Commodities outlook Less panic, still opportunity,September 2010 Macquarie Commodities Team Macquarie Capital (Europe) Limited Level 35 Citypoint, 1 Ropemaker St, London, UK+44 203 037 4271 / 4273 / 4061/ 4476 jim.lennonmacquarie.com max.laytonmacquarie.com colin.hamiltonmacquarie.com bonnie.liumacquarie.com hayden.atkinsmacquarie.com duncan.hobbsmacquarie.com graeme.trainmacquarie.com,Page 2,Key points,2H 2010 to see slower growth but China to re-accelerate in 2011 Market is forward looking commodity prices have already factored in short term weakness Rest of world slower recovery but no big collapse China, the flexible friend, leads the supply response in down and upside RMB appreciation raises marginal costs. Stocking/de-stocking on price. Supply dynamics of individual commodities very important we are most bullish on commodities with limited supply response (not surprisingly) China still the key but growth in other developing countries gradually to become important,Page 3,Summary large sell-down in late Q2, bullish selectively into 2011,Chinese consumption growth strong in main end-use markets in1H10, but “demand” has been weak due to destocking The construction, consumer appliance, motor vehicle sectors all boomed. We see demand growth slowing in 2H10 as the government tightens monetary policy, some fiscal stimulus measures roll off and the residential property sector slows on the back of the recent measures taken to reduce prices and speculative activity in the property market. But due to destocking impact on import demand will be less severe. Recent concerns about Chinese tightening and European debt seem overdone - The 2Q correction took some of the reflation-related exuberance out of metal prices, and has seen some de-stocking in China. A construction slowdown in 2H10 in China is reflected in our demand and supply forecasts, but we dont incorporate a severe slowdown given the importance of the construction sector to Chinese employment and the desire for the government to reduce prices, partly by releasing land and increasing supply (however the impact of low-cost housing probably wont kick in until 2011). Given the impact of the recent measures to date, we expect Chinese policy loosening by the end of the year and 2011 looks set to meet the governments GDP targets. The first concrete signs of a recovery in US commodity demand have been emerging: Until recently, we had only seen an end to de-stocking in the developed world, however over the past two months aluminium and copper demand has increased significantly MoM, such that orders are up by 15-20% YoY. This is showing up in sustained strength in copper cancelled warrants. Our preferred commodity exposures are coking coal, iron ore, copper, platinum, lead/zinc over the next 12-24, due to expected supply tightness. Impact of RMB appreciation is important for aluminium, zinc, iron ore and nickel in particular as China is a marginal cost supplier.,Page 3,Page 4,Commodity prices base and iron ore bounce,Source: LME, Platts, GlobalCoal, Nymex, Macquarie Research, September 2010,Page 4,Page 5,Global IP is back to previous peak; the pace of growth is starting to ease,Source: Macquarie Research, Ecowin, September 2010,Page 6,Leading indictors suggest a moderate slowdown in manufacturing,Source: Macquarie Research, Ecowin, September 2010,Page 7,Chinese end-use indicators took off in 2009, construction growth slowdown flows through with lag,Source: NBS, Ecowin, Dragonomics, Macquarie Research, September 2010,Page 8,Chinese consumer good manufacturing growth has slowed,Source: NBS, Ecowin, Dragonomics, Macquarie Research, September 2010,Page 9,The example of steel world demand now back above peak!,Source: Macquarie Research, WSD, worldsteel, September 2010,Page 10,China almost always recovers as rest of world sinks,Source: Macquarie Research, China Metals, September 2010,Page 10,Note: Inverse relationship between China and ROW growth; also note that growth slowdown tends to be short-lived,Page 11,Chinese growth offset decline elsewhere in 2009,Source: Macquarie Research, INSG, ICSG, IAI, ILZSG, worldsteel, China Metals, September 2010,Page 12,World ex-China starts to contribute in 2010!,Page 12,Source: Macquarie Research, INSG, IAI, ICSG, ILZSG, China Metals, September 2010,Page 13,G3 IP has risen strongly off a low base, the drag from private construction coming to an end?,Source: Ecowin, Macquarie Research, September 2010,Page 14,Chinas property price clampdown in 2010,Central Government: April 16th State Council lifts the minimum required downpayment ratio (20% up to 30% for first home buyers, 40% to 50% for second home buyers and second home buyers pay 1.1x the PBOC benchmark lending rates, third home buyers need to pay majority in cash) April 17th State council directs banks to cease lending to third home buyers in areas of rapid price increase, to non-local buyers that do not have tax return / documentation, to stop lending to developers who are involved in land hoarding or delayed launches Local government implementation: April 30th - Beijing city government issues new rules to 1) Curb demand and 2) Raise supply 1) Includes following of central govt. rules, temporarily stop issuing mortgages for third properties or more, households prevented from buying one additional unit 2) Increase land supply for residential development, punish land hoarding, accelerate approvals Our conclusion: The Chinese government wants to see property prices retrained over the short and medium term. Over the medium term, demand for property is set to rise owing to rising GDP per capita (and this is relatively uncontrollable), so the main way to keep prices under pressure is to stimulate construction. Politically, affordable housing is particularly attractive for the government.,