SEB's Commodities Monthly: Tight supply vs. shaky demand

8/4/2019 SEB's Commodities Monthly: Tight supply vs. shaky demand

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SEB Commodities MonthlyTight supply vs. Shaky demand

20 SEPTEMBER 2011





3

Commodities Monthly

General

Supplies of several key commodities are tight whileothers are priced towards the upper end of theircost curves and enjoy consequent support. Broad-

based commodity indices will be unable to movehigher until growth prospects stabilize while pricesclearly remain at risk if they continue to deteriorate.With European and US governments buried in debt,we expect them to use monetary rather than fiscalstimulus measures to counter current lacklustregrowth. Therefore, we still recommend holding gold,expecting it to move even higher due to further USmonetary initiatives and a final risk spike from Euro-zone debt issues. We also suggest adding longpositions for commodities in short supply such asBrent crude, copper and corn. We further adviseadopting short positions in commodities enjoying a

better supply situation including wheat and zinc toact as safety valves in case of a US double-diprecession, Chinese hard landing or completeEuropean disintegration.

Due to tight supply on several fronts commodity priceshave remained firm despite slowing global growthmomentum, resurgent risk aversion and a major sell-offin global equities since the beginning of June.Concurrently, precious metals outperformed the rest ofthe sector as US and global growth slowed, US sovereigndebt was downgraded by S&P, the US debt ceiling

debacle occurred, interest rates declined, expectationsfor QE3 rose sharply, and European debt markets ran riotas the region’s sovereign debt issues escalated evenfurther. Next best performer was the agricultural sectordue to price support from disappointing US crops andthe return of La Niña. This followed the hottest summerin the US Midwest since 1955 which drove projectedending stocks for corn to a post-1996 low. Third bestperformer was the industrial metals sector. Severalmetals are currently priced in line with the respectivecost curves of marginal producers while the copper priceremains well above that of the highest marginalproducer. The energy sector was the worst performerdue to bearish pressure on the landlocked US WTI crudeoil benchmark and lower US natural gas prices due tostrong domestic supply. Global benchmark Brent crudeand coal prices, on the other hand, remained stable.

OECD Leading Indicators released in September (basedon July data) suggest a further deceleration in economicactivity for all OECD regions as well as China withforecasts valid six months forward. The JPMorgan GlobalManufacturing PMI also indicates a further slowdown ingrowth including decreases in both output and neworders with the general index at its lowest level since

June 2009. Cumulatively, these factors suggestcontinued lacklustre growth in demand for commoditieswith industrial metals and energy most at risk if itdeteriorates substantially.

UBS Bloomberg CMCIUBS Bloomberg CMCIUBS Bloomberg CMCIUBS Bloomberg CMCI(price index, weekly closing)

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JPM global manufacturing PMIJPM global manufacturing PMIJPM global manufacturing PMIJPM global manufacturing PMI(monthly, PMIs >50 expansive)

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OECD composite leadinOECD composite leadinOECD composite leadinOECD composite leading indicatorsg indicatorsg indicatorsg indicators(monthly, 100 corresponds to long term trend growth in industrial production)

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Chart Sources: Bloomberg, SEB Commodity Research



4

Commodities Monthly

Crude oil

Disappointing supply growth and supply sidedisruptions have ensured a relatively unchangedBrent crude price despite slower growth momentum

and greater risk aversion. While Saudi Arabianproduction is at a 30-year high the IEA has loweredits non-OPEC supply growth forecast for 2011 by 0.9mb/d since May. Backwardation in the Brentforward curve to end-2016 exceeding 15%highlights global oil market tightness. Theresumption of Libyan oil exports in 2012 and slowergrowth in oil demand should relieve tensions onlyslightly. OPEC reserve capacity will remain too lowfor comfort given the risk of a geopolitically drivensupply disruption while non-OPEC supply growthcould continue to disappoint on the downside. Weupgrade our Q4-11 average Brent crude oil priceforecast from $105/b to $110/b due to prolongedsupply side disruption, while reiterating ourrespective 2012 and 2013 forecasts of $110/b and$115/b with mainly upside price risk provided the USavoids recession.

It remains unclear when Libyan oil supplies will resumedespite the imminent victory of rebel forces. Accordingto latest official estimates crude oil exports could restartin September with capacity increasing to 500,000-600,000 b/d within two months, and to pre-war levelswithin a year. These projections should however be

regarded as a best case scenario given the substantialdamage to infrastructure and potential booby traps leftby loyalist forces. Libya’s security situation is alsoinsufficient to permit the return of foreign oil sectorworkers en masse. In addition to benefiting from Libyansupply side factors, crude oil prices in general and Brentin particular will be supported by the Atlantic hurricaneseason peaking and low shipment rates, particularly fromthe North Sea. Even stabilization of global growth aroundcurrent levels would justify higher oil prices. Suchincreases are necessary to limit increases in emergingmarket demand and to provide sufficient incentives for

major investments in future supply, which are requiredsimply to maintain current supplies. Marginal crude oilproduction now includes unconventional extraction, justifying a price range above $100/b. In our opinion,high prices are necessary to buy time to increase energyefficiency and develop alternative energy sources. Inaddition, high geopolitical risk will persist as long aspolitical instability and civil unrest continue throughoutthe Arab world. Meanwhile Saudi Arabia requires oilprices to exceed $90/b in the short term and move wellabove $100/b in the longer to finance its costlypolitically-motivated economic concessions designed tostabilize the country.

Crude oil priceCrude oil priceCrude oil priceCrude oil price(NYMEX/ICE, $/b, front month, weekly closing)

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ICE Brent

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2011


Current global crude oil demand estimatesCurrent global crude oil demand estimatesCurrent global crude oil demand estimatesCurrent global crude oil demand estimates

2010

(mb/d)

Revision

(kb/d)

2011

(mb/d)

Revision

(kb/d)IEA 89.3 -210 90.7 -400

EIA 88.20 +10 89.59 -240

OPEC 87.99 -140 89.26 -180



5

Commodities Monthly

EnergyWTI futures curveWTI futures curveWTI futures curveWTI futures curve(NYMEX, $/b)

Brent futures curveBrent futures curveBrent futures curveBrent futures curve(ICE, $/b)

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GasolGasolGasolGasoline and distillate inventoriesine and distillate inventoriesine and distillate inventoriesine and distillate inventories(DOE, mb, weekly data)

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Chart Sources: Bloomberg, SEB C ommodity Research



6

Commodities Monthly

Nordic power

Most markets have traded lower on macroeconomicworries lately. The Nordic power market however hastraded lower for other reasons. Since mid 2008 the hydro

balance has been in constant deficit and hit a low ofalmost -50 TWh last winter. Low precipitation was themain factor but low availability of Swedish nuclearcapacity and colder than normal winter temperaturesalso contributed. Since then we have seen very largeamounts of rainfall. Consequently the hydro balanceshifted into a surplus as July turned into August and hasthereafter continued to strengthen to +10 TWh.

For a long time Nordic spot prices held firm, even duringholiday lows in consumption. Hydro producers managedto stay in control quite well but in the beginning ofSeptember pressure from heavy rainfall together with ahigh level of wind power generation lead to extensiveforced spilling of water. The system price hit a weekdaylow of €17.91/MWh whereas Norway came as low as€2.96/MWh before regaining foothold. The differencebetween Continental and Nordic spot prices is extremelyhigh and we expect it to continue that way. German spotprices trade between 50-60 €/MWh on weekdays.

In the forward market the prompt contracts made heavylosses as the market digested the very low spot pricesand wet weather forecasts. Longer dated contractshowever held rather firm on the back of relatively strong

oil, coal and gas prices even though emissions fellsharply in the end of July. At the time of writing, Q4-11 istrading at 45.60 €/MWh, Nordic Cal-12 at 46.00 €/MWhand German Cal-12 at 57.50 €/MWh.

Summing up the bearish factors we have: (1) Heavyprecipitation all over the hydro producing areas. BothNorway and Sweden have seen plenty of rainfall for aprolonged period. (2) Wet forecasts well above normalahead. (3) Hydro producers are under pressure. There isno use in saving water at this moment. (4) The hydrobalance has turned into a surplus of some 10 TWh. (5)

Stronger SEK and NOK vs. the EUR make CO2 cheaperfor Swedish and Norwegian players. (6) Lower Emissionsprices. (7) Bearish macro economics. Summing up thebullish factors we have: (1) German power prices wellover Nordic. (2) Upside risk on expected low nuclearavailability. (3) Stronger USD makes coal generatedpower more expensive for European players.

Though the shift to a hydrological surplus alreadyhas pushed the market lower longer dated contractsstill trade at historically high levels. All in all it webelieve bearish forces remain the strongest. In spiteof this there is a risk for price spikes due to the

significant nuclear outages.

NordicNordicNordicNordic power pricepower pricepower pricepower price(Nord Pool, €/MWh, front quarter, weekly closing)

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7

Commodities Monthly

Industrial metals

Copper supplies have continued to increase moreslowly than expected for several years. During thefirst five months of this year, growth in production

of primary copper was flat y/y and included asubstantial decrease in output in Chile and NorthAmerica. Consequently, copper prices remain veryhigh, easing only slightly despite a de-stockingdriven 21% y/y decline in Chinese imports ofunwrought copper and copper products, increasingglobal growth concerns and broad-based riskaversion. Other base metals have moved lowertowards the upper end of their respective marginalcost curves. While base metals remain at risk from ahard Chinese landing or OECD recession, they enjoysupport from both a high cost base and tight supply.For copper we see mainly upside risk as supplygrowth continues to disappoint, the fact that Chinawill eventually begin re-stocking and the highprobability that OECD demand has little furtherdownside. We recommend buying copper at $8500/tand nickel at $20000/t.

Our main scenario is that the US economy will avoid anew recession and that China will not face a hardlanding. Nevertheless, in the near term we remaincautious towards base metals due to the uncertain globaleconomic outlook. However, while there has beenvirtually no recovery in OECD demand since the financial

crisis began in 2008, we do not regard a furtherslowdown as necessarily catastrophic for the industrialmetal sector although such a development could have amajor impact on the Chinese economy by driving downthe country’s exports and potentially turning a softlanding into a hard one.

So far Chinese economic activity has cooled in an orderlyfashion with GDP growth levelling out at between 9-10%, slightly faster than desired but still stable. Inflationhas also shown signs of levelling out recently. Most otherindicators also suggest a continued lack of volatility.

Consequently, we believe initiatives to stimulate activitywill begin replacing current measures to tighten demandfairly soon.

However both the direct and indirect impact on industrialmetals of lacklustre OECD growth due to its effect onChina could be mitigated by stimulus efforts. As well asgenerally stimulating the economy, President Obama’sproposed $ 450bn job creation program includes at least$50bn in infrastructure projects that should encouragedemand for industrial metals. In addition, QE3 could alsobecome a reality before the end of the month withsimilar supportive efforts possible both in Europe and

certainly in China if conditions deteriorate further.

LME indexLME indexLME indexLME index(weekly closing)

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CopperNickel

Aluminium

Zinc

Lead

Tin

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8

Commodities Monthly

Industrial metalsAluminiumAluminiumAluminiumAluminium LMELMELMELME aluminium price and inventoriesaluminium price and inventoriesaluminium price and inventoriesaluminium price and inventories

(weekly data)

• Over the summer, aluminium prices have once again

fallen towards marginal production costs, in part at least

underpinning current price levels.• However, in current circumstances it is difficult to see

aluminium prices moving significantly higher again in theshort term.

• We would expect a more broad-based global economic

downturn to make aluminium very unattractive givenhow long it took to reduce supply during the 2008 crisisand the subsequent rapid increase in inventories.

• However, from a long term perspective aluminium is

becoming increasingly attractive approaching $2000/t.

• After decreasing slightly over the summer aluminiuminventories have increased to near record highs again.

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CopperCopperCopperCopper LME copper priceLME copper priceLME copper priceLME copper price and inventoriesand inventoriesand inventoriesand inventories(weekly data)

• As usual the copper market is plagued by supply side

issues with both labour market conflicts and adverseweather lending further support.

• During the first five months of this year, supply matched

demand almost exactly, while copper de-stocking byChinese producers has ensured no price spike.

• Going forward we regard copper as fundamentally very

attractive below $8500/t as we expect Chinese

restocking to intensify and the market to be in deficituntil at least late 2012.

• Global copper inventories have remained stable over thesummer while cancelled warrants and net speculativelongs in COMEX copper have decreased to their lowestlevels in over a year, a development which while ofconcern may also create upside potential when marketsimprove.

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NickelNickelNickelNickel LME nickel price and inventoriesLME nickel price and inventoriesLME nickel price and inventoriesLME nickel price and inventories(weekly data)

• The nickel market has been driven significantly lower by

global growth concerns, easing supply disruptions,sharply higher nickel pig iron (NPI) supply and newmining capacity coming online.

• Overall, we believe supply has caught up with demand

and that the market balance is moving into surplus.Growth in supply is likely to continue for several years.

• However, as marginal production costs for Chinese NPI

lies well above the current price due to power shortagesprices are unlikely to fall much below $20000/t.

• Nevertheless, sensitivity to the global growth outlook is

likely to be amongst the highest in the sector.

• Two significant wildcards affecting the nickel market areChinese NPI volumes and delays associated with highpressure acid leach technology (HPAL), the latter mainlya potential bull trigger.

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9

Commodities Monthly

Industrial metalsZinZinZinZincccc LME zinc price and inventLME zinc price and inventLME zinc price and inventLME zinc price and inventoriesoriesoriesories

(weekly data)

• Zinc performed relatively well during recent market

turbulence after underperforming vs. the LME index

since 2008 lows and range trading since late 2010.• However, the market remains in a substantial surplus

that is unlikely to ease before late 2012 leaving zincvulnerable to market weakness in the short- to mediumterm.

• We regard as probably temporary the apparent tendency

this summer for growth in LME zinc inventories over thepast few years to reverse given the underlying marketbalance. During the same period, cancelled warrantsrose significantly.

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SteelSteelSteelSteel LME steel billet price and inventoriesLME steel billet price and inventoriesLME steel billet price and inventoriesLME steel billet price and inventories

(weekly data)

• Chinese 62% iron ore prices have increased 6.1% since

the end of June to currently $177.9/t. However, we noteseveral concerns whether this in fact properly reflectsthe iron ore price as increasing volumes are traded bythose sourcing iron ore below reference prices anddistribute into China on behalf of large numbers ofproducers.

• Since the end of June LME 3-month steel billets haveclosed between $565-600/t and currently trade at

$577/t, an increase of 1% over the period.• Concurrently, European domestic shredded scrap prices

decreased by 4.2% while domestic European HRC fell8.4%. North American, Midwest HRC lost 10% to tradecurrently 22.5% off its March 2011 high.

• With ongoing global growth concerns we see little near

term price upside for ferrous metals.

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10

Commodities Monthly

Industrial metalsAluminiumAluminiumAluminiumAluminium futures curvefutures curvefutures curvefutures curve(LME, $/t)

Copper futures curveCopper futures curveCopper futures curveCopper futures curve(LME, $/t)

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Nickel futures curveNickel futures curveNickel futures curveNickel futures curve(LME, $/t)

Zinc futures curveZinc futures curveZinc futures curveZinc futures curve(LME, $/t)

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s e p - 1 3

d e c - 1 3

m a r - 1 4

j u n - 1 4

s e p - 1 4

d e c - 1 4

m a r - 1 5

j u n - 1 5

s e p - 1 5

11-07-15

11-08-15

11-09-16

Lead futures curveLead futures curveLead futures curveLead futures curve(LME, $/t)

Tin futures curveTin futures curveTin futures curveTin futures curve(LME, $/t)

2325235023752400

2425

245024752500

252525502575

26002625

26502675270027252750

o k t - 1 1

j a n - 1 2

a p r - 1 2

j u l - 1 2

o k t - 1 2

j a n - 1 3

a p r - 1 3

j u l - 1 3

o k t - 1 3

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a p r - 1 4

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o k t - 1 4

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a p r - 1 5

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11-07-15

11-08-15

11-09-16

27000

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32200

j u n - 1 1

j u l - 1 1

a u g - 1 1

s e p - 1 1

o k t - 1 1

n o v - 1 1

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m a r - 1 2

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m a j - 1 2

j u n - 1 2

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11-03-31

11-04-28

11-05-27




11

Commodities Monthly

Precious metals

We sharpen our short- to medium term bullish viewon gold as the European sovereign debt crisis islikely to trigger further strong risk aversion, interest

rate hikes will be postponed even further andliquidity will remain plentiful. Under currentcircumstances a long position in gold is highlyrecommended with a new real term record high($2300/ozt) apparently within reach. At this time ofyear it is often suggested that gold will be drivenhigher by seasonally strong demand. If this effectexists at all it is of little importance with seasonaldemand characteristics already well known andgold easily stored.

Arguably, the European sovereign debt crisis has so fardeveloped more along the lines of a worst case scenario

than anything else. Even the short term Greek liquiditycrisis remains unresolved with the expansion of theEuropean Financial Stability Facility (EFSF), necessary forthe second bailout, still needing to be approved by Euro-zone member state parliaments. After that, the mediumterm solvency crisis must be dealt with. Finally, long termstability must be ensured and growth achieved. Based oncurrent market pricing no one seems to believe this willhappen. Meanwhile contagion is spreading to “too big tosave” states such as Spain and Italy, and even to themost healthy areas of the Euro-zone through the bankingsystem. Eurobonds could provide a medium term

solution but this would at the same time represent ahuge leap towards a debt union. Lack of radicaldecisiveness among politicians remains significantthough the explanation probably lies in the fact that theirprimary goal is to be re-elected. We therefore expect atleast one more acute crisis before the political unitynecessary for resolute action can be achieved. In theprocess gold could easily hit a new real term record high.On this basis, the gold price could very well rise inparallel with the US dollar.

Even if credible solutions to OECD problems were to bepresented it is unlikely that gold would fall back muchfrom its current level. Over the past month OECD interestrate hikes have been postponed even further whileliquidity is likely to remain plentiful for a long time.Although the upside risk has decreased, in all mainregions inflation remains high relative to interest rates.Chinese inflation needs to be monitored closely. Despiterecently stabilizing at a high level there is some risk of itreaccelerating towards year end, the opposite wouldhowever be bearish for gold.. Next to a major increase ingold supply from mining companies, significantly higherreal interest rates will probably eventually signal the endof the decade-long gold rally. However, that situation is

unlikely just yet, especially as policymakers have hugeincentives to try to inflate away their respective debt.

Precious metal pricesPrecious metal pricesPrecious metal pricesPrecious metal prices(COMEX/NYMEX, indexed, weekly closing, January 2010 = 100)

8090

100110120130140150160170180190200210220230240250260

270280290

j a n - 1 0

f e b - 1 0

m a r - 1 0

a p r - 1 0

m a j - 1 0

j u n - 1 0

j u l - 1 0

a u g - 1 0

s e p - 1 0

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m a r - 1 1

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m a j - 1 1

j u n - 1 1

j u l - 1 1

a u g - 1 1

s e p - 1 1

SilverPlatinum

GoldPalladium

Gold to silver ratioGold to silver ratioGold to silver ratioGold to silver ratio(front month, weekly closing)

30

34

38

42

46

50

54

58

62

66

70

74

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82

86

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Gold and currencies vs. USDGold and currencies vs. USDGold and currencies vs. USDGold and currencies vs. USD

-12-10-8-6-4-202468

10121416182022

242628

GOLD EUR JPY GBP SEK RUB NOK CHF

YTD (%) MoM (%)




12

Commodities Monthly

Precious metalsGoldGoldGoldGold Gold priceGold priceGold priceGold price

(COMEX, $/ozt, front month, weekly closing)

• Our bullish gold market view has strengthened such that

we now consider it possible the precious metal will reach

a new real term record high ($2300/ozt) before easing.• The very limited short- to medium term downside risk

mainly concerns easing inflationary pressure whileprincipal long term risk involves a significant increase insupply from gold miners.

• Significantly, the $1500-1900/ozt rally was driven by

investments in physical gold, a fact well illustrated by theaccumulation of physical gold ETF holdings whichcurrently stand at 2153 tonnes after peaking at 2217tonnes in August.

• In August US gold coin sales also increased sharply to

their second highest level this year after relatively weaksales in June and July.

200300400

500600700

800900

10001100

1200

130014001500

16001700

18001900

2000

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SilverSilverSilverSilver Silver priceSilver priceSilver priceSilver price(COMEX, $/ozt, front month, weekly closing)

• Like gold, silver has benefited from a strong rally this

summer. However, while in current circumstances it isdifficult to be bullish gold without being bullish silvertoo, we regard the commodity as a less attractivealternative to its more precious counterpart.

• Although the gold/silver ratio has recovered fromextreme lows earlier this year, on an historical relativebasis it remains very depressed.

• While physical silver ETF holdings have also risen over

the summer to currently 14205 tonnes, they remain wellbelow highs posted during the silver rally earlier this year(15518 tonnes).

• US silver coin sales have remained largely in line with

their monthly average so far this year.2468

101214161820

222426283032343638404244464850

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Platinum & PalladiumPlatinum & PalladiumPlatinum & PalladiumPlatinum & Palladium Platinum and palladium pricesPlatinum and palladium pricesPlatinum and palladium pricesPlatinum and palladium prices(NYMEX, $/ozt, front month, weekly closing)

• Both platinum and palladium are struggling under

uncertain macroeconomic conditions with the slump in

auto demand during the 2008 crisis still fresh in the mindof the market.

• Still, auto production has recovered since the Japanese

earthquake.

• Macroeconomic concerns could provide attractivebuying opportunities in current volatile markets.

• If global growth stabilizes palladium and platinum will

represent good value at around $700/ozt and $1700/oztrespectively.

• Physical platinum holdings increased over the summer to

a new record high of 45 tonnes while those of palladiumcontinued to decrease to 60 tonnes.

• From an historical perspective, speculative longpositions in both metals are very high.

100

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2300Palladium (left axis)

Platinum (right axis)




13

Commodities Monthly

Precious metalsGoldGoldGoldGold futures curvefutures curvefutures curvefutures curve(COMEX, $/ozt)

SilverSilverSilverSilver ffffutures curveutures curveutures curveutures curve(COMEX, $/ozt)

1550

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o k t - 1 1

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a p r - 1 4

j u l - 1 4

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11-07-15

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11-09-16

38,0

38,5

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11-07-15

11-08-1511-09-16

Palladium futures curvePalladium futures curvePalladium futures curvePalladium futures curve(NYMEX, $/ozt)

Platinum futures curvePlatinum futures curvePlatinum futures curvePlatinum futures curve(NYMEX, $/ozt)

725

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11-09-16

Physical sPhysical sPhysical sPhysical silver and goldilver and goldilver and goldilver and gold ETPETPETPETP holdingsholdingsholdingsholdings(weekly data, tonnes)

Physical pPhysical pPhysical pPhysical palladium and platinumalladium and platinumalladium and platinumalladium and platinum ETPETPETPETP holdingsholdingsholdingsholdings(weekly data, tonnes)

1100

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f e b - 1 0

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s e p - 1 0

o k t - 1 0

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m a r - 1 1

a p r - 1 1

m a j - 1 1

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s e p - 1 1

Silver holdings / 10

Gold holdings

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j a n - 1 1

f e b - 1 1

m

a r - 1 1

a p r - 1 1

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j u n - 1 1

j u l - 1 1

a u g - 1 1

s e p - 1 1

Palladium

Platinum




14

Commodities Monthly

Agriculture

While remaining short term neutral we revise ourmedium term view on the agricultural sector frombearish to neutral due to the return of the La Niña

phenomenon. Given already low inventories inseveral agricultural markets, with corn the mostobvious, further adverse weather conditions wouldbe unwelcome. A new La Niña event will deferanticipated normalization of growing conditionsand a general recovery in inventory levels until atleast the medium term. However, with the UBSBloomberg CMCI agricultural sub-index returning torecord highs in late August and having range tradedsince early 2011 we see little further upside risk inthe sector due to substitution and demanddestruction. In addition, current increased risk of aneconomic slowdown in the OECD region weighs on

commodities generally. A double dip recessionwould also hit agricultural markets but to a lesserextent than industrial metal and energy markets.Still, temporary rallies in single commodities due toadverse weather conditions remain likely.

After only three months of neutral conditions the La Niñaphenomenon returned in August and is expected tointensify as the northern hemisphere winter approachesthough peak strength and duration are still very difficultto forecast. Historically, weak La Niña events have oftenfollowed after stronger ones. The potential magnitude of

a La Niña’s impact (as closely monitored by the USNational Oceanic and Atmospheric Administration -NOAA) is defined as the extent of the deviation fromnormal surface water temperatures in the equatorial areaof the Pacific Ocean. This is the most accurate means ofcalibrating the scale of disturbance in global interactionbetween oceans and atmosphere known as El NiñoSouthern Oscillation (ENSO). Since mid-2009 agriculturalmarkets have been seriously impacted by crop failurescaused by one El Nino and one La Niña cycle (the hot andcold cycles of the ENSO respectively) culminating in thebroad rally in H2-2010.

With the northern hemisphere wheat harvest coming toan end markets are refocusing on the extremelyimportant US corn and soybean harvest beginning inOctober. After cold and wet weather during planting anda summer heat wave considerable uncertainty remainsregarding potential yields. Due to delayed planting frostcould adversely affect later harvesting. Further, USwinter wheat planting (starting soon) will be closelymonitored with far more rain required following thissummer’s exceptional drought.

GGGGrains pricesrains pricesrains pricesrains prices(CBOT, indexed, weekly closing, January 2010 = 100)

70

80

90

100

110

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130

140

150

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190

j a n - 1 0

f e b - 1 0

m a r - 1 0

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j u l - 1 0

a u g - 1 0

s e p - 1 0

o k t - 1 0

n o v - 1 0

d e c - 1 0

j a n - 1 1

f e b - 1 1

m a r - 1 1

a p r - 1 1

m a j - 1 1

j u n - 1 1

j u l - 1 1

a u g - 1 1

s e p - 1 1

Wheat

Soybeans

Corn

Year end grain inventories (days of supply)Year end grain inventories (days of supply)Year end grain inventories (days of supply)Year end grain inventories (days of supply)(USDA, yearly data updated monthly)

45

55

65

75

85

95

105

115

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135

0 0 / 0 1

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1 1 / 1 2

Wheat

Soybeans

Corn

Chart Sources: Bloomberg, USDA, SEB Commodity Research



15

Commodities Monthly

AgricultureCornCornCornCorn Corn priceCorn priceCorn priceCorn price

(CBOT, ¢/bu, front month, weekly closing)

• If the US harvest lives up to expectations the corn market

will be relatively well balanced in the 2011/2012 season.

However, yield uncertainty is high due to late plantingand a heat wave during the sensitive pollination phase.Frost could also become an issue going forward.

• However, due to exceptionally low inventories the corn

market is very sensitive to additional disturbances which justify a high risk premium.

• Even if the upcoming US harvest exceeds expectations

we see few opportunities for building inventories, whilecorn is likely to continue to trade between ¢700-800/bu.

• Growth in demand for ethanol is very slow at the current

price despite blenders taking aggressive steps tocapitalize on the ¢45/gal subsidy scheduled to bediscontinued at the end of this year. Some feed demandis also being diverted to low quality wheat.

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WheatWheatWheatWheat Wheat priceWheat priceWheat priceWheat price(CBOT, ¢/bu, front month, weekly closing)

• The wheat market appears well balanced in the

2011/2012 season despite some higher quality tightness.

• The northern hemisphere spring wheat harvest has

peaked with realization of production estimates justifying a lower risk premium.

• Bearish pressure is also being exerted by the return ofBlack Sea region wheat to the market again after Russianand Ukrainian export restrictions were lifted.

• Meanwhile the southern US Great Plains remain indesperate need of rain before planting in October.

• The wheat market will probably continue to receive

support from substitution as expensive feed corn isreplaced by low quality wheat. CBOT corn trades aboveCBOT wheat, a situation not seen since the 1990s.

• Ample supplies of wheat relative to all other grains make

it the weakest in the sector.

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SoybeansSoybeansSoybeansSoybeans Soybean pricSoybean pricSoybean pricSoybean price ee e

(CBOT, ¢/bu, front month, weekly closing)

• US soybean yield expectations have been falling over the

summer due to unfavourable weather conditions in theMidwest. Inventories could therefore decreasesubstantially over the current season.

• The soybean complex has been relatively stable so farthis year compared to other grain markets. Soybeanshave range traded between ¢1300-1400/bu with ratiosto meal and oil relatively stable.

• Despite recent disappointing Asian demand, we expect a

recovery which together with potential loss of acreage tocorn indicates a relatively bullish outlook for soybeanseven if present prices limit demand growth.

• The soybean market outlook will become clearer over

the coming month as the northern hemisphere harvestand southern hemisphere’s planting season begin.

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2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1




16

Commodities Monthly

AgricultureCorn futures curveCorn futures curveCorn futures curveCorn futures curve(CBOT, ¢/bu)

Wheat futures curveWheat futures curveWheat futures curveWheat futures curve(CBOT, ¢/bu)

550

575

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625

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750

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11-07-15

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11-07-15

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Soybean futures curveSoybean futures curveSoybean futures curveSoybean futures curve(CBOT, ¢/bu)

SugarSugarSugarSugar(NYBOT, ¢/lb)

1250

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CocoaCocoaCocoaCocoa(NYBOT, $/t)

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17

Commodities Monthly

Commodity related economic indicatorsEUROZONE Current Date Previous Date NextIndustrial production (%, YoY) 4,2 2011-07-31 2,6 2011-06-30 2011-10-12

Industrial production (%, MoM) 1,0 2011-07-31 -0,8 2011-06-30 2011-10-12

Capacity utilization (%, sa) 80,9 2011-09-30 81,6 2011-06-30

Manufacturing PMI 49,0 2011-08-31 50,4 2011-07-31 2011-09-22

Real GDP (%, YoY) 1,6 2011-06-30 2,4 2011-03-31 2011-11-15

Real GDP (%, QoQ, sa) 0,2 2011-06-30 0,8 2011-03-31 2011-11-15

CPI (%, YoY) 2,5 2011-08-31 2,5 2011-07-31 2011-10-14

CPI (%, MoM) 0,2 2011-08-31 -0,6 2011-07-31 2011-10-14

Consumer confidence -16,5 2011-08-31 -11,2 2011-07-31 2011-09-22

USA

Industrial production (%, YoY) 3,4 2011-08-31 3,4 2011-07-31

Industrial production (%, MoM) 0,2 2011-08-31 0,9 2011-07-31 2011-10-17

Capacity utilization (%) 77,4 2011-08-31 77,3 2011-07-31 2011-10-17


Real GDP (%, YoY) 1,5 2011-06-30 2,2 2011-03-31

Real GDP (%, QoQ, saar) 1,0 2011-06-30 0,4 2011-03-31 2011-09-29

CPI (%, MoM) 3,8 2011-08-31 3,6 2011-07-31 2011-10-19

CPI (%, MoM, sa) 0,4 2011-08-31 0,5 2011-07-31 2011-10-19

OECD Composite Leading Indicator 103,4 2011-03-31 103,1 2011-02-28

Consumer confidence (Michigan) 57,8 2011-09-30 55,7 2011-08-31 2011-09-30

Nonfarm payrolls (net change, sa, ‘000) 0 2011-08-31 85 2011-07-31 2011-10-07

JAPAN

Industrial production (%, YoY, nsa) -3,0 2011-07-31 -1,7 2011-06-30 2011-09-30

Industrial production (%, MoM, sa) 0,4 2011-07-31 3,8 2011-06-30 2011-09-30

Capacity utilization (%, sa) 86,9 2011-07-31 86,4 2011-06-30


Real GDP (%, YoY, nsa) -1,1 2011-06-30 -1,0 2011-03-31

Real GDP (%, QoQ, sa) -0,5 2011-06-30 -0,9 2011-03-31 2011-11-14

CPI (%, YoY) -0,2 2011-08-31 0,1 2011-07-31 2011-09-30

CPI (%, MoM) 0,0 2011-07-31 -0,2 2011-06-30


Consumer confidence 37,5 2011-08-31 37,7 2011-07-31

CHINAIndustrial production (%, YoY) 13,5 2011-08-31 14,0 2011-07-31 2011-10-18


Real GDP (%, YoY) 9,5 2011-06-30 9,7 2011-03-31 2011-10-18

CPI (%, YoY) 6,2 2011-08-31 6,5 2011-07-31 2011-10-14


Consumer confidence 111,8 2011-07-31 108,1 2011-06-30

Bank lending (%, YoY) 16,4 2011-08-31 16,6 2011-07-31

Fixed asset investment (%, YoY) 25,6 2011-06-30 25,0 2011-03-31

OTHER

OECD Area Comp. Leading Indicator 103,2 2011-03-31 103,0 2011-02-28

Global manufacturing PMI 50,1 2011-08-31 50,7 2011-07-31

Sources: Bloomberg, SEB Commodity Research



18

Commodities Monthly

PerformanceClosing YTD

(%)1 m(%)

1 q(%)

1 y(%)

5 y(%)

UBS Bloomberg CMCI Index (TR) 1381,36 1,4 -0,5 30,6 19,5 39,6

UBS Bloomberg CMCI Index (ER) 1299,31 1,4 -0,5 30,4 19,4 28,8

UBS Bloomberg CMCI Index (PI) 1647,99 1,7 -0,4 33,1 20,7 66,7

UBS B. CMCI Energy Index (PI) 1515,31 5,1 0,1 17,5 20,0 36,1

UBS B. CMCI Industrial Metals Index (PI) 1205,00 -6,6 -1,1 22,5 9,6 18,2

UBS B. CMCI Precious Metals Index (PI) 2765,98 28,0 3,3 54,2 49,1 214,1

UBS B. CMCI Agriculture Index (PI) 1944,07 -1,1 -1,2 57,1 24,7 123,3

Baltic Dry Index 1814,00 1,1 38,9 1,1 -36,1 -57,4

Crude Oil (NYMEX, WTI, $/b) 87,96 -3,7 0,1 14,3 15,7 38,9

Crude Oil (ICE, Brent, $/b) 112,22 18,4 2,1 47,3 42,2 77,2

Aluminum (LME, $/t) 2380,00 -3,6 0,2 18,3 10,5 -1,9

Copper (LME, $/t) 8696,00 -9,4 -2,4 30,2 14,1 19,6

Nickel (LME, $/t) 21510,00 -13,1 1,0 6,4 -7,3 -15,6

Zinc (LME, $/t) 2159,00 -12,0 -1,1 17,3 0,7 -31,8

Steel (LME, Mediterranean, $/t) 582,50 2,2 2,6 45,6 18,3 N/A

Gold (COMEX, $/ozt) 1812,50 27,5 3,2 47,0 43,0 213,9

Corn (CBOT, ¢/bu) 692,00 10,0 -2,2 95,6 39,7 186,2

Wheat (CBOT, ¢/bu) 688,25 -13,3 -3,4 52,4 -5,3 75,4

Soybeans (CBOT, ¢/bu) 1355,50 -2,7 0,9 42,8 30,0 146,6Sources: Bloomberg, SEB Commodity Research

Major upcoming commodity eventsDate Source

Department of Energy, US inventory data Wednesdays, 16:30 CET www.eia.doe.gov

American Petroleum Institute, US inventory data Tuesdays, 22:30 CET www.api.org

CFTC, Commitment of Traders Fridays, 21:30 CET www.cftc.gov

US Department of Agriculture, Crop Progress Mondays, 22.00 CET www.usda.gov

International Energy Agency, Oil Market Report October 12 www.oilmarketreport.com

OPEC, Oil Market Report October 11 www.opec.org

Department of Energy, Short Term Energy Outlook October 12 www.eia.doe.gov

US Department of Agriculture, WASDE October 12 www.usda.gov

International Grains Council, Grain Market Report October 27 www.igc.org.uk

OPEC ordinary meeting, Vienna, Austria December 14 www.opec.orgSources: Bloomberg, SEB Commodity Research

Contact listCOMMODITIES Position E-mail Phone MobileTorbjörn Iwarson Global Head of

[email protected] +46 8 506 234 01

RESEARCH

Bjarne Schieldrop Chief analyst [email protected] +47 22 82 72 53 +47 92 48 92 30

Filip Petersson Strategist [email protected] +46 8 506 230 47 +46 70 996 08 84

SALES SWEDEN

Pär Melander Corporate [email protected] +46 8 506 234 75 +46 70 714 90 79Karin Almgren Institutional [email protected] +46 8 506 230 51 +46 73 642 31 76

SALES NORWAY

Maximilian Brodin Corporate/Institutional [email protected] +47 22 82 71 62 +47 92 45 67 27

SALES FINLAND

Jussi Lepistö Corporate/Institutional [email protected] +358 9 616 285 21 +358 40 844 187 7

SALES DENMARK

Peter Lauridsen Corporate/Institutional [email protected] +45 331 777 34 +45 616 211 59

TRADING

Niclas Egmar Corporate/Institutional [email protected] +46 8 506 234 55



19

Commodities Monthly

DISCLAIMER & CONFIDENTIALITY NOTICE

The information in this document has been compiled by SEB Merchant Banking, a division within Skandinaviska EnskildaBanken AB (publ) (“SEB”).

Opinions contained in this report represent the bank’s present opinion only and are subject to change without notice. All

information contained in this report has been compiled in good faith from sources believed to be reliable. However, norepresentation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents andthe information is not to be relied upon as authoritative. Anyone considering taking actions based upon the content of thisdocument is urged to base his or her investment decisions upon such investigations as he or she deems necessary. Thisdocument is being provided as information only, and no specific actions are being solicited as a result of it; to the extentpermitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this documentor its contents.

SEB is a public company incorporated in Stockholm, Sweden, with limited liability. It is a participant at major Nordic andother European Regulated Markets and Multilateral Trading Facilities (as well as some non-European equivalent markets)for trading in financial instruments, such as markets operated by NASDAQ OMX, NYSE Euronext, London Stock Exchange,Deutsche Börse, Swiss Exchanges, Turquoise and Chi-X. SEB is authorized and regulated by Finansinspektionen in Sweden;

it is authorized and subject to limited regulation by the Financial Services Authority for the conduct of designatedinvestment business in the UK, and is subject to the provisions of relevant regulators in all other jurisdictions where SEBconducts operations.

SEB Merchant Banking. All rights reserved.

SEB Commodity Research

Bjarne Schieldrop, Chief Commodity [email protected]

+47 9248 9230

Filip Petersson, Commodity [email protected]

+46 8 506 230 47



www.seb.se/mb

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SEB's Commodities Monthly: Tight supply vs. shaky demand