BarCap July8 Commodities Weekly

8/6/2019 BarCap July8 Commodities Weekly

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COMMODITIES RESEARCH 8 July 20

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 21

COMMODITIES WEEKLYSudakshina Unnikrishnan

+44 (0) 20 7773 3797

[email protected]

Kerri Maddock

+44 (0) 20 3134 2300

[email protected]

www.barcap.com

Commodity prices are mostly higher on the week. Oil prices have firmed and the latest

weekly EIA data were very constructive on both the inventory and demand front. Thesurplus of US oil inventories (excluding 'other oils') has now fallen to its lowest level

since December 2008 with the sharp reduction in products inventory the main

contributing factor. Macro concerns continue to dominate base metals price action,

although apparent progress in tackling the Greek debt crisis has offered the basis for a

short-term relief rally. Corn prices, which came under significant pressure after last

Thursdays USDAAcreage and Quarterly Stocks reports, have posted a modest recovery

with recent price declines being met with an uptick in import demand especially from

China with a key intent being to replenish domestic reserves.

Cross-commodities 6

Beijings central commitment to economic prosperity and high employment will continue todrive demand growth for commodities; Indian commodity demand growth is set to ease in

the short term as economic activity slows, but supportive structural factors should limit the

extent of the slowdown.

Energy 8

Diversion of drilling rigs to more lucrative oil opportunities is expected to pull gas-directed

drilling low enough in late 2012 to cause natural gas supply to first plateau and then slide

lower. This would mark a bullish turning point for gas; A carbon pricing scheme is due to be

unveiled in Australia this week and could add to the mounting challenges faced by miners;

our average annual price forecast for Brent in 2011 is unchanged at $112 per barrel, while

our 2012 Brent forecast is increased by $10 to $115 per barrel; In a week when the price ofcarbon stabilised in a disappointingly low 13-13.50 /t range, the usual chorus of we need a

central carbon bank rang through the air; The natural gas-directed rig count has fallen by

118 rigs since the peak of last year; Iraq Attacks on the rise as US departure looms.

Metals 14

As miners respond to record levels of global demand, supply-side pressures are building

leading to sharp increases in capital and operating costs.

Forecasts and data releases 15


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Barclays Capital | Commodities Weekly

8 July 2011 2

Commodity review

Commodity prices are mostly higher on the week. Oil prices have firmed and the latest weekly

EIA data were very constructive on both the inventory and demand front. The surplus of US

oil inventories (excluding 'other oils') has now fallen to its lowest level since December 2008

with the sharp reduction in products inventory the main contributing factor. Macro

concerns continue to dominate base metals price action, although apparent progress intackling the Greek debt crisis has offered the basis for a short-term relief rally. Corn prices,

which came under significant pressure after last Thursdays USDA Acreage and Quarterly

Stocks reports, have posted a modest recovery with recent price declines being met with an

uptick in import demand especially from China with a key intent being to replenish

domestic reserves.

Our Energy Flash Oil market update: 2012 outlook released this week delineates our oil

analysts detailed supply and demand forecasts for 2012 and changes to their oil price

forecasts for 2011 and 2012. The 2011 price forecasts were last changed on 24 March, while

the 2012 price forecasts have been unaltered since their initiation on 4 October 2010. The

2012 supply and demand forecasts show a continuation of robust emerging market demand.

Global oil demand is expected to grow by 1.38 mb/d, with non-OECD demand rising by 1.57mb/d. The main sources of demand growth in 2012 are expected to be China, India, Saudi

Arabia and Brazil. Non-OPEC growth is expected to rise by 0.42 mb/d. Output growth is

heavily concentrated in North and South America, and indeed outside the Americas non-OPEC

output is set to fall in 2012. In terms of the global price level, our oil analysts leave their Brent

forecast for 2011 unchanged at $112/barrel, while the 2012 forecast is increased by $10 to

$115/barrel. The increase in the 2012 price forecast is based on a further narrowing of global

spare capacity based on the balances, and by their view that the overall geopolitical context of

the market is likely to become increasingly uncertain as 2012 progresses. The severe

dislocation of WTI prices this year and the decoupling of WTI prices from both global prices

and other US benchmarks has made the forecasting of the Brent-WTI differential fraught with

difficulties and while our oil analysts still see the current size of differential as being

exaggerated, they are now pricing in a far longer period of dislocation and a continuing lack of

equilibrium relationships for WTI. As a result, their forecast for the average price of WTI in

2011 falls by $6 to $100/barrel. Those dislocations are also expected to hold back WTI relative

to Brent next year, and their 2012 forecast for WTI lags that of Brent in rising by just $4 to

$110/barrel. Price forecasts for later years are unchanged.

Indeed, a key risk to the oil market remains tied to global geopolitical risks and in the latest

Weekly Geopolitical Update we focus on rising violence in Iraq this summer,which is raising

new concerns about the ability of local security services to maintain order when US troops

depart at the end of the year. June was the deadliest month for civilians this year, with 340

killed while 14 US servicemen were killed in Iraq in June, making it the deadliest month for

US troops in three years. A particularly worrying aspect of the latest unrest is that many of

the attacks are occurring in Southern Iraq, which had been relatively peaceful in recentyears. These incidents in the South have been linked to Shiite militias with ties to Iran.

Several senior US officials have recently signaled a willingness to consider allowing some

troops to remain if the Iraqi government requests that their stay be extended and even

though Maliki reportedly wants to keep some US troops on hand, it will be politically

challenging for him to get the approval of the Iraqi parliament. Moqtada al-Sadr has publicly

warned that he will reactivate his Mahdi army and commence attacks on US troops if they

remain on Iraqi soil next year. The current increase in violence comes at a time when Iraq

has actually been experiencing a slow but steady increase in oil output. Having disappointed


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8 July 2011 3

last year, when production remained largely flat y/y, Iraqi output has started 2011 on a

reasonably strong footing. Nonetheless, Iraqs continued success depends largely on foreign

companies which must operate in what is still a post-war conflict zone, and the lack of basic

amenities and continuing militia violence keep the operating environment challenging.

This weeks base metals piece highlights how capital and operating costs in the resources

sector, and in particular in the metals and mining industry, are rising fast bringing backmemories of the double-digit cost increases that characterised 2006-08; the financial crisis

offered only a brief respite from structural supply-side pressures. As miners go full steam

ahead to bring on new production in response to record levels of global demand these

pressures are going to continue building, in our view. Cost drivers are diverse but the biggest

effects have come from energy, exchange rate shifts, equipment costs and a shortage of

skilled labour. The rising cost of meeting metals demand growth globally has implications for

far forward metals prices, which arguably have already been demonstrated this year. Despite

gyrations in front-end prices the far forwards have been more robust, with 63-month copper

prices up by 8% since the beginning of the year, while 3-month prices are down by 3%.

Focusing on emerging market demand implications for commodities, our cross-commodity

pieces this week focus on developments in China and India. As Chinas economy continues

its sustained advance and its society experiences rapid changes as a result, the social

agenda facing policymakers has been in flux. In our view, the strong central commitment to

economic prosperity and high employment, exemplified by plans to build massive

infrastructural projects and cap unemployment, will continue to drive demand growth for

commodities across the board. Here, we identify two elements of the

socioeconomic background that impact on commodities: the rural-urban balance and the

regional economic balance. In India, commodity demand is on a strong structural growth trend

with the combination of urbanisation, industrialisation and rising incomes points to surging

energy and industrial needs over the next few decades. Domestic commodity demand has

accelerated markedly in recent years and, as India progresses along the path of economic

development, this trend is set to continue. In the short term, however, the demand outlook is less

unequivocally positive, as slower economic activity risks curbing the strong demand growthmomentum. Tighter monetary conditions are beginning to be felt, particularly across rate-

sensitive segments of the economy such as discretionary consumption (eg, auto, consumer

durables) and investments, which are all large commodities end-user sectors, particularly for

metals. Yet, so far, there is little evidence in the data of any softening, suggesting structural

dynamics might be outweighing cyclical ones. Aluminium consumption is growing at double-

digit rates, while copper demand bounced back in March following a subdued start to the year.

In oil, domestic sales hit a new all-time high in April and y/y growth for the year to date is

running in line with last years robust pace.

Turning to the US natural gas market, our analysts take a detailed look at the current rig

count. The natural gas-directed rig count has fallen by 118 rigs since the peak of last year.

Although horizontal rigs have made up the majority of losses, on a percentage share basishorizontal rigs dominate the scene of natural gas production. Gas drilling continues to shift

from the traditional shale plays to the newer and liquids-rich basins, such as the Eagle Ford

and Marcellus. Natural gas supply growth could continue at lower rig count levels as rig

efficiency keeps improving. Our US natural gas analysts continue to believe that at the

current level (874 rigs), gas directed drilling should grow production incrementally. The

turning point in North American natural gas supply, by their projection, is not expected to

occur until Q4 12.


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8 July 2011 4

COMMODITY SECTOR VIEWS

Energy

Oil

June was a month of two halves for the oil markets. The first half of the month focused onOPEC and the meeting that ended without a consensus on raising production. The second

half saw the collective action by IEA member countries to release 60mb of SPR in 30 days.

These events created significant volatility throughout the month with prices first buoyed in

the aftermath of the failed OPEC meeting, and then a knee-jerk reaction downward

following the IEA release, only to rebound in a week to pre-SPR levels. While the result of the

OPEC meeting firms our fundamental views further, the SPR release does not alter our

constructive view on oil markets as it is the equivalent of borrowing oil from the future to

subsidise OECD demand. The IEA's action, we believe, puts pressure on producer consumer

relationships. Possible implications of the release could include less keenness on increasing

output by producers, a possible surge in prices when the 30 days are over and also

artificially lowered prices further amplifying existing demand rather than toning it down.

Given the noise at the front from uncertainties surrounding the IEA's actions in the coming

months and possible continuing weak macroeconomic data, we expect prices further out

on the curve to perform better.

US natural gas

Natural gas prices gained moderately over the past week supported by a warmer-than-

normal weather outlook. This weeks EIA storage report showed a surprisingly high injection

of 95 Bcf, much larger than the 78 Bcf consensus. The storage deficit to last year continues

to narrow even with above-normal heat, a sign that North American natural gas production

is still growing incrementally, adding downward pressure to the curve.

CoalEuropean coal prices were buoyed over the week, albeit trading in a narrow range, with

API2 prices increasing by $1/t and API4 prices following suit though paring most of its

gains by the end of the week. We believe planned strikes at South Africa's coal mines will

not create any supply disruptions from RBCT as stocks are plenty. Supply issues are,

however, seen developing in the Pacific Basin, with rainfall related production losses at

Hunter Valley coal mines in June now resulting in longer vessel queues at Newcastle waiting

to ship coal. On the demand front, Chinese stockpiles are ample and Chinese buyers will

show greater resistance to higher prices. Rhine river levels are now closing in on seasonal

averages and we expect German barges to pull coal from the ARA stocks more fluently if

the river levels continue to improve at the current rate. We expect coal prices to be range-

bound for most part of Q3 and to rebound in Q4.

Carbon

Carbon prices remain subdued after their hillside two weeks ago, with prices trading flat

over the week around 13.50 /t. While we see little downside to prices at this point, there is

also limited capacity for a significantly move up in carbon prices this year, in our view. With

the key reason for the sell-off being the expected buoyant buy-side failing to materialise, it

will be a big ask of prices to revert to the price levels seen in the past three months. With the

market remaining structurally long, prices are likely to stand for some time at the bottom of

the recent cliff wondering how to climb back up.


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8 July 2011 5

Base metals

Macro concerns continue to dominate price action, although apparent progress in tackling the

Greek debt crisis has offered the basis for a short-term relief rally across the complex. In terms

of fundamentals, the supply side is shaping a more diverse picture across the base metals, and

we expect this to lead to increasingly divergent price performances. We remain positive on

copper and tin, and we expect these metals to recover strongly in H2 11. In the case of copper,

we forecast weak mine supply growth this year with a risk of contraction due to an array of

challenges reinforced by recent widespread disruptions at facilities. A pick-up in Chinese

imports is the catalyst needed to take prices significantly higher and the draws in bonded

warehouse stocks suggest to us this is an imminent effect. Aluminium prices remain well

supported from strong global demand growth, energy-led cost inflation as well as from

expectations of tightening long-term energy availability. In addition, the threat to Chinese

production growth from power rationing offers a further upside risk. For lead, we expect the

indefinite closure again of the worlds largest lead mine, Magellan, to provide support and for

Chinese conditions to firm once battery manufacturing plants are reopened. We are neutral on

nickel with the view that recent price weakness is overdone, but that recovering production

will ease market tightness and lead to a moderate build in LME stocks. Zinc remains our least

favoured metal, with continued deterioration in the fundamentals with big stock builds, a

growing market surplus and sustained production growth.

Precious metals

Prices have extended their gains amid interest rate hikes, heightening in uncertainty

surrounding European sovereign debt risks as well as weaker macro data. The external

environment remains favourable for gold, and prices have sidelined the seasonal weakness

in demand. If investor interest wanes, prices could be subject to a temporary correction

before finding support from physical demand. Silver prices have struggled to retain upward

momentum as weak underlying supply and demand dynamics coupled with hefty ETP

outflows have trumped healthy coins demand from the retail sector. The PGMs are caught

between potentially weaker supply and weaker demand. The biennial wage negotiations in

South Africa and transfer of ownership highlight the potential for disruptions to mine supply

and, in turn, pose an upside risk to prices; however, this is likely to be tempered by concerns

over a slowdown in demand in Asia.

Agriculture

Corn prices came under significant pressure following the release of the 30 June USDA

Acreage and Quarterly Stocks reports which were bearish, with 2011 US plantings

estimated at 92.3mn acres, up from March's Prospective Plantings report and above market

expectations while Q2 US corn stocks at 3.67bn bushels imply a very significant shrinking in

feed demand. However, the recent correction in corn prices has been met with a slew of

import demand especially from China with a key intent being to replenish domesticreserves. Further, scepticism has been growing over data findings in the USDA reports and

the potential for downgrades in addition to strong import demand is providing prices with

underlying support. The Acreage report was supportive for soybean, with acres pegged at

75.2mn acres - below both the 76.6mn acres in March's Prospective Plantings report and

market expectations, and bodes well for new crop prices, in our view. ICE sugar prices have

risen to four-month highs, with gains underpinned by production downgrades in Brazil and

the long ship line-up there. In the short term, we expect sugar prices to gain further as while

the market is still expecting a return to a surplus, recent concerns over the Brazilian crop on

ageing cane and low sucrose content has seen continued mark-downs in supply estimates.


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8 July 2011 6

Beijings central commitment to economicprosperity and high employment will continue todrive demand growth for commodities

CROSS COMMODITIES

This article is an excerpt from the Commodity Daily Briefing, 6 July 2011.

As Chinas economy continues its sustained advance and its society experiences rapid

changes as a result, the social agenda facing policymakers has been in flux. In our view, the

strong central commitment to economic prosperity and high employment, exemplified by

plans to build massive infrastructural projects and cap unemployment, will continue to drive

demand growth for commodities across the board. Here, we identify two elements of the

socioeconomic background that impact on commodities: the rural-urban balance and the

regional economic balance.

A key part of the socioeconomic agenda is the differing social and income dynamics

between urban and the rural populations. The industrialisation occurring in major urban

centers has long been drawing in surplus rural labour. However, there is regulation of that

flow, mainly through the household registration system, which constrains the ability of rural

migrant workers to permanently settle in urban areas. The flow of labour supply from rural

areas has been capped as older migrant workers found they had to return to the

countryside and some younger and better educated potential migrant workers have been

less willing to move given their aspiration to better terms than were applied to previous

generations of migrants. China is therefore experiencing shortages of younger and more

educated migrant workers in some cases, for example for work on assembly lines in the

eastern coastal cities. However, a structural shortage in specific locales does not imply an

end to the labour surplus in rural areas. Since a significant proportion of the rural labour

surplus is formed by middle-aged to elderly labourers who cannot fill the type of positions

that require a slightly more educated workforce, the rural unemployment situation may not

be fully flexible. According to a spokesperson for the Ministry of Human Resources and

Social Security, last October, about 100mn surplus rural workers were waiting to be

employed (Reuters). Beijing is set to resolve this dilemma, as well as remove any potential

for rural concerns, by creating more training and employment opportunities, providing

more benefits and reforming the household registration system. Another factor is the

current position of the regional economic balance between the western and eastern regions

of the country. As a result of the export-focused economic model, the more landlocked

western regions, which account for roughly 70% of the land and 29% of the population, are

significantly less developed than the coastal cities in the east. The authorities have therefore

taken several initiatives to develop the west to resolve and alleviate some of the rural labour

surplus by attracting more migrant workers into the western cities. As highlighted by

Chinas 12th five-year plan, Beijing plans to continue to drive the development of the region

through policies such as lower taxes, land credit and subsidies to attract manufacturers to

relocate away from the coastal regions. Previous five-year plans have also shown thatBeijing is set to increase government spending to build massive infrastructure projects and

create more employment opportunities. All these endeavours will require huge inputs of

commodities, and as a result we remain positive on the outlook for China as the key

demand growth.


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8 July 2011 7

Indian commodity demand growth is set to easein the short term as economic activity slows, butsupportive structural factors should limit theextent of the slowdown

CROSS COMMODITIES


Indias commodity demand is on a strong structural growth trend. As highlighted in our report,

India: the next commodity power house, the combination of urbanisation, industrialisation and

rising incomes points to surging energy and industrial needs over the next few decades.

Domestic commodity demand has accelerated markedly in recent years (see chart) and, as India

progresses along the path of economic development, this trend is set to continue. In the short

term, however, the demand outlook is less unequivocally positive, as slower economic activity

risks curbing the strong demand growth momentum. Tighter monetary conditions are

beginning to be felt, particularly across rate-sensitive segments of the economy such as

discretionary consumption (eg, auto, consumer durables) and investments, which are all large

commodities end-user sectors, particularly for metals. Fixed capital formation grew by a mere

0.4% in Q1 11 compared with an increase of over 14% in 2010. Auto sales are also slowing andcredit growth is projected to decelerate markedly in FY 11-12, according to our economists ( for

more details see The Emerging Markets Quarterly: Summer storms). In this context, commodity

demand growth should start easing somewhat. Yet, so far, there is little evidence in the data of

any softening, suggesting that structural dynamics might be outweighing cyclical ones.

Aluminium consumption is growing at double-digit rates, while copper demand bounced back in

March following a subdued start to the year. In oil, domestic sales hit a new all-time high in April

and y/y growth for the year to date is running in line with last years robust pace. Indian coal

imports remain well supported and beyond the summer when weather-related volatility tends

to be high they should stay on a strong growth path, underpinned by robust demand growth in

the power sector, partly on the back of capacity additions. Ahead, we expect softer economic

activity to start chipping away at the recent strength in commodity demand, but in the absence

of a pronounced economic pull-back, the magnitude of the impact will likely prove limited, in ourview, as supportive structural factors should keep providing a strong basis for growth.

Figure 1: India commodity demand growth is accelerating (average %)

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Aluminium

NatGas

Copper

Coal

Oil

Gold

2006-10 2000-05

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Aluminium

NatGas

Copper

Coal

Oil

Gold

2006-10 2000-05

Source: BP Statistical Review, Brook Hunt, GFMS, Barclays Capital
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8 July 2011 8

The diversion of drilling rigs to more lucrative oilopportunities is expected to pull gas-directeddrilling low enough in late 2012 to cause naturalgas supply to first plateau and then slide lower.

This would mark a bullish turning point for gas

ENERGY


Do oil prices matter for North American natural gas? They do when the attraction of higher

returns from oil pulls enough of the finite number of on-shore drilling rigs away from gas-

directed service. To match the return opportunity from unconventional oil drilling, producers

would need to receive $12-15/MMBtu for their gas, nearly triple current price levels. Given the

wide disparity between oil and gas prices, one might wonder why E&P companies would drill for

gas at all. But there are insufficient North American oil prospects to divert enough activity away

from gas. Producers must still deliver the production growth their investors demand, and if that

growth comes mainly from gains in gas supply, so be it. But by late 2012 we expect enough rigs

to be directed toward oil service and away from gas to change the trajectory of gas supply.

Indeed, this diversion has already begun, as shown in the figure below. A bigger diversion will

require more good oil opportunities to exploit, and of course oil prices matter. Our view is that oil

prices move higher than todays level, and that gas prices remain stagnant this year, which

should provide the motivation for producers to continue searching for oil in North America. We

expect that when the gas market realizes supply is no longer growing, it will mark a watershed

event, causing gas prices to move higher, most likely for 2013 and beyond. We forecast this to

occur at the very end of 2012. Aggregate North American supply is expected to grow 1.7 Bcf/d

in 2011, led by 2.9 Bcf/d of growth in the U.S. that is somewhat offset by declines in Canadian

production and LNG. In 2012, declining Canadian production, along with lower LNG imports,

offset a smaller pace of U.S. supply growth, allowing for demand growth to outpace supply gains

for the first time in some years. This is hardly a tight market, but does represent a shift to

receding over-supply. Thus, we see a two-part market environment ahead: over-supply and a

bearish sentiment in 2011 and for most of 2012, then a change in gas supply trajectory, and

mood, toward the end of 2012.

Figure 2: Oil- and gas-directed U.S. rig count

0

200400

600

800

1,000

1,200

1,400

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Oil-directed rig count Gas-directed rig count

Source: Baker Hughes, Barclays Capital


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A carbon pricing scheme is due to be unveiled inAustralia this week and could add to themounting challenges faced by miners

ENERGY


A carbon pricing scheme is due to be unveiled in Australia this week, roughly two years after the

plan was shelved in the face of Senate opposition from the Greens Party. Legislation is expected

to be brought into the lower House of Representatives in August, with a vote in the Senate

expected two or three months later. The scheme is likely to start with a tax on carbon emissions

from mid-2012, before transitioning into a carbon trading scheme around 2015. If approved, this

will be the worlds second national emissions scheme outside Europe, and will inevitably bring

about increased costs for the mining industry. A recent report commissioned by the Australian

Coal Association painted a worrying picture for the coal mining industry. Two surveys were

carried out on existing mines (accounting for over 85% of total coal production) and potential

new mines, with an emissions pricing framework based on a targeted emissions reduction of 5%

relative to 2000 level emissions by 2020 (with an initial price of A$20/t), and assumptions that

no concessions would be given to any coal mining projects. As a result of the carbon scheme,

the survey found that a cumulative 262mt of coal production could be lost by 2020 from existing

mines (vs. Australias coal production of 424mt in 2010), while almost 380mt of production from

potential mines could be lost over the same time period. Already, costs in Australia are among

the highest in the world and have appreciated much faster than the global trend. Since 2000,

average cash costs of copper production in Australia have surged by over 200%, compared with

a 120% rise globally. Now, mines in Australia account for 20% of production in the top 10

percentile of costs, up from 4% in 2000. Anecdotal stories such as mining truck tyres costing

more than a Mercedes in Australia and wages of mining workers exceeding that of Bernankes,

all point to higher cost pressures. Added to that is the strength of AUD, which means that

although copper prices are now 5% higher than the 2008 peaks in USD terms, they are around

7% lower in AUD terms. Because of the fast rising costs, the EBITDA/revenue ratio of major

mining firms with a large Australian presence were lower in 2010 vs. 2006, even thoughrevenues have increased. The carbon scheme will only add to the mounting challenges miners in

Australia are grappling with.

Figure 3: Commodity prices have not appreciated by as much in AUD terms

0

2,000

4,000

6,000

8,000

10,000

12,000

Jun-03 Oct-04 Feb-06 Jun-07 Oct-08 Feb-10 Jun-11

Spot copper (AUD/t) Spot copper (US$/t)

Spot copper prices in USD and AUD

Source: EcoWin, Barclays Capital


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8 July 2011 10

Oil Market update: 2012 outlookENERGY

This article is an excerpt from the Energy Flash, 5 July 2011.

We are adjusting some of our oil price forecasts. In the case of benchmark global crude oilprices, our average annual price forecast for Brent in 2011 is unchanged at $112 per

barrel, while our 2012 Brent forecast is increased by $10 to $115 per barrel. The increasein expectations is due to a forecast further reduction in global spare capacity in 2012,

together with a significant intensification of the geopolitical background to the oil market.

WTI prices remain severely dislocated, and our price forecasts are being adjusted toreflect a longer period of WTI decoupling from not only Brent but also from other US oil

benchmarks. Our forecast for WTI in 2011 is reduced by $6 to $100 per barrel, while our

2012 WTI forecast is increased by $4 to $110 per barrel.

Our detailed 2012 supply and demand forecasts show a continuation of robustemerging market demand. Global oil demand is expected to grow by 1.38 mb/d, with

non-OECD demand rising by 1.57 mb/d. The main sources of demand growth in 2012

are expected to be China, India, Saudi Arabia and Brazil. Non-OPEC growth is expected

to rise by 0.42 mb/d. Output growth is heavily concentrated in North and South

America, and indeed outside the Americas non-OPEC output is set to fall in 2012.

In this report, we make some changes to our oil price forecasts for 2011 and 2012, as well

as releasing our detailed supply and demand forecasts for 2012. Our 2011 price forecasts

were last changed on 24 March, while our 2012 price forecasts have been unaltered since

their initiation on 4 October 2010. In terms of the global price level, our Brent forecast for

2011 is unchanged at $112 per barrel. However, our Brent forecast for 2012 is increased by

$10 to $115 per barrel. The increase in the 2012 is based on a further narrowing of global

spare capacity based on the balances shown in Figure 1, and by our view that the overall

geopolitical context of the market is likely to become increasingly uncertain as 2012

progresses. The severe dislocation of WTI prices this year and the decoupling of WTI prices

from both global prices and other US benchmarks has made the forecasting of the Brent-WTI differential fraught with difficulties. While we still see the current size of differential as

being exaggerated, we are now pricing in a far longer period of dislocation and a continuing

lack of equilibrium relationships for WTI. As a result, our forecast for the average price of

WTI in 2011 falls by $6 to $100 per barrel. Those dislocations are also expected to hold back

WTI relative to Brent next year, and our 2012 forecast for WTI lags that of Brent in rising by

just $4 to $110 per barrel. Price forecasts for later years are unchanged.

The global balances projected for 2012, remain supportive for prices, occasioning the

increase in forecast average prices for 2012. Among the key macroeconomic assumptions

shown in Figure 4, our demand forecasts are based on 4.3% global GDP growth in 2012, a

little higher than the 4% forecast for this year. US GDP growth is forecast at 3.4% in 2012, a

substantial improvement from the 2.5% in 2011, and Chinese growth is forecast at 8.7%, adeceleration from the 9.3% pace of the current year. In oil demand terms, we see growth of

1.38 mb/d, marginally down from the current 1.59 mb/d forecast for 2011, with the

absolute level of global demand averaging 87.8 mb/d in 2011. The oil demand profile will

continue to be dominated by non-OECD demand growth, which we expect to be 1.57

mb/d, while OECD oil demand growth slips back further into negative territory of -0.19

mb/d, following a fall of 0.09 mb/d this year.
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8 July 2011 11

Central problemENERGY

This article is an excerpt from the Weekly Carbon and Energy Matters, 4 July 2011.

In a week when the price of carbon stabilised in a disappointingly low 13-13.50 /t range,

the usual chorus of we need a central carbon bank rang through the air (see Bloomberg for

instance). Now, we will admit the last few weeks were a bit painful for the market, but let usnot get carried away. The point of an emissions trading scheme is very simple. It is to keep

the emissions of the sectors covered by the scheme within a given cap, and we would

argue, it is very effective at doing this all on its own. Now, the environmental effectiveness

of the EU ETS is purely a function of the cap and the resulting carbon price is just a

reflection of the ambition of that cap. In a cap and trade scheme, the cap is everything while

trade is there to allow greater efficiency in meeting that cap. Any attempt by a government-

based body to intervene in the market will only introduce inefficiencies and will be

ultimately doomed, in our view. If it maintains a high price when emissions are falling, all it

will do is make the market longer allowances by encouraging greater emissions reductions.

With a given cap, all this means is that future price reductions will have to be even greater

for the market to balance. Furthermore, if anyone thinks direct intervention in markets is a

good thing, the history of foreign exchange markets tells a different story (if anyone canprovide us with a good example of when fixing a currency has had a utility maximising

outcome, please let us know). What proponents of a carbon central bank actually want is a

non-political body to have the power to change the cap to safeguard their investments.

Why? Well, one, why pay for price protection (a forward) when the governments can give

you a price floor for free. Two, and more pertinently, because democracy is proving to be an

obstacle to actually increasing the ambition of the current cap (or even having a cap given

policy failure in the US and Australia). Even in Europe, the phase 3 cap at the moment is not

being changed because our elected officials are not in a mind to do so and hence the

discussion about the set-aside that would allow a cap adjustment in the future. While the

political economy of deriving targets are a lengthy discussion, to introduce a body just to

deepen the cap whenever prices looked low, would remove price risk but only at the price of

making the EU ETS both inefficient and undemocratic.

Figure 4: EUA and CER prices (/t)

-1

13

5

7

9

11

13

15

17

19

Feb-11 Mar-11 Apr-11 May-11 Jun-11

EUA Front year (/t) sCER Front Year (/t) EUA-CER spread

Source: Barclays Capital


12/23


8 July 2011 12

An autopsy of gas rig countENERGY

This article is an excerpt from the Natural Gas Weekly Kaleidoscope, 5 July2011.

The natural gas-directed rig count has fallen by 118 rigs since the peak of last year.However, we continue to believe that at the current level (874 rigs), gas directed drilling

should grow production incrementally. The turning point in North American natural gassupply, by our projection, is not expected to occur until Q4 12.

Although horizontal rigs have made up the majority of losses, on a percentage sharebasis horizontal rigs dominate the scene of natural gas production. Gas drilling

continues to shift from the traditional shale plays to the newer and liquids-rich basins,

such as the Eagle Ford and Marcellus. Natural gas supply growth could continue at

lower rig count levels as rig efficiency keeps improving.

Independent producers have shed 114 gas rigs from last years peak reached inSeptember. By dissecting the Smith S.T.A.T.S data, we show some evidence of

redirection toward oil targets. We expect small decreases in the gas rig count as oil

opportunities remain limited. In the near term, independent producers have plenty of

incentives to continue pursuing gas targets.

Figure 5: Gas production (Bcf/d) versus rig count

47

49

51

53

55

57

59

61

63

65

67

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

US marketed lower-48 onshore gas production, Bcf/d

total gas-directed rig count (RHS)

Source: EIA, Smiths S.T.A.T.S, Barclays Capital

In our view, the true turning point in natural gas balances can accurately be characterized as

the moment production turns downward. Currently, the rig count is moving mostly

sideways with a slight downward bias, as rigs are redirected toward oil drilling. Gas-directed

drilling activity peaked last August near 1,000 rigs and currently stands at 874. We estimate

that 825 rigs approximately keeps production flat that is, growth from new drilling offsets

declines from existing wells. Still, production shows few signs of turning lower indeed,April EIA-914 data showed another sequential monthly increase. To fully understand the

growth trajectory of US natural gas supply, we take another look at the Smith S.T.A.T.S. rig

count data. The aggregate rig count is of critical importance to figuring out supply trends,

but just as important are trends in drilling, in particular who is drilling, where they are

drilling, and by what method. We attempt to answer these questions through a detailed

analysis of the Smith data and shed light on trends in drilling efficiency.


13/23


8 July 2011 13

Iraq Attacks on the rise as US departure loomsENERGY

This article is an excerpt from the Geopolitical Update, 7 July 2011.

Rising violence in Iraq this summer is raising new concerns about the ability of localsecurity services to maintain order when US troops depart at the end of the year.

On Tuesday, two bomb blasts outside a municipal office north of Baghdad left 28 peopledead and dozens wounded. The bombings came one day after a series of attacks across

Iraq, including a rocket attack on Baghdads heavily fortified Green Zone, claimed at

least 10 lives. June was the deadliest month for civilians this year, with 340 killed. In

addition, 14 US servicemen were killed in Iraq in June, making it the deadliest month for

US troops in three years.

A particularly worrying aspect of the latest unrest is that many of the attacks areoccurring in Southern Iraq, which had been relatively peaceful in recent years. The

incidents in the South have been linked to Shiite militias with ties to Iran. There are

concerns about Prime Minister Malikis willingness to take on these militias, particularly

those linked to radical cleric Moqtada al Sadr.

Several senior US officials have recently signaled a willingness to consider allowing sometroops to remain if the Iraqi government requests that their stay be extended. Even

though Maliki reportedly wants to keep some US troops on hand, it will be politically

challenging for him to get the approval of the Iraqi parliament. Moqtada al-Sadr has

publicly warned that he will reactivate his Mahdi army and commence attacks on US

troops if they remain on Iraqi soil next year.

The current increase in violence comes at a time when Iraq has actually beenexperiencing a slow but steady increase in oil output. Having disappointed last year,

when production remained largely flat y/y at 2.4 mb/d, Iraqi output has started 2011 on

a reasonably strong footing.

Nonetheless, Iraqs continued success depends largely on foreign companies from theworld's largest, which have signed 12 deals with Baghdad, to the smaller firms that have

inked 40 deals with the Kurdistan region which must operate in what is stil l a post-war

conflict zone, and the lack of basic amenities and continuing militia violence keep the

operating environment challenging.

Figure 6: Iraq oil production hit an all-time high in June

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

06 07 08 09 10 11

Iraqi oil production, mb/d

Source: IEA, EIA, MESS, Platts, Reuters, Bloomberg, Barclays Capital


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8 July 2011 14

As miners respond to record levels of globaldemand, supply-side pressures are buildingleading to sharp increases in capital andoperating costs

METALS


Higher energy and agricultural prices have been the driving forces behind the kind of global

inflationary pressures that have got central bankers worried, but cost pressures are also

building in other areas of the global economy. Capital and operating costs in the resources

sector, and in particular in the metals and mining industry, are rising fast. This brings back

memories of the double-digit cost increases that characterised 2006-08; the financial crisis

offered only a brief respite from structural supply-side pressures. As miners go full steam

ahead to bring on new production in response to record levels of global demand these

pressures are going to continue building, in our view. BHP Billiton recently announced a major

capex increase at its Worsley Alumina operation in Australia with project costs having risen by

58% to US$3bn. Cost drivers are diverse but the biggest effects have come from energy,

exchange rate shifts, equipment costs and a shortage skilled labour (Commodity Daily Briefing18 April 2011). Resource companies in Australia in particular have faced significant increases

in costs (Commodity Daily Briefing 4 July 2011) with labour playing a key part. There is now

even evidence that skilled labour shortages are beginning to cause delays to bringing

production to market with Woodside Petroleum, Australia's largest energy firm, partly blaming

labour shortages for delays to its Pluto liquefied natural gas project, which is six months

behind schedule and $1bn over budget. Iron ore miner Cliffs Natural Resources has

highlighted that "If you add up all of the projects people want to bring online, there are not

enough qualified workers to make it happen. In Australia, resource companies plan to

increase investment spending by a massive 63% y/y this year, but that may prove challenging

given the scarcity of key inputs. The rising cost of meeting metals demand growth globally has

implications for far forward metals prices, which arguably has already been demonstrated this

year. Despite the gyrations in front end prices the far forwards have been more robust, with63-month copper prices up by 8% since the beginning of the year, while 3-month prices are

down by 3%.

Figure 7: Capital costs for metals and mining projects are escalating rapidly

0%

10%

20%

30%

40%

50%

60%

70%

80%

Constancia

(Cu)

Ambatovy

(Ni)

Sierra

Gorda (Cu)

Andina

Expansion

(Cu)

Toromocho

(Cu)

Kutcho (Cu) Pebble (cu)

Capital cost escalation announced in 2011

(nominal US$ cost increase from previous estimate)

Source: Brook Hunt, Barclays Capital
https://live.barcap.com/go/publications/content?contentPubID=FC1702205https://live.barcap.com/go/publications/content?contentPubID=FC1702205https://live.barcap.com/go/publications/content?contentPubID=FC1726139https://live.barcap.com/go/publications/content?contentPubID=FC1726139https://live.barcap.com/go/publications/content?contentPubID=FC1702205https://live.barcap.com/go/publications/content?contentPubID=FC1702205


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8 July 2011 15

FORECASTS AND DATA RELEASES

Commodity price comparisons

Price Change Week rice Change Month Ago rice Change Year Ago

Commodity (%, Thurs/Thurs) 7-Jul-11 Ago Price (%, M/M) Price (%, Y/Y) PriceRough Rice CBOT $/bushel 9.8% 15.3 13.89 3.2% 14.8 53.7% 9.9

Wheat CBOT $/bushel 6.8% 6.25 5.85 -14.9% 7.34 21.1% 5.16

Tin LME $/tonne 5.7% 27,540 26,050 6.6% 25,825 56.0% 17,650

Crude Oil ICE $/barrel 5.5% 118.57 112.40 1.5% 116.85 61.3% 73.53

Heating Oil NYMEX $/gallon 5.3% 3.09 2.94 0.6% 3.08 56.4% 1.98

Silver OTC $/oz 4.9% 36.53 34.82 -1.4% 37.06 103.1% 17.98

Gas Oil ICE $/tonne 4.7% 969.6 926.3 0.7% 962.8 53.5% 631.7

Rubber Tocom Y/kg 4.5% 389.3 372.40 -7.7% 422.0 11.0% 350.8

Feeder Cattle CME $/lb 4.2% 1.44 1.38 15.0% 1.25 26.7% 1.14

Sugar ICE $/lb 4.1% 0.30 0.28 21.2% 0.24 73.0% 0.17

Palladium NYMEX $/oz 3.4% 786.0 760.1 -3.0% 810.5 77.7% 442.3

Corn CBOT $/bushel 3.3% 6.50 6.29 -11.7% 7.37 75.3% 3.71

Copper LME $/tonne 3.3% 9,740 9,430 6.6% 9,140 46.6% 6,645

Crude Oil NYMEX $/barrel 3.2% 98.52 95.46 -0.6% 99.15 33.0% 74.05

Soybeans CBOT $/bushel 3.0% 13.46 13.06 -3.5% 13.94 35.5% 9.93

Lean Hogs CME $/lb 2.9% 0.97 0.94 8.4% 0.90 23.2% 0.79

Gasoline NYMEX $/gallon 2.8% 3.12 3.04 4.5% 2.99 54.2% 2.03

Aluminium LME $/tonne 2.3% 2,588 2,531 -3.5% 2,683 30.7% 1,980

Wheat KBOT $/bushel 2.1% 7.04 6.89 -19.6% 8.75 30.9% 5.37

Oats CBOT $/bushel 2.1% 3.4 3.34 -8.1% 3.7 34.4% 2.5

Nickel LME $/tonne 2.0% 23,899 23,427 5.6% 22,621 24.9% 19,141

Zinc LME $/tonne 2.0% 2,412 2,365 6.2% 2,272 30.2% 1,853

Gold OTC $/oz 1.9% 1,530.3 1,502.4 -0.8% 1,543.1 27.7% 1,198.6

Live Cattle CME $/lb 1.8% 1.15 1.13 28.9% 0.89 27% 0.91

Lead LME $/tonne 1.4% 2,726 2,688 6.9% 2,549 52.2% 1,791

Platinum NYMEX $/oz 1.0% 1,740 1,723 -4.8% 1,829 14.3% 1,522

Coffee ICE $/lb 0.9% 2.68 2.65 1.8% 2.63 66.7% 1.61

German Power EEX Euro/MWh 0.8% 50.4 50.00 -11.7% 57.1 11.3% 45.3

Cocoa ICE $/tonne 0.8% 3,194 3,170 10.5% 2,891 8.6% 2,941

Coal API2 ICE $/tonne 0.5% 123.8 123.20 -1.6% 125.8 33.1% 93.0

Barley WCE C$/tonne 0.0% 207.0 207.00 1.0% 205.0 20.3% 172.0

UK Natural Gas ICE /therm -0.3% 0.6 0.63 -3.2% 0.7 8.5% 0.6

Carbon ICE $/tonne -0.5% 23.71 23.83 11.0% 21.36 32.0% 17.97

Azuki Beans TGE JPY/30kg -0.8% 11,940 12,040 -2.9% 12,300 8.3% 11,020

Coal API4 ICE $/tonne -0.9% 118.7 119.80 -3.0% 122.4 30.8% 90.8

Lumber CME $/1000 ft -1.2% 242.0 244.90 5.9% 228.5 19.2% 203.0

Aluminium Alloy LME $/tonne -1.8% 2,350 2,394 -1.5% 2,385 22.1% 1,925

Freight Capesize C4 OTC $/tonne -2.4% 10.1 10.30 1.5% 9.9 -4.3% 10.5

UK Power APX Euro/MWh -2.6% 48.4 49.71 -5.6% 51.3 10.5% 43.8

Carbon CER ECX Euro/tonne -2.9% 10.7 10.98 -14.9% 12.5 -14.7% 12.5Carbon EUA ECX Euro/tonne -3.9% 13.0 13.53 -21.9% 16.7 -12.5% 14.9

US Natural Gas NYMEX $/mmbtu -5.5% 4.13 4.37 -14.3% 4.82 -9.4% 4.56

Cotton ICE $/lb -14.8% 1.36 1.60 -8.4% 1.49 64.7% 0.83Source: Barclays Capital


16/23


8 July 2011 16

Commodity price forecasts

Barclays Capital quarterly average commodity price forecasts

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11F Q3 11F Q4 11F

Base Metals (LME cash)

Aluminium US$/t 2,165 2,092 2,088 2,343 2,503 2,600 2,650 2,700

Copper US$/t 7,243 7,013 7,243 8,634 9,646 9,137 10,500 12,000

Lead US$/t 2,219 1,944 2,031 2,390 2,605 2,550 2,750 3,000

Nickel US$/t 20,078 22,382 21,178 23,598 26,899 24,165 25,000 27,000

Tin US$/t 17,225 17,844 20,559 26,001 29,950 28,694 33,000 34,300

Zinc US$/t 2,288 2,018 2,013 2,315 2,393 2,250 2,400 2,500

Base Metal Index^ 199 199 203 238 266 254 280 306Precious metals

Gold US$/oz 1110 1196 1227 1370 1387 1508 1560 1520

Silver US$/oz 16.9 18.3 18.9 26.5 31.9 38.4 40.2 28.3

Platinum US$/oz 1562 1630 1550 1697 1789 1781 1840 1880

Palladium US$/oz 440 492 493 678 788 756 825 870Energy

WTI US$/bbl 78.9 78.1 76.2 85 95 102 99 102

Brent US$/bbl 77.4 79.4 77.0 87 106 117 110 115

US Natural Gas US$/mmbtu 5.0 4.4 4.2 4.0 4.2 4.4 4.3 4.5

UK Natural Gas p/therm 35.6 37.9 43.0 52.5 57 58 50 7Agriculture

Cocoa US$/t 3070 2987 2863 2856 3303 3043 2800 2900

Coffee Usc/lb 134 140 174 205 256 271 225 195

Sugar Usc/lb 24.4 16.0 20.0 29.0 30.5 24.5 23.5 21.5

Cotton Usc/lb 76 81 88 130 180 168 160 138

Wheat Usc/bushel 496 467 653 707 786 745 770 715

Corn Usc/bushel 370 355 422 562 670 731 730 660

Soybeans Usc/bushel 955 957 1035 1245 1379 1361 1430 14

0

55

Barclays Capital annual average commodity price forecasts

2006 2007 2008 2009 2010 2011F 2012F Long Term

Base Metals

Aluminium US$/t 2,568 2,640 2,573 1,664 2,172 2,613 2,750 3,200

Copper US$/t 6,731 7,129 6,961 5,148 7,533 10,321 12,000 6,000

Lead US$/t 1,286 2,592 2,093 1,721 2,146 2,726 2,800 1,700

Nickel US$/t 24,271 37,276 21,115 14,604 21,809 25,766 30,000 17,500

Tin US$/t 8,761 14,542 18,500 13,579 20,407 31,486 37,000 18,000

Zinc US$/t 3,274 3,251 1,876 1,654 2,158 2,386 2,800 2,000

Base Metal Index^ 197.6 237.2 204.3 146.2 210 276 317

Precious Metals

Gold US$/oz 604 697 872 972 1,226 1,494 1,300 850

Silver US$/oz 11.6 13.4 15.0 14.6 20.2 34.7 19.8 11.4

Platinum US$/oz 1,139 1,304 1,569 1,205 1,610 1,823 1,835 1,500

Palladium US$/oz 319 354 348 262 526 810 850 400

Energy

WTI US$/bbl 66.2 72.3 99.7 62 80 100 110 137.0

Brent US$/bbl 66.1 72.7 98.4 63 80 112 115 135.0

US Natural Gas US$/mmbtu 6.98 7.12 8.90 4.16 4.39 4.35 4.55 5.25

UK Natural Gas p/therm 41.7 30.0 58.2 31.1 42.2 58.8 67.5 -

Coal API2 US$/t 63 87 144 71 93 123 - -

Coal API4 US$/t 50 62 120 66 92 122 - -

Coal Newcastle US$/t 49 66 128 72 99 131- -

Carbon (EUA) /t 18 20 23 13 15 19 28 40

Carbon (CER) /t na 16 17 12 12 14 20 25

Agriculture

Cocoa US$/t 1503 1882 2555 2794 2944 3012 3050 na

Coffee Usc/lb 108 117 132 125 163 237 190 na

Sugar Usc/lb 14.7 9.9 12.1 17.7 22.3 25.0 23.0 na

Cotton Usc/lb 52 57 64 57 94 162 105

Wheat Usc/bushel 402 636 798 530 581 754 650 na

Corn Usc/bushel 260 373 527 374 427 698 570 na

Soybeans Usc/bushel 592 861 1234 1031 1048 1406 1290 na

na

Note: ^Economist Intelligence Unit weight. Base metals prices are LME cash. Precious metals spot prices. WTI: front month NYMEX close. Brent: front-month IPE close. USnatural gas: NYMEX front-month close. UK natural gas: NBP day ahead close. Cocoa, Coffee, Sugar, Cotton: front month ICE close. Wheat, Corn, Soybeans: front monthCBOT close. Source: Barclays Capital


17/23


8 July 2011 17

Trade recommendationsFigure 8: Key recommendations

Unit $ %Open trades

Long Comex gold Dec-11 26/11/2010 1376 1515 $/oz 277 21.3%

Long Brent crude oil Dec-15 27/01/2011 98.2 104.4 $/bbl 6.3 6.4%

Long LME aluminium Dec-15 29/03/2011 2884 2791 $/t -93.5 -3.2%

Long CBOT corn Dec-11 20/04/2011 656 613 c/Bsh -43.0 -6.6%

Long LME copper Dec-11 26/05/2011 9035 9551 $/t 516.0 5.7%

Rationale: Stocks are declining and physical indicators point to a pick up in buying, especially in China. The picture for raw materials is further tightening, with a

narrowing in scrap discounts and worse than expected mine output in Q1.

Rationale: Whilst we are wary of tighter US liquidity eventually bringing and end to the gold price rally we continue to see further price upside in the short-term.

Gain/Loss

Contract Entry Date Entry price

Current price

(July-05-2011)

Rationale: We expect further corn price gains supported by weather concerns which have seen lagging US corn plantings compared to five year averages and concerns

on acreage and yields; elevated US ethanol production, strong US export sales and extremely low US inventory levels.

Rationale: The market is pricing in a tighter medium-term outlook for crude and with our 2015 forecast for Brent p egged at $135/bbl we expect this trend to

continue.Recent IEA stock release is also putting pressure on the back-end of the curve.

Rationale: The reassessment of long-term energy market dynamics as a result of Japan's nuclear crisis supports a period of concerted strength at the back end of the

aluminium curve. Moreover, China's rising capital and enegy costs suggest a production slowdown ahead.

Note: The long position on COMEX gold was originally opened on 11/05/2010 and includes losses/gains from the previous trade (Dec-2010)Source: Reuters, Barclays Capital

Figure 9: Closed trades

Exit Date Unit $ %Directional trades

Long Carbon EUA Dec-11 24/02/2011 30/06/2011 15.4 13.5 /t -1.9 -12.1%Long KBOT wheat ** Dec-11 20/04/2011 30/06/2011 964 733 c/Bsh -231.0 -26.4%Long UK natural gas Q3-11 29/03/2011 26/05/2011 63.9 58.5 p/therm -5.4 -8.5%Long LME nickel Jun-11 24/02/2011 26/05/2011 27501 22821 $/t -4680 -17.0%Long European delivered coal (API2) ** Apr-11 27/01/2011 29/03/2011 114.5 125.7 $/t 16 14.4%Short Comex silver Dec-11 27/01/2011 24/02/2011 27.1 33.1 $/oz -6 -22.4%Long LME copper Jun-11 22/09/2010 24/02/2011 7833.0 9505 $/t 1672 21.3%Long CBOT corn ** Mar-11 26/11/2010 24/02/2011 553.0 685.8 c/Bsh 245 55.1%Short UK natural gas Summer 2011 19/10/2010 27/01/2011 47.2 52.5 p/therm -5 -11.3%Long NYMEX crude oil ** Dec-11 19/10/2010 27/01/2011 84.8 99.3 c/bbl 12.1 14.2%Short US natural gas Dec-11 13/08/2010 26/11/2010 5.54 5.12 $/mmbtu 0.43 7.7%Long ICE cotton Dec-10 14/04/2010 19/10/2010 75.7 110.3 c/lb 35 45.7%

Long LME lead Dec-10 21/06/2010 13/08/2010 1851 2065 $/t 214 11.6%Long LME copper ** Sep-10 10/12/2009 13/08/2010 7062 7143 $/t 345 5.0%

Long NYMEX palladium Jun-10 22/02/2010 11/05/2010 444 532 $/oz 88 19.8%

Long ICE sugar Jul-10 18/03/2010 14/04/2010 22.6 17.7 c/lb -5 -21.6%

Long LME Nickel Jun-10 10/12/2009 18/03/2010 16331 22760 $/t 6429 39.4%Long NYMEX crude oil May-10 10/12/2009 18/02/2010 75.4 79.1 $/b 3.7 4.9%

Long ICE sugar Mar-10 10/12/2009 18/02/2010 23.3 26.5 c/lb 0.03 13.8%

Spread tradesNatural gas spread widening 15/12/2010 30/06/2011 0.63 0.41 $/mmbtu -0.22 -

Short forward Henry Hub Oct-11 4.49 4.43 $/mmbtu 0.05 -

Long forward Henry Hub Jan-12 5.12 4.84 $/mmbtu -0.27 -Crude oil spread tightening ** 20/04/2011 26/05/2011 -0.36 -0.37 $/b 0.34 -

Long forward Brent crude Jul-11 123.5 115.1 $/b -8.45 -

Short forward Brent crude Aug-11 123.1 114.7 $/b 8.46 -Gasoil spread tightening 22/09/2010 19/10/2010 -16.8 -15.3 $/t 1.50 -

Long nearby ICE gasoil Dec-10 669.75 705.50 $/t 35.75 -

Short further forward ICE gasoil Jun-11 686.50 720.75 $/t -34.25 -

US Henry Hub natgas 21/06/2010 13/08/2010 0.66 0.65 $/mmbtu 0.01 -Short position Oct-10 5.01 4.35 $/mmbtu -0.66 -

Long position Jan-11 5.67 5.00 $/mmbtu 0.67 -US Henry Hub natgas curve flattener - 10/12/2009 18/02/2010 1.47 1.20 $/mmbtu 0.27 -

Long position Mar-10 5.38 5.17 $/mmbtu -0.21 -Short position Jan-11 6.9 6.375 $/mmbtu -0.48 -

Gain/Loss

Exit priceClosed Trades Entry DateContract Entry price

Note: Entry and exit pr ices reference closing prices on the day of publication.** These trades include gains/losses from previous t rades. Source: Reuters, Barclays Capital


18/23


8 July 2011 18

Global economic forecasts

1Q11 2Q11 3Q11 4Q11 1Q12 2010 2011 2012 1Q11 2Q11 3Q11 4Q11 2010 2011 2012

Global 4.2 3.3 4.0 4.3 4.3 4.9 4.0 4.3 3.4 4.0 4.0 3.7 2.6 3.8 3.0

Developed 1.6 1.3 2.7 3.0 2.8 2.5 1.9 2.8 2.1 2.8 3.0 2.8 1.4 2.7 1.9

Emerging 7.3 5.7 5.7 5.9 6.2 7.9 6.6 6.2 6.3 6.4 6.4 5.7 5.3 6.2 5.3

BRIC 7.6 6.8 7.1 6.8 7.5 8.9 7.6 7.4 6.6 6.9 6.7 5.4 5.0 6.4 5.1

America 2.9 2.8 3.1 3.6 3.7 3.7 3.0 3.6 3.4 4.3 4.5 4.4 2.8 4.2 3.5

United States 1.9 2.0 3.0 3.5 3.5 2.9 2.5 3.4 2.1 3.4 3.6 3.5 1.6 3.2 2.5

Canada 3.9 2.5 2.5 2.5 2.5 3.2 2.9 2.5 2.6 3.3 3.2 3.1 1.8 3.1 2.2

Latin America 5.4 4.8 3.3 4.3 4.4 6.2 4.6 4.1 8.3 7.9 8.2 8.2 7.5 8.1 7.9

Argentina 9.1 5.8 2.0 5.5 4.3 9.2 7.0 4.3 25.3 23.3 22.6 22.9 21.5 23.5 26.1

Brazil 5.4 2.9 3.4 4.5 4.5 7.5 3.8 4.2 6.1 6.6 7.1 6.6 5.0 6.6 5.7

Chile 5.4 5.0 5.0 5.0 4.5 5.2 6.4 4.5 2.9 3.2 3.5 4.0 1.4 3.4 3.0

Colombia 9.8 5.5 3.0 4.5 5.0 4.3 5.7 4.6 3.2 3.0 3.2 3.2 2.3 3.2 3.3

Mexico 2.1 6.5 3.0 3.0 4.0 5.4 3.9 3.7 3.5 3.3 3.7 3.6 4.2 3.5 4.0

Peru 6.6 5.7 4.6 5.4 4.0 8.8 6.4 5.2 2.3 2.9 3.0 3.6 1.5 2.9 3.1

Venezuela 6.9 4.4 5.0 4.6 5.6 -1.4 4.3 3.5 28.2 22.8 23.0 24.3 28.2 24.5 21.9

Asia/Pacific 6.3 4.7 6.5 6.8 6.7 8.1 6.0 6.5 3.4 3.8 3.6 2.8 2.3 3.4 2.7

Japan -3.5 -2.3 3.7 5.0 4.4 4.0 -0.5 3.2 -0.2 0.5 0.5 0.0 -1.0 0.2 0.1

Australia -4.7 4.7 5.1 2.3 1.1 2.7 1.4 3.0 3.3 3.8 4.1 3.8 2.8 3.8 2.7

Emerging Asia 9.3 6.5 7.2 7.5 7.6 9.3 7.8 7.4 5.4 5.7 5.3 4.2 4.1 5.1 4.1

China 9.4 7.8 8.0 9.5 8.7 10.4 9.3 8.7 5.1 5.6 5.2 3.4 3.3 4.8 4.0

Hong Kong 11.9 -1.2 4.1 4.7 5.1 7.0 5.5 4.5 4.0 5.2 6.1 5.4 2.4 5.2 4.7

India 8.4 7.6 9.1 5.0 8.8 9.0 7.7 7.9 9.5 9.3 9.2 8.3 9.6 9.1 6.7

Indonesia 4.0 6.0 5.8 9.6 4.4 6.1 6.5 6.4 6.8 5.9 5.0 6.0 5.1 5.9 6.0

South Korea 5.4 4.5 6.2 6.3 3.6 6.2 4.4 4.1 4.5 3.9 3.3 2.8 3.0 3.6 2.1

Malaysia 7.0 4.9 2.5 4.1 5.8 7.3 5.0 5.5 2.8 3.5 3.7 3.9 1.7 3.5 2.2

Philippines 15.0 4.8 4.0 -0.1 10.3 7.6 5.0 5.3 4.0 4.6 5.1 5.0 3.8 4.7 3.8

Singapore 22.5 0.3 3.0 4.9 4.3 14.5 6.0 4.5 5.2 4.5 3.4 2.8 2.8 4.0 1.8

Taiwan 19.0 0.4 1.9 4.5 4.8 10.9 5.9 4.0 1.3 1.6 1.7 1.8 1.0 1.6 1.9

Thailand 8.4 0.8 2.0 5.1 5.0 7.8 3.6 4.7 3.0 3.6 4.1 4.5 3.3 3.8 2.7

Europe and Africa 3.0 2.1 2.1 1.9 2.2 2.4 2.6 2.5 3.3 3.7 3.8 3.8 2.6 3.6 2.6

Euro area 3.4 1.2 1.7 1.9 1.6 1.7 2.0 1.8 2.5 2.8 2.8 2.9 1.6 2.7 1.8Belgium 4.3 2.1 1.8 2.3 1.8 2.1 2.7 2.0 3.5 3.3 3.7 3.4 2.3 3.5 2.6

France 3.8 0.8 1.8 1.9 2.0 1.4 2.0 2.1 2.0 2.2 2.5 2.7 1.7 2.3 1.7

Germany 6.1 1.6 2.1 2.2 1.6 3.5 3.4 2.0 2.2 2.5 2.6 2.7 1.2 2.5 1.7

Greece 0.6 -0.4 -2.7 -0.5 0.4 -4.4 -3.5 0.1 4.5 3.2 2.8 3.5 4.7 3.5 2.5

Ireland 5.1 -1.4 2.4 1.1 1.8 -0.4 0.4 1.8 0.8 1.4 1.5 1.8 -1.6 1.4 1.4

Italy 0.5 1.3 2.0 2.3 0.7 1.2 1.1 1.3 2.3 2.9 2.7 2.9 1.6 2.7 1.7

Netherlands 3.6 2.6 2.0 1.9 1.8 1.6 2.4 2.0 2.0 2.4 2.8 2.9 0.9 2.5 2.6

Portugal -2.4 -2.6 -2.3 -1.7 -1.1 1.3 -1.7 -1.3 3.7 3.7 3.3 3.6 1.4 3.6 2.4

Spain 1.2 0.3 1.0 1.2 1.9 -0.1 0.8 1.7 3.2 3.3 3.3 3.1 2.0 3.2 2.0

United Kingdom 1.9 2.2 2.1 2.3 2.4 1.3 1.6 2.2 4.1 4.5 4.8 4.9 3.3 4.6 2.8

Switzerland 1.0 1.6 1.6 1.2 1.6 2.6 2.0 1.4 0.2 0.2 0.7 0.8 0.7 0.5 1.1

EM Europe & Africa 2.8 3.9 3.0 1.9 3.4 4.6 4.4 4.2 6.3 6.9 7.3 6.8 5.8 6.8 5.9

Czech Repub. 3.6 2.6 2.4 2.4 3.8 2.2 2.8 3.3 2.0 1.9 2.2 2.3 1.4 2.1 2.3

Hungary 6.2 1.7 1.4 1.2 2.9 1.1 2.6 3.2 4.1 4.3 4.0 3.9 4.9 4.1 3.6Poland 4.1 3.6 3.7 3.7 3.7 3.8 3.9 3.7 3.8 4.6 4.8 4.6 2.7 4.6 3.5

Russia 0.9 5.0 3.3 0.9 3.3 4.0 4.3 4.6 9.6 9.7 9.1 8.2 6.9 9.1 7.1

Turkey 3.7 2.3 1.7 1.2 2.9 9.0 5.8 4.1 4.3 6.5 9.0 8.5 8.6 7.1 7.1

Israel 4.7 4.0 4.0 4.0 4.8 4.9 5.0 4.2 3.9 3.8 3.8 3.7 2.6 3.9 3.2

South Africa 4.8 3.5 3.7 3.9 4.1 2.8 3.9 4.1 3.8 4.5 5.7 6.0 4.3 5.0 6.0

Consumer prices% annual chg

Real GDP% over previous period, saar

Consumer prices% over a year ago

Real GDP% annual chg

Note: Weights used for real GDP are based on IMF PPP-based GDP (2008-2010 average). Weights used for consumer prices are based on IMF nominal GDP (2008-2010average). Source: Barclays Capital


19/23


8 July 2011 19

FX forecasts

FX forecasts Forecast vs outright forward

Spot 1m 3m 6m 1y 1m 3m 6m 1y

G7 countries

EUR 1.45 1.48 1.50 1.48 1.44 2.1% 3.6% 2.5% 0.4%JPY 80.7 80 82 83 85 -0.8% 1.7% 3.1% 5.9%

GBP 1.61 1.66 1.72 1.74 1.76 3.4% 7.2% 8.6% 10.1%

CHF 0.84 0.91 0.90 0.95 0.98 8.2% 7.1% 13.1% 16.9%

CAD 0.96 0.93 0.93 0.93 0.97 -3.6% -3.7% -3.9% -0.3%

AUD 1.07 1.07 1.04 1.00 0.95 0.1% -1.9% -4.6% -7.3%

NZD 0.83 0.78 0.76 0.74 0.72 -5.6% -7.7% -9.5% -10.8%

Emerging Asia

CNY 6.46 6.42 6.36 6.28 6.11 -0.7% -1.4% -2.3% -4.3%

HKD 7.78 7.77 7.77 7.77 7.77 -0.1% -0.1% 0.0% 0.1%

INR 44.70 44.75 45.25 44.50 44.00 -0.2% 0.0% -3.0% -6.4%

IDR 8579 8500 8600 8700 8500 -1.1% -0.6% -0.5% -5.1%KRW 1068 1075 1050 1025 1025 0.4% -2.3% -5.1% -5.7%

LKR 109.5 109.5 109.0 108.5 107.8 -0.2% -1.0% -2.1% -2.8%

MYR 3.02 3.00 2.94 2.90 2.84 -0.8% -3.1% -4.7% -7.3%

PHP 43.39 43.50 42.80 42.00 41.50 0.2% -1.7% -3.7% -5.2%

SGD 1.23 1.220 1.210 1.190 1.190 -0.7% -1.5% -3.1% -3.0%

THB 30.71 30.35 30.00 30.00 29.50 -1.6% -3.1% -3.7% -6.0%

TWD 28.72 28.85 28.20 27.75 27.00 0.7% -1.1% -2.1% -3.4%

VND 20585 20600 20500 20500 20000 -0.2% -3.1% -6.2% -13.2%

Latin America

ARS 4.11 4.1 4.15 4.15 4.65 -0.7% -1.1% -3.9% 0.6%

BRL 1.56 1.54 1.5 1.55 1.55 -3.9% -7.7% -6.5% -10.3%CLP 468 460 450 450 450 -3.5% -6.3% -7.2% -9.1%

MXN 11.72 11.65 11.5 11.6 11.8 -2.1% -4.0% -4.0% -4.2%

COP 1,771 1,763 1,750 1,750 1,750 -1.6% -2.5% -2.8% -3.7%

PEN 2.76 2.75 2.75 2.76 2.78 -0.5% -0.8% -0.8% -0.9%

EEMEA

EUR/CZK 24.32 23.95 23.50 23.75 23.60 -1.4% -3.1% -1.9% -2.2%

EUR/HUF 266 265 265 265 265 -0.5% -1.0% -1.7% -2.7%

EUR/PLN 3.98 3.90 3.85 3.85 3.80 -2.2% -3.8% -4.4% -6.5%

EUR/RON 4.23 4.25 4.20 4.15 4.10 0.3% -1.2% -3.1% -5.8%

USD/RUB 27.85 28.0 27.9 28.5 28.5 0.2% -0.8% 0.3% -1.7%

BSK/RUB 33.53 34.0 34.2 34.7 34.1 1.2% 0.8% 1.4% -1.5%USD/TRY 1.62 1.60 1.60 1.60 1.60 -2.0% -3.1% -4.8% -8.2%

USD/ZAR 6.76 6.74 7.03 7.13 7.23 -0.7% 2.7% 2.7% 1.2%

USD/ILS 3.40 3.36 3.36 3.35 3.35 -1.2% -1.5% -2.3% -3.1%

USD/EGP 5.96 5.96 5.98 6.00 6.15 -0.6% -1.4% -2.9% -5.5%

USD/UAH 7.98 7.97 7.98 7.97 8.09 -0.6% -2.1% -4.2% -6.7%

Source: Barclays Capital


20/23


8 July 2011 20

This weeks key data releases

The PBoC this week announced the third benchmark interest rate hike in 2011. The structure of the hike is symmetrical - a25bp increase in lending and deposit rates. The timing of the move suggests that while the policy rate hikes look close to an

end, we should not rule out the possibility of a fourth interest rate hike in Q3 11.

The ISM manufacturing index rose to 55.3 in June from 53.5 in May, well above forecasts. The strengthening was broad-based, with new orders increasing to 51.6 from 51.0, production rising to 54.5 from 54.0, the supplier delivery index moving

higher to 56.3 from 55.7, and employment improving to 59.9 from 58.2. The ISM non-manufacturing index fell to 53.3 from

54.6 in June, below our economists forecast (54.5) but close to consensus (53.7). The decline was driven by the new orders

index and the supplier deliveries index. The business activity and employment indices struck a stronger tone, as both broadly

were unchanged from May.

The ECB raised interest rates by 25bp as expected. The euro area final manufacturing PMI was down 2.6 points from the Maylevel and is thus at its lowest since December 2009. New orders component fell 3.5 points to 49.6, while the employment

index fell 1.6 points to 52.7, pointing to a significantly reduced pace of manufacturing and employment expansion, as the

adverse effects of what our economists consider a global growth soft patch filter through. Euro area retail sales (volumes) fell

by 1.1% m/m (SA) in May, while the April gain was revised down to 0.9% from 0.7%.

Monday Tuesday Wednesday Thursday Friday

04 Jul 05 Jul 06 Jul 07 Jul 08 Jul

US Public Holiday

euro area PPI

euro area retail sales US ISM Services Index

euro area GDP

German manuf. orders

EIA Weekly Natural Gas

Storage

Dept of Energy Weekly Oil

Data

German IP

ECB Rate Announcement

CFTC Data

SHFE Aluminium, Copper

and Zinc Inventory Data

US employment report


Preliminary (June) China

commodity data out this

week (National Bureau of

Statistics)

OECD Main Economic

Indicators

USDA WASDE Report

OPEC Monthly Oil Report

EIA Short-Term Energy

Outlook

US Trade


Data

IEA Oil Market Report

USDA Oil Crops Outlook

USDA Cotton and Wool

Outlook

euro area IP


Storage

USDA Feed Outlook

USDA Wheat Outlook

OECD Leading Economic

Indicator

euro area HICP

US retail sales

CFTC Data



euro area trade

US CPI

US IP

US consumer sentiment


US housing market index US Housing Starts

German ZEW Survey

US housing starts


Data

US Existing Home Sales


Storage

US FHFA housing price

index

US leading indicators

US Philly Fed Index

CFTC Data




Detail ed (June) China

commodity data out this

week (National Bureau of

Statistics)

US Chicago Fed Index

US Case-Shiller HPI

US consumer credit

US new home sales


Data

US durable goods orders


Storage

US pending home sales

CFTC Data



Euro area HICP flash

US GDP

US Chicago PMI

US consumer sentiment


21/23


8 July 2011 21

COMMODITIES RESEARCH ANALYSTS

Barclays Capital5 The North ColonnadeLondon E14 4BB

Gayle BerryCommodities Research+44 (0)20 3134 [email protected]

Xin Yi ChenCommodities Research+65 6308 [email protected]

Suki CooperCommodities Research+1 212 526 [email protected]

James Crandell Commodities Research+1 212 412 2079

[email protected]

Helima CroftCommodities Research+1 212 526 [email protected]

Paul HorsnellCommodities Research+44 (0)20 7773 [email protected]

Costanza JacazioCommodities Research+1 212 526 [email protected]

Kerri MaddockCommodities Research+44 (0)20 3134 [email protected]

Miswin MaheshCommodities Research+44 (0)20 [email protected]

Roxana Mohammadian-MolinaCommodities Research+44 (0)20 7773 [email protected]

Kevin NorrishCommodities Research+44 (0)20 7773 [email protected]

Biliana PehlivanovaCommodities Research+1 212 526 [email protected]

Amrita SenCommodities Research+44 (0)20 3134 [email protected]

Trevor SikorskiCommodities Research+44 (0)20 3134 [email protected]

Nicholas SnowdonCommodities Research+1 212 526 [email protected]

Sudakshina UnnikrishnanCommodities Research+44 (0)20 7773 [email protected]

Shiyang WangCommodities Research

+1 212 526 [email protected]

Yingxi YuCommodities Research

+65 6308 [email protected]

Michael ZenkerCommodities Research

+1 415 765 [email protected]

Commodities Sales

Craig ShapiroHead of Commodities Sales+1 212 412 [email protected]

Martin WoodhamsCommodity Structuring+44 (0)20 7773 [email protected]

Peter RozenauersCommodities Sales, Non Japan Asia+65 9114 [email protected]


22/23

Analyst Certification(s)We, Sudakshina Unnikrishnan and Kerri Maddock, hereby certify (1) that the views expressed in this research report accurately reflect our personal viewsabout 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 orindirectly related to the specific recommendations or views expressed in this research report.

Important DisclosuresFor current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays CapitalResearch Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi-bin/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 Capitalmay have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/oran 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 permittedand subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel todetermine 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), theprofitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potentialinterest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing informationwas obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads arehistorical 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 researchproducts, whether as a result of differing time horizons, methodologies, or otherwise.


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BarCap July8 Commodities Weekly

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