Open Close High Low Daily change Change (%) Cash Settle

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1 : Daily 22 November 2010 Focus: Base metal ETF s already impacting the spreads? Walter de Wet, CFA* [email protected] Leon Westgate* [email protected] Focus: After an initial flurry of interest, and a period where the investment argument for ETF s was challenged by various sources, the furore about the various physically-backed base metal ETF proposals and the potential tying-up of physical inventory appears to have died down. What is interesting however is the apparent impact on the base metal forward curves. While the copper far-forwards have been tight for some time now, the aluminium far-forward spreads have also tightened dramatically, in spite of a continued large overhang of inventory. The base metals ended last week relatively flat on the day, with recent volatility, concerns over Ireland s immediate economic outlook, and fears over Chinese tightening saw the metals take the back seat and track fluctuations in the currencies. That trend has continued this morning, with the metals still in dollar-watching mode. Gold continues to trade around the $1,350 level. In the physical market buying on dips prevail. We expect this trend to continue into January. However, we also believe the gold market is pricing the Fed QEII action already. The latest CFTC report showed that money mangers had cut back their net lengths by 20.8% during the week from a record high level on the 9th of November. Swap dealers continue to accumulate shorts. Commercial hedgers are less short in total; implying fewer producers are selling and/or more consumers are long. It is worth noting the net short position held by the commercial hedgers was at its lowest level on record last week. Commodity price data (19 November 2010) Base metals LME 3-month Open Close High Low Daily change Change (%) Cash Settle Change in cash settle Cash 3m Aluminium 2,285 2,262 2,308 2, % 2, Copper 8,391 8,404 8,517 8, % 8, Lead 2,275 2,278 2,323 2, % 2, Nickel 21,750 21,900 22,300 21, % 21, Tin 25,200 25,000 25,300 25, % 25, Zinc 2,152 2,162 2,213 2, % 2, Open Close High Low day/day Change (%) ICE Brent % NYMEX WTI % ICE Gasoil % API2 Q1' % EUA Dec % AM Fix PM Fix High bid Low offer Closing bid Change (d/d) EFPs Gold 1, , , , , /-0.5 Silver /0.0 Platinum 1, , , , , /3.0 Palladium /1.0 Sources: Standard Bank; LME; BBG Please refer to the disclaimer at the end of this document.

2 Daily 22 November 2010 Focus: Base metal ETF s already impacting on the spreads? After an initial flurry of interest, and a period where the investment argument for ETF s was challenged by various sources, the furore about the various physically-backed base metal ETF proposals and the potential tying-up of physical inventory, appears to have died down. What is interesting however is the apparent impact on the base metal forward curves. While the copper far-forwards have been tight for some time now, on the back of a bullish fundamental story, aluminium far-forwards have also tightened dramatically, in spite of a continued large overhang of inventory. The generic copper month spread has been trading at a backwardation of $350 - $400/mt recently, arguably anticipatory of an on-warrant inventory level closer to 200 kt rather than the current 327 kt of metal, but nevertheless consistent with fears over future mine supply and continued strong Chinese demand. The behaviour in the aluminium forwards is even more stark however. The 3-15 and month aluminium spreads have both tightened up significantly, with the 3-15 month spread even trading at a small contango in early October. As it stands, the month spread is still trading at levels more commonly associated with 1 million mt of on-warrant LME stocks. While some of the tightness may be related to the impact of warehousing deals, the recent movement suggests that the ETF s or fears over the impact of ETF s on metal availability, may also be manifesting itself in the aluminium spreads. The base metals markets are relatively small, with aluminium having 4.1 Mt of stock on LME warrant (and perhaps another 4-6 Mt elsewhere), or ~$20 billion potentially available to the market. Copper is much smaller, with only around 330kt of metal on LME warrant, or ~$2.8 billion potentially available. Should physicallybacked ETF s manage to gain traction, the farther-dated spread could become extremely tight, particularly in conjunction with an economic recovery and a return to more normal stock levels. Copper month spread vs. LME on-warrant stocks Sources: Standard Bank, LME Aluminium month spread vs. LME on-warrant stocks Sources: Standard Bank, LME By Leon Westgate Base metals The base metals ended last week relatively flat on the day, with recent volatility, concerns over Ireland s immediate economic outlook, and fears over Chinese tightening seeing the metals take the back seat and track fluctuations in the currencies instead. That trend has continued this morning, with the metals still in dollar-watching mode. With little economic data for the market to get its teeth into, the base metals will likely continue to track the dollar, while the Thanksgiving holiday in the US, due later this week, may also deter the market from taking any aggressive action. Although the performance of the US equity markets will likely also be key in determining short term price direction, a general feeling of uncertainty and a lack of momentum still dominates, with the metals likely to continue reacting to headlines and other exogenous factors this week, rather than forging a path of their own. China announced new measures to cool inflation overnight, including increases in food production and stable energy and transport prices. The measures shied away from an interest rate hike however. Comments from a PBOC advisor, that a faster appreciation of the yuan could also curb imported inflation were also reported, though whether this also becomes policy is far from certain. 2 Elsewhere, Codelco announced its premium for China at $115/mt, up 35% on the previous year and significantly higher than the $98/mt set in Europe and Korea. The increase suggests Codelco is bullish on Chinese refined demand over the coming year, with the agreement now perhaps seeing the moribund physical market also start to show some life now the uncertainty is out of the way. By Leon Westgate

3 Daily 22 November 2010 Gold continues to trade around the $1,350 level. In the physical market buying on dips prevail. We expect this trend to continue into January. However, we also believe the gold market is pricing the Fed QEII action already. We use gold s causal relationship with liquidity to determine what the market is pricing already we estimate that a gold price around $1,375 fully price a QEII program of $600bn. As a result we need either greater sovereign credit problems out of Europe, combined with bond buying by the ECB, or further dollar weakness driven by events other than QEII, to push gold much higher. Given that further sovereign credit problems in Europe at this stage appear the most likely scenario, we believe gold in euro-terms may outperform gold in dollar-terms. Gold support is at $1,340 and $1,330. Gold resistance is at $1,365 and $1,375. The ZAR is almost unchanged despite a 50bps rate cut by the South African Reserve Bank. To us it s an indication that high yielding assets continue to attract money. But we also look at the strong ZAR from a PGM perspective - the ZAR remains largely unchanged while platinum has declined substantially in the past two weeks, leaving the platinum price in ZAR much lower. From a cost-of-production perspective we continue to believe platinum must trade above $1,800 on a sustainable level soon if the ZAR remain below ZAR 7.00 against the dollar. Platinum support is at $1,650 and $1,630. Resistance is at $1,675 and $1,690. We look at the latest CFTC data released on Friday. Speculative length as a percent of open interest (OI) has declined for all precious metals during the past two weeks. Silver in particular has seen a sharp decline in speculative length, with the net noncommercial position on COMEX as a percent of OI falling from 28% at the start of October to only 14% last week. This was on the back of a sharp decline in short positions (long spec positions have also declined, but at a slower pace than shorts). In fact, silver s non-commercial length as a percent of OI is at its lowest level since Apr'09. Despite this the silver price remains at high levels. We believe the liquidation of weak long positions has taken some risk out of the market. As a result we also believe the low level of speculative length relative to open interest is bullish for silver. By Walter de Wet The oil market was dominated by concerns over Euro-zone debt issues and China s tightening of monetary policy last week. The huge weekly inventory draw in the US in the order of 9mbbl was largely ignored. Net for the week, front-month WTI was down $3.37/bbl to settle at $81.51, and front-month Brent lost $2/bbl to settle at $ The latest CFTC report showed that money mangers had cut back their net lengths by 20.8% during the week from a record high level on the 9th of November. Swap dealers continue to accumulate shorts. Commercial hedgers are less short in total; implying fewer producers are selling and/or more consumers are long. It is worth noting the net short position held by the commercial hedgers was at its lowest level on record last week. Looking ahead for the week, we have macro data release including Euro-Zone consumer confidence and PMI, US Q3 GDP and durable good orders. As the Euro-zone debt issues settle on the back of Ireland bailout ahead of the US Thanksgiving holiday on Thursday, we expect the energy market to remain in consolidation mode. Further ahead, we see supply and demand fundamentals to improve at a very slow pace and market direction generally directed by excess dollar liquidity and downward risk of Chinese monetary tightening. By James Zhang 3

4 Daily 22 November 2010 Base metals Daily LME stock movement (mt) Metal Today Yesterday In Out One day change YTD change (mt) Contract turnover Aluminium 4,302,125 4,305, ,650-3, , , ,346 Copper 359, , , ,500 34, ,072 Lead 204, , ,575 8, ,992 Nickel 130, , ,906 4, ,717 Tin 14,195 14, , ,723 Zinc 634, , ,225 35, ,103 Shanghai 3-month forward prices COMEX active month future prices ZAR metal prices (19 November 2010) Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash 15,804 58,804 15, , ,573 14, month 16,019 59,517 16, , ,050 15, futures pricing Price Change Price Change Price Change Price Change Price Change 1-month forward 2-month forward 3-month forward 6-month forward 1-year forward Sing Gasoil ($/bbbl) Gasoil 0.1% Rdam ($/mt) NWE CIF jet ($/mt) Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO 380 Cargo ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q1-11 Q2-11 Q3-11 Cal 11 Cal 12 API2 (CIF ARA) API4 (FOB RBCT) Forwards (%) 1-month 2-month 3-month 6-month 12-month Gold Silver USD Libor Technical Indicators 30-day RSI 10-day MA 20-day MA 100-day MA 200-day MA Support Resistance Gold , , , , , , Silver Platinum , , , , , , Palladium Active Month Future COMEX GLD COMEX SLV NYMEX PAL NYMEX PLAT DGCX GLD TOCOM GLD CBOT GLD Dec'10 Dec 10 Jan'11 Jan'11 Dec'10 Oct'11 Dec'10 Settlement 1, , , , , Open Interest 629, ,248 24,470 34,536 1, ,154 2,485 Change in Open Interest 3,619 2, , Date: 19 November 2010 Sources: Standard Bank; LME; Bloomberg Cancelled warrants (mt) Cancelled warrants (%) Metal Open Last 1d Change Open Close Change Change (%) Aluminium 16,320 16,440 5 Ali Dec' Copper 63,400 63, Cu Dec' % Zinc 17,840 17,

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