9 March 2012

The exuberance with which commodity markets greeted a much better run of economic data and the easing of sovereign debt concerns in early 2012 has faded, and growth-sensitive sectors such as base metals are now struggling to make much headway. The most important commodity theme right now appears to be the inexorable rise of geopolitical tensions and their effect on boosting oil prices as Iranian sanctions tighten a global oil market already desperately short of shockabsorbing capacity. At present, there seems little likelihood of easing tensions with Iran, which itself has a strong incentive to do whatever it can to ratchet oil prices higher – to offset the decline in its own revenues and simultaneously weaken the economies of its main western opponents. Consequently, we are raising our exposure to the energy sector, reducing it to base metals, are at market weight in precious metals and have a small underweight in agricultural commodities. By market, our main overweights this month are in Brent crude and gasoline, while we have much smaller overweights in copper, WTI crude, corn, soybeans and gold. Our largest underweights are in US natural gas, nickel, zinc, aluminium, coffee and sugar. Over the past month, the BCRI has matched the performance of the neutral portfolio (both gaining 2.3%). For the year-to-date, the BCRI is up 8.6%, 0.1% more than the neutral portfolio. So far in 2012, the DJ-UBS reweighted in line with the Barclays Capital Research rankings has gained 3.2%, outperforming the standard benchmark by 0.7 percentage points. Figure 1: BCRI performance since December 2010
125 120 115 110 105 100 95 90 01-Dec Commodities Research Index - Excess Return BCRI Base Portfolio Index - Excess Return 05-Feb 12-Apr 17-Jun 22-Aug 27-Oct 01-Jan 07-Mar Data to March 8th

Kevin Norrish +44 (0)20 7773 0369 Roxana Mohammadian Molina +44 (0)20 7773 2117 Sudakshina Unnikrishnan +44 (0)20 7773 3797

Source: Barclays Capital


2% 18.1 110.2% 9.7% outperformance since the BCRI was launched in late 2010).7% 8.6%. the BCRI is up 8.6% 8.6% 5.1% -7.0% -11. we overweighted Brent crude oil and gasoline.3% 11. Source: Barclays Capital Last month.2% -15.8% -4.9% 4.9% 7.8 7.9 93.6 115.3% 11.1% -1. two of the strongest energy markets Figure 3: Energy performed best since BCRI launch… Excess Returns since launch Energy Precious Metals BCRI Agriculture Industrial Metals -10% Source: Barclays Capital Figure 4: … and also did best since the last reweighting Excess Returns since last reweighting Energy BCRI Agriculture Precious Metals Industrial Metals -5% 0% 5% 10% 15% 20% -5% Source: Barclays Capital 0% 5% 10% 9 March 2012 2 .5% 11.3% 7.1% -4.1 95. the BCRI outperformed the neutral portfolio in three out of the four sectors we rank (Figure 2).4% -1.7% more than the plain vanilla version of the DJ-UBS (2.3% -1.5% 13.3% 8.5 2. Figure 2: BCRI performance statistics Change in index Since previous rebalancing (3-February-2012) Excess Return Date Index level year-to-date 2011 start of index Commodities Research Index BCRI Base Portfolio BCRI applied to DJ-UBS Standard DJ-UBS BCRI applied to S&PGSCI Standard S&PGSCI Sub Indices BCRI Energy BCRI Ind metals BCRI precious Metals BCRI Agriculture Base Portfolio Energy Base Portfolio Ind metals Base portfolio precious Metals Base Portfolio Agriculture 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 109.1% -4.7 111. 0. same as the neutral portfolio in which weights are held constant (Figure 2). the DJ-UBS reweighted in line with the Barclays Capital Research views returned 3.4 91.9% -5.4% 15.3% -0.2% 4.9% -6.2%. the BCRI is up 2.1% -1.4% 0.5% 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 08-Mar-12 118.1 98. Sub index performance does not include the impact of the relative sector weightings.3% -13.5% 0.4% -8.6 121.4% -2. Energy had the largest outperformance and the largest positive contribution to the BCRI return.4 116. mainly due to the markets’ rankings.5% 7.6% -4.1% 10.0% 8.5% 3.5 113. By sectors. which ended up being the weakest energy market. Also.2% Note: The BCRI was launched on 1 December 2010.Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 BCRI performance review Since last month’s Barclays Capital Commodities Research Rankings.3% -0.3% 2. So far in 2012.5% -1.8% -22.9% 11. 3 February 2012. At the individual market level. the BCRI outperformed the neutral portfolio in all the sectors except precious metals. 0.1 92.2% 2. we heavily underweighted US natural gas.3% -0.3% -22.6% -0.8% -0.1% more than the neutral portfolio.4 95. For the year-to-date.3%.4% 21.6% 16.6% -1.2% -5.3% -13.6% 10.

our relative overweight of platinum provided a small positive contribution to the BCRI performance since platinum was the precious metal market with the smallest fall. the DJ-UBS reweighted in line with the Barclays Capital Research views has outperformed the standard benchmark version. the outperformance was mainly the result of our market rankings. but the three markets that we overweighed fell relatively less. the sector with the second-largest positive contribution to the BCRI performance. but energy outperformed all other sectors (Figure 4). 0. Last. the DJ-UBS reweighted in line with the Barclays Capital Research views has outperformed the plain vanilla version of the index by 0. the DJUBS reweighted in line with the Barclays Capital Research views is down 0. At the sector level. and coffee. the S&PGSCI index reweighted in line with the Barclays Research views is up 4. our ranking of the sugar. 0. we underweighted energy relative to the other sectors. On the other hand.6%. was the strongest agriculture market. Within agriculture. On the other hand. The outperformance of the reweighted DJ-UBS relative to the benchmark is 2. corn and wheat markets contributed negatively to the BCRI performance. copper and lead. tin and zinc (the three markets that we underweighted) were the weakest base metals markets. whilst in fact base metals was the weakest sector overall. Barclays Capital 9 March 2012 3 .3% less than the standard version of the index. In base metals. last month we overweighed gold and silver relative to the PGMs. On the other hand. which we overweighed. and also to our relative overweight of gold within the portfolio. the other sector that contributed positively to the BCRI performance. precious metal was the only sector to underperform the neutral portfolio since the last reweighting of the BCRI. On the year-to-date.3% less than the plain vanilla version of the index. we overweighed base metals. This was mainly due to our strong overweight of the sector.Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 since the last reweighing of the BCRI. most of the outperformance came from our accurate ranking of the individual markets.7% since the BCRI was launched in late 2010. was the weakest. Since the last reweighting of the BCRI. Nickel. which we underweighted. All base metals markets have fallen since the last reweighing of the BCRI. Indeed. Gold ended up being the weakest precious metal market and contributed negatively to the BCRI performance. At the individual commodity market level. At the sector level.6%. We relatively overweighted aluminium. Figure 5: Performance of research-weighted indices relative to benchmarks 3% 2% 1% 0% -1% -2% Jan-11 Mar-11 May-11 Jul-11 Research weights indices underperform Sep-11 Nov-11 Jan-12 Mar-12 S&PGSCI DJ-UBS BCRI base portfolio Research weights indices outperform Source: Ecowin.7%. which ended up being the second-weakest commodity sector overall. Soybean.

2 December 2010. A ranking of five signifies a very strong market and one a very weak market. with the exception of US natural gas where the forward position refers to the next December point on the forward curve. in which we explain how these rankings are used in the under/overweighting of commodities within the BCRI relative to the neutral portfolio. The March rankings by commodity market and sector are shown below. Alternatively. Source: Barclays Capital Figure 7: Sector rankings Sectors Base Metals Energy Precious Metals Agriculture Source: Barclays Capital Ranking 3 5 4 3 9 March 2012 4 . for each of the base metals (except tin) and for each energy commodity excluding carbon. the analyst is able to select a forward deferred position. The daily performance of the BCRI is reported on Barclays Capital Live. Figure 6: Individual commodity market rankings Commodity Aluminium Copper Nickel Zinc Lead Tin WTI Crude Brent Crude Gas Oil Heating Oil Unleaded Gasoline Natural Gas Carbon EUA Carbon CER Gold Silver Palladium Platinum Coffee Cotton Sugar Cocoa Corn Soybeans Wheat Sector Base Metals Base Metals Base Metals Base Metals Base Metals Base Metals Energy Energy Energy Energy Energy Energy Energy Energy Precious Metals Precious Metals Precious Metals Precious Metals Agriculture Agriculture Agriculture Agriculture Agriculture Agriculture Agriculture Ranking 4 5 3 3 4 3 3 4 3 3 4 1 2 2 4 4 4 3 2 3 2 2 4 4 3 Front end TRUE TRUE TRUE TRUE TRUE N/A TRUE TRUE TRUE TRUE FALSE TRUE N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Note: The default position for all the commodities being ranked is at the front end of the curve which is represented with TRUE. with that position rolling forward to the next December position in October. For a more detailed explanation of the ranking methodology. see Launching the Barclays Capital Commodities Research Rankings.Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 March 2012 rankings The Barclays Capital Commodity Research Rankings reflect individual sector and market analyst views on the relative strength of fundamentals for each commodity. represented by FALSE. For each commodity the deferred position represents a rolling six-month forward exposure.

The exuberance with which markets greeted the better economic data and easing of sovereign debt concerns in early 2012 has already faded in commodities markets. This situation has been exacerbated by the impression that China may have overstocked in key base metals such as copper in late 2011/early 2012. the ability of the oil market to absorb supply shocks was far greater. if prices continue to rise. We think this third factor is likely to prove the most pervasive over the next month or so. that were a feature of late 2011. have been reduced somewhat.Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 March 2012 rankings commentary Sector ranking The key macro drivers of commodities so far this year have been three-fold. there seems little likelihood of easing tensions with Iran. both to offset the decline in its own revenues due to lower export quantities as the result of sanctions and to weaken the economies of its main western opponents. Thirdly. and it is notable that the growth-sensitive base metals sector has struggled to make much headway since its early January surge. a significant change to last month’s rankings when base metals was our top ranked sector. increasing signs that China will achieve a soft landing and an improvement in business confidence. especially in precious metals. Firstly. our main underweights. and we have raised our exposure to energy as a result. underweight in base metals (though modestly overweight copper) and underweight in agriculture (though with small overweights in corn and soybeans). Individual market rankings have changed little. We also have a bigger weighting to US gasoline and have moved from an underweight in WTI to a small overweight. The key change is a big increase in our overweight position in Brent. while our small underweights in gas oil and heating oil are now even smaller. which has been positive for all risk assets and has reversed some of the heavy liquidation of commodity positions. Energy We have made several changes to our energy weightings this month. Today. As a result. and more recently. At present. a brighter economic environment. are neutral in precious metals (though with a modest overweight in gold). comprising a stronger-than-expected flow of economic data out of the US. which itself has a strong incentive to do whatever it can to ratchet oil prices higher. which traditionally exhibits a high beta to global growth expectations. Consequently. in US natural gas and carbon. the steady receding of European sovereign debt contagion fears. High oil prices themselves are also generating concerns about global growth. and the changes result mainly from a higher sectoral ranking to energy. geopolitical risks have clearly provided significant upside risk to oil prices. In crude oil. Secondly. 9 March 2012 5 . though we are underweight US natural gas). the inexorable rise of geopolitical tensions and their effect in boosting oil prices as Iranian sanctions have tightened a global oil market already desperately short of shock-absorbing capacity in the form of either spare capacity or inventory. Meanwhile. These were the main drivers through January and were especially supportive for the base metals sector. the lack of buffers is having the opposite effect on price volatility and market sentiment. as discussed in the previous section. we are heavily overweight energy in our portfolio (especially Brent crude. In 2010. when spare capacity was almost 6 mb/d. we are altering our sectoral rankings this month to favour energy and precious metals. but extremely strong fundamentals have also played a part. these concerns will worsen.

the road remains difficult and the risk of this failing is not immaterial. at least in the short term. while the current strength in gasoline prices appears overdone. which remain very low. While we are maintaining our Q1 and 2012 annual price forecasts for both Brent and WTI. Equally. this is a market to be approached with some caution. with much of the decline in corn output already factored in. which has tightened supplies. with a proposal by the EC to reduce supply. Soybean fundamentals also remain positive on lower South American supply estimates and strength in US export demand. with ample 9 March 2012 6 . The end of winter could force some gas out of storage (for contractual reasons). European carbon is now highly exposed to policy developments.Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 OECD inventories are now more than 65 mb lower than the five-year average. in our view. On products. summer gasoline remains constrained. China) to geopolitical issues (eg. which is likely to send through significant volumes to Cushing. the weakness in supply has more than offset any demand weakness. We remain positive on Brent. which should continue to outperform WTI as US Midwest balances look heavy given the lack of infrastructure and growing production. which we have lowered. Old crop corn fundamentals remain supportive due to damage to the South American crop. what was global spare sustainable capacity of over 4 mb/d this time last year is not much higher than 1. then we would expect annual averages to be as much as $20 per barrel higher than currently forecast. strength in US export sales. with underweights in coffee. While we think it more likely than not the proposals will pass. the main changes to our weightings in agriculture this month come from the sectoral ranking. which would tighten US inventories in 2012-13. We remain bearish overall for US natural gas. with dry weather in South America due to the La Nina weather event tightening global supplies further. in North Sea. We expect South American supply estimates to be lowered. especially for soybeans. the USDA’s Agriculture Outlook Forum in February estimated flat y/y US soybean plantings in 2012. creating even weaker prices. Our main overweights are still in corn and soybeans. while the end of the winter demand juxtaposed with spring refinery maintenance makes us neutral on the middle distillates. this will provide some upside to the market. most of our agriculture weightings have been reduced. resulting in inventories falling further. Wheat. If the EC succeeds in being able to set aside a large volume of allowances from 2013. ranging from technical problems (eg.7 mb/d today. The combination of stronger-than-expected growth in Asian demand has more than offset weakness in the US. as the surplus created by still-growing supply and a significant overhang in storage continues to require gas to price well into coal prices to find new demand. Further. with European stocks at a 15-year low. As a result. In fact. a trend that has already started. in Syria. Agriculture As with energy. Yemen and Sudan) have curtailed a huge amount of supply. If the proposal fails. In the short term at least. should the steady deterioration in Iran’s external relations with no resolution in 2012 continue to force itself into the base case. sugar and wheat. Grains remain our favoured positive exposure across the agricultural complex this month. while a plethora of outages in non-OPEC supply centres. and inventory levels in the US. trying to make its way through the legislative channels. has weaker fundamentals than corn and soybeans. the market will fall again as the market has seen a bounce since the proposals have started to clear the regulatory hurdles.

while in China there are early indications of targeted easing in the property market. We are positive on copper fundamentals because even though the supply outlook is the strongest it has been in a long time. However. pushing the market into surplus. which we expect to be capped by Chinese NPI supply. and with early signs of targeted easing in the property market and an expected improvement in growth momentum. Although this could be a downside risk to prices. In other base metals. we see price downside as very limited given the proximity of prices to production costs. a lower sectoral ranking for base metals means that weights are lower across the board. We expect the metal surplus to persist and for stocks to rise to a record high this year. stocks both on the LME and in China are building fast and mine supply growth is strong. with supply prospects looking robust in key producers. which should help to stimulate activity in the low-cost/first-time buyer sector. we are relatively neutral. Russia and Thailand. The Indonesian export ban could have a significant effect on nickel fundamentals. cold weather that could lead to winterkill in key Black Sea producer regions and parts of Eastern and Western Europe for winter sown crops are a concern. We continue to view soft commodities less favourably than the grains. it would not come as a surprise to the market. Despite lower Brazilian output. In nickel. However. Record-high imports at the end of 2011 against a backdrop of softer demand suggest that import demand could weaken over the coming months. and our main underweights are in nickel and zinc. This will restrict the upside to prices. 9 March 2012 7 . Zinc and nickel are at the bottom of our rankings on the basis that they have the weakest fundamentals. the move to a larger surplus in 2011-12 is bearish for sugar prices. The US is undergoing a recovery. We have further repositioned our portfolio to reflect our expectations for the pricing environment for base metals to strengthen. In aluminium. as is India’s exportable surplus (we expect further exports to be given the go-ahead) and strong production prospects in key Northern Hemisphere producers such as the EU. Base metals Whilst there have been few changes to our metals rankings this month. supply is growing strongly and is expected to continue improving throughout the year. beyond near-term support on this news. We believe that copper is best positioned to capture further upside and have raised our ranking a notch. which bodes well for future metals consumption. though inventories in China have built. and we continue to view the market negatively on expectations of a hefty ‘on-year’ Brazilian crop weighing on prices and sentiment. we expect prices to come under further pressure. providing potential upside risk for prices depending on when and how it is implemented so it should be watched closely. we believe demand will improve. LME inventories are falling fast and cancelled warrants remain elevated. Our main overweight is still in copper.Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 feed wheat supplies and global inventories at all-time highs. Cotton has moved higher in a knee-jerk reaction to India (the world’s second-largest producer and exporter) imposing an export ban effective immediately. we still expect the deficit to persist and for stocks to fall further. Coffee prices have tumbled. a pick-up in global inventories and demand being lacklustre due to current macro fears abounding. The zinc market is in surplus. Economic data point towards an improved growth outlook.

Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 Lead demand in the US could receive a boost from the strengthening transportation market. Consequently. While the price floor remains fragile. Weaker Chinese tin imports and rising LME stocks have created a less price-supportive environment on the one hand. though we think that unlikely in the short term. Prices came under pressure in the past month as concerns about China’s growth materialised and the Fed’s comments failed to signal further quantitative easing. while discussions about further restrictions in Indonesian exports will provide support on the other. and the combination of the two has tightened the balance in the short term. when safety-related stoppages increased. Platinum has been driven higher by potential supply disruptions. Silver has also been boosted by investment demand. While some physical interest has emerged upon the sharp price correction. investment demand has turned positive. Precious metals Once again the main changes to our precious metals weights result from a downgrading of its sectoral ranking from last month. whereas ETP outflows had proved to be a drag on palladium prices last year. Our main underweight in precious metals is in platinum. and we are neutral in palladium and silver. as well as greater-than expected actual supply disruptions at the second-largest producer. underlying dynamics vary significantly across the complex. 9 March 2012 8 . but the portfolio is much less exposed to gold than it was last month. the elevated investor interest in platinum exposes prices to further profit-taking in the near term. Gold had been boosted by investor interest but sidelined the mixed physical market. silver maintains the scope to outperform gold should investment demand pick up. but the external backdrop remains gold-supportive. in contrast to Q4 11. Palladium’s underlying market trends have been supportive with our auto analysts raising their 2012 SAAR forecast for the US and ETP holdings rising to their highest since October. But now that Impala Platinum is looking to restart its operations. while in China stocks have fallen to very low levels following the ramp up of battery manufacturing plants. gold remains our main overweight. however. the cushion for prices has not proved to be solid thus far. and speculative positioning. Notably. Kevin Norrish Commodities Research +44 (0)20 7773 0369 Trevor Sikorski Commodities Research +44 (0)20 3134 0160 Sudakshina Unnikrishnan Commodities Research +44 (0)20 7773 3797 Michael Zenker Commodities Research +1 212 526 2081 Miswin Mahesh Commodities Research +44 (0)20 77734291 Suki Cooper Commodities Research +1 212 526 7896 Roxana Mohammadian-Molina Commodities Research +44 (0)20 7773 2117 Helima Croft Commodities Research +1 212 526 0764 Nicholas Snowdon Commodities Research +1 212 526 7279 Kate Tang Commodities Research +44 (0)20 7773 0930 kate.horsnell@barcap.Barclays Capital | Barclays Capital Commodities Research Rankings – March 2012 COMMODITIES RESEARCH ANALYSTS Barclays Capital 5 The North Colonnade London E14 4BB Gayle Berry Commodities Research +44 (0)20 3134 1596 Commodities Sales Craig Shapiro Head of Commodities Sales +1 212 412 3845 Martin Woodhams Commodity Structuring +44 (0)20 7773 8638 9 March 2012 9 .com Paul Horsnell Commodities Research +44 (0)20 7773 1145 Amrita Sen Commodities Research +44 (0)20 3134 2266 Shiyang Wang Commodities Research +1 212 526 7464 shiyang.croft@barcap.

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