COMMODITIES RESEARCH

July 2011

COAL AND FREIGHT MONTHLY Parachute

Atlantic coal markets continued their lacklustre performance last month. We expect prices to drift lower in the short term, given the hydro situation improving in Scandinavia, a seasonally low period of demand in Western Europe and ample stockpiles at ARA ports, before a pick-up ahead of restocking in Q4. However, we expect stock draws from ARA to pick up as the Rhine river levels improve, provided the current wet spell across Europe continues, and this should protect the downside to prices. We continue to hold our API2 price forecasts at $123/t. The dearth in European orders for coal from Richards Bay continues as the market remains well supplied from other sources. In Asia, a good part of the supply needs are being met by Australia and Indonesia, while Europe is well stocked and getting steady supplies from Colombia, Russia and the US. Further, Indian buying continues to draw in coal from Indonesia, and we have revised our API4 price forecasts lower from $122/t to $119/t for 2011. As such, the API2-API4 spread is likely to remain moderately positive. Newcastle prices have been trading in a tight range around $120/t. We expect prices to drift lower in the short term but the downside to be capped as the underlying fundamentals remain strong. Post the Japanese earthquake, the situation of ample supplies has resulted in prices trading lower than our expectations. As a result, we have revised our price forecasts from $131/t to $125/t. In the coming months, we expect freight rates to drift lower, albeit slowly. We expect the BDI to average 1250 in H2 11. In 2012, as the fleet size continues to build, we expect a more balanced distribution of the fleet across both the basins, and we expect rates to be stable, albeit at low levels. Figure 1: European coal prices drift lower and now trading in a narrow range
250 200 150 100 50 0 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Coal prices, $/t Richards Bay FOB Newcastle FOB ARA CIF

Miswin Mahesh +44 (0) 20 7773 4291 miswin.mahesh@barcap.com Amrita Sen +44 (0) 20 3134 2266 amrita.sen@barcap.com Trevor Sikorski +44 (0) 20 3134 0160 trevor.sikorski@barcap.com www.barcap.com We would like to thank Yingxi Yu for her ideas and invaluable contributions to this report.

Source: McCloskeys, Barclays Capital

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 19

Barclays Capital | Coal and Freight Monthly

BALANCES AND PRICES

Figure 2: Global balances
Mt Japan South Korea China India Taiwan Europe Others Total imports Y/Y change (%) Indonesia Australia China Vietnam Russia South Africa USA Colombia Others Total exports Y/Y change (%) Global trade balance
Source: McCloskeys, Ecowin, Barclays Capital

2004 118 56 10 14 55 160 67 480 -1.3% 105 107 74 6 45 67 3 51 10 470 8.6% -10

2005 120 59 16 23 55 156 110 538 12.3% 129 107 61 10 49 74 19 55 21 524 11.7% -14

2006 119 60 31 28 56 169 125 588 9.1% 183 111 54 20 70 67 20 58 22 605 15.4% 18

2007 126 66 41 35 59 167 139 633 7.8% 195 112 45 24 74 67 24 65 23 629 3.9% -5

2008 131 74 31 35 59 165 143 637 0.6% 200 125 36 16 70 68 35 69 27 646 2.7% 8

2009 113 80 82 60 53 153 134 675 5.9% 233 139 18 23 79 67 20 65 20 665 2.9% -10

2010 125 89 111 75 57 138 151 745 10.4% 291 141 14 17 71 63 23 71 22 712 7.1% -33

2011F 116 93 97 90 59 144 151 750 0.6% 302 145 6 16 73 65 24 72 16 718 0.8% -32

Figure 3: European imports

Mt Germany UK Spain Italy France Turkey Others Total Imports y/y change (%) Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 2.4 1.3 0.8 1.1 0.9 1.2 4.1 11.8 -14% 2.9 1.0 0.6 0.8 1.1 1.4 4.8 12.6 1% 2.3 0.9 0.5 1.1 0.7 1.5 4.2 11.2 -16% 2.1 0.8 0.4 1.1 1.1 1.2 4.2 10.9 -15% 2.5 1.1 0.6 1.1 0.6 1.5 5.0 12.4 -2% 1.7 1.9 0.8 1.1 1.0 1.0 5.1 12.7 -12% 2.1 2.1 0.6 1.4 0.8 1.4 5.1 13.4 -22% Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 2.0 1.5 1.2 1.3 1.1 1.4 5.4 13.8 -32% 3.7 1.7 1.0 1.4 1.0 1.9 5.5 16.2 6% 2.5 0.8 1.2 0.9 0.8 1.5* 6.5 12.7 -1% 2.6 2.1 0.7 1.0 0.7 1.8 3.8 12.7 -3% 2.4 2.2 0.8 1.2 0.7 1.5 3.9 12.7 -9% 2.6 2.1 0.8 1.1 0.7 1.9 3.5 12.7 8%

Note: * Estimates. Source: McCloskeys, Barclays Capital

Figure 4: Price forecasts

Benchmarks API 2 (US$/t) API 4 (US$/t) Newcastle (US$/t)
Source: Barclays Capital

2004 72 54 53

2005 61 47 47

2006 63 50 49

2007 87 62 66

2008 144 120 128

2009 71 66 72

2010 93 92 99

2011F 123 119 125

19 July 2011

Barclays Capital | Coal and Freight Monthly

THE GLOBAL COAL AND FREIGHT MARKETS

Atlantic basin: Air brake

Atlantic basin activity lacklustre at present could pick up in Q4

Atlantic coal markets had a lacklustre period over June and the first half of July. During this period, API2 prices remained fairly stable at $122.75/t, although API4 prices drifted well below $120/t and settled at $115/t by the middle of July. In line with our expectations, the API4 price premium to other benchmarks was eroded as the lack of demand for South African coal finally caused some price reductions. The dearth in European orders for coal from Richards Bay continues as the market remains well supplied from other sources. In Asia, most of the supply needs are being met by Australia and Colombia, while Europe is well stocked with imports from Colombia, Russia and the US. In the Atlantic basin, we expect prices to drift lower in the short term before they regain some momentum ahead of winter restocking, given the improving hydro situation in Scandinavia, a seasonally low period of demand and ample stockpiles at ARA ports. We expect Q4 11 contracts to perform well given restocking needs expected. However, we expect stock draws from ARA to pick up as the Rhine river levels improve provided the current wet spell across Europe continues and this should protect the downside to prices. Further, we highlight that ARA stock levels are only close to seasonal averages and are well below 2010 levels. Given the above, we continue to hold our API2 price forecasts at $123/t. In the year-to-date, API4 prices are averaging $121/t, $1 lower than our API4 price forecasts of $122/t. However, given that Indian buying has been increasingly taking more coal from Indonesia, thereby displacing volumes of South African coal, we are decreasing that average to $119/t to reflect that change. Newcastle prices are currently averaging $123/t, lower than our forecast of $131/t, given the oversupply post the Japanese earthquake. As a result, we are revising that lower to $125/t for 2011.

Further pressure on prices as hydro situation improves and stockpiles are high

Figure 5: ARA coal stocks are high

6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (in mt) 2010 2011 4 year average

Figure 6: UK utility stocks are below the 5-year average

20 18 16 14 12 10 8 Jan Feb Mar Apr May Jun Jul
Source: McCloskey, Barclays Capital

(in mt)

2010

2011

5 year average

Aug Sep Oct Nov Dec

Source: Clarksons, MCcloskey, EMO, OBA, Barclays Capital

19 July 2011

Barclays Capital | Coal and Freight Monthly

Atlantic demand: Weather, Rhine and Rhone

Renewables and power imports help to offset German coal burn

Despite the capacity gap created by the shut-down of 8.3 GW of German nuclear plant, German coal burn remains limited, as the gap has been filled with generation from renewable sources, including the 15GW of photovoltaic power plants and imports of nuclear power from the Czech Republic and France. With the Rhine River levels deteriorating again and now below seasonal averages, transporting coal from the ARA ports on barges or by rail has resulted in increased costs to utilities. In France, the Rhone River levels are currently low, and further deterioration could result in outages of French nuclear plant due to a lack of cooling water. A drop in French generation would curtail exports of power to Germany and would be positive for coal demand. This highlights the important role weather will play in determining coal burn over the coming two months. If Europe is predominantly going to be hot and dry, as suggested in the report by ENTSO-E (European Network of Transmission System Operators for Electricity), there is a fair chance of cooling water restrictions in some of the North Sea region countries for river located plants (especially in France). According to ENTSO-E, in September, France could require imports of up to 6000MW to cover the minimum required margin. As of April, French and German coal imports have underperformed relative to our expectations; we have adjusted total German and French coal imports for 2011 lower by 11% and 12%, respectively. Similar trends of lower than expected coal imports are seen in Italy and Spain. While in the UK, coal imports have been on the low side, we believe this more to do with destocking rather than actual coal burn being reduced. Overall, we adjust our European imports for 2011 down 5%. Given that there are conflicting views on expected European weather, ranging from continuous rain to a sustained period of hot and dry weather, the outcome for European coal burn is complicated. If there were a hot, dry summer, the Rhone and Rhine River levels would further deteriorate, and we would expect power station coal stocks in Germany to run low due to higher demand feeding greater air conditioning use, less hydro and nuclear availability and limited barges pulling coal from ARA ports. While this would be supplemented by healthy output from the 15GW photovoltaic capacity, the demand for coal would increase and the key issue would be the ability to move coal out of ARA ports and get it to power stations. At the very least, this would support ARA prices, although upside might be kept in check by limitations on the ability to move coal from port to power station. On the other hand, if there were wet and cool weather across Europe, improving Rhine River levels would mean barges functioning at full capacity and no additional cost to utilities to draw stocks from ARA ports. While this does not promise increased coal burn, there would be a more balanced distribution of stocks between utilities and ports. Wet weather would not bode well for Germanys photovoltaic cells but would mean hydro levels across Europe will pick up and nuclear output would not be threatened with outage. As there would be less (or no) interruptions in the export of power to Germany and neighbouring countries, ARA prices would see less support and further downward drift would be expected. In terms of long-term fundamentals, Germany has been focussing on replacing some of the lost nuclear capacity with renewable generation capacity, particularly from wind and solar. The German governments draft renewable energy act, due to take effect at the start of 2012, looks to promote 10GW of off-shore wind by 2020. Looking at the support framework set by the governments draft renewable energy act, a report by offshore wind agency WAB argued that the proposed guaranteed feed-in payments would not provide a sufficiently attractive return on investment to attract new funds to the German offshore sector. If only half the planned offshore target is achieved, or 5GW, coal generators could be needed to generate an additional 15TWh (assuming 35% utilisation for offshore turbines), the equivalent of extra coal burn of about 4.5mt/year.
4

Scenario One: Dry weather in Europe

Scenario Two: Wet weather in Europe

Germany and wind energy

19 July 2011

Barclays Capital | Coal and Freight Monthly

Norwegian water reservoir levels have improved from the weak start to the year due to heavy rains during the last three weeks of June. Hydro levels at 67% are now above seasonal averages and well above the 52% seen last year. Available electricity output capacity is now above 50,000GWh, or about 60% of the total installed capacity. The increased hydro levels have moderated power prices and reduced demand for thermal coal across Scandinavia. We expect the water levels to improve from here, provided the rainfall continues.
Turkish coal imports fall in May but up 30% y/y

Turkish steam coal imports fell in May to 1.2mt, compared with 1.37mt in the same month last year, as the take from Colombia fell to the lowest level since July 2010. However, total steam coal imports for the first five months reached 7.8mt, up 30% y/y. Supplies from Russia regained top spot from Colombia in May, with 0.81mt, compared with 0.74mt last year and higher than Aprils 0.70mt. Year-to-date imports from there were 3.77mt, up from 3.53mt over the same period in 2010. Imports from Colombia saw a dramatic fall after outperforming Russia in April. In June, coal stocks at Northwest European ports were steady, with more cargoes arriving from the Baltic ports carrying Russian coal, in addition to the high volumes from Colombia and marginal supplies from the US. Among the ARA ports, Amsterdams OBA has stockpiles totalling 1.6mt (unchanged m/m), while Rotterdams EMO terminal has 2.9mt of stockpiles (down 0.3mt m/m). Rhine River levels had shown significant improvement in mid-June; however, with rainfall receding, the river levels have declined once again below seasonal averages but are set to improve with the oncoming rainfall expected in Europe.

European stock levels

Atlantic supply
Indian imports from South Africa fall

South African coal exports totalled 4.78mt in June. South Africa exported 1.2Mt of coal to India in June, little changed m/m. Indian exports accounted for 25% of the countrys total exports of 4.8Mt, while China was the second largest importer of South African coal at 770kt, up from 320kt in May. Exports to India have declined during the first half of this year due to high API4 prices, which have forced buyers to seek cheaper alternatives from Indonesia and other lower spec coal. Indian imports from Richards Bay (RBCT) have fallen 21% in H1 11 on a y/y basis, while Chinese imports from Richards Bay have increased 18% to 3.14mt in the January to June period. In H1 11, South Africa supplied 27.42 million tons of coal globally with Chinese and Indian imports accounting for about 39% of exports (17.7mt, up 1.7% y/y) and the Atlantic basin taking 9.55mt. Over the past few months, disruptions to South African coal output were threatened by possible strike action by the National Union of Mineworkers (NUM) over wages in the coal sector. In the last round of talks, coal producers offered NUM a wage rise offer of 4.2% to 4.5%, well below labour demands of 14%. The difference is that food and fuel price pressures are stoking wage demands, while the big mining companies say they can illafford to offer increases far above inflation. The effect of any ensuing strikes will depend on duration: a short strike of a week or two would likely have little immediate effect on South African coal exports as RBCT stocks are ample to cater to present demand. A strike of longer duration, say a month, would eventually curtail the supply of South African coal into the market, eventually providing support and upside to API-4 prices and most other coal benchmarks. Russian coal output was steady during June. Russia is expected to emerge as Indias third source of thermal coal imports after South Africa and Indonesia. Though still in an evolving phase, coal imports to India from the Eastern Russian ports of Vladivostok, Vanino, Vostochny and others on the Pacific are rising and re expected to exceed 1mt this year. Major Russian miners are building large coal terminals on Pacific ports to meet the
5

South Africa coal mine strikes, limited effect

Russian coal supplies steady and India emerges as a new destination

19 July 2011

Barclays Capital | Coal and Freight Monthly

additional demand pull from Asia. The coal volumes from Russia, though insignificant at this juncture compared with our projected Indian import total of more than 90 mt for 2011, may in the long run reduce the countrys dependence on current major suppliers (Indonesia in particular). The first move in this direction was made by Indias largest coal importer and infrastructure major Adani Enterprises in early 2011, when it brought a capesize coal cargo from Vostochny to the privately run Mundra Port on the west coast of India.
Russian coal supplies competing with Colombian supplies in Turkey

Russian and Colombian supplies have found an increasing market for steam coal in Turkey, which is expected to increase its steam coal imports nearly 30% between 2011 and 2013. Turkish coal fired power plant capacity is expected to double in the coming years and usage by the cement industry is set to consume a good amount of steam coal. Turkey is the worlds largest exporter of cement and its fourth-largest producer. The reason Colombian coal is entering Turkey is largely due to availability and limits to the export of coal from Russia. In Russia, railcar freight rates have been increasing due to the decommissioning of old railcars and the increased demand on rail for transportation of coal and construction materials, particularly for the 2014 Russian Winter Olympics. We expect this railcar situation to last until early 2012, as there has been a steady increase in activity in rail wagon manufacturing in Russia. The costs and limits on rail freight have provided an opportunity for Colombian coal to be provided at competitive price levels. Colombian steam coal exports touched 35.63mt during H1 11, up 5% y/y. Among the major mining regions, Cerrejon exports in H1 11 reached 15.21mt up 1.4mt y/y, while Drummonds exports were almost flat y/y at 10.48mt. During H1 11, exports to Europe touched 25mt a 50% y/y increase in the year-to-date. The Netherlands is the largest destination for Colombian coal with 9.17mt exported during H1 11, followed by Denmark which received 3.28mt, Israel with 2.64mt, the UK with 2.51mt and Turkey with 2.11mt. French imports from Colombia declined to 0.6mt in the six-month period, compared with 1.03mt last year. The increase of exports to Europe has been offset by the fall in exports to the Americas to 9.81mt from 11.56 mt in H1 10. Most of the reduction has been to the US, which is increasingly exporting coal. Exports to Chile have grown 23% to 2.31mt in H1 11. Exports to Asia have fallen 86% to 0.81mt, compared with the 5.79mt during the same period last year. Exports to China were reduced the most, falling by 2.95mt to a mere 165,000mt during H1 11. Also shipments to South Korea were reduced almost 75% from 0.82mt in H1 10 to H1 11. In the next four to five years, Colombia has few new capacity expansion projects coming online such that Colombian output growth will run at a slower pace than expected due to delayed delivery of large mining equipment from Japan. The US has become a key supplier into the European market in 2011, with H1 11 US east coast coal exports were up 32% from 22.9 mt in H1 10. Combined coal exports from Hampton Roads and Baltimore ports in June 2011 were up 1.22mt to 4.72mt. Deliveries to Italy almost tripled on a y/y basis in June, touching 0.63mt in the month. Although a good portion of the increase accounts for met coal, steam coal volumes to Europe are increasingly picking up. In particular, given the natural gas glut in the US, we expect the US to slowly and steadily develop its export capabilities. US coal is attractive to Europe because it is being offered at a discount. In particular, aggressive discounts have been offered for high sulphur Illinois Basin thermal coal. Despite their high sulphur, chlorine and AFT levels, they have become more popular with international buyers in recent months given that they are priced at a $15-30/t discount to API2. As the specification of the coal limits its use in Europe, it will take considerably more strength in API4 prices (or greater discounts to US coal) to drive higher exports of steam coal. However, given the limited export infrastructure in the US, we still expect that US exports of coal to be dominated by coking coal.
6

Colombian steam coal exports up 5% y/y

Colombian long term supplies

US exports into Europe

19 July 2011

Barclays Capital | Coal and Freight Monthly

Pacific basin: Balanced

Prices have been range bound around $120/t
Pacific basin coal prices have been stuck in a tight range around $120

Since the onset of summer, Pacific Basin coal prices have appeared comfortable trading in a tight range around $120/t. The prompt Newcastle contract dipped below this level briefly in mid-June, and though prices have rebounded since then, the momentum for moving much higher has been weak. At the same time, Newcastle has remained at a premium to API4 but stayed at a discount to API2, with a contango remaining along the entire forward curve. At current levels, we do not expect prices to push significantly higher in the near term, while on the other hand still-robust demand should keep prices well supported. After a period of re-stocking, consumers in main importing centres appear to be relatively well stocked. Chinas improving hydro situation is easing concerns about power shortages, while the import arbitrage window with Australia remains closed. Indian purchasing interest is being dampened by the monsoon season, whereas demand from Japan remains lacklustre. Anecdotal evidence suggests that some Atlantic coal has been sold at discounts into the Pacific basin, increasing supply and further dampening price upside.

Prices should remain well supported although upside in the near term looks limited

Pacific demand: Restocked

Domestic prices in China fell for the first time in three months and have been stable since

The uptrend in Chinas domestic coal prices has faltered, reflecting a noticeable improvement in domestic supplies. After rising more than 10% since late March, FOB prices of 5,500kcal/kg NAR coal at Qinhuangdao port declined in early July and have remained largely stable since then. Supply of imported material has increased imports of thermal coal rebounded by 57% y/y to 7.5mt in May, while exports plunged 53% y/y to just 0.36mt, marking a sharp turnaround from the past three months when imports came in consistently below 5mt in each month. In addition to increased overseas supplies, good rainfall has helped bring about a recovery in hydro generation levels and alleviate the tight power situation in the south. The earlier restocking by utilities also means that coal stock levels at major utilities have moved back to a comfortable 17 days of supply, while port stocks have also increased significantly, with QHD stocks in particular moving towards 8 mt. The domestic coal tightness has eased compared with a month ago, although seasonal demand is likely to be strong and should keep the situation relatively tight, particularly given the unpredictability of hydro. Nonetheless, there should be less impetus for the Chinese authorities to make changes to the 17% import VAT, as originally anticipated. Without any reductions in the VAT, the arbitrage window remains closed, offering no incentives to import. This is largely in line with anecdotal reports that business between Chinese consumers and regional producers have come to a standstill recently, with material sold only if producers are willing to offer significant discounts to international markers. The onset of the monsoon season in India has been accompanied by reports of softer purchasing interest in recent weeks. Despite this, fundamentals remain positive as far as India is concerned. Power generation is still growing at a robust pace of 8.2% y/y in June, with thermal generation rising by 5% y/y. Indeed, the rate of generation exceeded its June target by another 2%, after coming in 4% higher than target in May. The rate of new generation capacity additions has continued at a solid pace. According to data from the Central Electricity Authority (CEA), India added a total of 550MW in generation capacity in May, of which 300MW was in thermal-fired plants. This was lower
7

Chinas hydro situation has improved

The import arb window remains shut

Indias buying interest has weakened during the monsoon season, but underlying generation still robust

New generation capacity is being added at a solid pace

19 July 2011

Barclays Capital | Coal and Freight Monthly

than the original target of 825MW and slightly lower than additions in the prior two months (735MW and 1700MW in April and March). So far this fiscal year, new capacity additions have been about 66% of the target for thermal capacity and about 69% of the total target.
Domestic Indian coal production still running below targets

Meanwhile, domestic coal production grew by 1% y/y to 40.7mt in May, 4.4% lower than the 42.5mt target set for the month. Production in the first two months (April-May) of the current fiscal year has totalled 80.48mt, 3.4% below target and is unlikely to significantly improve in the near term given uncertainty about environmental regulations. A group of ministers (GoM) has been formed to sort out differences between the environment and coal ministries, but has failed to make much progress so far. At the same time, Japans coal consumption continues to be hampered by damaged coalfired plants and the effect of the 11 March earthquake on overall electricity generation. Electricity generated across the 10 major utilities fell by another 4.7% y/y in May, with nuclear generation in particular plunging by 31.5% y/y, alongside a fall in the nuclear capacity factor to 40.9%, lowest in our records (dating back to January 2006). Thermal generation again rose to plug the nuclear shortfall (+18.6% y/y), with oil and LNG the biggest beneficiaries, whereas coal demand declined. Over March-May, Japans utility coal consumption has fallen by 1.5% y/y, while crude, fuel oil and LNG consumption by utilities have gained by 150%, 18% and 14% y/y, respectively. Eventually, together with the gradual restoration of transport infrastructure and coal-fired stations, coal is set to benefit from the uncertainty about Japans longer-term nuclear policy. In early July, a government announcement to conduct stress tests on all reactors increased doubts about the safety of reactors and injected uncertainty into whether reactors can be restarted without first undergoing the tests. This has already caused delays to the restart of a few nuclear stations for instance, a withdrawal of decisions by the Mayor of Genkai to restart nuclear plants on 7 July, as well as a delay by Shikoku Electric to restart its No. 3 reactor on Ikata (890MW). Figure 8: Japans nuclear capacity factor falls to a new low
80% Capacity Factor (%) 12-month average

Nuclear capacity factor fell to a new low in Japan, but coal demand also fell

But coal will benefit from the likely long-term direction of Japans energy policy

Figure 7: The import arb window into China remains closed

0 -5 -10 -15 -20 -25 -30 -35 -40 -45 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Newcastle/China spread (incl 17% VAT)
Source: CoalSpot.com, CCTD, Barclays Capital

Newcastle/China spread (incl 17% VAT)

75% 70% 65% 60% 55% 50% 45% 40% 35% May-07 May-08 May-09 May-10 May-11

Source: FEPC, Barclays Capital

19 July 2011

Barclays Capital | Coal and Freight Monthly

Pacific supply: A price for carbon

A carbon scheme in Australia has just been announced

The announcement of a carbon scheme has dominated attention in Australia. On 10 July 2011, the government announced that a carbon tax of A$23/t will be introduced from 1 July 2012. The starting price is some 35% higher than current EUA carbon prices. About 500 of the highest polluting businesses will have to pay the carbon price, which will rise by 2.5% in real terms every year until 1 July 2015, when it will be replaced by a market-based emissions trading scheme. Legislation is expected to be brought into the lower House of Representative in August, with a vote in Senate expected two or three months later. If approved, this will be the worlds second national emissions scheme outside Europe and will inevitably bring about some increased costs for the coal mining industry. It is still early to fully assess the effect of the proposed carbon scheme on the coal mining sector, but there are a few important points to note: According to the government, this tax will add about $1.80/t to coal production costs, but the miners with higher methane emissions would face higher cost pressures. A report commissioned by the Australian Coal Association (ACA) in June showed that about 4,700 jobs will be lost in existing coal mines, 14,100 jobs in the Australian economy and loss of coal sales would exceed $22bn over nine years. In addition, by 2020, a cumulative 262mt of coal production could be lost from existing mines, while almost 380mt of production from potential mines could be lost. The report was based on an initial carbon price of A$20/t and assumptions that no concessions would be given to any coal mining projects. However, such industry-based assessments tend to overestimate the effects of proposed environmental legislation on their industry. A $1.3bn assistance scheme would be offered by the government to the coal industry. However, according to the ACA, this would cover less than 10% of the carbon tax bill for the coal industry, far below the 94.5% offered to other trade exposed sectors of the economy, including aluminium and zinc smelting, steel manufacturing, flat glass making, pulp and paper making.

The scheme will increase costs for the coal mining industry

Queensland terminals and producers are slowly recovering from the floods

In terms of actual shipments at present, data suggest that terminals in Queensland are slowly recovering from the floods, though export volumes remain lower compared with last year. According to data compiled by McCloskeys, the Dalyrymple Bay Coal Terminal (DBCT)s throughput is likely to reach an annualised 52-53mt for the July-September quarter, a marked increase from less than 45mt/y over January-May 2011, although still some way below the 66mt/y reached in the same quarter in 2010. Other major terminals are also showing improvements, though a few obstacles pose short-term risks, including maintenance (11 July 21 August) at one of the berths at Hay Point and strike action at Brisbane terminal. Meanwhile, most mines have lifted their force majeure declarations, although coal stocks remain very low. On the other hand, Newcastle exports have continued at normal capacity. While ship loading has continued to underperform targets, vessel queues have remained manageable at below 20, suggesting there are no severe infrastructural bottlenecks at present.

19 July 2011

Barclays Capital | Coal and Freight Monthly

Freight: Spinnaker
Freight rates begin to soften again

Rates in Atlantic basin are healthier

Freight markets drifted lower, albeit slowly, in June, with the BDI moving in a very tight range of 89 index points. The movement is in line with our expectations, with the rebound in May having slowed initially and now showing signs of softening further. The West Australia to China route for Capesizes lent some support to the index over the month, but we expect this to tone down over the coming months due to ample iron ore and coal stockpile levels in China and demand continuing at moderate levels with the growth rate possibly losing steam. Rates in the Atlantic basin remain healthier than those in the Pacific basin, yet they are likely to balance out once bunker fuel prices average lower and allow for adjustment of fleet size over the basins. We expect iron ore exports from Brazil to rebound in August, in line with seasonal trends. In the Atlantic basin, Panamax rates were boosted as low water levels on the Mississippi River restricted load levels. The reductions are up to 10% on panamax loads with access being limited to the deepwater channel on the approach to the port of New Orleans along the lower Mississippi-Gulf. The onset of the Indian monsoon has limited Supramax iron ore exports into China. We expect Indian exports of iron ore to resume in September once the monsoon season subsides and the removal of the export ban finally takes effect. The month also saw the maiden voyage of the first of Vales Chinamaxes. The 400,000 dwt ship carrying 391,000 tonnes of iron ore from Brazil was originally destined for China. However, it was rerouted to anchor at the Taranto port in Italy incurring significant bunker fuel prices. Vale stated commercial reasons, not political reasons, for its decision to reroute its iron ore cargo all the way from China to Europe. Seven more of these ships are expected to be delivered by the end of this year. There are currently 10 ports in the world that can accommodate Vales 400,000 dwt ships, which require a draft of 23 meters. However, Vale is also building a portable transhipment station in Southeast Asia that will help redistribute iron ore at a cost effective rate to other consumers in the region who require smaller amounts of iron ore and who have smaller ports. We expect the entry of these Chinamaxes to leave a lasting impression on Capesize trade routes.

Mississippi river and Panamax rates

Indian Supramax cargoes limited by monsoon

Vales Chinamaxes enter the fleet

Iron ore
Chinese iron ore imports flat y/y

Iron ore inventories for mid-July at ports in China are at record levels of 94.04Mt The Chinese General Administration of Customs reported trade figures for the month of June, disclosing iron ore imports of 51.1Mt, -4% m/m and flat y/y. The import figure was in line with 2010 monthly average of 51.6Mt. While the headline figure is relatively soft, we believe it is mainly explained by de-stocking activity at Chinese steel mills, as crude steel production (CSP) remains high in China, and weaker iron ore exports from India affected by the monsoon season. For 2011, our Latin American research team forecasts Chinese iron ore imports of 669Mt, an 8% y/y increase. According to the National Bureau of Statistics, Chinese domestic iron ore (ROM: run-ofmine) output climbed for the fourth consecutive month to 124Mt in June, +21% m/m (we calculate an implied grade of c.17% Fe). Domestic iron ore production is gaining share from imported material, and we expect high cost domestic production (marginal tonnes above US$150/ton) to support iron ore spot prices in the short/medium-term. Concurrently, our Latin American Equity Research team views Chinese steel mills to have been aggressively destocking in iron ore. We expect iron ore imports to pick up in H2 11.

Chinese domestic iron ore climbs for the fourth consecutive month

19 July 2011

10

Barclays Capital | Coal and Freight Monthly

Chinese crude steel production resilient

On the end-user demand front, at 58.62Mt, Chinas crude steel production was flat m/m in June, though up 11.5% y/y. Annualised total crude steel production in H1 11 now stands 12.6% higher y/y at 705.7Mt. Nevertheless, there are signs of improvement though the first part of the month showed moderate production, Chinas daily output of crude steel averaged 2.02Mt in the last ten days of June (record high figure and up 3% from mid-June) according to preliminary figures disclosed by the Chinese Iron and Steel Association (CISA). Resilience continues in Chinese CSP figures, which so far have been unaffected by energy rationing and slower demand. If we mark to market 700Mt in our Latin American Equity Research teams seaborne iron ore S&D model, we arrive at an implied notional deficit of 84Mt (versus our base case deficit of c.40 Mt). The Indian ministerial panel on mines unanimously approved the draft Mines and Mineral Bill 2011 and has submitted it for final clearance to the Cabinet. According to Mr. Jairam Ramesh (Environmental Minister), the new bill should require coal companies to share 26% of their profits with local communities and other miners to pay twice as much in royalties as they currently pay to the government. Mr. Siddharth Rungta (president of the Federation of Indian Mineral Industries) stated that the resultant increase in costs from royalties should increase total costs of iron ore miners by roughly 10%, reducing the competiveness of the Indian iron ore exporters. On balance, the bill may eliminate the higher cost Indian export capacity, which we believe is supportive of iron ore spot prices. Brazilian iron ore exports during June came in at 25.5Mt, a 3% m/m decline (previously disclosed). The slight decrease was mainly attributable to lower demand from Europe at 5.8Mt (-7% m/m) and a strong deceleration of volumes channelled to Japan, at 2Mt, down 18% m/m and 35% below the monthly average of 2010. Shipments to China were robust at 13.2Mt, up 7% m/m. We expect a recovery from Japanese demand during the Q4 11 on reconstruction efforts.

Indian mine royalties increased

Brazilian iron ore exports slightly lower in June

Figure 9: Brazilian iron ore exports low seasonally, but expected to rebound in August
# of ships (LHS) Dead Weight Tonnage (Combined - Mt) - RHS 160 140 120 100 80 60 40 20 0 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 26 24 22 20 18 16 14 12 10

Source: Barclays Capital Latin American Equity Research Team, Bloomberg, Barclays Capital

19 July 2011

11

Barclays Capital | Coal and Freight Monthly

Fleet analysis: Current fleet, age profile and the orderbook.

Capesize
More Capes on the way

As of June 2011, the Capesize fleet consists of 1270 capes with a total volume of 230 million dwt. The orderbook from the current month to early 2014 shows another addition of 436 capes, representing a further expansion of close to 35% of the current fleet. More than half of the close to 450 ships in the orderbook is expected to be delivered within 2011. In terms of the age of the current Capesize fleet, close to 45% of the fleet is only up to five years old, while ships older than 20 years is a very small 14%. Given the age profile of the current cape fleet, our expectations on how many capes will be sent for scrappage are low. Scrappage levels have only now started picking up, those that have been sold for scrappage are still operating, and there is a considerable lag until the actual time of delivery into the scrap yard. On the demand side, we do not expect a high growth rate, which leads us to believe that rates will be capped at low levels until the end of 2011. Further, Capesize rates are expected to be affected the most compared with Panamaxes or Supramaxes that have a slightly lower rate of fleet growth. We expect the 400,000 dwt Vale ships to have a significant effect on Capesize rates, given that the long and lucrative Brazil-to-China route will now demand fewer charters from the biggest miner in Brazil. Also, the iron ore route from Brazil to Europe will receive less volume given that the 400,000 dwt ship was rerouted to Italy on its maiden voyage, indicating that European demand for iron ore can also be met cost effectively through the deployment of these big ships. Cape rates on the Brazil to China iron ore route have now fallen to $20/t and far less than the nearly $100/t in 2008 when Vale decided to place orders for its own ships to transport iron ore. At present freight rate levels, transporting iron ore using the giant Chinamaxes may not really look as beneficial as in 2008; however, after analysing Vales cash flows and the amount allocated for the ships as a percentage of its total capex, as well as the companys own statements, we believe Vale will continue to take delivery of rest of the Chinamaxes on its orderbook creating further pressure for Capesizes. However, given that these huge ships can only dock in ten ports, we see deployment of Capesizes on shorter routes and possibly even routes of redistribution of iron ore from the portable transhipment stations or from the Malaysian distribution centre to Asia and from the Oman distribution centre to the Middle East and Africa. This is where we also expect good demand for smaller ships, but the conclusion is that long routes for capes carrying iron ore from Brazil are likely to be less lucrative. Figure 11: Capesize orderbook: 525 ships and when they will arrive
2014 1%

The future for cape routes

Figure 10: Capesize age profile of current fleet

(26+) 5% (16 to 25 years) 25%

(2013) 25%

(2012) 26%

(upto 5 years) 44% (6 to 15 years) 26%

Source: SSY, Clarksons, Lloyds List Intelligence, Barclays Capital Source: SSY, Clarksons, Lloyds List Intelligence, Barclays Capital

(2011) 44%

19 July 2011

12

Barclays Capital | Coal and Freight Monthly

Panamaxes
Panamaxes to outperform Capesizes

As of June 2011, close to 1900 Panamax ships with a total volume close to 143 million dwt are in operation. Panamaxes have so far this year managed to perform better than capes on the rates front, with the operating cost well covered so far. Panamaxes benefit from the potential of better exports out of Russia during this summers grain season. It already received a fair degree of support in May during the South American grain season. In 2011, already close to 80 Panamaxes have been delivered from the orderbook, and for the rest of the year, a further 280 Panamaxes are expected to be added to the fleet. Panamaxes have fared better than Capesizes so far this year because in 2010 fewer Panamaxes as a proportion of the total fleet were added than the Capesize. We expect Panamaxes to fare better than capes. However, looking at the orderbook until early 2014, more than 700 Panamaxes are expected to join the fleet, which essentially means an additional 50% of the current fleet is going to be added over the next three years. Though Panamaxes are well supported now, pressure could build by mid-2012 as the bulk of these new ships come online. However, from a demand perspective, we expect more cargo to be available for Panamaxes than for Capes. Panamaxes have the advantage of size when it comes to delivering resources whether it be coal, iron ore or grains to new destinations with smaller ports. Given that we are positive on Indian seaborne demand for resources, in particular coal, we expect Panamaxes to charter through healthy routes with India as a destination. Also, given the huge Chinamaxes from Vale setting up distribution centres in Oman and Malaysia, we expect demand for smaller ships to carry iron ore from these centres to various destinations with smaller ports. Figure 13: Panamax orderbook: 789 ships and when they will arrive
2014 1%

Figure 12: Panamax age profile of current fleet

(26+) 14% (upto 5 years) 44%

(2013) 25%

(16 to 25 years) 25%

(2012) 26% (2011) 44%

(6 to 15 years) 26%
Source: SSY, Clarksons, Lloyds List Intelligence, Barclays Capital Source: SSY, Clarksons, Lloyds List Intelligence, Barclays Capital

Port congestion
Congestion levels increased in June

Port congestion increased by the end of June across the major ports, with a total of 40 ships queuing, which were carrying iron ore, and an average waiting period of 5.6 days. Once Chinese ports drew stocks in the first week of July, most of the congestion cleared, with levels now reducing to 28 and the average waiting period reducing to 4.3 days. Coal ports in Australia were affected by unfavourable weather in Hay Point, which increased berth delays. Congestion at the Newcastle port has increased due to coal availability issues. The last week of June also saw increased congestion at Indian ports, with 13 ships waiting at Goa, compared with six ships by the beginning of July, as the monsoon sets in and affected Indian west coast exports. The average waiting period on the Indian west coast has increased as a result of the monsoons and the loadings.
13

19 July 2011

Barclays Capital | Coal and Freight Monthly

Short-term outlook
Short-lived sudden spikes

In the coming months, we expect freight rates to fall further, albeit slowly. We expect the BDI to average 1250 in H2 11. In 2012, as the fleet size continues to build, we expect a more balanced distribution of the fleet across both the basins and rates to be stable, albeit at low levels. The sudden spikes in rates, when seasonal demand picks up, will be short lived because, given the balance of vessels in both basins, marginal charter requirements will be absorbed easily by the market. Figure 15: Net bulker additions, more ships added to the fleet

Figure 14: The Baltic Indices: A drift lower and then range bound for the rest of the year
2,400 BPI 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11
Source: Reuters, Barclays Capital

140 BDI BCI 120 Net change in the bulk fleet (no. of ships) 100 80 60 40 20 0 -20 -40 Jul-11 -60 Jun-09 Dec-09 Jun-10 Deletions Additions Net Change Dec-10 Jun-11

Source: SSY, Barclays Capital

19 July 2011

14

Barclays Capital | Coal and Freight Monthly

Coal prices and indicators

Figure 16: Exchange coal prices, $/t
240 210 160 180 150 120 90 40 60 30 Jul-06 0 Jul-02 $/t $/t 120 API 2 API 4

Figure 17: FOB coal prices, $/t

200 FOB Richards Bay prices FOB Newcastle prices

80

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-05

Jul-08

Jul-11

Source: EcoWin, Barclays Capital

Source: McCloskeys, Barclays Capital

Figure 18: Coal forward curve

94 92 90 88 86 /t

Figure 19: Coal price volatility

60 50 40 30 20 10 10 day close-to-close coal price volatility

84 Aug-11

Nov-11 This Week

Feb-12

May-12

Aug-12

Nov-12

Last Week

3 Months ago

0 Jan-11

Feb-11 Mar-11

Apr-11 May-11

Jun-11

Jul-11

Source: EcoWin, Barclays Capital

Source: Reuters, Barclays Capital

Figure 20: Global steel production

40% 30% 20% 10% 0% -10% -20% -30% May-09 Global steel production, y/y change

Figure 21: Chinese IP

22 20 18 16 14 12 10 8 6 Chinese IP growth, % y/y

Nov-09

May-10

Nov-10

May-11

4 Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Source: EcoWin, Barclays Capital

Source: EcoWin, Barclays Capital

19 July 2011

15

Barclays Capital | Coal and Freight Monthly

Atlantic Basin fundamentals

Figure 22: UK steam coal imports
4.5 mt 4 3.5 3 2.5 2

Figure 23: Fuel switching in UK power generation

UK Natural Gas (TWh) UK Coal (TWh)

16 14 12 10 8

1.5 1 0.5 Apr-08

6 4 Jun 06

Apr-09

Apr-10

Apr-11

Jun 07

Jun 08

Jun 09

Jun 10

Jun 11

Source: McCloskeys, Barclays Capital

Source: DECC, NETA, Barclays Capital

Figure 24: German imports by region

Other 5% Colombia 30%

Figure 25: US exports to the European union

1.8 1.6 1.4 1.2 1 0.8 mt

South Africa 4%

Russia 42%

0.6 USA 3% 0.4 0.2 0 May-03 May-05 May-07 May-09 May-11

Poland 16%
Source: McCloskeys, Barclays Capital

Source: McCloskeys, Barclays Capital

Figure 26: Share of South African exports to key countries

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% May-07 May-08 May-09 May-10 May-11 India Netherlands

Figure 27: South African exports by basin

6 5 4 3 2 1 0 May-08 mt Total Atlantic Total Pacific

May-09

May-10

May-11

Source: McCloskeys, Barclays Capital

Source: McCloskeys, Barclays Capital

19 July 2011

16

Barclays Capital | Coal and Freight Monthly

Pacific Basin fundamentals

Figure 28: Power generation by source
Coal Nuclear Japan Oil Hydro Natural Gas Others

Figure 29: Japan power consumption by sector

30 20 10 Japan power demand by sectors (% y/y)

South Korea

0
India

-10 -20
0 20 40 60 80 100

China

-30 Sep-07

Household Other Total Industrial Aug-08 Jul-09 Jun-10 May-11

Source: FEPC, Barclays Capital

Source: FEPC, Barclays Capital

Figure 30: India power generation

20% y/y Thermal Total

Figure 31: Indonesian coal exports by Asian country (YTD)

Japan, 13% Others, 27%

15%

10%

South Korea, 13%

5%

0%

Taiwan, 8%

-5% Sep-08

China, 14%
Aug-09 Jul-10 Jun-11

India, 25%
Source: McCloskeys, Barclays Capital

Source: CEA, Barclays Capital

Figure 32: Australian coal exports by Asian country (YTD)

Others 9% Taiwan 14% China 5%

Figure 33: Monthly thermal coal imports by country

40 35 30 25 20 15 10 Mt

Korea 22%

Japan 50%

5 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Japan South Korea Taiwan China

Source: McCloskeys, Barclays Capital

Source: McCloskeys, Barclays Capital

19 July 2011

17

Barclays Capital | Coal and Freight Monthly

China charts
Figure 34: China monthly power generation
50% 40% 30% 20% 600 10% 0% -10% -20% Jan-08 400 200 0 Nov-08 Sep-09 Jul-10 May-11 2000 2002 2004 2006 2008 2010 Total generation y/y Thermal generation y/y 1000 800

Figure 35: China electricity installed capacity

1200 GW Overall Coal-fired

Source: EcoWin, Barclays Capital

Source: China electricity council, Barclays Capital

Figure 36: Chinas domestic coal prices

940 890 840 790 740 690 640 Jan-10 RMB/t

Figure 37: Chinas coal railings and port handlings (mt)

160 150 140 130 120 45 110 100 90 40 35 30 May-11 Total railings (LHS) Port handling (RHS) 60 55 50 65

Aug-10 Shanxi (5500NAR)

Nov-10

Jun-11

Datong (5800NAR)

80 Sep-07

Aug-08

Jul-09

Jun-10

Source: CCTD, Barclays Capital

Source: CCTD, Barclays Capital

Figure 38: China monthly coal net trade

12 10 8 6 4 2 0 -2 -4 -6 -8 May-04 Sep-06 Jan-09 May-11 Net exporter Mt Net importer

Figure 39: Chinas inventory trends

70 60 50 40 30 20 10 0 Nov-07 Jun-08 mt Port stocks Generator stocks

Jan-09 Aug-09 Mar-10 Oct-10 May-11

Source: CCTD, Barclays Capital

Source: CCTD Barclays Capital

19 July 2011

18

Barclays Capital | Coal and Freight Monthly

COMMODITIES RESEARCH ANALYSTS

Barclays Capital 5 The North Colonnade London E14 4BB Gayle Berry Commodities Research +44 (0)20 3134 1596 gayle.berry@barcap.com Paul Horsnell Commodities Research +44 (0)20 7773 1145 paul.horsnell@barcap.com Roxana Mohammadian-Molina Commodities Research +44 (0)20 7773 2117 roxana.mohammadian-molina@barcap.com Trevor Sikorski Commodities Research +44 (0)20 3134 0160 trevor.sikorski@barcap.com Michael Zenker Commodities Research +1 415 765 4743 michael.zenker@barcap.com Commodities Sales Craig Shapiro Head of Commodities Sales +1 212 412 3845 craig.shapiro@barcap.com Martin Woodhams Commodity Structuring +44 (0)20 7773 8638 martin.woodhams@barcap.com Peter Rozenauers Commodities Sales, Non Japan Asia +65 9114 6994 peter.rozenauers@barcap.com Xin Yi Chen Commodities Research +65 6308 2813 xinyi.chen@barcap.com Costanza Jacazio Commodities Research +1 212 526 2161 costanza.jacazio@barcap.com Kevin Norrish Commodities Research +44 (0)20 7773 0369 kevin.norrish@barcap.com Nicholas Snowdon Commodities Research +1 212 526 7279 nicholas.snowdon@barcap.com Suki Cooper Commodities Research +1 212 526 7896 suki.cooper@barcap.com Kerri Maddock Commodities Research +44 (0)20 3134 2300 kerri.maddock@barcap.com Biliana Pehlivanova Commodities Research +1 212 526 2492 biliana.pehlivanova@barcap.com Sudakshina Unnikrishnan Commodities Research +44 (0)20 7773 3797 sudakshina.unnikrishnan@barcap.com Helima Croft Commodities Research +1 212 526 0764 helima.croft@barcap.com Miswin Mahesh Commodities Research +44 (0)20 77734291 miswin.mahesh@barcap.com Amrita Sen Commodities Research +44 (0)20 3134 2266 amrita.sen@barcap.com Shiyang Wang Commodities Research +1 212 526 7464 shiyang.wang@barcap.com

19 July 2011

19

Analyst Certification(s) We, Miswin Mahesh, Amrita Sen and Trevor Sikorski, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important Disclosures For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgibin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.

This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange. Barclays Capital Inc., U.S. registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019. Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca). Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital. In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutional investors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143. Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong. Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin). This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd. This material is distributed in Brazil by Banco Barclays S.A. This material is distributed in Mexico by Barclays Bank Mexico, S.A. Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Barclays Bank PLC-DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi). Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLC-QFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. This material is distributed in Dubai, the UAE and Qatar by Barclays Bank PLC. Related financial products or services are only available to Professional Clients as defined by the DFSA, and Business Customers as defined by the QFCRA. This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the Publication to be used or deemed as recommendation, option or advice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al Faisaliah Tower | Level 18 | Riyadh 11311 | Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number: 1010283024. This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21. This material is distributed in India by Barclays Bank PLC, India Branch. This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583. Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at 'wholesale clients' as defined by Australian Corporations Act 2001. IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Barclays Capital is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference. Copyright Barclays Bank PLC (2011). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request. EU16808