bulk commodity markets in more detail.
Deutsche Bank AG/London
11 January 2008
The iron ore market continues to tighten with recent spot price movements again highlighting strong demand while providing a positive lead for iron ore producers in the current contract negotiations. We have raised our price assumptions to +45% for lump and fines (prev +25%) for JFY 2008 and remain at +10% for JFY 2009, implying contract prices in 2009 will be around 60% higher than those being received currently. For pellets we assume a broadly similar profile. We maintain our previous view of the profile of price declines from 2010-2012 but from a higher base. We expect that JFY2010 will be the year that the supply side catches up to demand and expect to see the prices declining from then but remaining at elevated levels by historic standards. Our long term prices remain unchanged following the review in Q3 when we increased our LT assumptions by around 58%.
We outline key points on this bullish assessment: Spot iron ore prices into China from India have been trending higher and are currently close to US$190/t CIF, but slightly below the US$210/t recorded in November. Freight rates have remained at close to record highs in December. By comparison Brazilian iron ore on a delivered contract basis (CIF) is selling for around USD137/t CIF and Australian production for around USD87/t. The FOB price for iron ore fines is around USD50/t in JFY 2007. An increase of +45% in contract prices would lift the delivered price of Australian ore to around US$110/t and Brazilian to around US$150/t – still below the price being paid for iron ore from India at spot prices.
Figure 7:Spot iron ore prices go stratospheric
220 200 China CiF (spot) Australian CIF Brazilian CIF
Figure 6: Iron ore price forecasts
2008 Iron Ore Lump Australian export (JFY) (USc/dlt) US$/t (62% grade, 2% moisture) % Chg from previous year % Chg from previous forecast Iron Ore Fines Australian export (JFY) (USc/dltu) US$/t (62% grade, 2% moisture) % Chg from previous year 45% 10% -13% -15% -15% 0% 72.0 79.2 69.3 58.9 50.1 38.8 45% 16% 118.5 10% 16% 130.3 -13% 13% 114.0 -15% 10% 96.9 -15% 10% 82.4 0% 63.9 91.9 101.1 88.4 75.2 63.9 49.9 151.2 2009 166.3 2010 145.5 2011 123.7 2012 105.2 LT 82.2
180 160 140 120 100 80 60 40 20 May-04
Source: CRU, Reuters, Deutsche Bank estimates
% Chg from previous forecast 16% 16% 13% 10% 10% Source: IISI, UNCTAD, TEX, SSY Group, Deutsche Bank Global Markets Research
The benefits that such a re-based price delivers to industry profitability have been partially offset by higher assumed industry costs, both operating and capital. According to AME the industry’s total project pipeline contains over 400Mt of new capacity to come on stream from 2007-2009. Despite this, Chinese domestic production remains constrained while its market continues to require increasing volumes. Outside of China, shortages of skilled personnel and equipment are continuing to limit the quantum of the supply response. We acknowledge that the current iron prices are well above the inducement price as evidenced by the numerous small players attempting to bring production to market and this is borne out in our long-term pricing assumptions (below current levels). However, we believe that prices will continue to go up over the next two years, before coming down again.
Spot iron ore sales have usually been a very small component of the major iron ore producers’ portfolios and have typically been used only as a pointer for iron ore demand in the negotiations – this position is changing with the spot market becoming larger and a number of the majors announcing that they are looking to increase sales into this market. Rio Tinto recently announced on 18 December it had sold 1Mt of iron ore in the month of December 2007 at US$190/t CIF and that a similar amount had been sold for January shipment at a price of US$187/t. With the freight cost around US$35/t to China, Rio is netting around US$150/t compared with ~US$50/t under contract sales for fines! Rio Tinto also announced that it plans to sell up to 15Mt of iron ore on to the spot market during 2008. We believe this highlights the readiness of major producers to extract higher price outcomes through the spot market and signals a significant price increase in contract prices in JFY 2008. The demand side continues to look robust. The most recent IISI release for November showed global steel production grew only 4% YoY in November, with YTD at +7.7%. This was largely due to a slowdown in China with steel production growth of only +4.3% YoY in November and 16.7% YTD. However, strong iron ore spot prices suggest reducing availability of domestic
Deutsche Bank AG/London
85 Dec-06 M ar-07 Jun-07 Sep-07 Dec-07 Nov-97 Source: Datastream. SSY Group. In our opinion.4Mt. it will be difficult for the key steel producers to “cry poor” in the current iron ore price negations with steel prices continuing to climb as shown in the chart below. with additional expansion plans beyond this articulated. Furthermore. Since the contract prices were last agreed (24th December 2006) the movements in the relative currencies has meant that Brazilian producers are now receiving 9% less for their ore in the local currency (despite a 10% price rise in April 2007!). 200 0 1 998 2001 2004 2007E 201 0E 201 3E Source: IISI.00 0. We expect a strong finish to the year if supply is willing and still see around 385Mt of imports for 2007. the slowing growth in steel production appears to be more a production phenomenon than a drop in steel demand with steel prices continuing to rise. For this reason the major iron ore producers have announced capacity expansions with around 400Mt of capacity coming on stream between 20072009. 1997-2007 400 Mt 40% 300 30% 20% 50% 1. The chart below shows the relative price movements for contract iron ore fines in local currencies since the last price settlements (prices set to 1 on 24th December 2006). China's iron ore imports rose 24% YoY in November to 35. Australian producers are receiving 2% less while the Chinese and Japanese consumers are paying 2% and 5% more respectively (not a bad outcome for the consumers in a tightening iron ore price environment). Production during the January – October 2007 period increased 22% YoY to 566Mt. Mt (lhs) Page 80 Deutsche Bank AG/London . Deutsche Bank estimates Source: Reuters 12 month rolling total. We see domestic output increasing to around 720Mt in 2007 and are forecasting a further 11% increase in 2008.20 1. we expect China to continue to grow its imports by around 50-70mt pa between 2009 and 2013. Figure 11: Chinese iron ore imports.15 1.90 0. Company data. Domestic iron ore production in China is struggling to match demand and grades are declining. Deutsche Bank Global Markets Research Figure 9: Relative fines iron ore price movements in varying currencies 1. while in October output rose 13. Beyond this.5% growth in crude steel production in 2008 we expect imports to increase by 55Mt to 440Mt.95 200 10% 0% -10% 0 -20% Nov-99 Nov-01 Nov-03 Nov-05 % chg (rhs) Nov-07 100 0. according to AME.10 1. UNCTAD. YTD imports are +17% to 349Mt. TEX. Recent Chinese customs statistics on the iron ore and steel side show no let up in demand for iron ore.6% YoY to 60Mt.11 January 2008 Commodities Outlook iron ore. Figure 8: CRU steel price index – Domestic HRC prices 900 800 700 600 500 400 300 200 100 0 Jan-00 Jul-01 Japan Source: CRU Figure 10: Domestic iron ore production is leveling out and grades are lower Mt 1 000 Jan-03 Jul-04 China Jan-06 Jul-07 Germ any 800 600 400 Currency movements will also be providing a spur for producers at the negotiating table in the current price negotiations in our opinion.05 Australia Japan Brazil China On the back of 12.
spot sales of premium hard coking coal from Australia have risen toward USD180/t FOB (>USD80/t above last year’s contract settlements) and low vol PCI coal prices have risen to USD160/t. The continuing robust demand outlook coupled with continued supply-side issues within the industry set the scene for a tight market over the next 12-24 months. Deutsche Bank Global Markets Research Our near-term forecasts continue to reflect the strength in the iron ore market.FOB 120 100 80 60 40 20 0 2000 2002 2004 2006 2008E 2010E 2012E Hamersley lump Hamersley fines Tubarao pellets Fines Prices Benchmark 62. China continues to pull back from its position as an exporter of coking coal. Since our Q3 review developments in hard coking coal have continued to be very positive. Deutsche Bank Global Markets Research Source: TEX.6 134. Amid tightening fundamentals. UNCTAD. according to CRU. numbers of >900Mt could be achievable. YTD (to November) China is a net importer of coking coal of 3Mt versus a balanced position during the same period last year. Our base case assumes continued growth to around 750Mt by 2013.7 122. If lower grades are assumed with steel volumes higher than currently factored in. Figure 15: DB Iron Ore Supply/Demand Model Mt 2005 1545 2006 2007E 1695 1830 2008E 1941 2009E 2062 2010E 2162 Apparent Demand for Iron Ore Total World Production Demand satisfied by Imports Iron Ore Fines Benchmark Price Source: TEX. we show our LT profile expectations of Chinese iron ore imports. Figure 14: Chinese iron ore imports LT 800 700 600 500 400 Mt Figure 12: Iron ore seaborne trade vs benchmark price (FOB).FOB) Source: IISI. Deutsche Bank Global Markets Research The figure below has a summary version of our updated supply and demand model for iron ore. We have adjusted both short and medium term prices upwards to reflect both the tightness in the iron ore market. Aside from the continued strong Indian demand that is stretching suppliers in Australia.7 74. UNCTAD. Deutsche Bank Global Markets Research In the chart below.0 (USc/Dltu .8 118. The Chinese Government has recently announced plans to increase export tariffs on coke to +25%. Canada and the US. UNCTAD. 1525 1789 1989 2159 2309 2423 703 750 828 893 964 1032 Figure 13: Iron ore fines and lump prices 200 180 160 140 USc/Dltu .6 81. UNCTAD.11 January 2008 Commodities Outlook In the chart below we highlight the anticipated growth in seaborne trade of iron ore primarily driven by the strength of demand from China. SSY Group. TEX. Deutsche Bank AG/London Page 81 . 2000-2010 1000 900 800 700 600 500 400 2000 2002 Seaborne trade 2004 2006 2008E 2010E Mt USc/Dmtu 145 125 105 85 65 45 25 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E Source: TEX. cost pressures and also rising capital costs. in our view.
500 250 200 150 500 100 50 Jan-02 Sep-02 M ay-03 Jan-04 Sep-04 M ay-05 Jan-06 Sep-06 M ay-07 0 Figure 19: Australia – dominant in the premium hard coking coal market Poland 1% Canada 16% Other 5% 1. although still 28% higher than our previous assumption. there is a supply response underway but it will continue to take time to filter into the system given ongoing infrastructure constraints (both rail and port). This is particularly the case on the East coast of Australia. which is likely to result in the premium in the hard coking coal market staying at elevated levels for longer than the lower quality coals.000 350 300 1. We expect Chinese exports of metallurgical coke and semicoke to exceed 15Mt in 2007.200 1. Kt Exports Imports Figure 18: Australian coal exports 140 120 100 80 60 40 Mt 0 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 20 0 YE Jun 2000 Source: Reuters.11 January 2008 Commodities Outlook Figure 16: Chinese metallurgical coal exports vs price.000 USA 16% Australia 62% Chinese coke exports (LHS) Chinese export coke price (RHS) Source: Reuters Source: Reuters As with iron ore. although the majority of this (>80%) is expect to be in the semi-hard and semi-soft coal category. Deutsche Bank estimates Australia remains the dominant supplier of metallurgical coal to the global markets as shown in the chart below – consequently Australia’s ability to grow its exports through its infrastructure will be a key component in the supply/demand mix for coking coal. 2002-2007 2.600 1. US coking exports will partially offset this demand but we expect the market to remain acutely tight into 2009. 2003-2007 1. According to CRU Australian exports of coking coal are expected to rise by around 10-12Mt next year.500 Kt US$/t 450 400 2. Figure 18 shows the exports of coal from Australia over the last 8 Australian fiscal years as reported by the Australian Bureau of Agriculture and Resource Economics (ABARE). up around 6% YoY. Coke prices are expected to rise further due to the export tax. It is worth noting that the large As a result of the continuing tightening in the coking coal market dynamics we are now forecasting a +60% increase for premium hard coking coal prices in JFY 2008 (prev +25%) to US$150/t and for JFY2009 a reduction of -5% to US$143/t.400 1. We expect a similar profile for standard hard coking coal. For premium hard coking coal the demand outlook continues to be robust for 2008. 2001 2002 Metallurgical 2003 2004 2005 2006 Thermal 2007 Source: ABARE. CRU Coke prices are also on the rise reflecting strong underlying demand for carbon units in key Asian markets. Indian imports are expected to increase further (by 4-5Mt) while Ukrainian imports could also see significant growth. Figure 17: Chinese metallurgical coke exports vs price. The tightness in the coke market is highlighted below with Chinese export prices increasing by US$150/t since our last quarterly review and are currently tracking close to US$400/t.000 800 600 400 200 increase in metallurgical coal exports in 2007 was at the expense of growth in thermal coal exports. Page 82 Deutsche Bank AG/London .
5% growth of 114Mt. WEFA. For semi-soft and low vol PCI coals we do see increased supply during 2008/2009 which should translate into weaker but still elevated prices during FY09. and also strong demand for PCI coals as steel makers look to increase injection rates given the tight coke market.11 January 2008 Commodities Outlook Figure 20: Metallurgical coal price profiles 160 Mt 140 120 100 80 60 40 20 0 Figure 22: DB Metallurgical Coal Supply/Demand Model Mt Total metallurgical coal imports for coke making Total seaborne metallurgical coal trade Surplus/Deficit in seaborne market Premium hard coking coal (JFY)(US$/t) Standard hard coking coal (JFY)(US$/t) 2005 228 2006 223 2007E 236 2008E 243 2009E 254 2010E 259 172 175 183 191 202 207 -2. The continued use of the export quota system and the lack of immediate capacity growth will limit thermal exports in Australia to just 2. Low Volatilie PCI Coal 102 68 68 107 92 83 (US$/t) Source: IISI. MCIS. particularly in Australia. As highlighted in our review of the coking coal market. Congestion at the Port of Newcastle due to a shortage of capacity in the Hunter Valley coal chain has continued with few immediate signs of easing. We continue to see supply side issues. TEX. The Australian Corporate Regulator (ACCC) has approved a continuation of the existing export quota system (CBS) for 2008. in our view. TEX.6 -0. The continuing strength of demand from China is highlighted by the lower level of net exports in 2007 versus 2006. In China.4 1. Deutsche Bank Global Markets Research In the table below we show our revised supply demand model which incorporates some significant adjustments reflecting market developments in H207 and further updates on actual traded volumes. WEFA. MCIS. During 2007 shipping allocations in the port of Newcastle were cut by 9Mt to 82Mt and if achieved will represent only 2% grow over the year. supply infrastructure issues and rising A$ and Rand through 2007 have been positive influences on thermal coal prices with spot prices at record highs. Deutsche Bank Global Markets Research Mined Energy Thermal Coal A combination of positive Asian thermal coal market developments. MCIS. according to McCloskey Coal. WEFA. which should help underpin coal prices into 2009. our expectations of increasing demand for all types of coking coal including PCI and semi-soft could see the removal of some of the current thermal coal production that can make the semi-soft coking coal grade requirements. rejecting the proposal by the terminal operators for a new system based on rail contracts.9 -3. TEX. Deutsche Bank Global Markets Research In addition we have also made significant revisions across the profile to semi-soft coking and low volatile pci coal prices. Chinese domestic term contracts are due to be settled Deutsche Bank AG/London Page 83 .6 -4. albeit producers are closely eyeing the export market given the differential between spot and contract prices.0 127 114 94 150 143 129 125 105 85 139 132 118 P remium hard co king co al Semi-So ft Co king Co al Standard hard co king co al Lo w Vo latilie P CI Co al Semi-Soft Coking Coal (US$/t) 80 58 62 93 80 72 Source: IISI. Figure 21: Seaborne coking coal trade vs prices 250 Mt 140 200 120 150 100 80 100 60 40 50 20 0 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E Hard coking coal price (RHS) 0 160 Seaborne coking im ports (LHS) Source: IISI.6 -2.
800kc NAR and while it would seem logical to expect higher exports given the strong Asian spot price at greater than US$90/t.9% in 2009. Strong demand from India in particular. Price developments during 2007 were all one-way traffic. and US$96/t in Europe.7% in 2008 to just over 600Mt and by a further 3. In October. Australian and Indonesian producers for 2008 deliveries with the Russian priced at US$80/t. Chinese export prices are currently close to US$100/t. Deutsche Bank Global Markets Research Spot prices increased from around US$52/t in January 2007 to close the year at US$90/t ex Newcastle. Key developments are highlighted below: • In March contract negotiations between Japanese utilities and Australia suppliers were settled +6% to US$55. China-Japan LT contracts for JFY2007 were partially settled at a price of US$67. +28% on the previous year.11 January 2008 Commodities Outlook shortly with but prediction that prices would be up by ($4. strong domestic demand and tightening rail capacity could keep exports relatively constrained. a lack of meaningful Russian supply growth and continued difficulties in getting tonnes out of South Africa all pushed prices higher. Deutsche Bank Global Markets Research Source: Reuters Page 84 Deutsche Bank AG/London . Philippines all showing stronger demand.9/t. according to McCloskey with >1Mt lost due to rail line closures while RBCT coal stocks are only 1.N ewcastle Source: CRU. +87% over the year. flat at around 67Mt. 2002 .7/t. South African exports. This is being driven almost entirely by stronger Asian demand growth with India. In Europe we see little growth in demand. Late 2007/early 2008 has not started well. In May.1Mt. Asian tightness has fed through to European spot prices topping US$95/t. Reuters. Figure 24: Global Import demand growth driven by Asia 500 Mt 12% Figure 25: Spot prices in Asia and Europe 100 US$ /t 400 10% 90 80 300 8% 200 6% 70 60 50 40 30 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E YoY % chg (RHS) Asian import demand for thermal coal 4% 20 Jan-02 N o v-02 Sep-03 Jul-04 M ay-05 M ar-06 Jan-07 N o v-07 fo b . Japan.2007 9000 Kt • 8000 7000 6000 5000 4000 3000 2000 1 000 0 Jan-02 A ug-02 M ar-03 Oct-03 M ay-04 Dec-04 Jul-05 Feb-06 Sep-06 A pr-07 • Source: CRU. Reuters. We expect global import demand to grow by +3. Recent export prices ex Qinhuangdao are being quoted in the US$9698/t range. We highlight this trend in the chart below. despite a strong performance in December. Xstrata settled mid year contracts with the JPU’s at US$78/t reflecting the continued run up in spot prices. Tonnage allocations were also cut reflecting lower availability.$7/t) which would mean a new QHD price for domestic coal in the mid-late 60s per tonne adjusted to an export quality of 5. Thailand. were again disappointing. For India in particular we see up to 15% YoY CAGR out to 2012 given coal shortages domestically. with only modest growth in North America.R ichards B ay fo b . AME highlighted Korea Western Power awarded contracts for 1Mt from Russian. In late 2007. • Figure 23: Chinese thermal coal net exports. China.
email@example.com Deutsche Bank AG/London Page 85 .willis@db. yet lower as supply conditions improve modestly.2 2. The table below is a summarised version of our global steam coal model following a full review and updated trade statistics. WEFA.FOB shipment 53 52 56 85 74 67 -9.4 512 558 582 604 628 651 502 570 587 606 630 655 2005 2006 2007E 2008E 2009E 2010E port) (JFY) Source: IISI.1 2.2 3. For JFY 2009 we lifted our forecast by 19% to USD74/t.11 January 2008 Commodities Outlook With tight conditions expected to continue into 2008 we have raised our contract price assumption forecast for JFY2008 to USD85/t which is +53% YoY and 33% higher than our previous assumption. Figure 26: DB Thermal Coal Supply/Demand Model Mt Supply of Internationally Traded Coal Demand for Internationally Traded Thermal Coal Internationally Traded Market Balance Newcastle Contract Japanese Guide Price (US$/t .1 5. We make no changes to our long term price forecast given the adjustments made in the previous quarter when we lifted our LT thermal coal price +32% to USD52. MCIS.com Rob Clifford (44) 20 754 58339 robert. Deutsche Bank Global Markets Research Tama Willis (44) 20 754 58170 tama. TEX.2 12.
IMF.2 India 0. IMF.8 Nickel consumption (Kg per capita) 1. IMF.6 0.4 China 0. CPM Group.0 1.5 Germany Sweden France UK Italy Venezuela MexicoRussia Thailand 0. IMF. Brook Hunt (2006) Figure 5: Nickel consumption intensity 2.4 1.5 Indonesia India Brazil China 0.5 South Korea 2. Brook Hunt (2006) Source: DB Global Markets Research. IMF.0 Japan Australia 1. IMF (2006) Figure 3: Aluminium consumption intensity 30 Aluminium consumption (Kg per capita) Germany South Korea 20 Taiwan Japan Italy 15 Sweden 10 Thailand China Venezuela France Russia UK Australia Figure 4: Copper consumption intensity 30 Copper consumption (Kg per capita) Canada 25 25 20 Korea 15 Taiwan US Sweden Germany Italy 10 Thailand Russia 5 China Indonesia Mexico India Brazil 0 0 10 France Japan Canada US Australia UK 5 0 0 Brazil Indonesia Mexico India 10 15 20 25 30 GDP per capita ('000) 35 40 45 50 5 20 30 GDP per capita ('000) 40 50 Source: DB Global Markets Research.0 0 Taiwan 5 Italy 4 3 South Korea Taiwan Thailand 1 India Indonesia Mexico Ven Russia China Brazil 5 10 15 Japan Canada UK Sweden 40 US 1.2 Italy 1.0 0. BP Yearbook (2006) Source: DB Global Markets Research.0 0 5 10 15 20 25 30 GDP per capita ('000) 35 40 45 50 Brazil Russia Australia Canada France UK US Germany South Korea Figure 6: Zinc consumption intensity 14 Taiwan 12 Zinc consumption (Kg per capita) Australia South Korea Japan 10 8 Germany 6 4 2 0 0 China Mexico Russia Thailand Brazil India Venezuela Indonesia 5 10 15 20 25 30 GDP per capita ('000) Italy France Sweden UK Canada Japan US 35 40 45 50 Source: DB Global Markets Research.0 Oil consumption per capita (gallons per day) US Figure 2: Gold consumption intensity 6 Gold fabrication demand (Kg per capita) Canada 2.11 January 2008 Commodities Outlook Commodities Chartbook Commodity consumption around the world relative to per capita income Figure 1: Oil consumption intensity 3. Brook Hunt (2006) Page 86 Deutsche Bank AG/London .0 2 Germany France Aus 20 25 30 GDP per capita ('000) 0 5 10 15 20 25 30 GDP per capita ('000 USD) 35 40 45 50 0 35 45 50 Source: DB Global Markets Research.6 1. Brook Hunt (2006) Source: DB Global Markets Research.8 0.
USDA (2006). IMF Deutsche Bank AG/London Page 87 . Brook Hunt (2005).11 January 2008 Commodities Outlook Commodities Chartbook Commodity consumption around the world relative to per capita income Figure 7: Iron ore consumption intensity 1200 Japan 1000 Iron Ore consumption (Kg per capita) Australia 800 Figure 8: Uranium consumption intensity 14 Taiwan 12 Uranium consumption (Kg per capita) South Korea South Korea 10 600 8 Germany 6 Canada Japan France Sweden 2 India Brazil China 5 10 15 20 25 30 GDP per capita ('000) 35 40 45 50 Russia US Venezuela Russia Taiwan Germany Sweden 400 China Brazil Italy France Canada UK US 4 200 India 0 0 5 10 15 UK 20 25 30 GDP per capita ('000) 35 40 45 50 0 0 Source: DB Global Markets Research. USDA (2006). USDA (2006). IMF Figure 11: Corn consumption intensity 400 350 corn consumption (Kg per capita) 300 250 Brazil 200 150 100 50 0 0 China Venezuela Thailand Indonesia India 5 10 Russia 15 20 25 GDP per capita ('000) 30 Australia 35 40 South Korea Japan Taiwan Mexico Figure 12: Wheat consumption intensity 400 Wheat consumption (Kg per capita) Canada 350 300 Australia Canada 250 200 150 100 50 0 0 Venezuela India Indonesia China Mexico Brazil Thailand 10 20 Korea Japan Taiwan 30 40 50 US Russia GDP per capita ('000) Source: DB Global Markets Research. IMF Source: DB Global Markets Research. (2006) Figure 9: Meat consumption intensity 45 US 40 Meat consumption (Kg per capita) Brazil Australia Canada Figure 10: Sugar consumption intensity 60 Brazil Australia Sugar consumption (Kg per capita) 50 Mexico 35 30 25 20 15 10 5 0 0 India China Mexico 40 Venezuela Canada Russia Thailand Taiwan Korea US 30 20 Indonesia India Japan China South Korea Japan 10 Taiwan 0 10 20 30 GDP per capita ('000) 40 50 0 5 10 15 20 25 30 GDP per capita ('000) 35 40 45 50 Source: DB Global Markets Research. IMF Source: DB Global Markets Research. IMF Source: DB Global Markets Research USDA (2006).
IMF Figure 3: Industrial metal prices relative to per capita income 45 40 35 30 25 20 15 10 5 0 1970 1975 1980 1985 1990 1995 2000 2005 1 0 Figure 4: Lead & tin prices relative to per capita income 9 8 7 Number of tonnes G7 per capita income divided by lead and tin prices Tin Lead 80 70 Number of tonnes 60 50 40 4 3 2 1 0 1970 1975 1980 1985 1990 1995 2000 2005 30 20 10 0 G7 per capita income divided by respective metal prices Copper Zinc Aluminium Nickel (rhs) 7 6 5 4 3 2 6 5 Source: DB Global Markets Research. IMF Figure 5: Grain prices relative to per capita income 20000 18000 16000 Number of bushels 14000 12000 10000 8000 6000 4000 2000 0 1972 1977 1982 1987 1992 1997 2002 2007 Figure 6: Coal prices relative to per capita income 1200 1000 800 Tonnes G7 per capita income divided by grain prices Corn Wheat G7 per capita income divided by coal Corn: 1970-2007 avg ` Wheat: 1970-2007 avg 600 400 200 0 1970 1970-2007 average 1975 1980 1985 1990 1995 2000 2005 Source: DB Global Markets Research. IMF Page 88 Deutsche Bank AG/London . IMF Source: DB Global Markets Research. IMF Source: DB Global Markets Research.11 January 2008 Commodities Outlook Commodities Chartbook Commodities relative to G7 per capita income Figure 1: Crude oil prices relative to per capita income G7 per capita income divided by the price of oil 3000 Number of barrels of oil 2500 2000 Ounces Figure 2: Gold & silver prices relative to per capita income 120 100 80 60 ` 40 2000 20 0 1972 1977 1982 1987 1992 1997 2002 2007 1000 0 Ounces 4000 1970-2007 average 3000 G7 per capita income divided by precious metal prices Gold Silver 7000 6000 5000 Oil price decline helps to boost the purchasing power of a G7 consumer 1500 1000 500 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 Higher oil prices cut the purchasing power of a G7 consumer Source: DB Global Markets Research. IMF Source: DB Global Markets Research.
0 0. soybeans & wheat 180 160 140 120 Days of use 100 80 60 40 20 Corn stock-to-use ratio Wheat stock-to-use ratio Soybean stock-to-use ratio Total available stocks divided by daily consumption 1200 9 800 6 400 3 0 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07 0 3Q87 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Reuters. DB Global Markets Research Figure 5: Zinc stock-to-consumption ratio 2000 Kt Total comm ercial stocks (lhs) 1600 Stock to consumption ratio (rhs) Long-term equillibrium ratio (rhs) 12 15 Weeks 18 Figure 6: Corn. DB Global Markets Research Source: DB Global Markets Research. DB Global Markets Research Figure 3: Copper stock-to-consumption ratio 2500 Kt Total com m ercial stocks (lhs) Stock to consum ption ratio (rhs) 2000 Long-term equillibrium ratio (rhs) 10 Weeks 12 Figure 4: Nickel stock-to-consumption ratio 300.11 January 2008 Commodities Outlook Commodities Chartbook Commodity inventory-to-use ratios Figure 1: Crude oil 27 US crude inventory cover of refinery runs (days) Figure 2: Aluminium stock-to-consumption ratio 6000 Kt Total com m ercial stocks (lhs) Weeks Stock to consum ption ratio (rhs) 5000 16 14 12 4000 10 8 6 4 1000 2 0 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07 25 Long-term equillibrium ratio (rhs) 23 3000 21 2000 19 17 0 15 1995 1997 1999 2001 2003 2005 2007 3Q87 Source: DB Global Markets Research. USDA Deutsche Bank AG/London Page 89 . EIA Source: Reuters.0 12 150. INSG.0 8 100. ILZSG.0 3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 4 Kt Total com m ercial stocks (lhs) Long-term equillibrium ratio (rhs) Stock to consum ption ratio (rhs) 16 Weeks 20 8 1500 6 1000 4 500 2 0 3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 0 3Q07 0 3Q07 Source: Reuters.0 250.0 50. WBMS. DB Global Markets Research Source: Reuters. ICSG.0 200.
Bloomberg Figure 5: Lead & tin prices in real terms 4000 Deflated by US PPI Figure 6: Corn & wheat prices in real terms 35000 30000 25000 20000 USD bushel 15 Corn price in real terms (2005 US dollars) 20 Deflated by US PPI Wheat price in real terms (2005 US dollars) Real lead price (2005 US dollars. rhs) Real tin price (2005 US dollars. rhs) 80 70 60 50 60 50 40 30 400 800 40 600 30 20 10 0 1974 1978 1982 1986 1990 1994 1998 2002 2006 20 10 0 1960 200 0 1970 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: DB Global Markets Research. IMF. IMF. Bloomberg Source: DB Global Markets Research. lhs) Real silver price (2005 US dollars.11 January 2008 Commodities Outlook Commodities Chartbook Commodities prices in real terms Figure 1: Crude oil prices in real terms 90 80 70 1000 Figure 2: Precious metal prices in real terms Deflated by US PPI 1400 1200 Real crude oil price (2005 US dollars) Deflated by US PPI Real gold price (2005 US dollars. Bloomberg Figure 3: Aluminium & zinc prices in real terms 6000 Figure 4: Copper & nickel prices in real terms 50000 Deflated by US PPI Real copper price (2005 US dollars) Real nickel price (2005 US dollars) Deflated by US PPI Real copper price (2005 US dollars) 5000 40000 Real nickel price (2005 US dollars) 4000 30000 3000 20000 2000 1000 10000 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Source: DB Global Markets Research. Bloomberg Page 90 Deutsche Bank AG/London . IMF. IMF. Bloomberg Source: DB Global Markets Research. lhs) 3000 2000 ` 1000 15000 10000 5000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 0 10 5 0 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: DB Global Markets Research. IMF. Bloomberg Source: DB Global Markets Research. IMF.
11 January 2008 Commodities Outlook Commodities Chartbook Commodity Forward Curves Figure 1: WTI crude oil forward curve Figure 2: Aluminium forward curve January 2008 January 2008 June 2007 September 2007 June 2007 September 2007 Source: DB Global Markets Research Source: DB Global Markets Research Figure 3: Copper forward curve Figure 4: Nickel forward curve January 2008 June 2007 September 2007 January 2008 June 2007 September 2007 Source: DB Global Markets Research Source: DB Global Markets Research Figure 5: Zinc forward curve Figure 6: Wheat forward curve 950 900 850 800 750 June 2007 Wheat forward curve Jan 2008 700 650 September 2007 January 2008 Dec 2007 600 550 Sep 2007 500 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Source: DB Global Markets Research Source: DB Global Markets Research Deutsche Bank AG/London Page 91 .
inverted rhs) 60 15 25 35 50 45 Figure 4: Devon Energy Corporation-CDS spreads and the US natural gas price 110 100 90 80 70 4 6 8 5Y CDS spread (bp. lhs) Oil prices (WTI USD/bbl. CDS spreads and the US natural gas price 70 60 35 45 5Y CDS spread (bp. Inc. inverted rhs) 0 2 40 55 65 75 60 50 40 30 20 10 12 14 16 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 30 20 85 10 95 10 0 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 105 0 Jan-03 Source: DB Global Markets Research Source: DB Global Markets Research * A credit default swap allows one party to “buy” protection from another party for losses that might be incurred as a result of default by a specified reference credit (or credits). and the “seller” of protection agrees to make a payment to compensate the buyer for losses incurred upon the occurrence of any one of several specified “credit events. inverted rhs) 2 4 6 8 10 12 14 16 Jan-08 50 40 30 20 20 10 0 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 85 10 95 105 0 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: DB Global Markets Research Source: DB Global Markets Research Figure 2: Conoco Phillips CDS spreads and the WTI crude oil price 70 5Y CDS spread (bp.11 January 2008 Commodities Outlook Commodities Chartbook Credit Focus: Energy Crude oil price vs. CDS spreads Figure 1: Occidental Petroleum CDS spreads and the WTI crude oil price 80 70 60 50 55 40 65 30 75 5Y CDS spread (bp. lhs) US natural gas price (USD/mmBtu. CDS spreads US natural gas price vs. The “buyer” of protection pays a premium for the protection. lhs) US natural gas price (USD/mmBtu. lhs) Oil prices (WTI USD/bbl.” Source: Moody’s Page 92 Deutsche Bank AG/London . inverted rhs) 25 15 Figure 3: Burlington Resources.
CDS Spreads Figure 1: Alcoa CDS spreads and the LME aluminium spot price 80 70 60 50 40 2.000 3.550 30 20 10 Jan-05 2.000 4.800 2.000 26. inverted rhs) 2.000 9. inverted rhs) 120 2. lhs) Gold spot price (US$/troy ounce.050 3.000 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Copper spot price (USD/metric ton. inverted rhs) 1. lhs) 256 226 196 166 5.000 60 42.000 15 10 Jan-05 820 20 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: DB Global Markets Research.800 3. inverted rhs) 320 420 100 40 35 30 25 520 620 720 20 40 50.000 1. The “buyer” of protection pays a premium for the protection.050 1.” Source: Moody’s Deutsche Bank AG/London Page 93 . LME * A credit default swap allows one party to “buy” protection from another party for losses that might be incurred as a result of default by a specified reference credit (or credits).000 76 46 16 Jan-05 8.000 10.000 18. LME Source: DB Global Markets Research.000 Figure 4: Barrick Gold CDS spreads and the gold spot price 55 50 45 Barrick Gold 5Y CDS spread (bp.550 1.11 January 2008 Commodities Outlook Commodities Chartbook Credit Focus: Metals & Mining Metals Commodity Prices vs.300 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Alcoa 5Y CDS spread (bp.300 Figure 3: Phelps Dodge CDS spreads and the LME copper spot price 286 Phelps Dodge 5Y CDS spread (bp.000 Source: DB Global Markets Research.300 1. lhs) Nickel spot price (USD/metric ton. lhs) Aluminium spot price (USD/metric ton.000 80 34. LME Figure 2: Inco CDS spreads and the LME nickel spot price 140 Inco 5Y CDS spread (bp.050 2.000 136 6. and the “seller” of protection agrees to make a payment to compensate the buyer for losses incurred upon the occurrence of any one of several specified “credit events. LME Source: DB Global Markets Research.000 106 7.
lhs) Nickel spot price (USD/tonne. USD/tonne. rhs) 70000 60000 50000 40000 30000 20000 10000 Figure 5: Newmont Mining stock price and the gold spot price 80 75 70 65 60 55 50 45 40 35 30 Jan-06 400 Jul-06 Jan-07 Jul-07 500 600 700 Newmont share price (lhs) Gold price (USD/oz. USD/tonne. rhs) Figure 6: Xstrata stock price and spot thermal coal prices (Asia & Europe) 90 80 70 60 50 40 30 20 10 Jan-06 Xstrata share price (lhs) API#2 Coal price (Cal 07. rhs) 900 800 Source: DB Global Markets Research Source: DB Global Markets Research Figure 3: Lonmin stock price and the platinum spot price 100 90 80 70 60 50 40 30 20 Jan-06 Jul-06 Jan-07 Jul-07 Lonmin share price (USD) Platinum price (USD/oz. lhs) Aluminium spot price (USD/tonne. rhs) 3500 3200 11000 10000 9000 8000 Source: DB Global Markets Research Source: DB Global Markets Research Figure 2: CVRD stock price and the LME nickel spot price 50 45 40 35 30 25 20 15 10 5 Jan-06 Jul-06 Jan-07 Jul-07 CVRD share price (USD. rhs) Figure 4: Freeport McMoRan stock price and the LME copper spot price 130 120 110 100 90 80 70 60 50 40 30 Jan-06 Jul-06 Jan-07 Jul-07 7000 6000 5000 4000 Freeport McMoran share price (USD. rhs) API#4 Coal price (Cal 07.11 January 2008 Commodities Outlook Commodities Chartbook Equity Focus: Metals & Mining Metals’ commodity prices versus stock market price Figure 1: Alcoa stock price and the LME aluminium spot price 55 50 45 2900 40 2600 35 30 25 Jan-06 2300 2000 Jul-06 Jan-07 Jul-07 Alcoa share price (USD. lhs) Copper spot price (USD/tonne. rhs) 1650 1550 1450 1350 1250 1150 1050 950 850 130 120 110 100 90 80 70 60 50 40 Jul-06 Jan-07 Jul-07 Source: DB Global Markets Research Source: DB Global Markets Research Page 94 Deutsche Bank AG/London .
00 10.00 2009 0.00 Q108 90 90 Q208 80 80 Q308 85 85 Q408 85 85 2007 72.60 1630 420 Q408 965 16.00 6. Source: DB Global Markets Research forecasts Precious Metals’ Price Forecasts USD/oz Gold Silver Platinum Palladium Q108 850 15.0 2012 9.00 18.0 2010 8.00 13.00 10.00 LT 46.75 Q408 125.00 22.8 2008 7.00 15.75 Q308 125.7 1540 405 2010 780 14.0 Figures are period average.00 81.00 Q108 0.00 Q208 14.00 16.00 75.00 2011 2012 LT - Figures are period average.00 2007 13.70 10.00 Q108 105.5 23.00 Q407 0.00 10.75 2012 65.00 10.0 LT 10.70 2008 11.4 1305 356 2008 909 16.000 13.00 4.0 Q408 7.00 21. Source: DB Global Markets Research forecasts US Refining Margins USD/barrel East Coast 2-1-1 Midcontinent Gulf Coast US GC Complex West Coast 5-3-2 Q108 9.00 3.00 12.75 3.00 14.00 4.50 2010 0.00 10.00 80.75 2008 119.00 4.00 10.00 LT 0.00 2012 79.00 9.50 Q208 120.00 19.00 4.00 10.0 Q208 7.00 LT 81.00 10.75 2010 95.00 2009 10.0 2011 9.00 2011 77.00 9.00 2010 75.50 1560 380 Q208 900 16.00 4.28 1623 410 2009 863 15.00 28.7 2008 85.00 4.00 21.20 1600 400 Q308 925 16.00 4.5 18.00 2009 80.4 72.00 2010 11.00 16.00 4.00 4.00 15.26 2007 97.00 10.00 Q408 10.00 21.00 79.0 1210 420 2012 600 10.0 2007 7.0 2009 8.00 2009 116.00 79.00 10.00 11.9 15.00 10.00 16.0 Q308 7.00 18.00 2011 0.50 2011 75. Source: DB Global Markets Research forecasts Deutsche Bank AG/London Page 95 .80 1700 440 2007 698 13.00 2007 -0.2 1400 410 2011 650 12.1 21.75 2008 0.00 Q208 0.00 2012 0.00 85.00 8.7 1150 405 LT 525 9.00 10.00 USD/mmBtu Natural gas U308 USD/lb Uranium Q108 8.00 18.00 Q308 12.00 1081 400 Figures are period average.00 18.00 23.00 10.11 January 2008 Commodities Outlook Price Forecasts Energy Price Forecasts USD/barrel WTI Brent Spreads (USD/barrel) WTI-Brent WTI-Maya Brent-Dubai Q307 0.
8 2641 121.0 2513 -10% 120.0 2205 -20% 147.5% 91 -12.8 29625 -10% 1265.0 4409 11% 150.0 27888 -2% 1110.0 30865 -5% 1325.0 17637 0% 115.0 7165 -2% 306.94 118 45% 130 10% 114 -12.5% 97 -15% 82 -15% 64 -22% 94 -19% 150 60% 150 60% 150 60% 99.0 2249 7% 97.5% 84 -15% 85 -19% 139 63% 139 63% 139 63% 90. Minor Metals & Mineral Sands Q108 Iron ore lump Australian export (JFY) (USc/dlt) Price change Iron ore fines Australian export (JFY) (USc/dlt) Price change Premium hard coking coal (JFY) (USD/tonne) Price change Standard hard coking coal (JFY) (USD/tonne) Price change Figures are period average.0 2359 22% 110.0 7055 -9% 335.9 3262 104.0 29211 -9% 1681.0 23149 35% 1000.0 1213 0% 50.5% 98 -12.8 1692 0% 65.5 9976 7% 400.0 2271 -21% 100.50 150 60% 143 -5% 129 -10% 113 -12.5 14716 21% 452.0 7275 8% 321.0 29762 -10% 1400.0 8378 0% 375.0 16094 22% 690. Source: DB Global Markets Research Q208 151 45% Q308 151 45% Q408 151 45% 2007 102.6 7091 325.5% 2011 124 -15% 2012 105 -15% LT 82 -22% 104 9.5 2326 3% 76.5% 79 -13% Page 96 Deutsche Bank AG/London .0 13228 18% 655.0 14330 23% 600.0 7716 0% 1300.0 3307 0% 114.8 2684 11% 110.0 2425 -21% 105.0 2315 -22% 103.7 14456 667.0 2800 2% 119.5% 118 45% 118 45% 118 45% 79.0 2381 -2% 102.0 2425 29% 82.0 5512 19% 230.0 2138 8% 117.2 2583 105.0 24471 23% 1050. Source: DB Global Markets Research forecasts Steel Making Raw Materials.0 6945 -11% 320.0 22046 39% 800.0 15212 20% 650.5 2304 -21% 95.5% 82 9.3 6752 12% 250.0 2535 0% 108.0 1433 0% 55.0 2425 5% 105.0 2315 14% 107.0 5071 15% 200.0 992 0% 315.5 2105 -7% 105.11 January 2008 Commodities Outlook Price Forecasts Industrial Metals’ Price Forecasts Q108 Aluminium US cents/lb USD/tonne Price revision Copper US cents/lb USD/tonne Price revision Lead US cents/lb USD/tonne Price revision Nickel US cents/lb USD/tonne Price revision Tin US cents/lb USD/tonne Price revision Zinc US cents/lb USD/tonne Price revision 110.00 139 63% 132 -5% 118 -10% 104 -12.0 2161 0% Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT Figures are period average and relate to the spot price.0 2205 0% 98.02 2008 151 45% 2009 166 10% 2010 146 -12.0 37060 1343.0 2646 -7% 125.0 8267 0% 350.0 28660 -15% 1350.5 2679 -4% 121.0 1808 0% 730.0 1102 0% 45.0 2756 -2% 127.0 2315 2% 100.0 8818 0% 380.0 7385 5% 330.
7 3.0 4.6 16.9 1.6 4.5 2.2 13.7 1.2 7.2 2.5 4.8 2.1 4.9 2.9 2.2 1.2 1.4 7.4 2.1 8.2 3.3 3.2 1.3 2.2 4.9 2.0 2.9 2.9 4.6 0.2 2.9 4.9 4.2 1.0 5.6 4.2 5.0 5.2 -5.7 4.2 1.8 4.8 3.8 6.0 5.4 2.2 6.1 6.6 3.7 2.6 -7.0 4.9 -0.9 5.6 5.2 3.4 5.5 13.8 New Zealand 1.6 6.1 1.3 5.0 6.2 1.8 3.1 25.1 2.2 3.0 2.7 1.0 -4.5 6.2 2.8 7.0 6.7 7.6 Romania 7.8 2.2 2.3 1.9 0.1 3.0 15.0 5.9 2.4 2.3 -5.9 1.5 14.7 0.5 -4.3 1.0 Asia (ex-Japan) China Hong Kong India Indonesia Korea Malaysia Pakistan Philippines Singapore Taiwan Thailand Vietnam Latin America Argentina Brazil Chile Colombia Mexico Venezuela World QUARTERLY GDP Q1 2006 US Japan Euroland Germany France Italy Spain United Kingdom Dollar Bloc Canada Australia New Zealand 4.0 3.8 -5.2 15.3 8.5 8.4 2.9 1.0 9.8 Israel 5.0 2.1 4.3 4.8 2.7 8.7 1.2 8.8 2.5 1.0 2.8 25.7 2.1 Kasakhstan 10.9 -7.2 1.3 3.4 -4.3 4.5 -8.3 2.3 1.5 2.2 6.6 2.9 -1.2 3.4 2.5 1.1 -9.5 2.7 2.3 2.2 3.3 6.3 Q1 2007 0.1 9.1 1.0 -2.8 1.1 3.2 3.8 4.2 2.7 3.0 4.5 3.4 10.0 3.0 15.8 1.6 4.3 3.7 10.2 2.7 Turkey 6.7 3.1 1.6 7.2 2.4 0.9 6.0 -0.9 5.5 2.5 8.0 -4.7 16.4 2.8 -12.1 1.5 -13.3 1.3 4.8 1.5 5.0 2.3 1.5 2.1 South Africa 5.5 6.9 -4.5 2.2 -5.0 1.3 2.0 9.5 Sources: Deutsche Bank Global Markets Research.8 Denmark 3.2 6.2 -10.7 2.0 2.2 -2.8 2.2 6.5 Q2 2008 2.6 1.5 -6.5 -1.2 5.5 4.0 2.1 5.3 0.6 -0.7 3.2 3.5 4.4 Q2 2006 2.9 4.8 -4.1 2.0 2.0 3.0 6.0 7.4 1.4 2.1 8.4 4.0 1.4 5.0 4.0 10.8 3.5 3.3 4.3 4.0 4.8 6.8 0.5 3.1 3.8 4.4 4.a.3 -0.6 5.3 5.3 -0.4 2.4 3.4 2.4 5.5 -2.2 2.5 7.5 1.7 7.0 1.3 2.2 -6.0 3.3 2.5 2.1 Current Account (% of GDP) 2006 2007F 2008F 2009F -6.8 2.5 9.7 -8.0 3.9 0.3 1.1 8.0 1.2 2.8 2.2 4.2 7.8 -9.2 2.1 1.0 3.5 9.0 2.7 Q4 2008 2.1 3.4 5.9 2.8 Australia 2.3 3.0 6.2 1.3 3.9 -3.2 2.6 2.0 1.8 3.1 -7.2 1.7 3.4 12.7 11.5 2.9 2.5 7.6 0.3 1.0 -3.4 3.8 2.4 -9.0 -0.6 8.6 4.6 Q4 2006 2.9 -7.8 1.0 2.0 6.5 3.0 3.0 7.5 16.6 -8.6 -4.5 2.5 3.5 5.0 4.7 2.3 3.3 15.0 2.0 2.2 Q4 2007 0.7 2.9 5.0 7.2 31.5 1.7 16.0 3.5 -4.6 1.1 2.2 1.3 1.6 13.3 17.7 -1.1 2.8 3.2 -13.9 2.9 3.9 1.2 -6.9 3.9 4.0 3.1 2.9 9.0 7.8 2.2 5.5 3.5 3.4 7.7 23.8 -9.5 1.2 6.0 4.3 1.7 2.8 6.3 11.3 3.2 -5.3 3.0 7.5 10.8 3.6 3.8 10.8 4.2 0.4 4.8 6.5 5.3 2.4 1.3 3.2 3. -5.5 1.8 0.4 -5.7 3.0 5.7 2.0 14.7 2.6 7.2 2.4 25.0 0.8 1.0 2.1 2.0 3.8 1.6 3.4 n.6 -0.6 2.8 5.2 1.9 3.7 1.8 3.0 6.3 6.5 4.3 4.1 5.4 3.5 2.3 5.2 5.5 2.3 1.4 3.2 -1.0 7.8 1.0 6.8 -1.5 6.7 1.9 10.4 4.1 2.0 5.7 1.7 3.3 -7. National Statistical Authorities Deutsche Bank AG/London Page 97 .0 7.2 1.8 2.6 -2.1 5.5 2.0 6.0 -3.9 1.1 -8. CPI (% yoy) 2007F 2008F 2.1 -2.8 2.4 0.6 14.3 8.5 2.3 1.0 1.3 2.6 -9.2 -3.4 0.6 0.7 4.6 2.7 1.5 4.9 17.4 2.2 -0.3 3.1 Hungary 3.8 2.3 1.4 2.11 January 2008 Commodities Outlook Global Economic Indicators US Japan Euroland Germany France Italy Spain Netherlands Belgium Austria Finland Greece Portugal Ireland Growth of real GDP (% yoy) 2006 2007F 2008F 2009F 2.3 7.9 3.7 5.3 2.8 1.0 2.6 4.6 2.2 4.8 9.7 -2.5 2.6 3.4 0.9 3.5 0.0 8.8 3.2 -2.7 8.8 3.3 7.3 0.3 4.9 Poland 6.8 2006 3.4 -3.2 -6.9 5.1 9.6 Q3 2008 2.9 1.0 2.3 2.0 2.3 3.9 4.0 5.5 1.6 6.6 -3.8 10.4 7.6 2.2 13.3 4.4 1.8 14.3 5.6 1.1 -3.8 2.2 4.0 3.5 1.0 1.4 3.3 5.3 3.1 -0.6 -13.4 -4.4 8.2 13.1 Other Industrial Countries United Kingdom 2.8 2.7 1.2 Czech Republic 6.2 1.7 2.5 4.6 3.9 2.3 3.5 1.4 5.3 3.5 11.2 1.0 4.0 2.3 -0.2 -4.1 3.5 6.7 2.3 2.4 2.9 2.5 5.2 Sweden 4.0 3.0 6.5 -3.0 7.0 1.8 -1.9 6.7 3.1 11.5 2.7 -0.1 4.6 -10.0 1.6 5.7 2.6 1.5 2.0 2.6 7.6 1.8 3.9 2.4 4.3 3.9 1.0 2.7 28.2 4.6 4.4 6.5 2.9 3.3 -3.3 2.9 -1.5 9.9 -4.0 -9.9 9.0 3.7 2.3 1.2 -8.4 2.8 8.8 -1.2 -1.4 5.1 1.4 4.9 1.4 2.2 4.2 4.0 14.2 2.9 4.6 -2.1 1.5 6.6 1.7 2.6 -0.6 1.9 3.3 5.3 -3.1 8.1 2.2 -2.1 1.0 1.1 5.0 2.2 2.4 4.5 3.9 3.9 3.3 -3.0 9.5 2.5 5.5 Canada 2.0 2.6 -8.2 2.1 3.6 2.6 1.3 3.7 2.6 5.7 3.5 Norway 2.7 1.3 -5.1 -12.7 Russia 6.1 5.0 5.9 (% qoq annualised) Q2 2007 Q3 2007 3.7 2.2 -11.3 9.8 -12.2 3.4 -4.4 1.3 -1.0 6.8 2.5 5.0 -1.3 6.1 3.8 1.9 1.1 Inflation.2 -0.1 1.1 -0.3 2.2 3.0 4.1 2.3 3.0 1.2 0.0 5.8 3.4 -4.7 11.6 2.1 2.2 -3.6 7.5 4.6 Emerging Europe/Africa Egypt 6.3 -4.5 6.3 3.9 4.3 1.1 Ukraine 7.1 3.9 4.1 2.9 -4.9 6.6 1.4 3.0 -3.4 0.2 -3.8 6.2 2.3 7.8 4.6 5.3 5.7 -4.4 6.0 17.7 7.0 1.8 7.3 3.9 21.9 5.7 2.0 1.4 4.2 3.7 5.0 3.2 -3.0 7.8 2.4 3.5 -3.3 3.1 Q3 2006 1.3 7.6 6.6 2009F 2.0 4.1 -4.2 Slovak Republic 8.2 2.0 1.6 3.5 -2.7 0.2 Q1 2008 1.6 7.3 4.1 Switzerland 3.
5 -0.a.a.75 2.7 2.0 -0.2 0.5 6.00 2.60 4.0 1.0 n.5 n.19 8.3 1.0 3.7 2.0 1.20 9.45 15.4 -0. 2012F 1.a.1 1.a.92 3.50 8.a. n.8 2.50 4.5 2.78 1.4 1.a.00 4.2 4.a.5 9.5 2.3 2.1 0.7 1.a. 3.0 n.a.4 10Y bond yields (eop) 2008F 2009F 2010F 4.1 3.3 4.14 8.5 1.1 4.a. n.5 3.8 3.50 3.80 3.a.a.1 0.40 1.71 1. 5.a.35 58.a. 1.5 1. 2.75 5.a.3 1.96 1.2 0.0 n.3 n.9 2.5 2.2 -0.6 6.55 n.4 2.7 3.3 1.00 4.7 3. n.a.25 7.a.74 2.25 11.75 4.2 1.00 2006 Industrial countries USA Japan Euroland United Kingdom Switzerland Canada Australia Emerging Markets Russia South Africa China India Indonesia Brasil Mexico 1.a.7 2.0 3.00 n. n.2 0.8 1.a.90 n.a.80 n.75 2011F 1.25 9.2 2.0 2.2 0.50 5.2 0.2 8.10 4.00 5.50 3. 1. n.0 4.6 3. n.7 1.00 5.5 2012F 2.4 1.25 6.0 2006 1. n.a.50 8.6 1.0 n.25 11.00 5.4 1.00 8. n.0 1. 2012F 4.a.a.30 4.7 8.2 2.75 5.3 1. n.0 9. n.3 1.5 n.4 2006 Industrial countries USA Japan Euroland Germany France Italy United Kingdom Switzerland Canada Australia Emerging Markets Russia South Africa China India Indonesia Brasil Mexico 5.5 1.8 7.50 3.a.9 7. 2.75 10.a.7 0.3 4.68 9. 6.6 1.a.00 6.5 8.9 1.4 1.15 0.00 5.0 n.00 5.00 6.11 1.a.00 4.a.79 34.2 1.a. 2012F 1.a.5 2. n.a.00 n.48 4.3 11.5 2.85 58.30 4.4 1.68 3. 6. 9.1 3. n. n.95 4.a.5 4.3 0.3 0.a.2 2.55 n.0 5.00 8200 2. 2.0 2011F 1.00 0.1 2.3 9.3 1.4 -0.50 3.8 0.5 4.50 3.8 2.5 2.a. % yoy 2008F 2009F 2010F 1. n.a.a.50 4.a.55 n.00 n.4 2006 4.3 1.2 8. 6. 2. n.4 1.0 3.1 2012F 2.a.3 0.5 1.1 2.a.90 24.50 8.00 n.50 5.05 n.67 1.4 1. FX rate vs. n. 2012F n.49 1.4 2.50 4.61 1.88 1.25 6.6 1.00 4.25 1. 2012F 1.2 1.4 2.8 1.a.5 2.0 GDP per head.a.7 1.32 1. n.2 1.0 7.68 34.a.a.40 1.a.a.05 1.6 1.a.0 2.5 0. 4.2 n.5 2.3 7.00 7.4 1.0 n.00 4.2 1.75 13.00 n.0 1.1 0. n.47 11879 2. n.1 0.5 2.00 4. n.75 4.5 3.a.00 4.5 -0.4 8.7 2.6 3.2 6.30 11.1 2007F 1.2 6.a.50 5.3 3.0 1.5 7.8 1. % yoy 2007F 2008F 2009F 2010F 2011F 1.50 2.12 1.0 1.95 7.a.0 1.2 7.2 0.60 8.3 1.3 1. 6.68 -0.3 0.3 1. n.00 4.00 9.7 1.50 6.7 1.a.7 1. n.00 8. n.00 4.5 6.a.75 4.00 2. 1.90 9. USD (eop) 2008F 2009F 2010F 1.25 6.00 4. n.5 1.4 10.7 1.0 1.92 3.36 39.a.23 44.5 1.35 1.25 6. n.6 2.3 GDP growth.25 6.7 4.8 3.00 n.75 1.41 6.a.00 8.50 7.00 8.9 2.7 2011F 2.0 3. 6.16 1.76 1.a.2 1.3 0.00 0.4 3.5 6.41 4.0 1.50 n.75 4.40 134 1.22 4.33 6.00 4.a.1 10. 2006 1.1 2.6 1.2 2.3 2.71 7.1 2.a.00 10.a.a.00 n.50 3.29 2007F 2. 6. % yoy 2008F 2009F 2010F 2.6 2.2 n. 2. 2007F 1.00 4.0 3.4 3. 3.50 3.a.80 3.4 9. n.3 2.1 2.6 3.50 8.a. n.6 9.75 5.00 n.0 -0.75 5.5 1. n.7 1.a.5 n.50 4.6 2.38 n.2 1.3 3.5 1.a.a.00 4.8 2. n.a.55 4.60 4. n.0 -0.1 0.5 -0.92 40.00 90 n.7 11.a. n.50 7.9 2. n.1 0.a.4 1.20 4.00 n.8 0. n.7 5.8 n.3 1.50 6.a.50 6.6 1.3 0.8 2.8 2.6 1.8 10.8 7.3 3.8 3.8 6.a.3 3.6 3.1 2.25 7.a. 9.0 9.25 2.4 0.2 1.4 1.8 0.2 0.8 1.0 10.a.a.56 43.09 5. n.2 1.02 1.75 11.75 3.50 n.3 0.4 9. 5.8 1. n.8 4.2 2.25 6.8 n.a.75 4.a. 2. n.00 85 1.14 7.2 0.45 2.0 4. 2011F n.00 7.57 1.4 1.84 15.5 -0.9 2.00 6.50 n.25 2.a.00 4.50 6.4 1.46 1.00 9.9 1. n.00 4.00 4.66 11.05 3.0 1.4 1.8 1. % (eop) 2007F 2008F 2009F 2010F 2011F 4.8 2.75 6.0 3.a. 9. n.00 11.8 3. 5.1 5.00 115 1.5 4.6 0.00 4.67 57. EUR (eop) 2008F 2009F 2010F 1.94 n.00 9.2 1.0 n.1 2. n. 8. 8.50 3.a. 2. n.50 n.50 8.1 0.40 1.30 4.a.0 1.5 -0.a.76 24.1 2. n.7 2.6 0.0 6.00 5. n.75 6.4 4.1 4.5 1. 4. % yoy 2008F 2009F 2010F 3.3 0.3 1. 2.75 4.0 2.70 12600 2.6 2.9 3.50 3. 2006 3.8 1.75 11.5 4.2 2.7 7.45 1.45 4.4 1.41 n.a.5 3. n.0 2.00 4. 1.9 1.5 4.0 -0.20 11.7 n. 24.13 13485 2. n.00 n.0 3.61 1. 7.0 -0.4 1.00 4. n.4 3.5 6.40 9020 2.3 1.7 4.75 6.00 5.0 11.00 9.a.74 1. n.a.0 0.8 2. n.4 2.a.3 7.4 1. n.7 0.1 2.25 6.75 9.75 4.50 n.2 3.3 0.0 4.2 4.7 5.a.0 2.4 2. 10.8 3.25 10. 3.5 6. n.5 4.25 0.5 7. n.90 4.78 32.79 26.5 1.00 8.a.a.50 8.6 Key official interest rate.05 5.20 4.88 10.a.a.25 5.35 115 1.50 3.00 4. 1.98 46.47 16.05 1.00 8800 2.a.1 0.a.5 7.a. n.10 11.a.8 n.25 0.2 4. 2012F 5. n.9 1. n.0 4.00 4. n.a.a.5 3.5 1.00 10.3 n. 1. DB Global Markets Research Page 98 Deutsche Bank AG/London .75 3.3 4.3 1.0 2.3 2.7 1.8 1.75 FX rate vs.0 n.8 7.00 7.2 10.4 7.a.5 1.3 1.69 56.6 1.3 2011F 2.a.4 1.25 4.75 9.a.0 4.25 8.2 0.a. 8000 n.a.7 n.00 2.a.2 3.a.00 2007F 1.8 1.4 2011F 5.00 4.0 4.6 2.7 2.5 -0.40 9300 1. n.50 2.3 5.2 2.7 1.25 n.75 4.55 n.7 2.4 1. n. 23.3 0.8 2. n.6 2.0 9.2 0. n.25 2.00 5.7 2.0 1.a.6 6.0 n.22 1.1 0.0 3.3 Population growth.78 24.7 1.00 5.8 2006 Industrial countries USA Japan Euroland Germany France Italy United Kingdom Switzerland Canada Australia Emerging Markets Russia South Africa China India Indonesia Brasil Mexico 1.a.9 1.0 0.2 1.61 35.3 1.24 11.01 8.1 0. n.8 1.2 8.a. n.1 2.00 n. 0.8 2.9 2.15 10. n.52 7.6 8.1 1.8 5.20 4.1 13.25 2. n.76 24.a.10 0.a.45 167 1.75 8.a. n.0 3.1 4.2 1.1 0.51 1.70 11.50 9000 1.2 2.4 2.8 1.5 0.25 1.a.0 -0. n.5 -0.25 3.3 0.a.47 1.5 n.4 9.00 0.a.7 2.2 0.3 1.a.1 0.8 3.3 7.5 1.8 8.86 44.0 1.8 1.04 0.2 2.75 4.8 1. n.3 0.75 10. n.3 0.00 119 1.5 -0. 7.32 157 1.53 10.00 3.5 -0.3 4.0 4.7 2.0 2.a.2 1.25 10.9 1.3 1.2 n.3 1.00 4.0 4.50 3.a.a.57 1.5 5.82 14. n.8 5.14 10.11 January 2008 Commodities Outlook Long Term Forecasts 2006 Industrial countries USA Japan Euroland Germany France Italy United Kingdom Switzerland Canada Australia Emerging Markets Russia South Africa China India Indonesia Brasil Mexico 2.5 2. n.7 5.8 1.50 3.8 0.1 5.19 8.a.00 6.41 4.a.3 0.a. Sources: National authorities.75 4.80 10.5 2.3 0.a.50 8.3 0.9 7.50 n. n.00 96 1.75 4. n.00 0.00 0.a.4 1.00 4.3 2.8 1.00 5.0 2.25 2.85 2007F 2.9 CPI inflation.00 2.a.a. 0.41 6.4 2007F 4.0 9.a.3 1.1 1.2 -0. 2.5 6.a.2 1.3 1.57 6. 1.a.4 7.50 4.a.8 7.3 1.7 2.75 5.2 8.a.20 8500 2.8 1.
DBLCI: Deutsche Bank Liquid Commodities Index – tracks six commodities. 18°C elsewhere. fuel oil CIF Rotterdam.65*EURUSD) HDD: Heating degree day – deficit of daily average temperature below 65°F in US. Barrel (bbl): liquid measure of 42 US gallons.Dark Spread = German power – coal/(2. Clean Spread: The spark spread minus the cost of emissions. usually over a month or season. UK Spark Spread: The spark spread represents the marginal value of selling UK electricity and buying UK natural gas for a gas fired power station. Reuters: DBLCI. Contango – Market condition in which forward prices increase as tenor increases. e. mmBtu: million British Thermal Units – Natural gas heatcontent measure. Fuel oil (FO) – Dense refined oil product used to fuel ships and generating stations. for NYMEX futures. usually cumulated over time. defined approximately as: PADD1 – East coast PADD2 – Midwest PADD3 – Gulf coast PADD4 – Inter-mountain west PADD5 – West coast Spark Spread: Price spread between electricity and the fuel (see also UK Spark Spread and German Dark Spread). 1000 cubic feet.jefferson@db. DBLCI-MR: DBLCI-Mean-reverting – rule-based variant of the above. and usually jet fuel and burning kerosene. HSFO: High sulphur fuel oil. Statistical arm of the US DOE.000 British Thermal Units. Oklahoma.6944 Therm: 100. rolling positions in crude oil and heating oil monthly. Bunkers – Fuel oil used to power ships. CDD: Cooling degree day – excess of daily average temperature over 65°F. and overweights those which are relatively cheap. Bloomberg: DBCM. corn and wheat once per year. aluminum. DOE: US Department of Energy. Distillate: Class of refined oil products including heating oil (aka gasoil) and diesel. South Africa. which releases weekly and monthly data. Often used as synonym for its EIA arm. Market standard UK Spark Spread = UK power – UK Natural Gas * 0. delivered Cushing.firstname.lastname@example.org. and in gold. coal FOB Richards Bay. approx. CAT: Cumulative average temperature. Insurance. Europe. or 0. ARA: Amsterdam-Rotterdam-Antwerp – major delivery hub for cargo entering Northwest Europe. Contacts Name Richard Jefferson Louise Kitchen Title Head of Commodity Sales. German Dark Spread: The spread between German power and coal -.g. e. Asia Global Head of Commodities Structuring & Sales Telephone 44 20 7547-7689 44 20 7547-5395 Email richard.1 mmBtu WTI: West Texas Intermediate – benchmark US crude oil. under-weights those commodities amongst the six which are expensive relative to their long-term average. EIA: Energy Information Administration. Crack – Price spread between crude oil and refined product (after the refining process of “cracking” large molecules to make smaller). Bpd: Barrels per day – measure for oil production or use.com Location London London Deutsche Bank AG/London Page 99 . and Freight – denotes commodity price delivered to destination. The sum of daily high + low)/2.com louise. CIF: Cost. Backwardation – Market condition in which forward prices decline as tenor increases. Henry Hub: Louisiana delivery point for NYMEX natural gas. Bcf: Billion cubic feet – macro measure of natural gas volume.11 January 2008 Commodities Outlook Glossary API: American Petroleum Institute – sets standards for specific gravity of crude oil. API#4 – TFS API#4 ® average price index for coal loading FOB Richards Bay. South Africa. API#2 – TFS API#2 ® average price index for coal delivered CIF ARA. LNG: Liquefied natural gas – can be shipped on specialpurpose tankers. PADD: Petroleum Area of Defense District – US regions for petroleum market data. FOB: Free on Board – denotes commodity price loaded and cleared for export at load port.
the highly correlated pairs (with a magnitude >=0.85) are shown with the darker grey. 0.0. -0.4.Page 100 Correlation Matrix 11 January 2008 Commodities Correlation Matrix Commodities Outlook Source: Deutsche Bank Deutsche Bank AG/London This Pearson moment correlation matrix is calculated from the daily returns of the 60 most recent business days’ data.4. The shading scheme is as follows: numbers in interval [-0.85] have a light grey background. This avoids severe consequences for those commodities with significant term structure. . numbers in [-0. where rolls introduce spurious jumps. which lower correlations.85.4] and [0.4] are unshaded. the first nearby futures contract is used. A roll adjustment is made by back-creating the price series according to the daily return of the prompt contract on the roll date. For most.
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