GETTING PHYSICAL. Commodities are attracting attention in Asia like never before.

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1 GETTING PHYSICAL Long-time commodity powerhouse Goldman Sachs takes top spot in Asia Risk s first commodity derivatives survey. But the chasing pack is making its presence felt in the region, as more banks look to create a physical set-up in the sector. By Joe Marsh Commodities are attracting attention in Asia like never before. During the past 12 months, commodity prices almost across the board have hit historic highs. And dealers and brokers involved in the sector have reaped large profits in Asia, particularly from the in-pouring of investment capital. The banks are responding with aggressive hiring efforts and even indications they plan to move beyond their traditional strengths and trade physical commodities. So while Goldman Sachs which has long been one of the dealers to beat in this area comfortably tops the rankings, coming first in most categories, it may now be looking over its shoulder. An example of a securities dealer that has made major gains is Lehman Brothers. Having only set up a commodity business in mid-2006, it was runner-up to Goldman Sachs in crude oil and refined products. Other notable successes were Deutsche Bank s second place overall and in the structured products category; Standard Chartered s second spot in precious metals; and Credit Suisse s fifthequal placing overall with Merrill Lynch, a recognised commodities specialist, through its subsidiary Entergy-Koch. GFI, meanwhile, ranked as the top interdealer broker, while Man Financial was the top futures broker. Allan Marson, Singapore-based head of commodities for Asia at Goldman Sachs, puts the dealer s success down to two broad factors: a continued commitment to commodities in the region and massive experience in the sector particularly in energy worldwide. We ve been in the Asian commodity derivatives business for 20 years, he says. We started making the investment in Asia before it was quite as topical as it is today. What we all know and love about China today [its growth story and therefore demand for commodities] was not as obvious then. We ve had a vision and staying power. Another thing Goldman Sach possesses that many of its rivals don t is a strong physical trading presence to the extent that it even owns physical assets in the form of power plants, refineries and mines. This is particularly important in Asia, where the ability to trade the physical oil barrel, for example and not just financial oil swaps can provide a major advantage. That s because the region is Overall results Companies cited: 122 Ranking Dealers % of overall points 1 Goldman Sachs Deutsche Bank Société Générale Barclays Capital 4.6 5= Credit Suisse 4.3 5= Merrill Lynch Standard Chartered UBS Lehman Brothers JP Morgan 2.7 Ranking Interdealer brokers % of overall points 1 GFI TFS Icap 2.0 Ranking Futures brokers % of overall points 1 Man Financial Triland Sucden 0.5 C2 May Commodities

2 COMMODITY terms of sales to Goldman Sachs and Morgan Stanley, the acknowledged top commodity banks. Barclays Capital made around $1.5 billion in global commodity revenue in 2006, says a senior commodity source in Singapore. The UK bank would not comment, apart from to say that 2007 revenues were significantly higher than those the year before. As for Barclays Capital s strong showing in survey coming in fourth overall Norton attributes it broadly to the bank s depth of commodity coverage and products. Globally, we don t have one particular product area that dominates, he says. We re equally active across three broad groups: energy, including emissions; metals; and hybrids. Barclays Capital has had a commodity desk in Sydney since the late 1990s and opened its Asian commodity desk in Singapore in 2003, before which it had been servicing Asia from London. The We probably have the most option-based specialists relative to the whole team compared to all our competitors Simon Grenfell, Deutsche Bank still much more physically orientated than Europe and the US. You don t have the same developed financial commodity markets, says Marson. In Europe and the US you have, for example, the LME [London Metal Exchange] and Nymex [the New York Mercantile Exchange], which are massive trading liquidity centres. You don t have these same centres of gravity in Asia as you do in the West. So Asia tends to look to them for price setting. That s part of why having a physical presence and being able to deal in physical products is more important in Asia than in the US and Europe. Asia doesn t have the same paper market liquidity. This is something that will change, says Marson, but not quickly. There will be an Asian centre of liquidity [for commodities] in the next four to five years, but it s not here today and won t be in the next 12 to 24 months. For example, the commodity exchanges in India and China still only allow trading in their domestic currency, he says, while the Japanese market is still fairly localised, with only a few international traders. Physical advantages Other banks seem to recognise the importance of a physical presence, as several have plans to start physically trading oil the most liquid and established of the energy commodities in the coming months. Barclays Capital, JP Morgan and Lehman Brothers all intend to do so this year. Russell Norton, head of Asia commodities at Barclays Capital in Singapore, says the bank will start trading physical oil in May or early June. One major reason for doing so, he says, is to be able to provide more illiquid indexes to clients and more products generally. Sources agree that, globally, Barclays Capital is the closest rival in bank now has commodity desks in Beijing, Hong Kong, Singapore, Sydney and Tokyo, while London also looks after Asian clients six locations, up from four a little over a year ago, says Norton. The commodity sales and trading headcount has doubled in the past two years, he adds. Another established commodity derivatives dealer, Deutsche Bank, has also been aggressive in terms of hiring. Since Simon Grenfell joined from Macquarie in August last year as head of commodities for Asia, the regional trading team has doubled and the structuring team has more than trebled. And Grenfell plans to make two more hires this year. This may explain the German bank s overall placing. And its traditional strength as a derivatives and particularly options house is reflected in its second place in the structured products and base metal options categories. We probably have the most option-based specialists relative to the whole team compared to all our competitors, says Grenfell. Most of my team are options specialists. Such a focus is partly why Deutsche Bank unlike many of its peers does not intend to get into physical commodity trading any time soon. We won t do that in the immediate future, for two reasons, says Grenfell. First, we have such a strong derivatives presence and client base here, we can serve them better as real derivatives specialists. Second, with several other banks pushing to get into the physical side, it will be even more competitive, and the barriers to entry in terms of cost will rise even higher, he says. I don t see it as worth the risk for Deutsche Bank at the moment, says Grenfell. If the bank was to make a move in this direction, it would get into physical electricity and natural gas first in Asia, two of its areas of strength in C3

3 Europe and the US. But the bank will not be trading physical oil in the next year or so, he adds. Such caution is not unfounded. All dealers agree the cost of entry is prohibitive. And the issues are manifold from having all the appropriate licences to deliver or receive the physical commodity to owning storage facilities. Nonetheless, several dealers feel it is worth the outlay and effort involved. JP Morgan intends to make its physical oil debut later this year and has signalled its intent with some major hires, most notably that of Oral Dawe, previously co-head of Asia commodities at Goldman Sachs, in late April. Dawe comes in as chief executive of Asia-Pacific commodities in Singapore. Meanwhile, Lehman Brothers will start trading physical oil some time this year, possibly moving into physical coal after that. And Arun French bank has made most progress in the past year in the investment product area something reflected by its appearance among the top five dealers in the structured products category. SG has started offering products with underlyings other than those based on the typical energy and metals area, he says. These new areas include agricultural commodities, such as biofuel-related crops. There are also new investors with previous exposure to the forex and equity markets looking at commodities, adds Repka. As a result, the bank developed new payoffs and new types of indexation for commodity products, similar to those that have proven popular in forex and equity. However, hedging among institutional and corporate clients has proven slow, even on the metals and energy side. The percentage of corporates and institutions hedging is very small compared to the The percentage of corporates and institutions hedging is very small compared to the physical flows, so there is huge potential there Marc Lansonneur, Société Générale C4 Murthy, who joined Lehman Brothers as Asia head of commodities trading from Goldman Sachs in December, says he wouldn t rule out owning physical assets, such as storage and refineries, with a view to trading around the assets. Energy focus We are still primarily focused on energy, he says, adding that the US dealer has done particularly well in crude oil something borne out by the survey results. Murthy had previously traded all types of oil and refined products, and he s now looking to widen Lehman Brothers coverage. Going forward, the focus will be on expanding our footprint in the coal, metals, agriculture and carbon markets, Murthy says, adding that he sees some of the biggest growth potential in investor products. The number of commodities staff at Lehman Brothers has doubled in the past year to more than 20 in sales, trading and structuring across Australia, China, Japan and Singapore, says Murthy. Meanwhile, a more recognised name in the Asian commodity markets Société Générale (SG), winner of Asia Risk s energy/commodity derivatives house of the year award for 2007 came in third place overall and in the oil category. Francis Repka, Hong Kongbased head of fixed income, currencies and commodities, says the May Commodities physical flows, so there is huge potential there, says Marc Lansonneur, SG s head of commodity derivatives in Singapore. A major barrier blocking some hedging activities are regulations preventing access by foreign banks to local markets such as China and India. As for the question of trading physical commodities, SG has been active in metal markets in Asia for many years, but this is not a strategy it will definitely follow for energy, says Lansonneur. The cost of entry in oil, for example, is very high, he says. We are still looking at whether it makes sense to expand in physical energy products trading to create extra value for this trading and marketing model, and how it should be done say, through internal growth or partnership. A big issue is that to be physical you have to be global, says Lansonneur. You can t trade fuel oil only in Asia, for example. What s more, moving into physical trading means competing not only with banks, but also energy majors and smaller trading companies, he adds. UK bank Standard Chartered s physical trading business is limited to a gold business in Dubai, but it is looking at ways of expanding that business, says Michael Bass, Singapore-based global head of commodities. The bank has focused on building a derivatives capability to meet the needs of its customers, both for risk management and investor products, says Sean Mulhearn, head of commodities marketing in Singapore. Despite being a relative newcomer to commodity derivatives, Standard Chartered took second place in the precious metals category. Having sold its metals-trading arm, Mocatta, in 1997, the bank re-entered the business in mid-2006, says Bass. Since then we ve rolled out in three main areas: base and precious metals where we are particularly strong energy and agriculture, he adds.

4 There are two main reasons for the bank s robust showing in precious metals, says Bass. First, it hired a team of specialists from Commerzbank in 2006 and second, the business builds on Standard Chartered s expertise in currency options. Precious metal trading volumes are driven particularly by the big jewellery markets in Hong Kong, India and the United Arab Emirates, says Bass. What has also helped the bank is what Bass describes as an extraordinary corporate customer base across the region and a strong project finance business, of which offtake agreements and hedging transactions are often a major part of overall deals. Beyond all the strong gains reflected in the commodity derivatives are by Asia Risk s inaugural survey, some parties expected Morgan Stanley to feature more prominently in the rankings. Some of the US securities dealer s rivals say its relatively poor showing could be down to the fallout from subprime-related turmoil that saw it write down a total of $9.4 billion last year and make staff cuts. This culminated in the departure in March of Neal Shear described by one commodities head as the godfather of Morgan COMMODITY Stanley s commodity business. He was also global head of fixed income before becoming another casualty of the credit crunch. Nonetheless, rivals say the dealer is still making good money from its commodity business and some expressed surprise at Morgan Stanley s position. Morgan Stanley is one of the superstars of the commodity space, says one Asia head of commodities. Morgan Stanley itself feels the survey results do not reflect its strengths in the commodity business. We had a a good year in 2007, with breakthroughs in new areas like carbon, dry freight and coal, and we expanded into other areas of physical oil trading like LPG [liquefied petroleum gas] and gasoline, says Harry Soh, Singapore-based co-head of commodity sales at the US dealer. The results do not seem to tally with our accomplishments, and are somewhat surprising. So while the rankings do not necessarily reflect revenues or profitability and nor is that their aim one thing is certain: it seems those at the top of the commodity pile cannot rest on their laurels as competition heats up in the coming months. Brokers building up Banks may be the biggest revenue generators in terms of commodity derivatives, but interdealer brokers are also an integral part of the Asian commodity markets. The top broker in the survey GFI, ahead of TFS then Icap has increased its commodity headcount in the region from 22 to 30 in the past year, including hires in coal swaps and options, dry freight and carbon credits. Simon Pallant, managing director for coal and freight, says since GFI gained a middle distillates team from its joint venture with Londonbased rival energy broker Spectron in April 2007, it has consolidated its position and gained market share. Moreover, the new coal swap desk has complimented GFI s dry freight physical and swaps business, as has GFI s new Shanghai dry cargo desk, he adds. Another contributory factor to the broker s success may be its hybrid model, which combines electronic and voice broking, says Jeremy Searle, Singaporebased head of oil broking. We ve been able to do this in commodity markets with our EnergyMatch screen, he adds. There is also our breadth of offering, says Searle. GFI has been able to capitalise on its knowledge of and contacts in related markets. Finally, we have continued to invest resources in Jeremy Searle, GFI: carbon is a big potential growth area in Asia newer, less liquid markets where others have been more cautious perhaps. Searle sees carbon markets as a big potential growth area in the coming year, along with dry cargo physicals and coal swaps and options. Another strong result was that of emissions broker CantorCO2e by coming top in the emissions category. Asia has grown rapidly, to be the most important part of our global operations in terms of volumes of carbon contracted, says Steve Drummond, London-based cochief executive at CantorCO2e, which has a joint venture with Japanese trading company Mitsui & Co. We have more than 20 deal-makers and technical specialists in the region, and this number is growing fast. The company is involved in carbonreduction projects from origination through to issued certified emissions reductions valid under the Kyoto Protocol. Most of our supply [of carbon credits] in Asia comes from India and China, which are the most developed markets in the region, adds Drummond. Most of our buyers are in Europe and Japan, though activity from USbased speculators is growing fast. C5

5 Crude oil and refined products Overall Brokers/dealers cited: 51 Banks % Brokers 1 Goldman Sachs GFI/Spectron 2 Lehman Brothers PVM 3 Société Générale TFS 4 Barclays Capital Morgan Stanley 4.4 Crude oil exchange-traded Brokers/dealers cited: 25 1 Goldman Sachs Lehman Brothers UBS 6.3 Crude oil over-the-counter Brokers/dealers cited: 29 Banks % Brokers 1 Goldman Sachs GFI/Spectron 2 Lehman Brothers PVM 3 Société Générale Tullett Prebon Fuel oil Brokers/dealers cited: 22 1 Goldman Sachs Morgan Stanley Lehman Brothers 7.8 Gasoline Brokers/dealers cited: 19 1 Goldman Sachs Morgan Stanley = Barclays Capital 5.6 3= GFI/Spectron 5.6 3= Société Générale 5.6 Naphtha Brokers/dealers cited: 17 1 Goldman Sachs Ginga Petroleum = PVM 8.8 3= Société Générale 8.8 Middle distillates Brokers/dealers cited: 21 1 Goldman Sachs GFI/Spectron TFS 8.4 Natural gas Brokers/dealers cited: 13 1 Goldman Sachs Credit Suisse Merrill Lynch Citi 9.0 5= Lehman Brothers 6.7 5= Morgan Stanley 6.7 How the survey was conducted Asia Risk s Commodity Survey was carried out in March through an online poll and canvassed thousands of executives at banks, brokers, corporates and institutions in Asia, receiving 311 responses. Participants voted for their top three commodity derivatives dealers/ brokers in order of preference for the past year in each category. Voters could base their choice on a variety of criteria, including pricing, liquidity provision, reliability, electronic trading capabilities and so on. Respondents were not allowed to vote for themselves or any subsidiaries of their firms. All responses were checked for validity. Three points were awarded for a first place, two points for second and one point for third. No weighting system was used for brokers, as respondents only submitted one vote. Only categories with a sufficient number of votes are included in the final poll. In most cases, we list percentage share of votes. The survey includes overall product leader boards, calculated by aggregating the total number of votes across individual categories. These overall results are naturally weighted, as there are more votes in the larger categories for example, oil or structured products than the smaller, less liquid categories, such as weather. C6 May Commodities

6 Base metals Overall Brokers/dealers cited: 33 1 Goldman Sachs Merrill Lynch Deutsche Bank Sempra Metals Man Financial 5.9 Aluminium Brokers/dealers cited: 27 1 Goldman Sachs Barclays Capital Deutsche Bank 6.5 Copper Brokers/dealers cited: 33 1 Goldman Sachs Sempra Metals 9.0 3= Barclays Capital 7.5 3= Merrill Lynch 7.5 Lead Brokers/dealers cited: 13 1 Goldman Sachs Merrill Lynch Man Financial 10.0 Nickel Brokers/dealers cited: 18 1 Goldman Sachs Sempra Metals 9.8 3= Man Financial 7.3 3= Merrill Lynch 7.3 3= Standard Chartered 7.3 Tin Brokers/dealers cited: 16 1 Goldman Sachs = Man Financial = Merrill Lynch 11.3 Zinc Brokers/dealers cited: 33 1 Goldman Sachs = Merrill Lynch 7.7 2= Sempra Metals 7.7 Base metal options Brokers/dealers cited: 18 1 Goldman Sachs Deutsche Bank Sempra Metals 9.2 Precious metals C8 Overall Brokers/dealers cited: 33 Banks % Brokers 1 Goldman Sachs = GFI 2 Standard Chartered 9.4 1= TFS 3 Barclays Capital Icap 4 Credit Suisse HSBC 4.9 Gold forwards Brokers/dealers cited: 20 1 Goldman Sachs Standard Chartered Société Générale 9.7 Gold options Brokers/dealers cited: 14 1 Goldman Sachs Standard Chartered Barclays Capital 7.6 May Commodities Silver forwards Brokers/dealers cited: 16 1 Goldman Sachs Barclays Capital 8.0 3= Credit Suisse 6.8 3= Standard Chartered 6.8 Silver options Brokers/dealers cited: 15 1 Goldman Sachs HSBC Credit Suisse 8.7 Platinum metals group Brokers/dealers cited: 18 1 Goldman Sachs Standard Chartered Barclays Capital 9.4

7 COMMODITY Other commodities Agricultural commodities Brokers/dealers cited: 28 1 Goldman Sachs Credit Suisse UBS Deutsche Bank JP Morgan 5.0 Emissions Brokers/dealers cited: 24 1 CantorCO2e Société Générale (Orbeo) 8.8 3= Econergy 5.3 3= Macquarie 5.3 3= Natsource 5.3 Freight Brokers/dealers cited: 15 1 Simpson Spence and Young Freight Investor Services Ginga Petroleum Icap 8.5 5= GFI 7.3 5= Merrill Lynch 7.3 Weather Brokers/dealers cited: 7 1 Swiss Re TFS Guaranteed Weather 16.7 Structured products Overall Dealers cited: 13 Dealers % 1 Goldman Sachs Deutsche Bank Credit Suisse ABN Amro Société Générale 5.2 Index-linked Dealers cited: 10 Dealers % 1 Goldman Sachs Deutsche Bank Credit Suisse 9.6 Tailored baskets Dealers cited: 9 Dealers % 1 Goldman Sachs Deutsche Bank Credit Suisse 13.6 Hybrids Dealers cited: 9 Dealers % 1 Goldman Sachs Deutsche Bank Société Générale 10.2 Exchange-traded funds Dealers cited: 6 Dealers % 1 Goldman Sachs Deutsche Bank Credit Suisse 10.7 Structured liability products Dealers cited: 10 Dealers % 1 Goldman Sachs Credit Suisse UBS 9.3 C9