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SEB Commodities Monthly 3 MAY 2011

Waiting for a technical correction


Commodities Monthly

Waiting for a technical correction


GENERAL 0-3 M  4-6 M  7-12 M  UBS Bloomberg CMCI Sector
Secto r Indices
• We see little upside in commodity prices at the moment other (price indices, weekly closing, January 2010 = 100)
than potential bullish influence from a continued dollar slump 160
• Several commodities are still supported by tight supply 150
Industrial Metals

• A technical correction is unavoidable due to a high level of Precious Metals


Energy
140
speculative positions but it may not materialize before we see Agriculture
a proper dollar trend reversal 130

120
ENERGY 0-3 M  4-6 M  7-12 M 
• We expect Brent crude prices to remain high in Q2-11 with risk 110

skewed to the upside of $120/b 100


• We also raise our H2-11 average Brent price forecast from
90
$95/b to $105/b on drawn out unrest in the MENA region
• The Libyan supply loss has created a shortage of sweet crude 80

nov-10
feb-10

feb-11
jan-10

mar-10

apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10

dec-10

jan-11

mar-11
apr-11
that could be exacerbated in Q2 as US and European refineries
ramp up production
• So far there seems to have been only limited demand
destruction due to high oil prices
Sector performance last month
INDUSTRIAL METALS 0-3 M  4-6 M  7-12 M  (MSCI World, UBS Bloomberg CMCI price indices)
• The industrial metals market currently focuses on Chinese soft 24
22
vs. hard landing expectations as leading indicators signal an 20
18 YTD (%) M/M (%)
approaching downturn 16
• Temporary sell-offs are likely over the nearest months on 14
12
periods of Chinese hard landing fear 10

8
The long term picture is supported by ambitious Chinese plans 6
to build low cost housing 4
2
• Japanese reconstruction demand, potentially recovering OECD 0
-2
demand and approaching Chinese industry restocking also -4

Agriculture
Industrial
Equities

Commodities

Energy

Precious
lends long term support
metals

PRECIOUS METALS 0-3 M  4-6 M  7-12 M  metals


• The short term gold market outlook remains bullish on
sovereign debt fear, inflation hedging, dollar softness and
elevated geopolitical risk
Winners & Losers last month
• The long term view is however starting to be moderated by (%)
potential dollar strength when QE2 comes to an end this 30
summer and FED could start signalling future rate hikes
25
• In addition, Chinese inflation is likely to start to retreat later
20
this year and reduce inflation hedging demand
15
• Gold could therefore peak in the $1700-1800/ozt area in 2011
10
5
AGRICULTURE 0-3 M 4-6 M  7-12 M 
0
• Even though agricultural commodity prices remain elevated
-5
due to low inventory levels and continued adverse weather the
-10
uptrend has clearly been broken
-15
• Demand destruction and more favourable long term weather
Coffe (Ar.)
Silver
Tin
Palladium

Platinum

Aluminium
Cotton

Lead

Corn

Gold
Zinc

WTI
Soybeans

Steel billets
Sugar

Copper
CO2 (EUA)
Power (Cont.)

Power (Nordic)

Nat. gas (US)

Heat. oil (US)

Gasoline (US)
Cocoa (US)
Nickel

Brent
Wheat

prospects are the main drivers


• While the short term outlook is supported by low inventory
levels and high uncertainty we expect an increasingly bearish
development over the year Chart Sources: Bloomberg, SEB Commodity Research

Arrows indicate the expected price change during the period in question.

2
Commodities Monthly

General
UBS Bloomberg CMCI
The commodity outlook is becoming less clear. (price index, weekly closing)
Recovery, USD weakness and plentiful liquidity 1800
remain positive forces, but Libyan oil outage is now 1700
discounted and China continues to implement 1600
measures to dampen its own (inflationary) 1500
1400
economic activity. With broad commodity indices at
1300
or close to record highs we see little further upside 1200
at present other than the possibility that they could 1100
continue to move higher as the USD depreciates. A 1000
technical correction is unavoidable at some point 900
800
with speculative positions near record highs and
700
volatilities at complacent lows. It is hard to imagine 600
what factor will trigger such a correction. Examples 500
include a strong reversal in the USD downturn 400
driven by European debt flare-ups; bad news from 300

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2004

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2006

2007

2008

2009

2010

2011
China suggesting the possibility of a hard landing;
deterioration in US growth; or an improvement in
the situation in MENA. The unavoidable technical
correction is however unlikely to mark the end of JPM global manufacturing PMI
the current cyclical bull market in commodities. It (monthly, PMIs >50 expansive)
may instead create attractive buying opportunities. 65

In April, the CMCI index (UBS Bloomberg’s broad 60


commodity price benchmark) gained 1% due to higher
55
precious metals (+8.4%) and energy (+5.0%) prices.
Industrial metals were unchanged and agricultural
50
commodities down 3.0%. At the same time however, the
USD index fell 3.0%. In other words, denominated in 45
most currencies commodities have become slightly
cheaper over the past month. 40

A depreciated USD, strong liquidity, speculative 35

positions, growth optimism and rising demand are all


30
driving commodity prices at present, although Brent
2005

2006

2007

2008

2009

2010

2011
crude has outperformed most commodities lately mainly
as a result of radically tighter fundamentals in Q1. In
response to rising demand many commodities are priced
either based on tight supply (e.g. cotton, corn, copper, OECD composite leading indicators
(monthly, 100 corresponds to long term trend in industrial production)
tin, sweet crude, coking coal and iron ore) or on rising
marginal costs (e.g. aluminium) while precious metals 105
104
move upwards because of liquidity, risk aversion and a 103
softer USD. Currently, commodities generally are 102
supported by both liquidity and growth, enjoying the 101
100
best of all worlds with support for both precious metals, 99
China
industrial metals and energy. Sooner or later one of these 98 Eurozone
97
drivers will have to give way. Either surplus liquidity will OECD
96 USA
need to be removed as growth is solid or growth will 95 Reference
break down paving the way for even higher liquidity. But 94
93
for now they co-exist together. 92
91
In terms of plain long positions we prefer gold, long 90
89
dated oil and copper while maintaining a bearish view on 88
agriculture generally as conditions normalise after La
2005

2006

2007

2008

2009

2010

2011

Niña episode. However, with an unavoidable correction


ahead and commodities priced fairly high, spread trades Chart Sources: Bloomberg, SEB Commodity Research
are preferable to outright longs with the long leg taken in
those commodities with the tightest fundamentals (e.g.
copper).

3
Commodities Monthly

Crude oil
Crude oil price
The physical tightness created by the loss of Libyan (NYMEX/ICE, $/b, front month, weekly closing)
sweet crude is probably discounted in the present 150
Brent crude price and in the size of speculative long 140 NYMEXWTI
positions. The shortage in sweet crude could 130 ICE Brent
however be exacerbated as US and European 120
refiners ramp up production in coming months. We 110
100
therefore expect sweet crude prices to remain high
90
for at least the rest of the second quarter with risk 80
skewed above $120/b. For H2-11 we expect the oil 70
price to ease once the summer driving season is 60
over with softer demand for sweet crude. We also 50
anticipate further signs of demand destruction and 40
potentially a reduced MENA risk premium. However, 30
20
we raise our Brent crude oil forecast for H2-11 from
10
$95/b to $105/b as the MENA situation has

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2003

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2008

2009

2010

2011
continued to deteriorate and therefore is unlikely to
be resolved in 2011.

The crude oil market is supported by a range of bullish US crude oil inventories
factors making record long speculators reluctant to take (DOE, mb, weekly data)
profits despite a 33% rally by Brent crude so far this year. 370
The main reason is the increasing likelihood that Libyan
oil will be out of the market for a long time, particularly 360
with Gaddafi loyalists attacking rebel held oil fields to
prevent further exports. Primarily, this has resulted in a 350
market shortage of sweet, i.e. low sulphur, crude oil. With
desulphuring capacity in the Atlantic basin limited, sweet 340
crude oils such as Brent, WTI and Bonny Light are trading
at a substantial premium to sour crude oils. In addition, 330 2006-2010 avg.
US growth optimism on strong economic indicators, 2010
potential further dollar weakness and growing inflation 2011
320
worries are keeping crude oil bulls happy. The main
upside risks concern a potential escalation in post-
310
election unrest in Nigeria, a further deterioration in the
j f m a m j j a s o n d
MENA situation, and a more acute sweet crude shortage.
However, a technical correction is unavoidable sooner or Chart Sources: Bloomberg, SEB Commodity Research
later.
Current global crude oil demand estimates
OPEC is insisting that the crude oil market is
oversupplied which may be true from a sour crude 2010 Revision 2011 Revision
perspective. However, it can do very little to relieve the (mb/d) (kb/d) (mb/d) (kb/d)
sweet crude shortage. Refinery activity was at a seasonal IEA 87.9 +10 89.4 +/-0
low when Libya left the market and the situation could EIA 86.68 -10 88.20 +/-0
OPEC 86.55 +160 87.94 +110
therefore deteriorate further in Q2-11 as refineries ramp
up production. Indications suggest OECD crude oil and
product inventories have begun to fall rapidly.

It is still too early to gauge the full impact of the current


high oil price on the global economy. So far it has
reduced growth in US consumer spending, but has not
yet had an abrupt impact on worldwide economic
activity. The correlation between oil and equities is once
again positive, with the US VIX index below 15%
indicating that financial markets are not over-concerned.

4
Commodities Monthly

Energy
WTI futures curve Brent futures
futures curve
(NYMEX, $/b) (ICE, $/b)
115 126
114 125
113 11-02-28 124 11-02-28
112 123
11-03-31 122 11-03-31
111 121
110 11-04-28 120 11-04-28
109 119
108 118
107 117
106 116
115
105 114
104 113
103 112
102 111
101 110
100 109
108
99 107
98 106
97 105
96 104

jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
Gasoline and heating oil prices Gasoline and distillate inventories
(NYMEX, ¢/gal, front month, weekly closing) (DOE, mb, weekly data)
450 250
NYMEXGasoline 240
400 NYMEXHeating oil 230
220
350
210
300 200
Gasoline 2006-2010 avg.
190
250 Gasoline 2011
180
Distillate fuel oil 2006-2010 avg.
170
200 Distillate fuel oil 2011
160
150 150
140
100 130
120
50
110
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2011

j f m a m j j a s o n d

US natural gas prices US natural gas futures


futures curve
(NYMEX, $/MMBtu, front month, weekly closing) (NYMEX, $/MMBtu)
15 7,25
14 7,00
11-02-28
13 6,75
11-03-31
12 6,50
11-04-28
11 6,25
10 6,00
9 5,75
8 5,50
5,25
7
5,00
6
4,75
5
4,50
4
4,25
3
4,00
2
3,75
1
maj-11
sep-11
jan-12
maj-12
sep-12
jan-13
maj-13
sep-13
jan-14
maj-14
sep-14
jan-15
maj-15
sep-15
jan-16
maj-16
sep-16
jan-17
maj-17
sep-17
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Chart Sources: Bloomberg, SEB Commodity Research

5
Commodities Monthly

Nordic power
Nordic power price
During April the power market was dominated by the (Nord Pool, €/MWh, front quarter, weekly closing)
aftermath of the Japanese earthquake and its 80
implications for the future of nuclear power, as well as 75
weather issues and the spring flood. In Germany an 70
earlier decision to extend the current nuclear program 65
was withdrawn as a result of the Japanese accident. The 60
nuclear debate in Europe and elsewhere is fierce and 55
where it will end is very difficult to predict. We believe it 50
will be impossible to significantly replace existing nuclear 45
capacity in the foreseeable future without switching to
40
CO2 intensive fossil fuel-based power generation. For
35
now, other cleaner energy sources are not realistic
30
alternatives and are also far more expensive. We believe
25
that both the industry and the unions will do their best to
20
turn public opinion around primarily because shutting

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2011
down nuclear capacity is more than likely to reduce
European industrial competitiveness with obvious
implications for employment.
Continental power price
Spot prices fell in April on normal seasonality, i.e. fewer (EEX, €/MWh, front quarter, weekly closing)
dark hours and higher temperatures. At the beginning of 95
the month prices were above EUR 60/MWh but hit a low 90
85
of EUR 33.63/MWh over Easter when a low load in
80
conjunction with the spring flood and warm weather 75
caused prices to collapse. While the warm and dry 70
weather has acted as a short term bearish price driver it 65
60
is bullish from a mid- to long term perspective as it
55
worsens an already very stretched hydrological balance. 50
As a result forward prices have increased over the past 45
month. The spot market traded above EUR 50/MWh in 40
the last days of April. The April average was EUR 35
30
53.84/MWh, EUR 10.37/MWh lower than in March. The
25
Swedish spot traded largely in line with the system price. 20
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2011
For the most part, forward prices moved sideways over
the month but finished higher. Q3-11 gained EUR
2.05/MWh to close at EUR 56.25/MWh while YR-12
EUA price
gained EUR 2.20/MWh before closing at EUR
(ECX ICE, €/t, Dec. 11, weekly closing)
52.35/MWh. The German curve remained stable during
35
the period despite higher fuel prices, narrowing the
spread between markets with the German YR-12 now
trading at a EUR 6.95/MWh premium to the Nordic YR-12 30

after hitting a low of EUR 10.00/MWh in the first few


days of April. 25

Going forward, we still believe prices will remain 20


high. The spring flood continues. What remains is
expected to be very controlled with smelting 15
concentrated in areas with very good reservoir
filling capacity due to their current low levels. 10
Despite a possibility that the prompt end of the
curve may continue to ease slightly as a result of the 5
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2009

2010

2011

spring flood and higher temperatures we expect its


back end to remain strong due to support from high
fuel prices and the large hydro balance deficit. Chart Sources: Bloomberg, SEB Commodity Research

6
Commodities Monthly

Industrial metals LME index


(weekly closing)
Currently the industrial metals sector is exclusively
4700
concerned with the outlook for a soft or hard 4500
landing in China where the business cycle is 4300
4100
beginning to show signs of weakness. Authorities 3900
continue to dampen economic activity by raising 3700
3500
interest rates and reserve requirement ratios. 3300
3100
Nevertheless, both economic growth and inflation 2900
remain strong. On the other hand, leading indicators 2700
2500
are signalling a moderate downturn. Under current 2300
credit conditions and given present high levels of 2100
1900
uncertainty it is difficult to imagine a situation in 1700
which a sustained industrial metals rally could 1500
1300
occur. Our overall short term view of the sector is 1100
neutral. A sharper than expected Chinese downturn 900

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2011
is likely to have a strong bearish effect on industrial
metals prices. However, further out, their prospects
are significantly brighter. Although more Chinese
interest rate hikes are expected this summer, Industrial metal prices
lending restrictions could be eased as early as H2-11 (LME, indexed, weekly closing, January 2010 = 100)
if the economy cools to a desired level. In addition, 200 Copper
China’s fixed asset investments remain high with 190 Nickel
Aluminium
further plans to build tens of millions of low cost 180
Zinc
housing units under the 2011-2015 five year plan. 170
Lead
160 Tin
The long term situation is further supported by 150
Japanese reconstruction requirements, potentially 140
recovering OECD demand, and the fact that Chinese 130
restocking needs are apparently increasing due to a 120
combination of continued strong economic growth 110
100
and relatively weak metal imports. In the near term
90
soft spots could therefore be used to build long term 80
positions. 70
60
nov-10
feb-10

feb-11
jan-10

mar-10

apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10

dec-10

jan-11

mar-11
apr-11
Chinese authorities continue to clamp down on energy
inefficient industrial metals production and overcapacity
even though such efforts have proven relatively
unsuccessful historically. This is due to a clear
divergence between central government efforts toward LME price and inventory changes last month
more efficient use of resources and local governments’
strategy to boost regional employment and growth. 13
12
However, current indications suggest the central 11
10
government will try to limit annual production growth of 9
8
ten non-ferrous metals to 8% over the next five years. 7
6
5
Indifference in industrial metals markets to 4
3
developments within the OECD has been well illustrated 2
1
by their limited reaction to the European and US 0
-1
sovereign debt debacle, which implies strong austerity -2
-3
measures over the next decade, as well as industrial -4
-5
production disturbances resulting from component -6 Price (%) Inventories (%)
-7
shortages following the Japanese earthquake. The lack of -8
Tin
Aluminium

Lead
Zinc
Copper

Nickel

Steel

interest in events within the OECD is probably


attributable to already modest demand growth
expectations that are more likely to surprise on the
upside than the down. For example, the US housing
Chart Sources: Bloomberg, SEB Commodity Research
market remains depressed with housing starts still
around 25% of pre-crisis levels.

7
Commodities Monthly

Industrial metals
Aluminium LME aluminium price and inventories
(weekly data)
• Chinese authorities have initiated a new wave of 5000000 3500
LME inventoris (t, left axis)
clampdowns on inefficient production and capacity
4500000 LME price ($/t, right axis) 3250
expansion. Planned projects are to be halted
4000000 3000
immediately.
• Reduced capacity expansion and energy efficiency 3500000 2750

ambitions could compel China to become a net importer 3000000 2500


as early as this year although historically local 2500000 2250
governments have been reluctant to comply with central
2000000 2000
government mandates.
• Prices are well supported by high input costs. Sensitivity 1500000 1750

to changes in energy prices is however likely to be high. 1000000 1500

• While LME inventories remain stable SHFE inventories 500000 1250


are falling back. Anecdotal evidence also suggests that 0 1000
unregistered Chinese inventories are falling.

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2011
Copper LME copper price and inventories
(weekly data)
• While LME and Chinese bonded warehouse inventories 1000000 11000
LME inventoris (t, left axis)
appear to be rising China’s industry inventories are likely
900000 LME price ($/t, right axis) 10000
to trend lower together with SHFE inventories. Extensive
800000 9000
restocking should therefore be expected later this year.
• We believe copper prices are well supported in both the 700000 8000

short and long term and do not expect prices below 600000 7000
$8500/t during periods of temporary risk aversion. 500000 6000
• The International Copper Study Group (ICSG) forecasts a
400000 5000
market deficit of 377 kt in 2011 and 279 kt in 2012.
• The second round of the Peruvian presidential election in 300000 4000

June will be extremely important for the copper market. 200000 3000

If Ollanta Humala wins, which could happen, contracts 100000 2000


with foreign mining companies will be renegotiated 0 1000
which could have a negative effect on supply.
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Nickel LME nickel price and inventories


(weekly data)
• So far this year the nickel market has been supported by 180000 60000
LME inventoris (t, left axis)
solid demand, falling LME inventories and supply 55000
160000 LME price ($/t, right axis)
disruptions. 50000
• The outlook is however worse. While the market appears 140000
45000
likely to be in deficit in H1-11, a surplus appears more 120000 40000
likely during H2. 35000
100000
• The International Nickel Study Group (INSG) expects a 30000
full year surplus of 60 kt. 80000
25000
• Chinese nickel pig iron (NPI) supply represents the 60000 20000
greatest market uncertainty and is likely to determine the 15000
40000
market’s eventual balance. 10000
• Our long term price target remains around $20000/t. 20000
5000
0 0
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Chart Sources: Bloomberg, SEB Commodity Research

8
Commodities Monthly

Industrial metals
Zinc
Zin c LME zinc price and inventories
(weekly data)
• The zinc market remains in oversupply with prices well 900000 LME inventoris (t, left axis) 5000
above production costs. It therefore continues to LME price ($/t, right axis)
800000 4500
represent one of the weakest segments of the industrial
metals sector. 700000 4000

• The International Lead and Zinc Study Group (ILZSG) 600000 3500
expects this year’s increased supply to exceed growth in
500000 3000
demand for a fifth consecutive year. It forecasts a market
surplus of 200 kt. 400000 2500

• While the zinc market appears relatively balanced next 300000 2000
year, it may be in deficit in 2013. We see a predominant
200000 1500
risk that the surplus will continue into 2012.
• LME inventories once again moved higher in April while 100000 1000

SHFE inventories also continued their uptrend. 0 500

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2011
Steel LME steel billet price and inventories
(weekly data)
• Sluggish MENA steel demand gives a bearish flavour to 90000 1300
the European steel market. 80000
LME inventoris (t, left axis) 1200
• Chinese economic cool down efforts are making market LME price ($/t, right axis) 1100
70000
stakeholders careful. 1000
• An approaching mild inventory cycle with rising steel 60000
900
inventories is also putting a lid on the upside for steel 50000 800
products. 700
40000
• Mainly sideways prices in April with small price changes 600
in most steel products. 30000
500
• Iron ore is trading at $181.5/t, up 4.4% m/m while coking 20000
400
coal was negotiated as high as $330/t in April. 10000 300
• The European steel market looks sideways to bearish
0 200
over the nearest months.
jul-08

okt-08

jan-09

apr-09

jul-09

okt-09

jan-10

apr-10

jul-10

okt-10

jan-11

apr-11
LME lead price and inventories LME tin price and inventories
(weekly data) (weekly data)
325000 4000 40000 36000
LME inventoris (t, left axis)
300000 33000
LME price ($/t, right axis) 3500 35000 LME inventoris (t, left axis)
275000
LME price ($/t, right axis) 30000
250000 3000 30000 27000
225000
200000 2500 25000 24000

175000 21000
2000 20000
150000 18000
125000 1500 15000 15000
100000
1000 10000 12000
75000
9000
50000
500 5000
25000 6000
0 0 0 3000
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Chart Sources: Bloomberg, SEB Commodity Research

9
Commodities Monthly

Industrial metals
Aluminium futures curve Copper futures curve
(LME, $/t) (LME, $/t)
2975 10000
2950 9900
2925 9800
2900 9700
2875 9600
2850 9500
2825 9400
2800
9300
2775
9200
2750
9100
2725
9000 11-02-28
2700
11-02-28 8900 11-03-31
2675
2650 11-03-31 8800 11-04-28
2625 11-04-28 8700
2600 8600
2575 8500

nov-11

nov-12

nov-13

nov-14
nov-11

nov-12

nov-13

nov-14

feb-12

feb-13

feb-14

feb-15
feb-12

feb-13

feb-14

feb-15

maj-11
aug-11

maj-12
aug-12

maj-13
aug-13

maj-14
aug-14

maj-15
maj-11
aug-11

maj-12
aug-12

maj-13
aug-13

maj-14
aug-14

Nickel futures curve maj-15 Zinc futures curve


(LME, $/t) (LME, $/t)
29500 2575
29000 2550
11-02-28
28500 2525
11-03-31
28000 2500
11-04-28
27500 2475
2450
27000
2425
26500 11-02-28
2400
26000 11-03-31
2375
25500 11-04-28
2350
25000 2325
24500 2300
24000 2275
23500 2250
23000 2225
nov-11

nov-12

nov-13

nov-14

nov-11

nov-12

nov-13

nov-14
feb-12

feb-13

feb-14

feb-15

feb-12

feb-13

feb-14

feb-15
maj-11
aug-11

maj-12
aug-12

maj-13
aug-13

maj-14
aug-14

maj-15

maj-11
aug-11

maj-12
aug-12

maj-13
aug-13

maj-14
aug-14

maj-15
Lead futures curve Tin futures curve
(LME, $/t) (LME, $/t)
2750 32400
2725 32350
11-02-28
2700 32300
2675 11-03-31 32250
2650 11-04-28 32200
2625 32150
2600 32100
2575 32050
2550 32000
11-02-28
2525 31950
2500 31900 11-03-31
2475 31850 11-04-28
2450 31800
2425 31750
2400 31700
2375 31650
nov-11

nov-12

nov-13

nov-14

nov-11
feb-12

feb-13

feb-14

feb-15

feb-12
maj-11
aug-11

maj-12
aug-12

maj-13
aug-13

maj-14
aug-14

maj-15

maj-11
jun-11

jul-11
aug-11
sep-11

okt-11

dec-11
jan-12

mar-12
apr-12

maj-12
jun-12
jul-12

Chart Sources: Bloomberg, SEB Commodity Research

10
Commodities Monthly

Precious metals
Precious metal prices
Our short term gold market view remains bullish on (COMEX/NYMEX, indexed, weekly closing, January 2010 = 100)
European and US sovereign debt fears, inflation 290
worries, the current bearish dollar trend and high 280
270 Silver
geopolitical risk. Our bullish long term view is 260 Platinum
250
however beginning to moderate due to a potential 240 Gold
230 Palladium
dollar bullish end to QE2 and expectations of US 220
interest rate hikes in early 2012. In addition, Chinese 210
200
inflation is likely to begin to show signs of slowing 190
180
going forward, resulting in reduced demand for 170
160
inflation hedging. Gold could therefore peak 150
between $1700-1800/ozt this year. However, 140
130
European and US sovereign debt concerns are 120
110
unlikely to recede and therefore represent the 100
90
greatest upside risk to the gold market together 80

nov-10
feb-10

feb-11
jan-10

mar-10

apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10

dec-10

jan-11

mar-11
apr-11
with a situation in which inflation accelerates. Key
downside risks include a stronger than expected
economic recovery and a sharp upturn in the dollar.

Although Chinese inflation continues to rise, substantial Gold to silver ratio


tightening measures already implemented should soon (front month, weekly closing)
begin to impact. Still, real interest rates are likely to
86
remain negative into the second half of this year. As a 82
result, its inflation hedging demand may not yet have 78
peaked. In Europe headline and core inflation are rising 74
relatively rapidly although ECB rhetoric has become 70
increasingly hawkish. However, the division between 66
62
economically stronger northern Europe and the weaker
58
south is increasing. This creates problems for the ECB 54
when raising interest rates. In the US inflation is also 50
rising although the Fed appears confident that it will 46
remain acceptable and has expressed no intentions yet 42
38
of hiking interest rates in 2011. Gold bulls are however
34
sceptical concerning the central banks’ ability to control 30
the situation and therefore strongly prefer gold and silver
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011
to paper money. Overall however, the real interest rate
environment appears likely to remain gold supportive
during the rest of this year, at least throughout the third
quarter. Potentially softer food and energy prices could Gold and currencies vs. USD
help dampen inflation in H2-11.
12
YTD (%) MoM (%)
11
While most people still consider the US AAA rating as 10
sacrosanct in current circumstances S&P’s outlook 9
revision from stable to negative managed to move the 8
market. As long as US politicians fail to agree on how to 7
handle mounting debt over the coming decade the US 6
will follow the same course as Europe from a sovereign 5
debt perspective. European and US leaders are obviously 4
equally unwilling to decide on measures that risk turning 3

their voters against them. In Europe, markets are 2


1
increasingly focusing on potential Greek debt
0
restructuring after Portugal gave in to pressure and
-1
asked to be bailed out. Greek restructuring is however
unlikely to be implemented before its budget has been GOLD EUR JPY GBP SEK RUB NOK CHF
rebalanced once again. Restructuring in itself is not
necessarily bullish for gold if performed in a controlled Chart Sources: Bloomberg, SEB Commodity Research
manner.

11
Commodities Monthly

Precious metals
Gold Gold price
(COMEX, $/ozt, front month, weekly closing)
• We maintain our bullish outlook for gold despite the fact 1600
that the long term view is being undermined by potential 1500
renewed dollar strength and the inflation dampening 1400
effects of Chinese monetary tightening. 1300

• A short term bullish view is largely justified by European 1200


1100
and US sovereign debt concerns, inflation worries, the
1000
current bearish dollar trend and high geopolitical risk. 900
• Demand for coins and bars remains strong. 800
• Physical gold Exchange Traded Product (ETP) holdings 700
continued to recover in April, increasing 43 tonnes to 600
2070 tonnes, while remaining below late 2010 highs 500
400
(2115 tonnes).
300
• Long speculative positions in COMEX gold have again 200
increased during the past two months but remain below

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011
record highs.

Silver Silver price


(COMEX, $/ozt, front month, weekly closing)
• Extremely strong demand for physical investment 50
products, mainly coins, bars and ETPs have driven silver 48
46
close to the 1980 nominal record high, i.e. $50/ozt. 44
42
However, in real terms prices need to move above 40
38
$140/ozt to post a new top. 36
34
• The US mint is currently selling four times as many silver 32
30
coins as they have historically. 28
26
• Physical gold Exchange Traded Product (ETP) holdings 24
22
posted a new record high in late April at 15518 tonnes. 20
18
• Meanwhile silver supply is growing and the market 16
14
heading towards a surplus in 2011. 12
10
• Considering the retail silver hype and exceptionally 8
6
strong silver outperformance vs. gold, we see increasing 4
2
evidence that violent corrections lower like the one in
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011
early May are likely to continue to occur.

Platinum & Palladium Platinum


Platinum and palladium prices
(NYMEX, $/ozt, front month, weekly closing)
• As expected Japanese data show vehicle production 1100 2300
more than halved following the earthquake and tsunami Palladium (left axis)
1000
in early March. Production elsewhere in the world has Platinum (right axis) 2050
900
also been severely affected due to component 1800
shortages. 800

• With normalization expected during Q2 demand for 700


1550

palladium and platinum should recover with bullish 600 1300


implications.
500
• The long term outlook for palladium vs. platinum is more 1050
400
bullish due to a tighter supply situation and its use in 800
gasoline powered cars favoured in China. 300

• Physical platinum and palladium ETP holdings rose to 43 200


550

and 69 tonnes respectively in April. 100 300


2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Chart Sources: Bloomberg, SEB Commodity Research

12
Commodities Monthly

Precious metals
Gold futures curve
curve Silver futures curve
(COMEX, $/ozt) (COMEX, $/ozt)
1800 48
47
1750 46
11-02-28
45
1700 11-03-31 44 11-02-28
11-04-28 43 11-03-31
1650 42
11-04-28
41
1600 40
39
1550 38
37
1500 36
35
1450 34
33
1400 32

nov-11

nov-12

nov-13

nov-14

nov-15
feb-12

feb-13

feb-14

feb-15
maj-11
aug-11

maj-12
aug-12

maj-13
aug-13

maj-14
aug-14

maj-15
aug-15
jun-11
sep-11
dec-11
mar-12
jun-12
sep-12
dec-12
mar-13
jun-13
sep-13
dec-13
mar-14
jun-14
sep-14
dec-14
mar-15
jun-15
sep-15
dec-15
mar-16
jun-16
sep-16
dec-16
Palladium futures curve Platinum futures curve
(NYMEX, $/ozt) (NYMEX, $/ozt)
810 1860

805 1850
800
1840
11-02-28
795
11-02-28 1830 11-03-31
790
11-03-31 1820 11-04-28
785 11-04-28
1810
780

775 1800

770 1790

765 1780
760 1770
jun-11

sep-11

dec-11

mar-12

jun-12

jul-11

jul-12
okt-11

jan-12

apr-12

Physical silver
silver and gold ETP holdings Physical palladium
palladium and platinum ETP holdings
(weekly data, tonnes) (weekly data, tonnes)
2200 75
2100 70
2000 65
1900 60
1800 55
1700 Silver holdings / 10 50
Gold holdings Palladium
1600 45
Platinum
1500 40
1400 35
1300 30
1200 25
1100 20
nov-10
feb-10

feb-11

nov-10
jan-10

mar-10
apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10

dec-10
jan-11

mar-11
apr-11

feb-10

feb-11
jan-10

mar-10
apr-10
maj-10

jun-10
jul-10
aug-10

sep-10
okt-10

dec-10
jan-11

mar-11

apr-11

Chart Sources: Bloomberg, SEB Commodity Research

13
Commodities Monthly

Agriculture
Grains prices
We expect agricultural commodity prices to (CBOT, indexed, weekly closing, January 2010 = 100)
continue to trend lower for the rest of this year as 190
production estimates are raised and risk premiums 180 Wheat
lowered due to the diminishing effects of the La 170
Soybeans
Corn
Niña weather anomaly. The current National 160
Oceanic and Atmospheric Administration (NOAA) 150
forecast suggests that global weather patterns will 140
have normalized by June. Due to generally high 130
agricultural prices, upside risk is limited by demand 120
destruction. However, inventories for several 110
agricultural commodities are low and sensitivity to 100
disturbances therefore very high. As both 90
decreasing La Niña related disturbances and normal 80
variations will continue to hamper production we 70

nov-10
feb-10

feb-11
jan-10

mar-10

apr-10
maj-10
jun-10
jul-10
aug-10
sep-10
okt-10

dec-10

jan-11

mar-11
apr-11
expect further temporary price rallies during the rest
of the year. Current examples include extremely dry
conditions in the US Great Plains where winter
wheat is growing, and cold, wet conditions in the
northern United States where soybeans, corn and Year end grain inventories (days of supply)
spring wheat are about to be planted. In the grains (USDA, yearly data updated monthly)
sector, corn is most exposed to disruptions and 130
could also pull other associated crops higher Wheat
120
through substitution effects. Soybeans
Corn
110
According to the International Grains Council (IGC) the
100
outlook for grain production in the 2011/2012 season is
favourable. IGC expects production to increase by 4.5% 90
after weather disturbances weighed on production in the
80
previous harvest year. Consumption is forecast to
increase by a more modest 1.5% but will slightly exceed 70
supply in absolute terms. The current forecast therefore
60
suggests a relatively well balanced market. IGC also
projects record high grain consumption during the 50
00/01

01/02

02/03

03/04

04/05

05/06

06/07

07/08

08/09

09/10

10/11
current season.

Soft commodity prices generally also continue to fall Chart Sources: Bloomberg, USDA, SEB Commodity Research
back. Sugar prices began to decrease earlier this year on
strong Brazilian and Thai production and have recently
been joined by cotton. Exceptionally high cotton prices
have finally caused demand to slow down resulting in
cancelled orders. Although the general sector is trending
towards lower prices there are some exceptions. Arabica
coffee has continued to move higher, trading above
$3/lb for the first time ever. The coffee market is
supported by strong demand, record low inventories and
production disruptions in several major producer
nations. The situation originated with three consecutive
disappointing Columbian crop years. However, given
current record high prices, demand destruction is bound
to put an end to the coffee rally sooner or later.

14
Commodities Monthly

Agriculture
Corn Corn price
(CBOT, ¢/bu, front month, weekly closing)
• Snow, rain and cold weather continue to delay US 800
planting with acreage losses to soybeans and lower
yields the potential result if conditions do not improve. 700
• Due to low inventories, the corn market will remain
600
highly sensitive to future disruptions.
• Although demand destruction and substitution appear to 500
be holding back the corn market, high oil prices continue
to stimulate demand from ethanol producers. 400
• According to the US Department of Agriculture (USDA)
global 2010/2011 ending stocks will reach 71.0 days of 300

supply, some 24% below their 10-year average.


200
• Even though high prices stimulate planting the IGC
expects consumption to slightly exceed production 100

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011
during the 2011/2012 season. A record crop is needed to
relieve the tight inventory situation.

Wheat Wheat price


(CBOT, ¢/bu, front month, weekly closing)
• While dry conditions in the US heartland, Europe and 1200
China are damaging the developing winter wheat crop,
1100
rain in the northern US and Canada is delaying spring
1000
wheat planting. However, conditions are now showing
signs of improvement on several fronts. 900

• The US winter wheat situation is the most severe in living 800


memory. USDA now rates 41% of the crop as poor or 700
very poor compared with 7% last year. This situation
600
could result in a tighter supply of high quality wheat.
• Global wheat inventory estimates for the end of the 500

2010/2011 season remain relatively solid at 96.9 days of 400


supply, some 3% above their 10-year average. 300
• IGC expects a well balanced market in the 2011/2012 200
season. We regard wheat as the weakest grain although
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011
bullish influences could come from the more strained
corn market.

Soybeans Soybean price


(CBOT, ¢/bu, front month, weekly closing)
• Potential record crops in Brazil and Argentina have 1800
begun to enter the market, exerting bearish pressure on
prices. 1600
• Although the USDA expects US soybean acreage to
1400
decrease this year, delayed corn planting could result in
acreage being transferred to soybeans. 1200
• The USDA estimates global 2010/2011 ending stocks at
81.4 days of supply, some 1% above their 10-year 1000
average, although US inventories are significantly
tighter. 800

• Strong Chinese imports appear to have replenished


600
inventories and could lead to a period of softer demand
even though the long term demand outlook remains 400
firm.
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

• We regard soybean fundamentals as stronger than those


of wheat but weaker than corn.
Chart Sources: Bloomberg, SEB Commodity Research

15
Commodities Monthly

Agriculture
Corn futures curve Wheat futures curve
(CBOT, ¢/bu) (CBOT, ¢/bu)
750 950

725 925
11-02-28
700 11-03-31 900
675 11-04-28
875
650
850
625
825 11-02-28
600
11-03-31
800
575 11-04-28
550 775

525 750

500 725
nov-11

nov-12

nov-13

nov-14
feb-12

feb-13

feb-14
maj-11

aug-11

maj-12

aug-12

maj-13

aug-13

maj-14

aug-14

nov-11

nov-12
feb-12

feb-13
maj-11

aug-11

maj-12

aug-12

maj-13
Soybean futures curve Sugar
(CBOT, ¢/bu) (NYBOT, ¢/lb)
1450 40

1425 11-02-28
35
1400 11-03-31
11-04-28 30
1375

1350 25

1325 20
1300
15
1275

1250 10

1225 5
1200
nov-11

nov-12

nov-13
feb-12

feb-13

0
maj-11

aug-11

maj-12

aug-12

maj-13

aug-13

2002

2003

2004

2005

2006

2007

2008

2009

2010

Cotton Cocoa 2011


(NYBOT, ¢/lb) (NYBOT, $/t)
220 3800

200 3600
3400
180
3200
160 3000

140 2800
2600
120
2400
100 2200
80 2000
1800
60
1600
40 1400
20 1200
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Chart Sources: Bloomberg, SEB Commodity Research

16
Commodities Monthly

Commodity related economic indicators


EUROZONE Current Date Previous Date Next
Industrial production (%, YoY) 7,5 2011-02-28 6,3 2011-01-31 2011-05-12
Industrial production (%, MoM) 0,5 2011-02-28 0,2 2011-01-31 2011-05-12
Capacity utilization (%, sa) 80,0 2011-03-31 78,1 2010-12-31
Manufacturing PMI 58,0 2011-04-30 57,5 2011-03-31 2011-05-02
Real GDP (%, YoY) 2,0 2010-12-31 2,0 2010-09-30 2011-05-13
Real GDP (%, QoQ, sa) 0,3 2010-12-31 0,4 2010-09-30 2011-05-13
CPI (%, YoY) 2,7 2011-03-31 2,4 2011-02-28 2011-05-16
CPI (%, MoM) 1,4 2011-03-31 0,4 2011-02-28 2011-05-16
Consumer confidence -11,6 2011-04-30 -10,6 2011-03-31 2011-05-20
USA
Industrial production (%, YoY) 5,9 2011-03-31 5,6 2011-02-28
Industrial production (%, MoM) 0,8 2011-03-31 0,1 2011-02-28 2011-05-17
Capacity utilization (%) 77,4 2011-03-31 76,9 2011-02-28 2011-05-17
Manufacturing PMI 61,2 2011-03-31 61,4 2011-02-28 2011-05-02
Real GDP (%, YoY) 2,3 2011-03-31 2,8 2010-12-31
Real GDP (%, QoQ, saar) 1,8 2011-03-31 3,1 2010-12-31 2011-05-26
CPI (%, MoM) 2,7 2011-03-31 2,1 2011-02-28 2011-05-13
CPI (%, MoM, sa) 0,5 2011-03-31 0,5 2011-02-28 2011-05-13
OECD Composite Leading Indicator 103,2 2011-02-28 102,9 2011-01-31
Consumer confidence (Michigan) 69,8 2011-04-30 67,5 2011-03-31 2011-05-13
Nonfarm payrolls (net change, sa, ‘000) 216 2011-03-31 194 2011-02-28 2011-05-06
JAPAN
Industrial production (%, YoY, nsa) -12,9 2011-03-31 2,9 2011-02-28 2011-05-19
Industrial production (%, MoM, sa) -15,3 2011-03-31 1,8 2011-02-28 2011-05-19
Capacity utilization (%, sa) 93,7 2011-02-28 91,1 2011-01-31
Manufacturing PMI 45,7 2011-04-30 46,4 2011-03-31 2011-05-30
Real GDP (%, YoY, nsa) 2,2 2010-12-31 4,9 2010-09-30
Real GDP (%, QoQ, sa) -0,3 2010-12-31 0,8 2010-09-30 2011-05-19
CPI (%, YoY) -0,1 2011-04-30 -0,2 2011-03-31 2011-05-27
CPI (%, MoM) 0,3 2011-03-31 -0,1 2011-02-28
OECD Composite Leading Indicator 105,4 2011-02-28 104,5 2011-01-31
Consumer confidence 38,3 2011-03-31 40,7 2011-02-28
CHINA
Industrial production (%, YoY) 14,8 2011-03-31 14,9 2011-02-28 2011-05-11
Manufacturing PMI 52,9 2011-04-30 53,4 2011-03-31 2011-06-01
Real GDP (%, YoY) 9,7 2011-03-31 9,8 2010-12-31 2011-07-15
CPI (%, YoY) 5,4 2011-03-31 4,9 2011-02-28 2011-05-11
OECD Composite Leading Indicator 101,9 2011-02-28 101,8 2011-01-31
Consumer confidence 107,6 2011-03-31 99,6 2011-02-28
Bank lending (%, YoY) 17,9 2011-03-31 17,7 2011-02-28
Fixed asset investment (%, YoY) 23,8 2010-12-31 24,0 2010-09-30
OTHER
OECD Area Comp. Leading Indicator 103,2 2011-02-28 103,0 2011-01-31
Global manufacturing PMI 55,8 2011-03-31 57,4 2011-02-28
Sources: Bloomberg, SEB Commodity Research

17
Commodities Monthly

Performance
Closing YTD 1m 1q 1y 5y
(%) (%) (%) (%) (%)
UBS Bloomberg CMCI Index (TR) 1481,64 8,8 1,3 38,4 30,3 42,7
UBS Bloomberg CMCI Index (ER) 1393,86 8,7 1,3 38,1 30,1 29,3
UBS Bloomberg CMCI Index (PI) 1761,07 8,7 1,1 42,5 33,3 71,1
UBS B. CMCI Energy Index (PI) 1766,53 22,6 5,0 44,1 27,9 44,8
UBS B. CMCI Industrial Metals Index (PI) 1330,75 3,2 0,1 32,6 18,2 32,7
UBS B. CMCI Precious Metals Index (PI) 2424,41 12,2 8,4 54,6 40,4 139,5
UBS B. CMCI Agriculture Index (PI) 1922,95 -2,2 -3,0 43,8 51,5 106,9
Baltic Dry Index 1269,00 -29,3 -17,1 -29,3 -62,2 -46,4

Crude Oil (NYMEX, WTI, $/b) 112,86 23,5 5,8 54,8 31,0 57,0
Crude Oil (ICE, Brent, $/b) 125,02 31,9 6,5 75,0 43,0 73,6
Aluminum (LME, $/t) 2767,50 12,0 4,5 33,1 22,7 0,5
Copper (LME, $/t) 9320,00 -2,9 -1,1 38,2 25,4 33,3
Nickel (LME, $/t) 26850,00 8,5 2,9 45,1 2,1 39,3
Zinc (LME, $/t) 2247,00 -8,4 -4,9 6,5 -1,7 -29,2
Steel (LME, Mediterranean, $/t) 559,00 -1,9 0,7 35,5 6,5
Gold (COMEX, $/ozt) 1531,20 7,7 6,4 41,4 29,7 133,9
Corn (CBOT, ¢/bu) 723,00 14,9 4,3 102,8 97,4 203,5
Wheat (CBOT, ¢/bu) 743,00 -6,5 -2,7 56,8 51,1 114,6
Soybeans (CBOT, ¢/bu) 1350,25 -3,1 -4,3 47,7 36,5 129,9
Sources: Bloomberg, SEB Commodity Research

Major upcoming commodity events


Date 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 May12 www.oilmarketreport.com
OPEC, Oil Market Report May 11 www.opec.org
Department of Energy, Short Term Energy Outlook May 10 www.eia.doe.gov
US Department of Agriculture, WASDE May 11 www.usda.gov
International Grains Council, Grain Market Report May 26 www.igc.org.uk
OPEC ordinary meeting, Vienna, Austria June 8 www.opec.org
Sources: Bloomberg, SEB Commodity Research

Contact list
COMMODITIES Position E-mail Phone Mobile
Terje Anderson Global Head of terje.anderson@seb.no +47 22 82 71 03 +47 92 61 26 76
Commodities
RESEARCH
Bjarne Schieldrop Chief analyst bjarne.schieldrop@seb.no +47 22 82 72 53 +47 92 48 92 30
Filip Petersson Strategist filip.petersson@seb.se +46 8 506 230 47 +46 70 996 08 84
SALES SWEDEN
Katarina Johnsson Corporate katarina.johnsson@seb.se +46 8 506 233 95 +46 73 501 52 02
Karin Almgren Institutional karin.almgren@seb.se +46 8 506 230 51 +46 73 642 31 76
SALES NORWAY
Maximilian Brodin Corporate/Institutional maximilian.brodin@seb.no +47 22 82 71 62 +47 92 45 67 27
SALES FINLAND
Vesa Toropainen Corporate/Institutional vesa.toropainen@seb.fi +358 9 616 286 08 +358 50 597 000 6
SALES DENMARK
Peter Lauridsen Corporate/Institutional peter.lauridsen@seb.dk +45 331 777 34 +45 616 211 59
TRADING
Mats Hedberg Chief Dealer mats.hedberg@seb.se +46 8 506 230 15 +46 70 462 29 78

18
Commodities Monthly

DISCLAIMER & CONFIDENTIALITY NOTICE

The information in this document has been compiled by SEB Merchant Banking, a division within Skandinaviska Enskilda
Banken 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, no
representation or warranty, expressed or implied, is made with respect to the completeness or accuracy of its contents and
the information is not to be relied upon as authoritative. Anyone considering taking actions based upon the content of this
document is urged to base his or her investment decisions upon such investigations as he or she deems necessary. This
document is being provided as information only, and no specific actions are being solicited as a result of it; to the extent
permitted by law, no liability whatsoever is accepted for any direct or consequential loss arising from use of this document
or its contents.

SEB is a public company incorporated in Stockholm, Sweden, with limited liability. It is a participant at major Nordic and
other 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 designated
investment business in the UK, and is subject to the provisions of relevant regulators in all other jurisdictions where SEB
conducts operations.

SEB Merchant Banking. All rights reserved.

SEB Commodity Research

Bjarne Schieldrop, Chief Commodity Analyst


bjarne.schieldrop@seb.no
+47 9248 9230

Filip Petersson, Commodity Strategist


filip.petersson@seb.se
+46 8 506 230 47

19
www.seb.se/mb

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