commodities outlook 11 jan

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Global

11 January 2008

Commodities Outlook

Deutsche Bank AG/LondonAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced fromlocal exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers ofDBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 torequest that a copy of the IR be sent to them.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

Table of Contents

Commodity Views .....................................2#1 Executive Summary ..............................3

#2 Trade Recommendations...................... 6#3 Trade Review........................................ 7#4 Commodity Indices...............................9#5 Global Macro....................................... 13#6 Commodity Cycles.............................. 16#7 Crude Oil & US Natural Gas................ 17#8 Markets vs. Analysts........................... 22#9 US Power............................................23#10 Commodity Term Structures ............ 24#11 Commodity Volatility......................... 33#12 Skew View & Spike Risk................... 37#13 Precious Metals ................................42#14 PGMs................................................ 47#15 Industrial Metals ...............................49#16 Agriculture ....................................... 61

#17 Emissions..........................................66#18 US Carbon Trading............................ 71#19 Uranium ............................................ 73#20 Bulk Commodities.............................77Commodities Chartbook ......................... 86Price Forecasts ........................................ 95

Research Team

London

Michael Lewis44 20 7545 2166Jude Brhanavan44 20 7547 1558

Hong KongAmanda Lee, CFA852 2203 8376

ParisMark Lewis33 1 4495 6761Isabelle Curien33 1 4495 6616

New York

Joel Crane1 212 250 5253

WashingtonAdam Sieminski, CFA1 202 662 1624

M a c r o

G l o b a l M a r k e t s R e s e a r c h

C o m m o d i t i e s

Commodity As An Asset Class : Like the Sirens in Greek mythology,commodities have been singing an alluring melody for global investors asfinancial market dislocation has enveloped more traditional asset classes.Instead of destruction, we anticipate another year of strong commodityprice gains in 2008, most notably in the agricultural sector.

Oil : We believe the run-up in oil prices during the fourth quarter of 2007goes beyond what can be explained by the decline in the US dollar andthe level of global growth. We see prices averaging USD85/bbl this year.

Natural Gas : We expect prices will eventually benefit from inadequatecapacity additions from proposed coal projects and wind power, which arerequired to meet electricity generation needs.

Precious Metals : The risk of further dollar weakness has not been

exhausted, in our view. Consequently we see the gold price overshootingthis year and expect fundamentals in platinum will remain tight into 2009.

Industrial Metals : We expect this sector to recover in 2008 as USrecession risk fades, the Fed stops easing, equity markets stabilise andChinese demand returns. We are particularly constructive towardsaluminium and copper.

Agriculture : Global land and water constraints as well as the need to feedpeople, cattle and cars are expected to deliver new price highs this yearWe favour corn, cotton and soybeans.

Commodities: Siren Or Beacon?



11 January 2008 Commodities Outlook

Deutsche Bank AG/London

Commodity ViewsEnergy

USD Level Δ wk Δ ytd 12M Low 12M High 5Y Avg View

WTI 96.33 -3.30% 0.36% 50.48 99.62 53.75

Brent 95.54 -2.35% 1.80% 51.70 97.84 52.40

Heating oil 2.64 -3.80% -0.31% 1.47 2.74 1.50

Gasoline (RBOB/gallon) 2.47 -3.70% -0.08% 1.36 2.57 1.54

US natural gas (/mmBtu) 7.97 1.49% 6.47% 5.43 8.64 6.97

Coal (API#2/tonne) 130.00 4.84% 4.84% 65.80 133.00 65.66

Uranium (/lb) 90.00 0.00% 0.00% 72.00 138.00 41.02

EUR Emissions Cal'10 24.48 2.01% 4.85% 12.92 26.01 20.98

Precious Metals

Spot (USD/oz) Level Δ wk Δ ytd 12M Low 12M High 5Y Avg View

Gold 879.05 2.58% 5.52% 607.92 879.05 505.54

Silver 15.49 3.72% 4.91% 11.67 15.82 8.79

Platinum 1550.00 0.62% 1.57% 1117.50 1550.00 979.88

Palladium 376.25 0.87% 1.28% 320.75 386.00 262.79

Industrial Metals

3M Fwd (USD/tonne) Level Δ wk Δ ytd 12M Low 12M High 5Y Avg View

Aluminium 2505 2.75% 3.99% 2395 2895 2066

Copper 7230 7.03% 8.31% 5340 8320 4394

Lead 2660 1.72% 4.31% 1550 3890 1237

Nickel 29895 9.91% 13.67% 25100 51600 19512

Tin 16500 0.76% 0.46% 10100 17575 8807

Zinc 2580 5.26% 8.86% 2220 4170 1966

Agriculture

1 st nearby (USD) Level Δ wk Δ ytd 12M Low 12M High 5Y Avg Comment

Corn 4.79 3.51% 5.10% 3.10 4.79 2.68

Cotton 0.68 0.80% 2.09% 0.46 0.69 0.55

Soybeans 12.67 1.46% 5.67% 6.65 12.68 6.91

Sugar 0.11 5.96% 5.08% 0.08 0.11 0.10

Wheat 9.08 -0.82% 2.54% 4.19 9.80 4.11

Agriculture

Bearish Bullish

Source: DB Global Markets Research, Bloomberg (Prices as of close of business Tuesday)





#1 Executive SummaryCommodities: Singing Seductively• China and US monetary policy are expected

to remain key drivers of commodity markets

during 2008. Consequently agriculture andprecious metals are our favourite sector callsfor 2008.

• We believe rallies in the agricultural sectorare still in their infancy and as the fightbetween feeding people, cattle and carsintensifies we expect new price highs to beachieved across the sector. We areparticularly constructive towards corn, cottonand soybeans.

• We believe 2008 will be the year that G3central banks intervene to rescue the USdollar. We are therefore positioning for newall time highs across the precious metalcomplex, particularly in an environment ofdeclining real interest rates in the US.However, we are wary that the recent run-upin gold prices may be moving temporarilyinto over-extended territory, particularly if theUS dollar its seasonal tendency to strengthenin January.

• Recessionary winds in the US pose thegreatest risks to the industrial metals sector,

in our view. If the economy enters recessionthen we would look for a further 20% declinein the S&P500 and for equity markets tostabilise around July 2008. At that point wewould start to reinstate bullish front-endstrategies to accompany our bullishassessment towards long-dated metal prices.

• If, on the other hand, rapid US rate cuts averta growth dip, the central scenario of DB’s USEconomics team, we believe rallies in thesector will occur sooner. We are particularlyconstructive towards aluminium. A reflectionof high energy prices and China’s move tobecome a net importer of aluminium.

• We believe the run-up in oil prices during thefourth quarter of 2007 goes beyond what canbe explained by the decline in the US dollarand the level of global growth. However,refinery capacity, oil production constraintsand geopolitical issues continue to play avery important role in boosting prices. Webelieve it will require some normalising ofthese factors to achieve our average crude oil

price forecast of USD85/barrel.

Like the sirens in Greek mythology, commodities havebeen singing an increasingly alluring song for globalinvestors as extreme financial market dislocation hasenveloped more traditional asset classes during 2007.However, instead of destruction, we anticipate anotheryear of strong commodity price gains in 2008, mostnotably in the agricultural sector.

Aside from underlying supply and demandfundamentals, which we believe remain bullish in anumber of commodity markets, we expect the ebb andflow of new risk capital entering commodities will alsobe a function of two opposing forces. The first is thetendency of global investors to be overly optimisticabout asset classes that have been past winners and tocommit more capital to these markets. We expect thesecond, and countervailing force, will be investorconcerns towards the increasing maturing of thecurrent commodity price and the possibility of a cyclicaldownturn in commodity returns.

The role of ChinaWe remain constructive to the ability of commodityprices to sustain recent gains and in certain markets tohit new price highs this year. We expect the main tradebalance shifts this year will be the country moving tobecome a net importer of corn and aluminium for thefirst time in this decade. We also expect the strength inunderlying GDP and income growth across China willremain a major factor supporting commodity prices overthe next few years. Indeed, the steady increase inChinese GDP per capita since 1995 is remarkably

similar to the improvement in living standards thatunfolded in South Korea and Taiwan from 1980, Figure1. On this basis, Chinese GDP per capita will reachapproximately USD20,000 soon after 2020.

Figure 1: A comparison of GDP per capita incomein South Korea, Taiwan and China

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28

G D P p e r c a p i t a

U S D

South Korea (Year 0 = 1980)

Taiwan (Year 0 = 1980)

China (Year 0 = 1995)

Number of years from 1980 for SK & Taiwan & from 1995 for China

GDP per capita based on PPP

Source: Deutsche Bank, IMF

Like per capita income, China’s urbanisation ratio hasalso been increasing for the past twenty years, byroughly 1 percentage point per annum. By 2006 theurbanisation ratio had reached 43.9% compared to23.7% in the mid-1980s, or equivalent to over 13 millionpeople being urbanised every year. We expect China’s





urban population to rise to 55% by 2020, bringing theurbanisation ratio towards those prevailing currently inMalaysia and the Philippines, Figure 2.

Figure 2: Asia’s march towards increased levelsof urbanisation

0

20

40

60

80

100

V i e t n a m I n d i a

T h a l i a n d

P a k i s t a n

A f r i c a

C h i n a

I n d o n e s

i a W o

r l d

P h i l l i p p i n e s

M a l a y s

i a J a p

a n E U U S K o

r e a H K

S i n g a p o r e

Source: CEIC (2007), National sources

Since per capita energy consumption in urban areas is3.5 times more than that in rural areas, the urbanisationtrends is generating a sustained period of strong energydemand. Indeed assuming no change in energyefficiency and per capita income of USD20,000 by 2020it would imply Chinese oil consumption of 20 millionbarrels per day, roughly similar to US oil consumptiontoday. It is also sustaining strong consumption growthfor industrial metals. Indeed we estimate that over80% of global demand for aluminium, iron ore and leadover the 2007-08 will come from China, Figure 3.

Figure 3: Contribution of Chinese demandgrowth to global demand growth

0 20 40 60 80 100

Aluminium

Iron ore

Lead

Steel

Nickel

Zinc

Copper 2007-08E

Source: Brook Hunt, UNCTAD, Tex Reports, AME, Deutsche Bank

Just as there have been fears of the US expansionrunning out of steam from December 2007 onwards,there has also been concern that the conclusion of theOlympic Games in Beijing this summer could have anegative effect on overall economic activity. Wedisagree. Olympic related investments have accountedfor only 0.3% of China’s total fixed asset investmentover the past five years. In contrast, Games hosted inSydney, Seoul, Barcelona and Athens represented

between 1% and 4% of total investments, or 4 to 12times more important than is the case of China today.

Figure 4: Olympic related investments

0

1

2

3

4

5

2004Athens

1992Barcelona

1998Seoul

2000Sydney

2008Beijing

1996Atlanta

Olympic-related investments as a % of totalinvestments during the five years prior to the event

Source: Haver, London East Research Institute, Deutsche Bank

We also believe another major trend driving globalcommodity markets will be increasing shortages ofagricultural commodities most notably in China. Indeedrising incomes and declining levels of arable land perhead of population in China are leading to a surge inagricultural imports. We believe these trends will leadto a further deterioration in the country’s agriculturaltrade balance. Although there has been a recovery inagricultural land loss over the past few years, arableland per head per person has been on the decline forthe past 30 years, Figure 5. Rapid urbanisation is likely

to sustain this trend, in our view.

Figure 5: China’s arable land per person is on thedecline

0.1

0.11

0.12

0.13

0.14

0.15

0.16

1978 1985 1990 1992 1994 1996 1998 2000 2002 2004 2006140

145

150

155

160Hectares of arable land per capita (lhs)

Total area under cultivation (millionhectares, rhs)

Source: China Statistical Bureau

Rising meat consumption is increasing therequirements for cattle feed. However, meatconsumption still remains low by internationalstandards. Currently, per capita meat consumption inChina is just 60kg annually. This represents just 60% ofthe world average and 20% of per capita meatconsumption in North America.





#2 Trade RecommendationsCommoditysector

Directional Trades Alpha RV Plays

Index • Long DBLCI-MR

• Long DBLCI-MR “Plus”

• Long Commodities Booster Fund

• Long DBLCI-MR vs. short S&PGSCI

• Long DBLCI-CL vs. short DBLCI-OY-CL

• Long DBLCI-OY-NG vs. short SPGSCI-NG

Energy • Bullish uranium

• Long Mar’09 WTI variance swap

• Long Mar’09 US NG variance swap

• Long Sep’09 US NG variance swap

• Long DBLCI-CL crude oil index vs. short OIX

oil equity index

• Long Jun’08 vs. short Dec’08 WTI

• Long Dec’09 vs. short Dec’10 WTI

• Short Jan’08 & long Feb’08 NG contract, and

keep rolling the positions every month

• Long DBLCI-OY-NG vs. short S&P GSCI-NG

sub-indices

• Short Feb’09 and long Apr’09 contract

Precious Metals • Long gold & platinum

• Take profit on long gold vol via

variance swap

• Scale up sell gold vol

• Long back-end copper vs. short back-end gold

Industrial Metals • Short front-end industrial metals in the

near term; position to go long

• Long back-end industrial metals

• Long curve flattening

• Sell copper vs. buy zinc

Grains • Long grains basket

• Long corn

• Long cotton

• Long soybeans

• Long Dec’08 wheat

• Long corn curve backwardation

1. Long Dec’08 corn vs. sell Dec’09 corn

• Long wheat curve backwardation

2. Long Dec’08 vs. short July’09

3. Long Dec’08 vs. short Dec’09

• Long wheat curve flattening at the front-end

4. Short Mar’08 vs. Long Dec’08 or

5. Short Mar’08 vs. Long Jul’08

Source: DB Global Markets Research





#3 Trade ReviewDate Commodity Trades Trade Performance

Nov 2 2007 Dry Freight: Time to Take Breath, Bearish Freight EquitiesThe Baltic Dry Index rallied approximately 150% in the first 10months of 2007. However, given Asian exchange rate strength,signs of easing port congestion and a moderation in the degreeof backwardation in the freight curve we position for the freightrally to take breath. In addition, Asian export growth, which hasbeen an important driver of dry freight rates in the past, wasalso at risk from a downturn in US business confidence.Maintain short.

Nov 2 2007 RV Dry Freight: Short Panamax vs. Long Handysize IndexIn addition to our directional bearish trade on freight rates andfreight equities, we also recommended a relative value trade ondifferent freight indices to take advantage of the significantdivergence in performance between the various vessel types.We believe the significant out-performance of Panamax overHandsize vessels is unsustainable. Maintain position.

Oct 5 2007 Playing Grains Seasonality: Long Mar’08 Corn

We are bullish corn but given the contango term structure wepreferred to go long a dated futures contract. Despite therecent rally, we believe there is more upside potential going into2008. Maintain long.

Sep 14 2007 Wheat Term Structure Trade

We believed the high spread between this year and next yearwheat was unsustainable, since it was wide enough toencourage immediate substitution, discourage inventory re-stocking and therefore a good sell. The spread has widened onsupporting weather and tender announcement which wassubsequently withdrawn. We continue to believe wheat mightbe pressured in the near term on weakening fundamentals:more water in Australia, India's wheat trade deficit shrinking,China now a small net exporter of wheat. Maintain short.

Aug 3 2007 Industrial metals were identified as the expected biggestlosers on lower equity marketsIn the last five years, industrial metal returns have displayed thestrongest positive correlation with the S&P500. This tradeexploited this fact and further equity market weakness would, inour view, hurt this sector more than others. The worst threeperforming commodities over the past month are all LMEmetals. Front end remain defensive, but, look to go longinto Q1

Source: DB Global Markets Research, Bloomberg





#3 Trade ReviewDate Commodity Trades Trade Performance

July 20 2007 RV Oil Index vs. Oil Equities

We found that crude oil index tends to outperform oil equity

index when the oil term structure is trading in backwardation,and underform in contango. This RV play weathered the stormof the sub-prime triggered sell-off as well as the 28% oil rallyover the past few months relatively well, in our view. Webelieve a RV trading strategy is best positioned to extract alphafrom the oil market. Maintain position.

July 20 2007 WTI Curve Play: Backwardation To Stay

The WTI curve had a roller coaster ride in 2007, from steepcontango earlier the year and then suddenly flipped back intobackwardation in the middle of the year. Given the consistenttrinity: record high oil prices, falling OECD inventories and

backwardation, we adopted a curve steepening trade based onour belief that the move from USD75/bbl to USD60/bbl betweenAugust and September 2006 will not be repeated. In fact, notonly oil did not sell-off, the strong rally and subsequent attack ofUSD100 has kept this trade in profit. Maintain long.

June 8 2007 Calm Before The Storm? Long Gold Variance Swap

June marked the low point in gold implied vol. This trade hasperformed as contagion from equity and FX markets spread intothe commodities complex and specifically gold. During theperiod of extreme VIX and USDJPY volatility, gold prices tradedUSD20 lower and implied vol rose. Since then the gold price

has broaken above USD800/oz which has pushed gold volhigher despite a recovery in risk appetites. Given the extremepositioning currently in the gold market as well as seasonaltrade in the EURUSD, we would recommend taking profit andprepare to scale up sell. Take profit and scale up sell .

Feb 16 2007 RV metals: Long Copper Forward vs. Short Gold Forward

We recommended a long copper position and funded this viagold where we were short term bearish. We believed forwardcopper was undervalued while forward gold was overvalued,given the high level of above ground stocks in gold compared toa copper inventory-to-consumption ratio which had fallen to amatter of days. This position also benefited from selling

contango and buying backwardation and therefore gainingpositive carry on both legs of the trade. Maintain position.

Feb 16 2007 Bullish Back-end CopperWe believe copper was over-sold and was likely to recover, witha stabilizing US housing market, easing China SRB metalrelease, inventory re-stocking in China and rising productioncost. We have been bullish backend industrial metals and therewas no exception to this trade. We recommended going longthe back-end of the copper curve, either as a directional long ora curve flattening trade. This trade has proved to be extremelywell timed we got in just after the copper price has bottomed.Despite the sub-prime related sell-off the back-end copper pricehas remained extremely resilient. Maintain long.






#4 Commodity IndicesDBLCI-MR: Another Strong Year

• We believe the appeal of commodities as adistinct asset class has been enhanced in theaftermath of the US sub-prime crisis.

• We expect the DBLCI-MR to post 20% returnsin 2008. This follows gains of 46.1% and49.0% respectively in 2006 and 2007. TheDBLCI-MR expects aluminium will becomethe engine room for index returns this year.

• We believe this will prove to be a rewardingstrategy as China becomes a net importer ofaluminium.

• For those investors concerned about a

possible cyclical downturn in commodityindex returns, we have launched the DBLCI-MR ‘Plus’, which is able to allocate betweencommodities and T-bills according toprevailing market conditions.

Last year proved to be another strong year in terms ofcommodity index returns particularly when comparedwith more traditional asset classes, Figure 1.

Figure 1: Asset class returns compared

4.05.4 5.4

12.2

32.6

0

5

10

15

20

25

30

35

Bonds EM FX Equity Commodities

Bonds: DBIQ Global IG SovereignEmerging Markets: DBIQ EMLEForeign Exchange:DB Currency Returns IndexEquity:MSCI GlobalCommodities: DBLCI-OY

2007 returns (%)


Commodity returns have performed strongly despitethe US sub-prime crisis and the increasing probability ofa US recession. We believe this resilient indexperformance during extreme financial marketdislocation has only enhanced the appeal ofcommodities as an event risk hedging asset class.

The tendency of investors to be overly optimistic aboutasset classes which have been past winners and overlypessimistic about asset classes which have been past

losers will encourage a new wave of risk capital to enterthe complex, in our view. The risk of overshooting in

certain commodity markets, for example gold, istherefore increasingly likely in our view.

Aside from the S&PGSCI, which posted negativereturns in 2006, the universe of commodity indices hastherefore posted positive returns on an annual basissince the end of 2001. Consequently this represents

one of the most durable rallies in commodity indexreturns on record. It also introduces a greaterprobability of an eventual cyclical downturn incommodity index returns, in our view.

While the majority of commodity indices has postedpositive returns since 2001, this masks a significantdivergence of index performance between theincumbent indices such as the S&PGSCI and DowJones-AIG and younger commodity indices, such as theDeutsche Bank Liquid Commodity Index-MeanReversion. We find that since the end of 2001, totalreturns on the Dow Jones-AIG commodity index have

risen 145% compared to 370% on the DBLCI-MeanReversion, Figure 2.

Figure 2: Commodity index returns since 2002

100

150

200

250

300

350

400

DJAIGCI S&PGSCI LBCI RJ/CRB RICI DBLCI DBLCI-MR

Total returns sincethe end of 2001

Source: DB Global Markets Research, Bloomberg (as of end 2007)

This divergence in part reflects the rapid developmentof the commodity index space over the past five yearswith at least 12 new commodity indices being launchover this period. Investors therefore need to be acutelyaware of the characteristics that distinguish thenumerous commodity indices in the marketplace.

The major determining features of a commodity indexare how many commodities are included and in whatproportion, what is the selection process, whichspecific futures contracts are used for each individualcommodity, how are these futures contracts rolled andare the commodities reset to base weights periodically?

Consequently, the universe of commodity indices canbe classified according to three broad categories:

a) fixed weight and fixed roll index;b) fixed weight and dynamic roll index andc) dynamic weight and fixed roll index.





The DBLCI-Mean Reversion and the DBLCI-MR ‘Plus’are therefore the only commodity indices not to adopt afixed commodity weight allocation, Figure 3. Insteadcommodity weights on the DBLCI-MR are changed overtime such that the index ‘over-weights’ cheapcommodities and ‘under-weights’ expensive onesaccording to a pre-defined mechanistic formula.

Figure 3: Agricultural commodity ralliescompared

Index Rolling frequencyRebalancingfrequency

Launchdate

Fixed weight, fixed roll index:

DBLCI

Energy: monthly

All others: annual Annual Feb-03

DJ-AIG Six times per annum Annual Jul-98

S&P GSCI Monthly Annual Jan-91

RJ/CRB Monthly Monthly Jun-05RICI Monthly Annual Jul-98

LBCI Monthly Annual Dec-00

MLCX Monthly Monthly Jun-06

UBS CMCIDaily rolling atconstant maturity Monthly Jan-07

Fixed weight, dynamic roll index

DBLCI-OY Dynamic Annual May-06

DBLCI-OYBroad Dynamic Annual Jan-07

DBLCI-OYBalanced Dynamic Annual Jan-07

Dynamic weight, fixed roll index:

DBLCI-MR

Energy: monthly

All others: annual No rebalancing Feb-03

DBLCI-MR‘Plus’

Energy: monthly

All others: annual No rebalancing Jun-07Source: DB Global Markets Research, Bloomberg

Reweighting events on the DBLCI-MR take place whenthe one-year moving average price of a commodity is awhole multiple of 5% away from the five-year moving

average. This strategy has proved rewarding over thepast two years as total returns on the DBLCI-MR haverisen 46.1% and 49.0% in 2006 and 2007 respectively.

This has seen the energy allocation collapse to 5% bythe beginning of 2006 and the DBLCI-MR migratingaggressively into corn and wheat. By the beginning of2007 the DBLC-MR had switched tack and had begunto build an aggressive energy position ahead of crude oilprices were hitting triple digits.

We estimate that by the middle of this year, the DBLCI-MR will have increased its allocation to aluminium from15% to approximately 45%. This would represent itslargest allocation to this commodity since May 1992. Atthe same time, we expect the allocation to crude oil andheating oil will be reduced from 65% to 35%.Accordingly, the DBLCI-MR is indicating downside risksto energy returns are mounting while aluminium returnswill perform strongly.

Figure 4: Historical weights of the DBLCI-MR andexpected change in allocations by June 2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

WTI Heating Oil Gold Aluminium Wheat Corn


We believe this rising allocation to aluminium mayprove a rewarding strategy during 2008 given tighteningfundamentals in the Chinese aluminium market. Chinais the world’s largest producer of both primaryaluminium and alumina, with an estimated market share

of 33% and 26% respectively in 2007. China is also thefastest growing market for aluminium demand, withconsumption increasing by 20% and 24% in 2005 and2006 respectively, with the level 2007 registering nearly39%. Consequently, China plays a critical role in theoutlook for global aluminium prices.

As a result of significant smelter capacity growth, theChinese aluminium market has been persistentlyoversupplied in recent years. This has led the countryto become a net exporter of primary aluminium sincethe beginning of 2001. However, this situation is

changing as the Chinese authorities take steps to closeinefficient smelters and restrict the level of aluminiumexports.





These steps have included:

• January 2005 : The withdrawal of an 8% export taxrebate and the imposition of 5% export tariff

• November 2006 : An increase in the export tariff to15%. In addition, the tax exemption for tolling ofprimary aluminium (importing alumina duty free) andexporting with a rebate was withdrawn.

• August 2007 : The removal of a 5% import tax onprimary imports, the imposition of 15% tax onaluminium bars and rods, and the elimination of an8% export rebate from aluminium extrusion andwhich became effective at the beginning of August.

• December 2007 : imposed new industrial productionguidelines setting minimum capacity requirementsfor primary aluminium and alumina producers.

These measures have been successful in reducingaluminium exports since September 2006 such that netexports in 2007 will be the lowest since 2001, at under100K tonnes. Moreover, in 2008 steps to discourageexports as well as strong domestic aluminiumconsumption point to the possibility of China becominga net importer of aluminium, Figure 5. Indeed on ourestimates, China is set to constitute more than 80% ofglobal aluminium demand growth between 2007 and2008 and in our view supports the bullish outlook foraluminium spot prices.

Figure 5: China’s move to become a netaluminium importer

-300

-100

100

300

500

700

900

1996 1998 2000 2002 2004 2006 2008?

China's net trade balance in aluminium (tonnes, 000s)

Net exporter

Net importer

Source: DB Global Markets Research, CEIC

To assess the outlook for commodity index returns weestimate both spot and roll returns for the individualcomponents of a commodity index. In terms of spotreturns, we expect these will be positive for aluminium,gold, corn and wheat. We recognise the upside pricerisks for crude oil, the WTI options market skewscurrently attaches a 10% probability of the Dec’09 WTcontract expiring above USD149/barrel. However, onour forecasts we are assuming crude oil and heating oilspot returns will be slightly lower compared to currentlevels.

In terms of roll returns, forward curves are pointing to adivergent outlook for this year. On the one hand, rollreturns for wheat, crude oil and heating oil are positive,which we expect to be sustained throughout 2008.Meanwhile roll returns are negative for gold, corn andaluminium, a reflection of the contango term structurein these markets. Figure 6 estimates the implied rollreturn for the coming year assuming the forward curveis unchanged from current levels. It also illustrates howmoving to a dynamic rolling futures schedule andadopting the Optimum Yield technology can help boostroll returns.

Figure 6: Implied roll return for components ofthe DBLCI with & without the OY technology

-10%

-5%

0%

5%

10%

15%

Wheat Crude oil Heating oil Gold Corn Aluminium

Implied roll return for 2008on current shape of theforward curveImplied roll return for 2008using the Optimum Yieldtecnologiy


We present our expectations for spot, roll and totalreturns for 2008 for the six components of the DBLCIand DBLCI-MR in Figure 7. The possibility of the rollreturn in corn and aluminium contributing positively tooverall returns reflects our belief that fundamentals inthese markets are tightening, which will flip thesecommodity forward curves from contango tobackwardation.

Figure 7: Expected composition of returns for thesix components of the DBLCI in 2008

Commodity Spot Re turn Roll Return Tota l Return

Crude Oil Negative Positive Neutral

Heating Oil Negative Positive Neutral

Gold Positive Negative Positive

Aluminium Positive Turning Positive Positive

Corn Positive Turning Positive Positive

Wheat Postive Postive Postive






On this basis, we expect total returns on the DBLCI-MRto rise 20% this year. However, given the increasingmaturing of the current bull run in commodity prices webelieve it is increasingly prudent to consider thepossibility of a period where commodity index returnsturn negative over the next 24 month period.

The DBLCI-MR ‘Plus’To address the risk of a cyclical downturn in commodityindex returns we launched the DBLCI-MR ‘Plus’ indexin June 2007. Its strategy is to achieve an optimal assetallocation between a commodity index, in this case theDBLCI-MR, and T-bills (cash) by detecting cyclicalupswings and cyclical downturns in global commoditymarkets.

It achieves this by rebalancing between cash andcommodities according to their relative performanceover the previous 12 month period. Such that if the

DBLCI-MR has outperformed cash in all 12 months thenthe index will be fully allocation to commodities and ifcash has out-performed commodities over the past yearit will have eliminated all exposure to commodities.

Figure 8 illustrates the performance of various alpha,beta and enhanced beta commodity allocationstrategies. We find that since August 1997, there havebeen only four months were monthly returns of theDBLCI-MR ‘Plus’ has been -5% or less. This compareswith 15 and 18 months for the DBLCI-MR and the S&PGSCI respectively.

Conclusion

In our view, the rapid development of the commodityindex space over the past five years is a sign of thebuilding credibility of commodities as a distinct assetclass. However, it also introduces challenges forinvestors in terms of selecting the correct index fortheir investment objectives.

Michael Lewis, (44) 20 7545 2166 [email protected]

Figure 8: The comparative performance of various alpha and beta commodity allocation strategies

Total Volatility** Excess SharpeReturn* Return* Ratio # maximum no. of months < -5%

Beta allocation strategiesDBLCI TM 14.65% 20.75% 10.60% 51.08% -11.21% 19S&P GSCI TM 7.66% 21.13% 3.83% 18.12% -14.41% 23DJ-AIGCI SM 8.07% 14.24% 4.23% 29.68% -7.54% 13

Enhanced beta allocation strategiesDBLCI-MR TM 15.05% 16.97% 10.99% 64.77% -14.73% 15DBLCI-MR TM 'Plus' 15.06% 12.61% 11.00% 87.20% -7.25% 4DBLCI-OY Balanced 14.96% 13.16% 10.90% 82.81% -7.05% 5

DB Com modity Booster Index - S&P GSCI TM 16.60% 17.01% 12.48% 73.36% -9.18% 9S&P GSCI TM 7.66% 21.13% 3.83% 18.12% -14.41% 18

DJ-AIGCI SM 8.07% 14.24% 4.23% 29.68% -7.54% 11

Alpha-Lite allocation strategiesDB Commodity Havest Index 9.19% 3.51% 5.33% 151.76% -3.25% 0DB Commodity Havest Index - S&P GSCI TM 10.90% 6.53% 6.98% 106.95% -6.56% 1

Other asset classesSPTR (S&P 500 Total Return) 5.85% 17.77% 1.79% 10.08% -14.46% 13USGATR (US Govt. All Total Return) 6.40% 4.65% 2.33% 50.09% -3.93% 0

* annualised return based on total return and exces s return; ** annualised vol of the daily lognormal returns # calculated as a quotient of excess return and the volatility: ## based on total return; Data from August 1997 to 7 January 2008

Monthly drawdown ##






#5 Global Macro

The US Economy: Flirting WithRecession• In January 2005 we stated that the next US

recession would begin in December 2007.This reflected the fact that the duration ofevery US expansion since 1954 has beendirectly proportional to the time the USFederal Reserve has given monetary stimulusto the economy.

• Consequently, the fuel tank was runningclose to dry when the US sub-prime crisisstruck six months ago. Since then economicindicators have been pointing to theincreasing recessionary risk enveloping the

US economy.• We expect the rapid programme of rate cuts

by the Fed over the past few months willavert recession (just). This is because realinterest rates today are around 200 basispoints lower than the average real fed fundsrate at the start of the last five US recessions.

• However, in this article we examine the likelycommodity winners and losers if financialmarkets start to raise the probability of a USrecession even further. We find that

industrial metals will be most exposed overthe coming six months.

• Meanwhile we expect a falling US realinterest rate environment will be bullishprecious metal prices, with the euro and thegold price at risk of overshooting this year.

• Although a US downturn may depress the oilprice, for as long as world GDP growthremains above 3%, we expect OPEC will be ina powerful position to defend any short termprice weakness. We expect OPEC will bequick to act to defend oil prices particularly inan environment of US dollar overshooting tothe downside.

• We see few contagion effects of a USrecession on the agricultural complex andconsequently we believe this sectorpossesses good diversification properties forinvestors.

Over the past five years, industrial metals havedisplayed a strong positive correlation with the S&P500,Figure 1. Since the start of the US sub-prime crisis,copper and zinc prices have been particularlymesmerised by the performance of US equity markets.The possibility of the US entering recession thereforeposes extreme dangers for the industrial metalscomplex given the tendency of the S&P500 to performbadly during US downturns.

Figure 1: Long & short-run commoditycorrelations versus the S&P500

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Energy PreciousMetals

Lives tock Agr icu ltural Indus trialMetals

Since December 1982

Last 5 Years

Correlation of various sub-sectorsof the S&P GSCI to the S&P500

Source: DB Global Markets Research, IMF, Bloomberg

Figure 2 examines the performance of the S&P500around US recessions since 1948. We find that onaverage US equity markets decline approximately 10%from their peak to the onset of recession and anaverage of 18% once the US has entered recession.

If the US enters recession this month, then the S&P500will have fallen by 10% since the October 2007 peakand consequently in line with historical averages.Moreover if this cycle conforms to historical averagesthen the S&P500 will decline a further 18% fromcurrent levels and hit this trough in July 2008, or sevenmonths after the economy has entered recession.

Of the group of industrial metals we believe copper ismost vulnerable in the event of a US recession. Figure

3 highlights the average change in inventories of the sixLME metals in the 25 weeks before and the 75 weeksafter the last three US recessions. We find that copperinventories have been the most sensitive to aslowdown in US economy activity, with inventoriesdoubling within three months of the US enteringrecession. Meanwhile, lead, nickel and zinc inventorieshave tended to be relatively unaffected in the monthsfollowing recession.





Figure 2: The performance of the S&P500 around US recessions since 1948

Recession period Peak to recession start From recession start to trough

Start End Months

S&P500peak

S&P500trough

# of months % decline # of months % decline

Total declinefrom peak to

trough

Jun-48 Oct-49 16 15-Jun-48 13-Jun-49 - - 13 -19.1% -20.6%

Jul-53 May-54 10 5-Jan-53 21-Sep-53 6 -9.1% 3 -5.6% -14.2%

Apr-57 Apr-58 12 2-Aug-56 21-Oct-57 8 -11.3% 7 -11.3% -21.3%Apr-60 Feb-61 10 3-Aug-59 25-Oct-60 8 -8.7% 7 -5.6% -13.9%

Dec-69 Nov-70 11 29-Nov-68 26-May-70 12 -14.0% 6 -25.7% -36.1%

Nov-73 Mar-75 16 11-Jan-73 4-Oct-74 10 -10.4% 12 -42.1% -48.2%

Jan-80 Jul-80 6 13-Feb-80 27-Mar-80 - - 3 -9.0% -17.1%

Jul-81 Nov-82 16 28-Nov-80 12-Aug-82 7 -7.7% 14 -21.1% -27.1%

Jul-90 Mar-91 8 12-Jun-90 11-Oct-90 1 -1.8% 4 -17.8% -19.3%

Mar-01 Nov-01 8 24-Mar-00 21-Sep-01 11 -18.7% 7 -22.2% -36.8%

Average 11 8 -10.2% 7 -17.9% -25.4%

Jan-08? 9-Oct-07 Today 3 -9.8%Source: DB Global Markets Research, NBER

Figure 3: The average change in LME inventoriesin the past three US recessions

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AluminiumCopperLeadNickelTinZinc

Number of weeks before/after the US enters recession

The average change in LME inventoriesin the weeks before and after the 1981,

1990 and 2001 US recessions

July 1981, July 1990& March 2001 = 100

Source: DB Global Markets Research, LME

Despite the risks, there is still a good chance that theUS can avert recession. Indeed the real fed funds ratepeaked at 3% in June 2007 and has subsequently fallento 2%. Meanwhile, the average real fed funds rate atthe start of the past five US recessions has been 5%, or200 basis points below where the real fed funds rate

peaked in the current cycle. Since we expect a further25 basis points off the Fed funds rate at the end of thismonth, it implies a further moderation in real interestrates. Indeed the threat of inflation shocks aheadprovides further scope for real interest rates to be evenlower over the coming year.

Figure 4: A pre-emptive Fed should help forestallrecession

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* deflated by core CPI

% %

"0" represents historical onset of recession(months)

Source: DB Global Markets Research, FRB, BLS

We believe precious metals and in particular gold priceswill be a major beneficiary of a declining real interestrate environment in the US. Figure 5 illustrates totalyear-on-year returns for gold as a function of the realfed funds rate since 1970. We find that there is a loosepositive correlation between the level of real short-termUS interest rates and gold returns. Specifically gold

returns tend to perform strongly in low or negative realinterest rate environments.





Figure 5: Gold returns in different US realinterest rate environments

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In an environment where the euro is overshooting and

central banks are poised to intervene to rescue the USdollar, we believe OPEC will also aim to keep oil pricesas high as possible in order to preserve their purchasingpower. We find that OPEC have a very good trackrecord in defending the oil price. Figure 6 examines theperformance of the crude oil price in the two weeksbefore and two to three months after the cartel haveagreed production cuts to defend the oil price.

We find that since the early 1990s, the cartel has a 70-80% success rate in defending the oil price. The twoyears here the cartel has failed were in 1998 and 2001,periods where world GDP growth fell below 3%. On

current forecasts we expect world GDP growth to rise4.5% in 2008 and consequently from a demandperspective indicated few bearish forces for the oil price.

Figure 6: The performance of the WTI crude oilprice before and after an OPEC quota reduction

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-14 -7 0 7 14 21 28 35 42 49 56 63 70

W T I o i l p r i c e = 1 0 0 i n t h e d a y b e f o r e q u o t a r e d u c t i o n Mar-93 Apr-98 Jul-98 Apr-99

Feb-01 Apr-01 Sep-01 Jan-02

Nov-03 Apr-04

Number of trading days before and after OPEC quota reduction

1998

2001


Conclusion

We believe the outlook for metals prices is bullishduring 2008. We expect the precious metals complexwill benefit from a falling US real interest rateenvironment and the threat of an overshooting in theEURUSD exchange rate.

We believe the prospects for the industrial metalscomplex are improving. However, we remain cautiousto adopting long front-end metal strategies at themoment since US recession risks still remain close tothe surface. Indeed if the US economy did fall intorecession during the current quarter then it would, inour view, imply a further 18% decline in the S&P500and equity markets not stabilising until July 2008. Weexpect it would also encourage a further rise in copperinventories on the LME.

However, if our US economists are correct and the UScan avert recession then we believe underlyingindustrial metals demand remains strong, most notablyfrom China. Consequently we expect a strong recoveryin these metal prices during 2008-09

We expect oil demand fundamentals will only start todeteriorate if world growth falls below 4%. However,we expect OPEC would only struggle to defend the oilprice if global growth falls below 3%. Consequently,we see little downside risks to our current oil priceforecasts.

Trade recommendations:

• Long gold. However, be wary of apocket of US dollar strength in the firstfour weeks of this year.

• Long back-end industrial metals. Lookto go long front end aluminium andcopper prices as US recession risks startto fade.






#6 Commodity CyclesBreaking New Records

• We find that over the past forty years, rallies inthe agricultural sector have, on average, a troughto peak rise of 160% and a typical duration ofapproximately 18 months.

• Consequently, rallies in the agricultural sectorhave tended to be less pronounced andshorter in duration than upswings in theenergy and metals’ sectors. For example,rallies in gold and silver prices have on averagetended to be 300% in magnitude and aroundthree years in duration.

• The tendency for agricultural price rallies to beshorter and less powerful is possibly a reflectionof the faster supply response in this sectorcompared to other parts of the commoditycomplex.

• However, the current upswing in commodityprices is distinctive because it is proving to beeither the most powerful or the most durableon record. For example, the crude oil price hasrisen just over 450% so far in this cycle with therally now more than six years old. Historically oilprice rallies have had a peak to trough rise of225% and lasted for just over two years.

• Consequently the current upswing in oil

prices which began in November 2001 hasbeen the most powerful and durable onrecord. A similar distinction is held by copperwhich had a trough to peak rise of 570%between November 2001 and May 2006.

Figure 1: The magnitude of the currentcommodity price rally compared to historicalaverages

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The magnitude of the current rally is measured from the trough to the peak, which for many industrial metals occurred in 2006 Source: DB Global Markets Research, Bloomberg, IMF

• While the rally in gold and silver prices hasnot yet surpassed the rallies of the late 1970sin percentage terms, they have been the mostdurable on record as the cycle approaches itsseventh year.

• The rally in many agricultural commodity prices

during this cycle is only still close to historicalaverages in both magnitude and duration. Yetinventories in a number of agriculturalcommodities have now fallen to critically lowlevels at a time when global demand for food,cattle feed and biofuels is increasing rapidly.

• We consequently believe the price rallies incorn, cotton, soybeans and wheat are still intheir infancy.

Figure 2: The duration of the current commodityprice rally compared to historical averages

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M o n t h s

Average duration of pricerally since 1970

Duration of current rally

These are amongst the mostdurable rallies on record

These price rallies arestill in their infancy

Source: DB Global Markets Research, Bloomberg, IMF

• Indeed for the current rally in corn and wheatprices to be the most powerful and durable inhistory would require grain prices to rise a further30-40% from here and price peaks to occur inthe first half of 2009. Soybeans and cottonprices would have to rise 70% and 105% withprice peaks occurring at the end of this year andthe first half of 2012 respectively.

• In our view, this degree of price appreciationmay prove too conservative as it fails to takeinto account that agricultural commodityprices in real terms are still cheap. Ifagricultural prices hit all time highs in real termsas has occurred in the energy and industrialmetals complex, then it would imply wheat, corn,soybeans and cotton appreciating by another130%, 175%, 240% and 375% respectively.This would imply corn and wheat prices hittingUSD12.5/bushel and USD20.30/bushelrespectively and cotton and soybean prices risingto USD3.22/lb and USD41/bushel respectively.

Michael Lewis, (44) 20 7545 2166

[email protected]





#7 Crude Oil & US Natural Gas• Oil markets continue to be characterized by

tight fundamentals, difficult geopolitics, andslow elasticity responses that might bringabout lower prices.

• Finding & development costs have risenmuch more rapidly than we expected whenwe last changed our long-term energy pricedeck in July 2007.

• Moreover, resource nationalism, changes infiscal terms, and geopolitical challenges tosupply are also impacting prices.

• Demand remains relatively unresponsive tohigher energy prices due to the growth in realincomes. Prices could be impacted by aglobal slowdown in GDP, but a worldwide

recession does not seem likely.• We expect nominal WTI and Brent oil prices

to average USD75/bbl in 2010 and USD80/bblin 2012-13. This compares with our prior“mid-cycle” estimates nearer USD65/bbl.

• US natural gas prices are forecast to averageUSD8.75/mmBtu in 2010, up from a priorUSD8/mmBtu.

2008-10 and mid-cycle oil and gas pricesIn mid-November we raised our near-term oil priceforecasts to reflect the reality of very high oil prices andthe continuing tightness in global supply and demand,but we did not feel compelled to change our mid-USD60s price forecasts for the "long-term" or "mid-cycle" in the 2012-2013 time frame that were set in July2007. We believe there is a price where oil demand willinduce changes in producer and consumer behaviour,and we still think this price is below USD100/bbl. Butas we mentioned in July, the “equilibrium” oil price isnot necessarily a constant, it can change up and downbecause of currency fluctuations, GDP changes,technology, geopolitics, taxation, environmental rules,

etc. On the supply side there are the competitive costsof tar sands, heavy oil, gas-to-liquids, biofuels amongothers. On the consumption side, technology mayfoster efficiency gains or offer up alternate fuels.

That said, one key factor that offers compelling newevidence that our longer-term energy price forecastsneed to be revised higher is rapidly increasing finding & development costs . The US Department of Energy hasjust published data from the large energy companiesshowing that average worldwide F&D costs averagedover the three-year period 2004-2006 to have risen byover 50% from the prior 2003-2005 period, soaring from

USD11.38/bbl to USD17.23/bbl.

Figure 1: DB’s energy price forecasts

WTI(USD/bbl)

Brent(USD/bbl)

US Gas(USD/mmBtu)

2006 66.25 66.11 6.98

Q1 2007 58.27 58.62 7.18Q2 2007 65.02 68.66 7.66Q3 2007 75.15 74.55 6.24Q4 2007 90.50 88.53 7.39

2007 72.36 72.66 7.12

Q1 2008E 90.00 90.00 8.00Q2 2008E 80.00 80.00 7.50Q3 2008E 85.00 85.00 7.75Q4 2008E 85.00 85.00 7.75

2008E 85.00 85.00 7.75

2009E 80.00 80.00 8.002010E 75.00 75.00 8.75

2011E 77.00 77.00 9.502012E 79.00 79.00 9.752013E 81.00 81.00 10.002014E 83.00 83.00 10.252015E 85.00 85.00 10.50

Note: Nominal prices Source: Bloomberg, DB Global Markets Research

The shocking rise in per barrel costs highlighted bythe US DOE reflects a combination of higher totalfinding and development costs (bonuses, royalties,labour, materials etc) and poor reservesreplacement. Our prior assumption was that per barrelF&D costs would rise toward USD20 in 2010, but thenew data for 2006 and continuing cost increases beingreported by companies for 2007 along with spottyreserve additions suggest that F&D costs could quicklybe headed toward USD25/bbl.

Higher oil prices are being supported by rising costs in aself-reinforcing loop. We understand that causalitytends to run from prices to costs and not the other wayaround, but unless some outside factor can forces oilprices down, we think that costs are unlikely to softenmuch.

Prior down-cycles in oil prices were generated by acombination of lower oil products demand, dramaticimprovements in seismic and drilling technology, andgreater access to reserves (aperatura & perestroika). Arepeat of this confluence of events is certainly possible,but seems improbable over the course of the next fewyears. Oil demand growth is increasingly being drivenout of Asia and the Middle-East, regions notimmediately susceptible to economic downturns in theUS or Europe. Technology is obviously improving, butdoes not appear to be on the verge of the enormousbreakthroughs (3-D seismic, horizontal drilling, andsubsea completions) of the last two decades. Accessto the areas of the highest geologic potential seems tobe decreasing as “resource nationalism” moves





consumption in the US has added a strong amount ofrising demand momentum into the markets. On thesupply side, oil production has shifted towards moretechnically challenging projects and less market-oriented economies. Disappointments in reachingoutput goals seem to have become the rule rather thanthe exception. Lower supply and demand elasticitieshave lengthened the time needed to rebalance.

Market Structure. The excess capacity in bothproduction and refining during the 1980s and 1990s hasbeen eliminated. Getting this back has proved to be anenormous struggle. Some of the losses wereeconomic in nature- the low oil prices of the late 1990sled to a period of low capital investment. Some of itwas political- as Peter Davies at BP has written, the"declines in Iraq and Venezuela were unforeseen andalmost certainly unforeseeable" while in our ownopinion the same could be said for the refinery

accidents and weather interruptions that have plaguedthe downstream sector.

Financial/ Trade. Commodities (including energy) areincreasingly being viewed as a standard asset class byinvestors. The flow of funds into the sector has made itmore prone to volatility. The decline in the US dollarhas likely encouraged demand while simultaneouslyreducing producers’ revenue. More restrictive tradepractices have limited the ability of industry to respondto these forces.

Geopolitics. From the perspective of the OECDnations, energy resources are increasingly concentratedin countries that have a mixed record of cooperationwith traditional international energy companies.Geopolitical flare-ups in countries like Nigeria havereduced production. The threat of a militaryconfrontation (with the potential for enormous impactsin the energy markets) between Iran and the US risesand falls with diplomatic setbacks and successes. Therate of production growth in Russia appears to havebeen slowed by that country's move to reassert centralcontrol over its resources. Iraq has not managed toreturn to pre-war production levels nor has Venezuelareturned to pre-strike levels.

How we might get back to USD75/bblThe case for weakening oil prices ultimately must reston a reversal or slowing in the drivers that took oil toUSD100/bbl.

Demand. Despite evidence that China and other Asiannations are less tied to economic conditions in theOECD countries, it seems hard to believe that Asiacould completely escape the impact of a slowdown inUS GDP. Our economic forecasting teams expect a

contraction in the US but not a severe recession, andthey see few signs of significant slowdown inChina/Asia in the near term. US oil demand has gone

flat but the rest of the world is still growing. We expectthat higher prices and more sluggish economies arelikely to result in a tempering of the growth rates seenover the last few years that dramatically reduced spareproduction capacity.

Supply. Non-OPEC supply growth over the period2005-07 was significantly lower than the rates achievedfrom 2000-04. We expect that in the 2008-09timeframe, non-OPEC annual production growth couldapproach the 0.8-1.0mmb/d range, a doubling of theyearly volumetric growth in 2005-07. Within OPEC,Angola is streaming new output and in Saudi Arabia,capacity enhancing oil projects are well underway,significant NGL additions are expected, and natural gasdevelopments could free up oil for export. Virtually allof the Angola and Saudi projects are light crude. Theyears 2008-09 should show better production responsethan what has been delivered over the last few years.

Refining. Although the potential for slippage andaccidents is still very high, downstream analysts at theIEA in Paris have compiled a data set of 2008-2010refinery projects suggesting that capacity growth islikely to exceed 1.5mmb/d each year over that period.With global demand likely to grow below that rate overthe same time frame, the potential exists for growth inspare refinery capacity.

Inventories. We believe that a large part of theinventory drop over the second half of 2007 can beattributed to the shift in the futures curve intobackwardation. The financial incentive for thecompanies to reduce stocks is high. The shape of thefutures curve can change rapidly and dramatically, and ashift toward a flatter curve could result is a rebuilding ofinventories and less apparent upward pressure on oilprices.

US Dollar. There is significant risk of US dollarovershooting to the downside (bullish for oil) but this ismost likely in an environment of more tepid globalgrowth. The emerging market currencies could be themore relevant forward-looking driver of the dollar aspurchasing power transfers to them. Many EMcurrencies, especially in Asia have further to rise againstthe dollar according to Deutsche Bank's FX strategists.This would imply continued upward pressures on oilprices but likely less than recently from the slide in thedollar against the major currencies. The US dollar hasdisplayed a tendency to rise and fall for extendedperiods of time. On average these cycles last for sevenyears, implying the current US dollar downtrend willstart to become long in the tooth during 2008.

However, it is worth noting that historically bear US

dollar cycles have tended to persist for longer than bullruns with the 1985 downtrend enduring for 10 years.The upswing and subsequent downswing in the US





dollar between 1995 and today bears a strikingresemblance to the 1978-1995 US dollar cycle. Ifhistory repeats itself then it implies the US dollar couldremain under pressure in 2008 and 2009, but could thenreturn to a period of strength (and lower oil prices) inthe 2011-13 time period.

Funds Flow. We view the enormous move of fundsinto commodities in somewhat the same way asdemand growth in Asia. The secular element to this islarge. "Commodities as an asset class" is bringinginvestment-grade money into the complex, but thespeculative element exists as well. Low interest ratesand a low dollar have encouraged speculative activity inoil, but a turn upward in the dollar could easily reversethe flow of hedge fund investments in oil.

Geopolitics. Rebuilding the 500kb/d of production lostin Nigeria is proving massively difficult, but output

losses do not seem to be getting worse. The attemptof the new government to restore stability in the NigerDelta has had some positive impact (fewer instances ofviolence, minor improvements in oil output). Thepotential for this to change substantially for the betterby 2009 is good, in our view. The situation in Iraq hasalso improved marginally over the last several months.Oil production had jumped from 2.0mmb/b in August toover 2.3mmb/d in November.

The Iranian nuclear standoff, which is likely to remainunresolved (and thus supportive for oil prices) in 2008,could enter a period of intense new negotiations afterthe new US president takes office in January 2009.There are many who believe that a fresh diplomaticpush from the US might encourage the emergence of a"grand bargain" that would satisfy everybody, includingIsrael. The most likely timeframe for such adevelopment would be 2009.

Figure 4: Oil demand and supply (mmb/d)

2006 2007 2008E 2009E 2010E 2015E

DEMANDUnited States 20.7 20.7 20.8 21.0 21.2 21.3OECD Europe 15.6 15.3 15.5 15.6 15.6 15.6Other OECD 13.0 13.1 13.3 13.1 13.1 13.2

Total OECD 49.3 49.2 49.6 49.6 49.9 50.1

USSR (former) 4.1 3.9 4.0 4.1 4.2 4.3China 7.2 7.5 8.0 8.4 8.8 9.2Non-OECD Asia ex-China 8.9 9.1 9.4 9.8 10.1 10.3Other Non-OECD 11.1 12.0 12.4 12.4 12.7 13.0

TOTAL DEMAND 84.7 85.7 87.3 88.4 89.8 91.2

SUPPLYUnited States 7.4 7.4 7.6 7.6 7.6 7.5OECD Europe 5.2 4.9 4.6 4.4 4.3 4.1Other OECD 7.4 7.5 7.4 7.6 7.7 7.8

Total OECD 20.0 19.8 19.6 19.7 19.6 19.4

USSR (former) 12.2 12.7 13.2 13.8 14.3 14.6Other Non-OECD 15.3 15.3 15.9 15.9 15.9 15.7Processing & Biofuels 2.2 2.5 2.8 2.8 2.9 3.0

Total Non-OPEC 49.7 50.3 51.4 52.2 52.6 52.6

OPEC CRUDE OIL 28.2 30.4 30.7 31.2 32.0 33.1OPEC NGLs 4.7 4.8 5.3 5.5 5.7 6.0

TOTAL SUPPLY 82.5 85.6 87.5 88.9 90.3 91.7Implied Stk Chng -2.1 -0.1 0.2 0.5 0.5 0.5

Source: IEA, DB Global Markets Research

Global oil demandOur demand forecasts are based on the assumptionthat global GDP does not stumble badly. According tothe IMF, real growth in global GDP over the period1980-2006 grew at 3.5% per annum. From 1995-2006the rate was 4.0% per annum. The IMF is estimatingeven stronger worldwide GDP growth at 4.9% pa in2007-08. Global oil demand from 1980-2006 grew at1.0% p.a. From 1995-2006 it accelerated to 1.8% p.a.Our estimates for average growth in 2007-08 for oilaverage circa 1.6%. Assuming that global GDPaverages about 4% p.a. over the period to 2015, wewould expect oil demand to grow approximately 1.7%each year.

Global oil supplyRelatively strong non-OPEC liquids (crude oil,condensate, NGLs, and biofuels) will characterize theperiod out to 2010. Over this 3-year period, weestimate about 2.0mmb/d of growth. Above-groundrisk are greater threats to this performance than theproblems posed by resource limits or other below-ground issues. The years after 2010 are murkier. Ourcountry and regional non-OPEC supply forecast suggestthat output could peak sometime between 2010 and2015 unless “not in my backyard” restrictions in manycountries are relaxed.

How high could oil prices go?Figure 5 examines the purchasing power of an averageG7 consumer in terms of the oil price. Since thebeginning of this decade the price of oil relative to percapita incomes has risen dramatically and so oilpurchasing power has declined. The average number of

barrels an average G7 consumer was able to buy overthe entire time span shown is circa 1000 barrels of oiland in 2007 stood at 566 barrels. However, for





purchasing power into deteriorate to the 1980-81 low of325 barrels, we would need to see oil at circaUSD130/bbl in 2008 or USD150/bbl in 2012.

Figure 5: Oil cost relative to G7 income

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N u m

b e r o f b a r r e l s o f o i l

Higher oil prices cutthe purchasing powerof a G7 consumer

Oil price decline helps toboost the purchasingpower of a G7 consumer

G7 per capita income divided by the price of oil

Source: DB Global Markets Research, IMF

In an environment of a weak US dollar, elevatedgeopolitical risk, strong world growth and persistingconcerns that non-OPEC oil production may be peakingwe expect oil prices will continue to trade expensivelywhen measured in real terms and relative to per capitaincomes. Consumers and producers should, in ourview, not be surprised to see a period of oil pricestrength extending into the middle of next decade.However, if one assumes G7 purchasing power willeventually move higher, then it is unlikely that oil priceswill be sustained over USD100/bbl.

US natural gas supply and demand outlookThe main challenge in the US natural gas markets overthe next few years will be dealing with the prospectsfor demand growth in the face of declining domestic USproduction. The use of natural gas in the electric powermarkets and the growth in natural gas as the preferredfuel in housing markets is likely to boost overall gasconsumption despite weakness in the industrial and“other” categories.

Even with strong upstream investment, rising costs andaccelerating decline rates (especially in newer projects)will likely constrain gas output growth in the comingyears. Canadian natural gas production is suffering thesame problems and new frontier supplies are yearsaway. Consequently, LNG will have to serve as abalancing item. This could be a problem in as much asinvestment decisions on upstream LNG projects aroundthe globe are being slowed as producers struggle withthe same material and labour shortages that are beingexperienced in virtually every area of engineeringconstruction. Eventually, we see US natural gas pricesre-connecting with oil prices as these global LNG andlabour issues outweigh domestic considerations.

Figure 6: US natural gas balances (bcf/d)

2005 2006 2007 2008E 2009E 2010E 2015E

CONSUMPTION

Residential 13.2 11.9 13.3 13.5 13.7 13.9 14.8

Commercial 8.4 7.9 8.4 8.5 8.6 8.7 9.3

Industrial 18.1 18.1 18.3 18.4 18.5 18.5 19.0

Electric Utilities 16.1 17.1 17.8 18.2 18.6 18.9 20.9

Other 4.5 4.8 4.8 4.7 4.7 4.6 4.3

Total Demand 60.2 59.8 62.7 63.3 64.0 64.7 68.3

DOMESTIC SUPPLY

Alaska 1.2 1.2 1.2 1.1 1.0 1.0 6.8

Gulf of Mexico Offshore 8.3 7.5 7.8 7.7 7.5 7.4 6.7

Other US 40.1 42.1 42.3 43.0 42.9 42.4 40.3

Total Dry Gas Product ion 49 .7 50.7 51 .3 51 .6 51.3 50 .8 53.9

Net Storage Withdraw 0.1 -1.2 0.7 0.0 0.0 0.0 0.0

Other & Balance 0.5 1.1 0.6 0.0 0.0 0.0 0.0

Total Domestic Supply 50.4 50.6 52.7 51.8 51.3 50.8 53.9

Exports 2.0 1.8 1.8 1.8 1.8 1.8 1.7

IMPORTS 11.9 11.0 11.8 13.3 14.4 15.7 16.1

Canada 10.1 9.3 8.9 8.8 8.7 8.8 7.8

LNG 1.7 1.7 2.4 4.5 5.8 6.8 8.3

Source: DOE/EIA, DB Global Markets Research

ConclusionsThere is no obvious “tipping point” price that quicklyforces demand lower and supply higher. The demandshock of 1980-81 was caused at least as much by fearof war, and the possibility that supplies would not beavailable at any cost, as it was by “high” oil prices. Thepotential to substitute coal, gas and nuclear power forexpensive oil is now seriously limited by environmentalregulations, resource problems, and voter opposition.The massive scale of the global oil and gas system andthe long lead-times needed to make changes suggestthat rapid “reversion to mean” scenarios are nowartefacts of history.

It is possible to imagine a period of slower globaleconomic growth (driven by an increasing drift towardsprotectionism, perhaps) - or technological innovationson supply or demand) that could result in aUSD60/barrel world. We can also envision aUSD100/bbl world characterized by rapid economicprogress in China and India combined with the failure ofOPEC’s and other countries’ state-directed oilcompanies to invest in capacity. We have set our mid-cycle (2012-13) oil price forecast at USD80/bbl(nominal).

Adam Sieminski (202) 662-1624

[email protected]





#8 Markets vs. AnalystsMud Wrestling: Bout 10• The contest between markets and analysts as

to who is the superior crude oil price

forecaster during this commodity price rally isnow in its tenth year.

• We find that since 1999, the futures markethas been a better predictor than analysts onseven out of the past nine occasions.

• Since 1999, the analyst community hasconsistently under-estimated the crude oilprice. Their forecasting error over this periodhas been +31%. The futures markets’forecasting error is lower at +18%.

• If the average analyst forecasting errorbetween 1999 and 2007 persists into thisyear, then it implies Brent crude oil pricesaveraging USD96/barrel.

• If the average forecasting error of the futuresmarket between 1999 and 2007 persists into2008, then it implies the Brent crude oil priceaveraging USD110/barrel.

In January 2004 we published the report “Tracking TheForecasting Error Of Commodity Analysts”. The reportexamined the consensus price forecast for crude oil atthe start of the year with the eventual outturn. We

found that the analyst community had consistentlyunder-estimated the oil price by an average of 30%between 1999 and 2003.

In the subsequent four year period the forecasting errorhas not improved. For the entire 1999 to 2007 periodthe analyst community has always under-estimated thefinal oil price and by an average of 31%, Figure 1.

Figure 1: Analysts have systematically under-estimated the strength in crude oil prices since1999

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008f

U S D / b a r r e l

Brent forecast at the start of the year

Outturn

43%

54%2%

25%

53%

43%

Average forecasting error 1999-2007 = 31%

29%

15%

18%

31%

Source: DB Global Markets Research, Reuters

Since 2004 we have advised commodity consumers,producers and investors alike that a more reliableforecast for crude oil in the coming year is to take theReuters consensus price forecast at the start of theyear and add 31%.

We find that applying this rule today yields an average

Brent crude oil price of USD95.5/barrel (USD72.9 x1.31). However, the most recent consensus priceforecast is from Reuters December poll. To beconsistent with earlier years we need to apply the 30%rule to January survey which will be published after wego to press. If we assume the consensus oil price hasrisen to USD75/bbl, in line with higher spot prices sinceChristmas then it assumes oil prices are likely toaverage just over USD98/bbl.

Tracking the futures market’s forecasting errorAnother route to assess the likely oil price for thecoming year is to examine the Calendar Brent swap

price at the start of the year and compare it with thefinal outturn. We fid that like analysts the futuresmarket has also consistently under-estimated thestrength in crude oil prices. However, the forecastingerror is lower at 18%.

Figure 2: The futures market has tended to be amore reliable predictor of oil prices in the yearahead

22%

0%22%-11%22%

39%

10

20

30

40

50

60

70

80

90

100

110

120

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008f

U S D / b a r r e l

Calendar Brent swap price atthe start of the year

OutturnAverage absolute forecastingerror 1999-2007 = 18%

18%

0%

24%

18%

Source: DB Global Markets Research, Reuters

Consequently if we apply this forecasting error to thecurrent Cal’08 Brent swap price yields an expectedaverage oil price for 2008 of USD110/barrel. Even atthese levels, the oil price would still be cheaper relativeto per capita income than it was at the beginning of the1980s.






#9 US PowerA Moratorium on Coal?

• With electricity demand growing at 1.7%annually, we believe approximately 75GW ofcapacity must be added to the systembetween 2008 and 2013.

• Nearly 60% of the 130 GW of capacityadditions planned for the US over the next fiveyears are coal and wind projects.

• Permits for coal power plant projects are beingdenied by state public utility andenvironmental commissions that findthemselves under serious pressure to respondto climate change warnings.

• Wind power is typically de-rated by 85%to90% for purposes of calculation peak loadneeds. Speeding up “other renewable fuel”projects and nuclear is not practical.

• More intensive use of existing natural gas firedgeneration and more gas new-build may berequired to avoid electricity shortfalls.

• In our view, natural gas futures prices for theperiod after 2010 do not reflect this problem.

US electricity consumption grew by annual rates of

4.2%, 2.6%, and 2.3% in the 1970s, 1980s, and 1990s,respectively according to data from the US DOE/EIA.The EIA is assuming a long-term growth rate of about1.3% per year in the new Annual Energy Outlook 2008which leads to lower projections of electricitygeneration. Because of relatively strong near-term GDPassumptions, however, the EIA is assuming a “normal”growth rate of 1.8% for electricity use in 2009. Recentforecasts by Wood Mackenzie put US electricity salesgrowth at 2.0% annually to 2010 and 1.7% per yearthereafter. On a base of circa 975 GW of installed netsummer capacity, this implies a need for 15-20 GW peryear of growth.

There are approximately 130 GW of electric powercurrently under development or proposed in the USout to the year 2013 according to estimates byWoodMac (see Figure 1). Coal plants are 28% of themix (36 GW), but acceptance of the climate changemessage in the US appears to have placed an effectivemoratorium on new coal projects. It is almostimpossible to get a public utility commission to grant apermit for a new coal plant that is not carbon captureand sequestration (CCS) "capable". Since mid-2007,plans for new coal plants in Kansas, Wyoming,Oklahoma, North Dakota, Texas and Florida have beenrejected by state utility and environment commissionsor cancelled due to regulatory uncertainties.

Wind is another 31% of the mix (40 GW), but for peakavailability purposes, only 10-15% (4-6 GW) of that canbe reliably counted. Capacity factors are determined bydividing actual energy produced in a given period by themaximum possible output running full time at rated

power. Typical annual average power capacity factorsare 20-40% for wind, but over shorter periods of time,installed wind power is often discounted much further,although this may be improving as geographic diversityand grid inter-connections are improving.

Figure 1: US electric power capacity growth2008-2013 (GW)

Coal, 35.7, 28%

Natural Gas,36.9, 29%Nuclear, 1.2, 1%

Wind, 40.4, 31%

OtherRenewable,14.6, 11%

Source: Wood Mackenzie, DB Global Markets Research

If there is any slippage in delivery on the renewableprojects (another 15 GW), the reliability problem getsworse. Conservation (or less demand) would help, butprobably not soon enough to have a significant impact.A total of 12 GW of new-build nuclear capacity has beenproposed for 2015–2016, but this comes too late tomeet demand requirements to 2013-14.

There are a number of regions in the US that soon willfall short of the generation capacity levels required tomaintain a 15% reserve margin for electricity. Florida,New York, and significant portions of the Mid-Atlantic,Southeast, and Midwest regions could fall below their

target capacity margins within two or three years ifadditional supply-side and demand-side resources arenot brought into service.

Besides turning out the lights, the only answer, in ourview, is more gas-fired combined cycle gas turbine(CCGT) cogeneration projects. This will be the only wayto add the capacity that can be put in service betweennow and 2013.

Adam Sieminski (1) 212 250 2928 [email protected]





#10 Commodity Term StructuresWinners & Losers

• Oil: Backwardation Returns

o And here to stay? • US Natural Gas: Sticky contango

o The world has turned upside down,again

o Will backwardation ever return?

• Wheat: How deep is your love?

o Moderating level of backwardation,Poised to flip back to contango?

• Corn: Good News or Bad News?

o Will backwardation finally arrive?• Industrial Metals: Curves flatten, but, what’s

next? Will the US Fed come to the rescue?

o Aluminium: Steep backwardation toreplace the current steep contango?

o Copper: Will contango steepen?

o Nickel & Zinc: From flat to flatter?Trade recommendations:Crude oil

•

Long Jun-08 vs. short Dec’08 WTI• Long Dec’09 vs. short Dec’10 WTI

US natural gas:

• Short Jan’08 and long Feb’08 futurecontract, and keep rolling the positionsevery month

• Long DBLCI-OY-NG vs. short S&P GSCI-NG sub-indices


Wheat

• Short Mar’08 vs. Long Dec’08 or

• Short Mar’08 vs. Long Jul’08

Corn

• Long Mar’08 corn

• Long Dec’08 corn vs. sell Dec’09 corn

Industrial metals

• Maintain long back-end

• Front end remain defensive, but, look togo long into Q1

Oil: Backwardation Returns

o And here to stay?

Trade recommendation:

• Long Jun-08 vs. short Dec’08 WTI


The WTI curve had a roller coaster ride in 2007, fromsteep contango earlier in the year to suddenbackwardation by the middle of 2007, Figure 1.

Figure 1: WTI forward curve flipped from steepcontango to steep backwardation in just onemonth

19 July 2007

20 June 2007


The strength in oil prices over last summer was in starkcontrast to the environment of record high oil prices in2006. At that time, USD78 oil was occurring withOECD inventories rising and the WRI forward curve incontango forward curve, which we dubbed the

inconsistent trinity. The rally in oil prices in the secondhalf of last year was therefore more fundamentallybased it was occurring at a time when OECDinventories were declining and the market was inbackwardation.

Consequently we adopted a curve steepening tradebased on our belief that the move from USD75/bbl toUSD60/bbl between August and September 2006would not be repeated in 2007, Figure 2. In fact, notonly did WTI crude oil not sell-off like it did in 2006, butthe strong rally and subsequent attack of the USD100level has kept this curve trade in profit.





Figure 2: Why USD75 oil in 2006 was differentfrom USD75 oil in 2007? This chart shows why:the oil market supply-demand balance was tightin 2007, but, it was not in 2006

17 July 2006

18 July 2007


Historically, the WTI curve always trades inbackwardation in a bull run and in contango in a bear run.2005 and 2006 were the exceptions as OPECengineered steep contango by flooding markets withcrude oil to safeguard long term oil demand growth andfight off geopolitical fears.

Figure 3: Historical WTI prices vs. forward curve

Historic WTI Price versus Forward Curve (USD/bbl)

10

20

30

40

50

60

70

80

90

100

A u g - 8 4

A u g - 8 5

A u g - 8 6

A u g - 8 7

A u g - 8 8

A u g - 8 9

A u g - 9 0

A u g - 9 1

A u g - 9 2

A u g - 9 3

A u g - 9 4

A u g - 9 5

A u g - 9 6

A u g - 9 7

A u g - 9 8

A u g - 9 9

A u g - 0 0

A u g - 0 1

A u g - 0 2

A u g - 0 3

A u g - 0 4

A u g - 0 5

A u g - 0 6

A u g - 0 7

A u g - 0 8

A u g - 0 9


Looking into 2008, we expect backwardation toremain in the crude oil market given still tightmarket fundamentals. With OPEC’s decision to leaveproduction unchanged at the end of last year, morecomplex refineries coming back online and demandremaining extremely robust despite high prices, webelieve the WTI curve is likely to steepen again. Indeed,although Cushing inventory has increased over the past

few weeks, the sudden flattening of the forward curveseems not to be warranted especially since the

absolute inventory level at Cushing remains low and theaggregate US crude oil inventory level keeps on falling.

Figure 4: WTI term structure vs. Cushing crudeoil inventory level

10

15

20

25

30

Jan-04 May-04Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Cushing Crude Stocks (million bbls, lhs)

M2-M4 Nymex WTI spread ($/bbl, inverted scale, rhs)

contango


Figure 5: Total US crude oil inventory has beenfalling

US Crude Oil Stocks (million bbl)

260

275

290

305

320

335

350

365

380

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

5-Year Range (2001-2005)5-Year Average (2001-2005)2006(monthly data)2007(monthly data)2007(weekly data)


For the oil bulls, we believe a curve play offers betterrisk adjusted returns than an outright long. For newlongs, we would recommend travelling down the curveand going long the spread at the deferred part of thecurve, such as Dec’09 vs. Dec’10.





Figure 6: WTI term structure

WTI forward curve (8 Jan 2006)

Jun-08

Dec-08

Dec-09

Dec-10

87.0

88.0

89.0

90.0

91.0

92.0

93.0

94.0

95.0

96.0

97.0

Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11



• Long Jun-08 vs. short Dec’08 WTI


US Natural Gas: Sticky Contango

o The world has turned upside down, again

o Will backwardation ever return?


• Short Jan’08 and long Feb’08 futurecontract, and keep rolling the positionevery month



The US natural gas forward curve is characterised witha strong seasonal pattern with the forward winter pricetrading substantially higher than the forward summerprice.

However, the seasonality predicted by the forwardcurve seldom turns into reality. Indeed, over the past12 years, natural gas has spent more time trading incontango than in backwardation and this trend is onlygetting worse.

Figure 7: Since 1995, US natural gas has spent

most of the time trading in contago

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

NatGas c ontango (M01-M02)

NatGas backwardation (M01-M02)

contango

backwardation


Since January 1995, US natural gas has spent 82% ofthe time trading in contango (M01-M02). However,from Winter 2002 onwards, the US natural gas M01-M02 spread has traded in contango 90% of the time,and from Winter 2004 onwards, the percentage hasrisen to 98%. Indeed, the strong seasonality that wasonce a common feature of the US natural gas market isevaporating, a result of both weaker winter heatingdemand and stronger summer cooling demand, in ourview.





Figure 8: Dwindling seasonality in the US naturalgas market

2005

2006

2007

strong winter premiumover summer

almost zerowinter premium

winter premium across the wholeterm structure has declined since

2004, and long-dated gas is nowtrading in contango to the front-end


Currently the forward curve is pricing in an almost zerowinter premium for 2008 and a drastically lower winterpremium from 2009 onwards.

Over the winter 07/08 period we expect record highlevels of storage to persist. Given normal weather wewould expect to end the current heating season onMarch 1, 2008 with 1600bcf of gas in storage. If it stayswarm this winter, we would expect to see even moregas in storage.

Figure 9: US natural gas inventory level

700

1100

1500

1900

2300

2700

3100

3500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

billion cubic feet

5-Yr Normal 2006 2007 2008 Actual 2008 Projected

Source: DOE/EIA, DB Global Markets Research

We are therefore recommending a few strategies toexpress our view that contango is likely to stay in theUS nat gas market.

The first strategy is to go short the Jan’08 and longFeb’08 NG futures contract, and keep rolling thesepositions every month. However, we prefer toimplement this strategy via indices to save us from thetrouble of rolling the futures every month.

The second strategy is to go long the DBLCI-OY-NG

sub-indices and go short the S&P-GSCI-NG sub-indices. We believe the OY technology will outperforma pre-defined fixed rolling strategy implemented by theS&P GSCI which rolls the front-line contract everymonth. In a contango environment this becomes alosing strategy as it leads to a substantial negative rollreturn.

Figure 10: Term structure play via commoditysub-indices

-150%

-100%

-50%

0%

50%

100%

150%

200%

Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08

C u m u

l a t i v e r e

t u r n s

Long SPGSCI NG index

Long DBLCI-OY-NG index

Long DBLCI-OY-NG vs. short SPGSCI NG index


The third strategy is to go short the Feb’09 and longthe Apr’09 NG contract , this expresses our view thatthe winter premium will narrow further, similar to whathas happened over the past few winters.

Trade recommendations :

• Short Jan’08 and long Feb’08 futurecontract, and keep rolling the positionsevery month







Wheat: How deep is your love?

o Moderating level of backwardation; poisedto flip back to contango?


• Short Mar’08 vs. Long Dec’08 or

• Short Mar’08 vs. Long Jul’08

In September this year we outlined why we believedthe high spread between this year and next year wheatwas unsustainable, since it was wide enough toencourage immediate substitution, discourage inventoryre-stocking and therefore a good sell.

Since then the spread has narrowed substantially fromUSc247 when we instigated the trade to a mere USc83as of Dec 7, 2007.

During the last few weeks of 2008 the spread haswidened on supporting weather and tenderannouncements, some of which however weresubsequently withdrawn. We continue to believewheat might be pressured in the near term onweakening fundamentals: for example, India's wheattrade deficit is shrinking, China is now a small netexporter of wheat and the possibility that after towyears of drought sufficient water levels will arrive inAustralia. We are therefore maintaining our curveflattening view in wheat.

Figure 11: Wheat December time spread closedwith profit

-50

0

50

100

150

200

250

300

Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07

Wheat Mar'08-Dec'08 timespread (USD/Bu)

Wheat Dec'07-Dec'08 timespread (USD/Bu)

Trade entry: 14-Sep-07

Current level: 08-Jan-08(plus positive roll returns)

backwardation

contango

profit


Figure 12: Wheat term structure has flattenedover the past four months. We expect it toflatten further

Wheat forward curve

500

550

600

650

700

750

800

850

900

950

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Dec 2007

Sep 2007

Jan 2008






Corn: Good News or Bad News?

o Will backwardation finally arrive?


• Long Mar’08 corn

• Long Dec’08 corn vs. sell Dec’09 corn

As discussed in the agricultural article, one of ourfavourite crops for 2008 is corn. Indeed corn hasstaged an impressive rally during the last few months of2007 and has finally managed to post positive returnson the year.

Figure 13: Mar’08 corn prices

250

300

350

400

450

500

Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07

Corn Mar'08 (USD/Bu)

Trade entry: 05-Oct-07

Current level: 08-Jan-08


In our view, the weakness in corn prices during thesecond quarter of 2007 was mainly driven by a surge inUS corn production, Figure 14 which had been triggeredby US farmers switching out of certain crop productionsuch as soybeans and into corn.

Figure 14: US corn production by year

10.2

10.6

11.0

11.4

11.8

12.2

12.6

13.0

13.4

M J J A S O N D J F M M J J

B u s h e l s

( b i l l i o n s )

Month US corn production estimate by the USDA w as made

2005-06

2004-05

2006-07

US corn production

2007-08

Source: USDA, DB Global Markets Research

Indeed the total area harvested in the US for corn,soybeans and wheat has stayed relatively stable since1990, Figure 15. Consequently any increases in onecrop tend to occur at the expense of another.

Figure 15: Area harvested for US major crops

0

10

20

30

40

50

60

70

80

90

100

1980 1985 1990 1995 2000 2005

Corn Soybean WheatHectares (million)


The game of musical chairs between US corn, wheatand soybean production has intensified over the pastfew years due to the substantial divergence in pricetrends in these markets. For example, in 2006 soybeanacreage gained at the expense of wheat and cornacreage. However in 2007, the strong rally in cornprices during the previous year (81%) opposed to thedisappointing gains in soybean prices (+14%) led to USfarmers to shift plantings our of soybeans and into corn.

Figure 16: US crop plantings: a game of musical

chairs: A crop’s gain is another’s loss, asindicated by the changes in area harvested eachyear

Year-on-year changes in area harvested

-6

-4

-2

0

2

4

6

8

10

2004 2005 2006 2007

Corn Soybean Wheat

Hectares (million)

larger areaharvested

smaller areaharvested


Going into 2008, we believe the game of musical chairsis likely to continue but this time corn acreage is cut andplantings recover in soybeans and wheat. Therefore,together with the increasingly tight market in Chinawhich we believe is set to become a net importer incorn over the next year, we are positioning for the cornprice to rally further and the corn curve to flip intobackwardation.





Industrial Metals: Curve has flattened,but, will the Fed come to the rescue?

o Aluminium: Steep backwardation toreplace the current steep contango?

o Copper: Will contango steepen?

o Nickel & Zinc: Flat, flatter, flattest?



• Front end remain defensive, but, look togo long into Q1 on stronger signs of theUS economy

Metal curves have flattened, but, what’s next?

Over the past two years we have been convinced thatindustrial metal curves would flatten. We have tradedaround this theme mainly by either going long the back-end of the curve or via curve plays. Indeed, industrialmetal curves have flattened substantially in bothperiods of rising and falling markets. Now that thecurve has flattened, in this section we are outlining ourexpectation for metal curves during 2008.

2007 reviewTo celebrate the start of 2008 we have designed a newset of charts to track the journey of the term structureof industrial metals during the course of 2007. FromFigure 17 to Figure 24, each chart plots the forwardcurve of each metal at a 5 business day intervals, witheach line representing the metal term structure on aparticular day.

Aluminum

The most dramatic curve moves have taken place in thealuminium market as shown in Figure 17. Aluminumstarted 2007 trading in a steep backwardation,represented by the orange line in Figure 17, andfinished the year in a steep contango, the blue line.

Whether a long position in aluminium in 2007makes money or not is largely dependent on whichpart of the curve the long position has beenadopted. Front-end would have meant losses andback-end profit.

We have examined the aluminium curves in greaterdetail over the H107 period, Figure 18, and for the lastfour months of 2007, Figure 19. Aluminium spent thefirst half of 2007 trading in backwardation and the lastfour months in contango.

Figure 17: Aluminium forward curves in 2007

Aluminium forward curves (2007)

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27forward month

2-Jan-2007

28-Dec-2007


Figure 18: Aluminum forward curve in H107,steep backwardation

Aluminium forward curves (Jan'07-Jun'07)

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27forward month

16-Jan-2007

11-May-2007


Figure 19: Aluminium forward curves Sep-Dec2007, steep contango

Aluminium forward curves (Sep'07-Dec'07)

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27forward month

28-Dec-2007

6-Nov-2007

11-Sep-2007






Copper

Copper was also no exception to this curve flatteningtrend, albeit at a slower pace. Copper spent the first 10months of 2007 trading in backwardation, Figure 20.Subsequent to the October sell-off the copper curvehad flattened substantially and currently front-end

copper is trading in a very small contango.

Figure 20: Copper forward curves, Jan-Oct 2007

Copper forward curves (Jan'07-Oct'07)

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2 1 22 23 24 25 26 27

forward month

2-Oct-2007

6-Feb-2007


Figure 21: Copper forward curves, Oct-Dec 2007,copper finally joined the curve flattening camp

during the last three months of 2007

Copper forward curves (Oct'07-Dec'07)

6,000

6,500

7,000

7,500

8,000

8,500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27forward month

2-Oct-2007

18-Dec-2007


Nickel

The same trend has occurred, but, at a different time.Nickel prices surged during the first part of 2007peaking at USD51,600/tonne. It is was therefore nosurprise that the nickel curve steepened during this rally,Figure 22.

Just as nickel rallied hard, it fell even harder to lose lostmore than half of its peak value and at one pointtouching the low of USD25,100/tonne. The nickel curvehas consequently flattened together with the sell-offand is currently trading in a small contango at the front-end.

Figure 22: Nickel forward curves Jan-May 2007,backwardation was the norm

Nickel forward curves (Jan'07-May'07)

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1 2 3 4 5 6 7 8 9 10 11 1 2 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

forward month

9-Jan-2007

11-May-2007


Figure 23: Nickel forward curve Jun-Dec 2007,curve has flattened since the sell-off in June andhas never turned back

Nickel forward curves (Jun'07-Dec'07)

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27forward month

June 2007

Jul - Dec 2007 the nickel forwad curve has stayed flatfor the second half of 2007

28-Dec-2007






Zinc

Zinc was not only the worst performing industrialmetals in 2007 in terms of spot price performance, but,it was also the worst performing commodity across thefive broad commodity sectors last year. Just as theover-riding trend in zinc prices last year was down, so

the same story applies to zinc forward curve: flat.Indeed, zinc is the only metal under investigation weretrends were one-way, namely curve flattening.

Figure 24: Zinc forward curves in 2007

Zinc forward curves (2007)

2,000

2,500

3,000

3,500

4,000

4,500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27forward month

2-Jan-2007

18-Dec-2007


Curve outlook

In the near term we expect curve flattening remains thecentral theme in the industrial metals market. Wemaintain our belief that back-end metal prices willoutperform and the front-end will continue to suffergiven its strong sensitivity towards the Fed funds cycleand the US equity market.

However, as outlined in the Global Macro article, webelieve the market is over pessimistic regarding the USeconomy and it is underplaying the strength in Chinesemetals demand. Consequently we are positioning to golong front-end metals on signs of stronger US economicgrowth.

A final look at the inventory level of the metals suggestto us that zinc has the strongest potential to deliversurprises in both price appreciation and curve movesgiven inventory levels on the LME close to their 5-yearlow and the proximity of current prices to productioncost and which may temporarily over-power the threatof looming capacity expansion in China. In terms ofnickel, we believe this market has the least potential tosurprise to the upside given inventory is currently sitting

at a 7-year high, Figure 25.

Figure 25: Inventories on the LME

0

20

40

60

80

100

120

140

0 100 200 300 400 500 600 700 800 900 1000 1 100 1 199 1 299 139 9

Copper peak 3-May-02

Lead peak 7-Aug-02

Tin peak 9-Aug-02

Nickel peak 2-Feb-06

Aluminium peak 23-Jan-04

Zinc peak 1 3-Apr-04

Number of days after LME in ventories peaked

Inventory peak=100Supassed the last peak

on 31-Oct 2007




• Front end remain defensive, but, look togo long on stronger signs of the USeconomy and an end to Fed easing

Amanda Lee, (852) 2203 8376 [email protected]





#11 Commodity VolatilityA Mixed View

Trade recommendations:Crude oil

• Long Mar’09 variance swap

US natural gas:


• Long Sep’09 variance swap

Gold

• Take profit on long gold variance swap

• Scale up sell

Industrial metals• Aluminium vol offers good value vs.

copper and nickel vol

Crude oil: long back-end vol via variance swap

The WIT crude oil implied vol curve seems to havetaken its lead from the flat price term structure, in ourview. Curve flattening is not unique to the crude oil flatprice. The vol curve was trading in contango two yearsago and is now currently in backwardation, Figure 1.The assault of triple digit oil has pulled up front-endcrude oil implied vol which is trading close to the 6-yearaverage. However, back-end vol has barely participatedin this rally and is currently trading close to the lowerquartile.

Figure 1: Crude oil volatility level

Oil implied vol cone: current curve vs. past 6-year distribution

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24Forward month

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

Median09-Jan-0609-Jan-0709-Jan-08

The blue boxplot for each month shows:i) the interquartile range (blue box)ii) the 5-95 percentile range (whisker)iii) the median of the 6-year history (dashed line)


While the longer dated implied vol remains higher thanthe realised vol, this gap has been closing, Figure 2.

Figure 2: WTI 12M implied vs. realised vol


With longer dated implied vol trading at lower 20% webelieve it offers good value such as via a variance swaptrade. Figure 3 summarises the realized volatility of fixdated contracts. Starting from the Dec’03 contracteach contract in Figure 3 has realized vol finishingsomewhere between 23% and 29%. Currently Mar’09implied vol is trading at roughly at 23% andconsequently we believe it offers good value to go longthe variance swap. Given the tight oil market supply-demand fundamentals we believe volatility will remain aconstant feature of the crude oil market in 2008.

Figure 3: WTI dated contracts realised vol

WTI 260 day realised volatility

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

27.5

30.0

Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07

Dec-03 Dec-04 Sep-05 Dec-05 Jan-06 Mar-06 Jun-06Sep-06 Dec-06 Jan-07 Mar-07 Jun-07 Sep-07 Oct-07Nov-07 Dec-07 Jan-08 Dec-08 Jun-09 Dec-09






US natural gas: Like WTI, go long back-end vol viavariance swap.After the spike to USD15/mmBtu in December 2005natural gas has spent the last two years trading in avery tight range, Figure 4. Other than the occasionalswings natural gas prices have been kept prisoner inthe USD6-8/mmBtu range for two years despite thehistorical tendency for natural gas to be the mostvolatile commodity and the market characterised withextreme overshooting both to the upside and downside.

Figure 4: US natural gas price

0

2

4

6

8

10

12

14

16

1990 1993 1996 1999 2002 2005

U S D / m m

B t u

Natural Gas price


Range bound trading naturally leads to a decline of therealized volatility and in tandem the implied vol. Figure5 shows that the current vol term structure is

substantially lower than the year-ago one. However,the nat gas vol term structure remains steeplybackwardated despite front-end trading substantiallylower.

Figure 5: US natural gas implied vol forwardcurve, current vs. year-ago


The realised vol of a range of fixed dated nat gascontract is summarised in Figure 6. There is asubstantial upward journey of each contract as itapproaches its expiry date. All contracts except one hasrealised vol finished above 30%.

Figure 6: US NG dated contracts realised vol

Natural gas 260 day realised volatility

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07Oct-07 Nov-07 Dec-07 Mar-08 Jun-08 Dec-08 Mar-09 Sep-09


Although the natural gas market has been lacklustre forthe past two years we believe spike risk has not beentotally eliminated. In fact, as discussed in the nextarticle , the nat gas vol skew currently shows asubstantial bias to upside price risk. We expectweather will remain a key driver and with the dwindlingseasonality we believe going long variance swap offersgood potential for vol pickups.

Among the contracts we believe the Mar’09 and Sep’09variance swap offers best value. Realized vol of theSeptember contract is the highest with Sep’06 finishingat 49% and Sep’07 at 38%, while Mar’06 at 42% andMar’07 at 40%. Mar’09 contract includes next winterwhich is a plus but implied vol is trading higher at 36%,this compares to Sep’09 trading at 30% which mightalso benefit from summer hurricanes activity.





Gold vol: take profit and scale up sellWe bought gold vol in June 2007 close to the low andtherefore we were well positioned for the risk aversionthat swept through global financial markets over thesummer and the contagion effects that ensued onprecious metals volatility.

This trade has performed as contagion from equity andFX markets spread into the commodities complex andspecifically gold. During the period of extreme VIX andUSDJPY volatility, gold prices traded lower and impliedvol rose subsequently.

Figure 7: 12M gold vol

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07

Gold 12M implied volTradeOpened


Subsequently with the gold price breaking theUSD800/oz level gold vol has rallied further despite arecovery in risk appetites. Indeed, the entire gold volterm structure is trading well above historic levels,Figure 8. Given the extreme positioning currently in thegold market as well as potential seasonal strengthen inthe EURUSD during the first four weeks of the year, wewould recommend taking profit and prepare to scale upselling.

Figure 8: Gold implied volatility level

Gold implied vol cone: current curve vs . past distribution

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

1M 2M 3M 6M 1Y 2Y 3Y 4Y

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

6-year median 04-Dec-07 04-Jan-08


Base metals: Aluminium vol offers good value vs.copper and nickel volAmong the base metals complex, only aluminiumimplied vol is trading within the box which representsthe interquartile range of 6-year worth of data. Copper,zinc, and nickel vol are all trading at or above theinterquartile range.

Figure 9: Aluminium volatility level

Aluminium implied vol cone: current curve vs. past distribution

10%

13%

16%

19%

22%

25%

28%

31%

34%

M01 M02 M03 M06 M09 M12 M24 M27

10%

13%

16%

19%

22%

25%

28%

31%

34%



Figure 10: Copper volatility level

Copper implied vol cone: current curve vs. past distribution

10%

15%

20%

25%

30%

35%

40%

45%

50%

M01 M02 M03 M06 M09 M12 M24 M27

10%

15%

20%

25%

30%

35%

40%

45%

50%







Figure 11: Zinc volatility level

Zinc implied vol cone: current curve vs. past distribution

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

M01 M02 M03 M06 M09 M12 M24 M27

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%



Figure 12: Nickel volatility level

Nickel implied vol cone: current curve vs. past distribution

20%

25%

30%

35%

40%

45%

50%

55%

60%

M01 M02 M03 M06 M09 M12 M24 M27

20%

25%

30%

35%

40%

45%

50%

55%

60%



Trade recommendations:Crude oil


US natural gas:


• Long Sep’09 variance swap

Gold

• Take profit on long gold variance swap

• Scale up sell

Industrial metals

• Aluminium vol offers good value vs.copper and nickel vol






#12 Skew View & Spike Risk

What Are Option Markets Saying?

A. Market Positioning Risks

• Net speculative positioning data provide agood indication of market sentiment anddirectional views among the speculativecommunity, in our view.

• Alternatively, the market bias of a particularcommodity can also be inferred from theoptions volatility skew.

• We believe combining the vol skew with thespeculative positioning data provide a morecomprehensive indication of the overallmarket positioning and sentiment.

• For example, currently speculators are netlong EUR according to the IMM data whilethe EURUSD options skew has shown thestrongest favour towards EUR put options(USD call options) since November 2000.

• IMM bulls plus options bears mean themarket is more balanced in our view andtherefore not as one-sided as implied by theIMM data alone. That is, euro bulls arebuying puts to hedge their directional longposition in our view.

• On the other hand, in the gold market, boththe CFTC net speculative positioning andoptions skew are overtly bullish gold and sohelping to propel the gold price to new highsand possibly above what is implied by thecurrent level of the US dollar.

• Extreme one-sided bullishness combinedwith the tendency of the USD to strengthenin the first four weeks of January suggests tous that the gold price is most vulnerable to asell-off currently. If a correction were tooccur we believe this would simply deliveranother opportunity to buy given ourmedium term bullish view towards theprecious metals sector.

• In the crude oil market, speculators are mildlylong while the options market has a strongfavour on calls.

• In the US natural gas market, the speculativecommunity is extremely bearish while theoptions skew has shown a strong bullishbias, possibly indicating gas bears arehedging with gas calls.

B. Spike Risk for Oil & Gas

• According to the options market skew, thereis a 10% chance that the Dec’09 WTI contractwill expire below USD61/bbl or above

USD149/bbl, against the futures price ofUSD92/bbl.

• Similarly, for US natural gas, our modelindicates that the Dec’09 NG contract has a10% chance that it might expire belowUSD5.7/mmBtu or above USD18.9/mmBtu,futures reference at USD9.6/mmBtu.

A. Market Positioning Risks Assessing market sentiment and positioning is verycrucial to any investment or hedging decision because

while it is nice to ride on the trend but risk alsoincreases substantially for over-crowded trade. Thevery first stop for market positioning is always thepositioning data reported by the CFTC, CommodityFutures Trading Commission.

Alternatively, the market bias of a particular commoditycan also be inferred from the options volatility skew.We believe combining the vol skew with thespeculative positioning data provide a morecomprehensive indication of the overall marketpositioning and sentiment.

To take the currency market as an example, as shownin Figure 1, currently speculators are net long EUR andindeed the long position has been intact since early2006.

Figure 1: Speculative EUR Positions

-40

-20

0

20

40

60

80

100

120

140

1999 2000 2001 2002 2003 2004 2005 2006 20070.80

0.88

0.96

1.04

1.12

1.20

1.28

1.36Net non-commercial positions on IMM, (lhs)

EUR/USD, (rhs)

Net long

Source: CFTC, DB Global Markets Research





However, this bullishness is not shared by the currencyoptions market. Figure 2 compares the latest vol skewof the EURUSD 12-month option with the one sixmonths ago. In July 2007 the vol skew is relativelybalanced between calls and puts option reflecting thethen range bound market during the first half of 2007.The current vol skew has shown a strong favourtowards put option.

Figure 2: EURUSD 12M skew favours puts

EURUSD 12M vol skew

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

10P 25P ATMF 25C 10C

d e v i a

t i o n

f r o m

A T M F ( v o l s )

07-Jan-08

30-Jul-07

stronger put skew


Indeed, the EURUSD options skew is showing thestrongest favour towards EUR put options (USD calloptions) since November 2000 as indicated by the 12-month 25-delta risk reversal trading at the lowest level

in 7-years as shown in Figure 3.

Figure 3: EURUSD 12M 25 Risk Reversal istrading at 7-year low

-1.00

-0.50

0.00

0.50

1.00

1.50

J an -9 9 De c- 99 No v- 00 Oc t- 01 S ep -0 2 A ug -0 3 J ul -0 4 J un -0 5 Ma y- 06 A pr- 07

EUR 12m 25 RiskReversal


IMM bulls plus options bears mean the market is morebalanced in our view and therefore not as one-sided asimplied by the IMM data alone. That is, euro bulls arebuying puts to hedge their directional long in our view.

In fact, our DB Positioning Indices, which take accountof the IMM, CTA, real-money investor positions, optionrisk reversals and weekly analyst survey data, isshowing an overall short position in the euros.

Figure 4: DB Positioning Indices (DB PI*)

Source: as of January 7, 2008, DB Global Markets Research*The DB PI comprises of positioning and sentiment data from five key segments of the FX markets. We use IMM, CTA and real-money investor positions as indicators of positioning; option risk reversals and weekly analyst survey results as measures of sentiment. Each of the five inputs is ranked on a scale of -10 and +10, where +10 is the most bullish that segment has been and -10 the most bearish. The DBFX PI is then simply the average of these inputs.

Gold: CFTC vs. skew view

This balanced view however is not shared by the goldmarket despite the currency move is a big driver of the

gold price in our view.

In fact, there has been a big divergence betweenEURUSD risk reversal and gold risk reversal, Figure 5.Over the past four years, EURUSD and gold RR largelytracks each other and the current divergence is thebiggest seen in years. This is particularly remarkablegiven the ATMF implied volatility of gold and EURUSDhas stayed relatively inline over the past 18 months,Figure 6, and the correlation between gold andEURUSD remains firm.





Figure 5: EURUSD Risk-Reversal and Gold RRnormally tracks each other – biggest divergenceseen in years

-1

0

1

2

3

4

5

6

7

Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2Gold 12m 25 Risk Reversal

EUR 12m 25 Risk Reversal (rhs)


Figure 6: EURUSD 12M vol vs. gold 12M vol


The gold 12M skew is currently showing a very strongcall skew as shown in Figure 7 while CFTC data is alsoindicating a massive net long position among thespeculative community, Figure 8.

Figure 7: Gold 12M skew favours calls

Gold 12M vol skew

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

10P 25P ATMF 25C 10C

d e v i a t i o n

f r o m

A T

M F ( v o l s ) 07-Jan-08

30-Jul-07

stronger call skew


Figure 8: Gold speculative positions

-9 0

-6 0

-3 0

0

30

60

90

120

150

180

210

24 0

J an-00 J an-01 J an-02 J an-03 J an-04 J an-05 J an-06 J an-07 J an -0825 0

35 0

45 0

55 0

65 0

75 0

85 0

N o n-C o mm erc ial N et P os it io ns (LH S) Go ld P ric e (R HS)

Long

S h o r t

US$/o zK Co n t r ac t s


Therefore, both the CFTC net speculative positioningand options skew are overtly bullish gold and so helpingto propel the gold price to new highs and possiblyabove what is implied by the current level of the USdollar. We believe gold options are being purchased toexpress a bullish view on gold, rather than a hedgeagainst any potential sell-off.

Conclusion : Buy on dips in gold

Extreme one-sided bullishness combined with thetendency of the USD to strengthen in the first fourweeks of January suggests to us that the gold price ismost vulnerable to a sell-off currently. If a correctionwere to occur we believe this would simply deliveranother opportunity to buy given our medium termbullish view towards the precious metals sector.





Crude oil: CFTC vs. skew view

In the crude oil market, speculators are mildly longwhile the options market has a strong favour on calls.

Figure 9: WTI speculative positions

-80

-50

-20

10

40

70

100

130

160

J an-00 J an-01 J an-02 J an-03 J an-04 Jan-05 J an-06 J an-07 J an-08

0

20

40

60

80

100

120

No n-C omm erc ial N et P os it io ns (LH S) C rude Oil P ric e (R HS)

Long

Short

US$/bblK Contracts


The crude oil skew in fact has moved from a strong putskew to a strong call skew over the past few months,Figure 10 possibly reflecting the strong demand of“lottery ticket” type of far out of the money calls.

Figure 10: WTI vol skew

WTI vol skew (Dec'08)

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

4P 15P 28P ATMF 36C 19C 5C

d e v i a t i o n

f r o m

A T M F

07-Jan-08

24-Aug-07


US Natural gas: CFTC vs. skew view

In the US natural gas market, the speculativecommunity is extremely bearish while the options skewhas shown a strong bullish bias, possibly indicating gasbears are hedging with gas calls. Again, a morebalanced market positioning in our view.

Figure 11: US natural gas speculative positions

-130

-110

-90

-70

-50

-30

-10

10

30

50

70

Jan-00 J an-01 Jan-02 J an-03 J an-04 J an-05 J an-06 Jan-07 J an-081

3

5

7

9

11

13

15

17

N o n-C o mm erc ial N et P o s it io n s ( LH S) N at ural Gas P ric e (R HS )

Long

Short

US$/mmBtuK Contracts


Figure 12: Natural Gas vol skew

NatGas vol skew (Dec'08)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

10P 20P 30P ATM 30C 20C 10C

d e v i a t i o n

f r o m

A T M F

07-Jan-08

24-Aug-07






B. Spike Risk for Oil & GasOther than position bias, the vol skew, and in particularthe fatness of the tails, also provides useful informationon price spike risk.

The probability density function of WTI crude oil isshown in Figure 13, the skew surface is compared tothe Black-Scholes surface (a flat vol skew is assumed inthe Black-Scholes world implying a constant vol acrossstrikes). The 10% left and right tails are also highlightedin Figure 13.

According to the options market skew, there is a 10%chance that the Dec’09 WTI contract will expire belowUSD61/bbl or above USD149/bbl, against the futuresprice of USD92/bbl.

While we believe upside price risk remains in the crudeoil market on geopolitics, weather, USD overshooting,escalating cost and tight market fundamentals, USD149oil seems far too high in our opinion. We do not believetriple digit oil is sustainable and longer term we areexpecting the crude oil price heading back to USD80 in2008-09.

Figure 13: WTI probability density function – very

fat right tailProbability Density Function: WTI

30 50 70 90 110 130 150 170 190 210

Skew surface right tail - 10% left tail - 10% Black-Scholes


Similarly, for US natural gas, our model indicates thatthe Dec’09 NG contract has a 10% chance that it mightexpire below USD5.7/mmBtu or aboveUSD18.9/mmBtu, futures reference at USD9.6/mmBtu.

Figure 14: US Natural gas probability densityfunction –very fat right tail as well

Probability Density Function: US Natural Gas

2 4 6 8 10 12 14 16 18 20 22 24

Skew surface right tail - 10% left tail - 10% Black-Scholes







#13 Precious Metals & The USDollarThe Threat Of Overshooting

• We believe exchange rate and precious metalmarkets are at serious risk of overshooting in2008.

• This reflects Fed easing, a falling US realinterest rate environment, the current USdollar cycle becoming increasingly long in thetooth and the non-linear relationshipbetween the gold price and the US dollar.

• For gold to surpass its all time high in realterms, as has occurred in crude oil, it wouldimply the gold price hitting USD1,260/oz.While our price objectives are more cautious,these alternative targets give an indication ofhow far the gold price rally could run.

Behavioural finance theory tells us that investors oftentend to be overly optimistic about asset markets whichhave been past winners and overly pessimistic aboutasset markets which have been past losers. As aresult, this often leads asset prices, and in particularexchange rates, to overshoot relative to fair value. Webelieve we will enter a period of exchange rate andcommodity price overshooting over the coming year.

US dollar cyclesSince the birth of floating exchange rates in 1972 theUS dollar has displayed long-run cycles of rising andfalling for extended periods of time. On average, cyclesin the US dollar trade-weighted index and against theeuro have lasted for seven years, Figure 1.

Given the increasing maturity of the current cycle andthe tendency of the US dollar to overshoot during thelatter stages of a cycle, we attach a high probability ofthe US dollar hitting even higher levels ofundervaluation against the euro. In previous turningpoints of the US dollar, the exchange rate has hit levelsof misalignment of around +/-40% versus PurchasingPower Parity. If this were to occur during this cycle itwould imply EURUSD rising to 1.62.

Figure 2: EURUSD vs. Purchasing Power Parity

0.60

0.80

1.00

1.20

1.40

1.60

1973 1977 1981 1985 1989 1993 1997 2001 2005

0.60

0.80

1.00

1.20

1.40

1.60

EURUSD20% BandPPP EURUSD

-37%

39%41%

-25%

28%Numbers referto the scale ofPPP mislignment


While we expect new lows in the US dollar it isunderstandable that some market participants may belooking for a bigger picture turn in EURUSD given theover 20% undervaluation of the US dollar vs. DB’s PPPestimate. To address this theory we examine the

cumulative Black-Scholes knockout probabilities forvarious levels of EURUSD over various time horizons.

We find that the implied probability of EURUSD tradingthe 1.30 level, which would be equivalent to a 10%correction from current levels, stands at 18% in oneyear and 30% in two years. Conversely the probabilityof the 1.50 level being reached is 78% in one year and83% in two years time.

Figure 3: Cumulative Black-Scholes EURUSDknockout probabilities

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

3M 6M 9M 12M 18M 2Y 3Y

1.50

1.25

1.30

1.60

1.35

1.55


Figure 1: Magnitude & duration of past US dollarcycles

USD Cycle Start End Years Change

Bear 1-Jan-73 10-Jul-80 6.6 -14.1%

Bull 11-Jul-80 25-Feb-85 4.7 63.4%

Bear 26-Feb-85 8-May-95 10.2 -43.2%

Bull 9-May-95 27-Feb-02 6.8 -40.1%

Average* 7.1 40.2%

Bear 28-Feb-2002 Current 5.8 -24.0%* Average percentage change is in absolute terms.US dollar cycles are measured by the US broad trade-weighted index

Source: DB Global Markets Research, US Federal Reserve





These probabilities would assume market playersanticipate an extended period of US dollar weaknesssimilar to the early 1990s when the US dollar wastrading around 20% undervalued against the syntheticeuro for a number of years. We find that current levelsof implied EURUSD volatility suggest a range of 15%,or EURUSD fluctuating between 1.38 and 1.58.

Since the current US dollar cycle is becomingincreasingly long in the tooth, investors need toconsider at what point the US dollar will embark on anew long-term uptrend. To assess the likely timing ofsuch an event we examined past turning points in theUS dollar and find six valuable lessons, all of whichsuggest an imminent turn in the US dollar is unlikely:

(i) Turning points in the US dollar have beenasymmetric such that downturns from up-cycles have been inverted (V-shaped) whileupturns from down cycles have tended to be

preceded by an extended bottoming-outperiod. Put another way, US dollar bear cyclestend to be more durable than bull cycles. Thiswould imply that a new long-term uptrend inthe US dollar may be several years away.

Assuming this dollar bear cycle conforms tohistorical averages then it would imply the USdollar will not embark on a new long termuptrend until August 2010, or 8.5 years.Alternatively, if one assumes the current USdollar cycle will continue to track the 1985-1995 US dollar cycle, then it implies the US

dollar only hitting rock bottom in September2011, Figure 4.

Figure 4: The 1985 and 2000 US dollar bubblescompared

60

80

100

120

140

160

180

200

0 24 48 72 96 120 144 168 192 216

Oct 1978-Dec 1987

Jun 1995-Current

Months after trough

USDDEM: October 1978& June 1995 rebased to 100

USD hits rockbottom inSeptember 2011

1985 & 2000 USdollar bubbles burst


(ii) Bull cycles have typically been preceded by asignificant narrowing in the US trade deficit.Although the US current account deficit hasfallen from 6.2% in 2006 to an estimated 5.1%of GDP in 2008, the deficit still remains large.We believe this will constrain a turnaround inthe US dollar’s fortunes for the time being.

(iii) The start of a new uptrend in the US dollar hastended to coincide with a turn in interest ratedifferentials in favour of the US dollar.However, we expect rate differentials betweenthe US and Euroland will continue to shiftagainst the US dollar during 2008.

(iv) A trend reversal in the US dollar has historicallybeen associated with longer-term turns incapital flows. However, US credit marketshave been the primary channel of capitalinflows into the US in recent years.

Consequently ongoing stress in the US creditand housing sectors are expected to hinder aturnaround in US capital flows in the near term.

(v) The pressure for adjustment from valuationextremes is greater when the US dollar isuniformly cheap rather than unevenly so. Atthe moment, while the dollar is cheap againstthe euro, on a trade-weighted basis the USdollar has not yet overshot, which reflects thefact that the US dollar is still expensive againstthe Japanese yen and most Asian emergingmarket currencies. This is therefore lowering

the pressures for a reversal in the US dollarcurrently.

(vi) Every turn in the US dollar since 1978 hascoincided with aggressive rounds of G3 foreignexchange intervention, Figure 5. For the timebeing dollar weakness is not yet a policyheadache for public sector authorities. ITassists in dampening inflationary pressure s inEurope, in a rising commodity priceenvironment, while it helps cushion theslowdown in the US economy. As a result, webelieve investors should only position for dollarstrength or at the very least stability in the USdollar exchange rate when central banks startintervening and buying the US dollar.





Figure 5: EURUSD central bank interventionsince 1980

0.50

0.70

0.90

1.10

1.30

1.50

1.70

81 84 87 90 93 96 99 02 05 08

0.50

0.70

0.90

1.10

1.30

1.50

1.70EUR selling

EURUSD

EUR buying

G3 action to stopthe euro falling

G3 action to stopthe dollar falling

Plaza Accord (1985)to push the dollar lower

Louvre Accord (1987)to stabilise the dollar

Before 1999, FX invention rounds are conducted in USDDEM Source: DB Global Markets Research

The threat of an overshooting in the US dollar posesconsiderable contagion risks to the commoditiescomplex. Indeed over the past three months we havewitnessed a sudden increase in the correlation betweencrude oil, gold and certain agricultural commodities tothe US dollar. We believe overshooting risks are mostacute in the precious metals markets and in particulargold. This reflects the historically non-linear relationshipbetween the US dollar and the gold price such thatsince 1980 the gold price has tended to react more toincremental changes in the US dollar when the USdollar is trading at depressed levels, Figure 6.

Figure 6: The non-linear relationship betweenthe gold price & the DXY dollar index

70

90

110

130

150

170

0 100 200 300 400 500 600 700 800 900

DXY

Gold price (USD/oz)

DXY vs gold price, 1980-2007


The assess the extent to which the precious metalprices could overshoot we examine prices in real terms,Figure 7. We find that despite the rapid real priceappreciation that has already occurred in this cycle, goldprice would need to rise an additional 40% from currentlevels to surpass the all time high in real terms hit at thebeginning of the 1990s while silver prices would haveto rise an additional 350%. This would be equivalent togold hitting USD1,250/oz.

Figure 7: Gold & silver prices in real terms

0

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1200

1400

1970 1974 1978 1982 1986 1990 1994 1998 2002 20060

10

20

30

40

50

60

70

80Real gold price (2005US dollars, lhs)

Real silver price (2005US dollars, rhs)

Deflated by US PPI


In terms of duration, the current gold price rally hasbeen the longest since the gold price became freelyfloating in August 1971. However, in terms ofmagnitude, the gold price would need to surpassUSD1,320/oz to be comparable to the rally in gold pricesthat occurred in the first half of the 1970s.

Figure 8: Gold rallies in comparison

Low

USD/oz

High

USD/oz

Magnitude

(% change)

Duration

(months)

Aug-71 to Feb-75 35.4 183.9 419% 42

Aug-76 to Jan-80 103.5 850.0 721% 41

Jun-82 to Feb-83 296.8 509.25 71.6% 8

Feb-85 to Dec-87 284.3 499.8 75.8% 34

Apr-01 to present 255.6 864.9 238% 81Although the gold price had been rising before August 1971, we take this as the start point for this rally since it marks the date the US government informed the IMF that the US dollar would no longer be convertible into gold. This consequently leads to the collapse of one of the main pillars of the 1944 Bretton Woods system.Highs and lows in the gold price relate to closing prices Source: DB Global Markets Research, Bloomberg





To assess the options market probabilities to the goldprice outlook, we examine cumulative Black-Scholesknockout probabilities. We find that the market isattaching a 48% and 63% probability of the gold pricehitting USD1,050/oz in one and two years’ timerespectively.

Figure 9: Cumulative Black-Scholes goldknockout probabilities

0

10

20

30

40

50

60

70

80

90

100

3M 6M 12M 24M

750

1000800

950850

900

%

1050

Source: DB Global Markets Research; Spot reference USD888/oz

Demand-supply fundamentalsWhile we expect production levels to recover furtherthis year, we expect producer dehedging andinvestment demand will support the gold price. During2007 and despite a number of new mines comingonline and record high gold price global mine production

rose slightly in 2007 to 2,522 tonnes. Rising productionin Russia, China and Australia was offset to somedegree by falling production in South Africa and NorthAmerica. We expect global gold mine production willrecover further in 2008 helped by increasing productionfrom Australia and China.

Producer de-hedging has continued in 2007, reducingthe global hedge book to 995 tonnes from 1,368 tonnesin 2006. We believe producer de-hedging will remain amain theme in the gold market, at least over the nexttwo years, reflecting the strong gold price outlook andstrong shareholder opposition towards hedging.

Figure 10: Producer de-hedging is expected toslow

-600

-400

-200

0

200

400

600

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2 008E 2 009E

T o n n e s

Source: DB Global Markets Research estimates

Investment demand remains strongInvestment demand remains one of the importantsources of physical gold demand and a key price driver.The popularity of gold ETFS has increased dramaticallysince their launch in March 2003. In 2007, the totalamount of physical gold held by the eight ETFs we trackrose an additional 40%, Figure 12. The launch of a newgold futures contract on the Shanghai Futures Exchangethis month may also attract a new layer of investmentdemand into the market.

Figure 11: ETF physical gold holdings since 2003

0

200

400

600

800

1000

2003 2004 2005 2006 2007

T o n n e s

ETF securitiesZKB (Zurich)

IAU (AMEX)GLD (JSE)GLD NYSE)GBS (LSE)GOLD (ASX)CEF (TSX)

Source: CPM, DB Global Markets Research estimates





Figure 12: Gold supply-demand balance

T o nnes 2005 2006 2007E 2008E 2009E

Tota l Supply 4,11 0 3 ,6 74 3,8 89 3,9 72 4,0 54Mine Production 2,550 2,473 2,522 2,585 2,650Secondary Supply 886 849 887 927 964Official Sector Sales 674 352 480 460 440

Total Dem and 3889 3751 3949 4026 4202Fab rication 3,138 2,742 2 ,774 2 ,901 3 ,039

Jew ellery 2,707 2,284 2,300 2,415 2,536Industrial 431 458 474 486 503

Inve s tm e nt 620 673 802 938 1,070ETF and similar 208 260 360 468 560Bars, coins& medallions 412 413 442 470 510

Produce r De -he dging 131 336 373 187 93

M ar ke t Ba la nc e 22 1 -76 .9 -6 0.1 -5 3.4 -1 48 Source: World Gold Council, CPM, DB Global Markets Research

The silver price has been trading cheap relative to gold

price for the past few months, Figure 14. The advent ofdigital cameras has removed one of the main industrialuses for silver. Today photographic demand as apercent of total fabrication demand has fallen from 32%in 2003 to an estimated 21% this year. Partly offsettingthis reduction in silver’s industrial use has been thegrowth in other areas such as electronics, and catalystuse.

Figure 13: Producer de-hedging is expected toslow

Silver tradescheap to gold


Figure 14: Silver supply-demand balance

M il l io n T roy Ounc es 2005 2006 2007E 2008E 2009E

Total Supply 776.4 773.2 774.1 788.3 797.0M ine Pr oduction 515.3 502.7 5 21.1 5 38.3 5 51.0

Peru 102.7 111.6 110.5 112.0 116.0

Mexico 93.0 96.5 101.3 106.4 108.5Australia 77.0 57.0 63.0 65.9 67.0United States 39.5 36.7 39.0 38.0 37.0Canada 36.1 31.6 27.7 26.0 24.5Other 167.0 169.4 179.5 190.0 198.0

Se co nd ar y Sup ply 226.1 244.5 245.0 244.0 242.0Old Scrap 205.0 215.0 217.0 215.0 212.0Coin Melt 5.0 7.0 5.0 4.0 3.5Indian Scrap 16.1 22.5 23.0 25.0 26.5

Governm ent Sales 35.0 26.0 8.0 6.0 4.0

Total Dem and 807.3 714.7 707.8 705.8 705.8Fabrication 807.3 714.7 707.8 705.8 705.8

Photography 207.6 177.5 162.7 149.6 137.7

Jew ellery & Silverw are 288.8 241.9 241.5 242.7 242.7Electronics and Batteries 101.9 114.0 121.7 127.8 136.1Other Indus trial A pplic ations 209.0 181.3 182.0 185.6 189.4

Market Balance -30 .9 58 .5 66 .2 82 .5 91 .2(excluding investment demand)

Source: CPM, DB Global Markets Research


•

Long gold in February given theoverextended nature of the rally and therisk of seasonal strength in the USdollar the

• Long silver


Jude Brhanavan, (44) 20 7547 1558 [email protected]





#14 PGMsStrong Fundamentals Continue

• We believe the case for robust platinumgroup metals demand and higher pricesremains firmly intact. The prospect of astructurally strong rand strengthens thiscase, especially for long-term prices.

• We believe the basis for the strength in thePGM prices continues to be founded inaccelera ting consumer demand, mostsignificantly in autocatalysis.

• Although there has been elevated speculativeinvolvement in the PGM markets in the fewyears, it is with just cause. The fundamentalsof these markets are strong; thus we believemarkets are likely to continue attractingspeculative involvement.

PlatinumWe believe the platinum market will continue to be indeficit for the foreseeable future. We are forecasting a414k ounce deficit for 2007, and a 214k deficit in 2008.While our official forecast is for a marginal surplus in2009, this could just as easily be a deficit if productionissues at the major producers are not rectified.Although higher platinum prices may well accelerate

palladium substitution in autocats, we believe the risksto our platinum forecasts are balanced, in the absenceof a substantial shift in the USD.

We expect continued penetration of diesel vehicles intoEurope, but more importantly, the US as the authoritiesthere have been showing increasing support for diesel-powered vehicles of late. While the market typicallyexpects a penetration rate of around 3% in the US overthe next few years, industry figures suggest that thiscould be as high as 5-8% within the next five years.This could result in additional demand of around 300k-500k ounces per annum. Continued high oil prices havealso the potential to accelerate research into fuel celltechnology, although our assumptions include minimaldemand from this sector for years to come

Figure 1: Platinum supply-demand balance

-600

-400

-200

0

200

400

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008e300

500

700

900

1100

1300

1500

1700Market balance ('000 oz, lhs)

Platinum price (USD/oz, rhs)

Forecast

Source: Deutsche Bank, Johnson Matthey

PalladiumWe believe that in time, the palladium market

fundamentals will improve, with symptomatic evidenceof reverse substitution in autocats as well as improvedjewellery off-take. Although the last two years haveseen declines in off-take, we believe consumers haveabsorbed a fair amount of the high levels ofmanufacturing purchases seen in 2005, which bodeswell for the future. Unfortunately, we expect theoverhang of above-ground stocks at around 6m ouncesin Zurich and anywhere between 2m ounces and 10mounces in Russian stock may limit price advances.

Figure 2: Palladium supply-demand balance

-1600

-1100

-600

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900

1400

1900

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008e-50

50

150

250

350

450

550

650

750Market balance('000 oz, lhs)

Palladium price(USD/oz, rhs)

Forecast


Aside from the above-ground stocks, we are alsoconcerned that autocat scrap will increase considerablyover the next few years. Vehicle manufacturersswitched aggressively from platinum into palladium inthe mid- to late-1990s and with the average vehicle’slifespan being around 12 years, we could see autocatrecycling increase to as much as 1.5m ounces p.a. overthe next few years.





Our final concern is that the private and public sector inRussia may attempt to “manage the palladium market”if prices move much higher than spot to provide peaceof mind to vehicle manufacturers in an attempt toensure that the price spikes at the beginning of thedecade that resulted in massive write-downs of stockwill not be repeated.

RhodiumWe expect the rhodium market will remain extremelyvolatile given the relative illiquidity of the market.Rhodium is heavily exposed to autocats (85% ofdemand) and we expect demand from this sector toremain strong given tightening regulatory environmentfor the various forms of nitrous oxides (NOxs). Rhodiumis particularly important in reducing NOx emissions thatoccur predominantly in diesel vehicles and in a “lean-burn” environment. As manufacturers continue tostrive for efficiency in gasoline engines, we wouldexpect an increase in the population of “lean-burn”engines.

Although small in the context of the overall market,consumption by the glass manufacturing industries(particularly LCD glass) should remain supportive fromthe current base. Ultimately, however, we expect thelong-term price to settle at levels substantially belowspot as mining operations in South Africa continue tomigrate to the UG2 and Eastern Limb reef horizons.These carry significantly higher rhodium content thanthe traditional Merensky reef horizon.

In the short to medium-term, however, we haverecognised that the impact of continued supply shockssuch as production issues at AngloPlat and Lonmin inparticular in a tight, illiquid market will likely result in thecurrent high prices being sustained for at least the nextfew years and have amended our forecasts accordingly.We have consequently raised our 2008 and 2009forecasts significantly.

Figure 3: Rhodium supply-demand balance

-200

-100

0

100

200

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008e0

1000

2000

3000

4000

5000

6000

7000Market balance ('000oz, lhs)

Rhodium price (USD/oz, rhs)

Forecast


ConclusionIn our view, the case for PGMs is easily explained. Themetals have highly unique and desirable physicalcharacteristics, making them useable in a number ofindustrial applications. PGMs have the unique ability tocatalyse reactions, many of which have desirableenvironmental consequences. Many of theseapplications happen to be in areas that face increasinglystrenuous environmental legislation, requiring the useof more catalytic material.

Also, in the case of autocats, which account for morethan 50% of the consumption of all PGMs, legislationhas tightened to such an extent that it has become astrategic and “critical path” item for automotivemanufacturers. On the supply-side, reserves are highlyconcentrated and barriers to entry very high. Thisenables producers to essentially design their own

returns by controlling the rate of new supply.

The biggest industry risk, in our view, is that significantprice spikes perhaps worsened by the growth inExchange Traded Funds permanently damage certainPGM demand categories, which would create moresecular problems for the business as a whole. While itseems that the days of continued delays and projectcancellations have passed, we have experiencedpersistent smelting accidents in the industry over thelast few years. If repeated, we expect this would keep

PGM prices higher for longer. More recently, the SAgovernment and the SA PGM industry’s tougher stanceagainst mine accidents has further contributed to lowerthan anticipated production levels.


• Long platinum

Gary Pearson, (27) 11 775 7247 [email protected]





#15 Industrial MetalsLonger Life on Stronger Fundamentals• Summary : Although industrial metals prices may

struggle in the first half of the year against US

economic jitters, we maintain a favourablemedium-term outlook across the complex. In ourview, providing the world continues to realisesustainable growth, and particularly as long asthe developing markets make up an increasinglylarger proportion of that growth, metals marketswill remain strong. We remain convinced thattrends in China will continue to have a substantialimpact on the metal price outlook.

• Copper: We expect that copper price weaknessseen in the back half of last year will continuewhile concerns over the US economy persist.

However, we remain positive on the medium-term outlook. While global inventories remainlow, the global market balance will remain tightin 2008 against below trend concentrateproduction and robust demand from the keyemerging markets. We revised our 2008 forecastdown 2% to USD7,165/t (USc325.0/lb), butraised the 2009 forecast to USD6,752/t(USc306.3/lb).

• Aluminium: Although aluminium continued tounder perform versus other metals in thecomplex in 2007, we believe the metal has one

of the most optimistic price outlooks. The steeprise in energy costs will pressure global smeltergrowth, in our view, and in collusion with theimpact of China’s eventual shift to a netimporter, we expect the global market balancewill head toward deficit in 2008 and 2009. Wehave moderately decreased our forecast in 2008to USD2,679/t (USc121.5/lb), but increased our2009 estimated by 11% to USD2,684/t(USc121.8/lb).

• Nickel: We expect nickel prices will remainstable as the global stainless steel market rampsup production in the beginning of the year as wellas from Asian producers re-entering the marketafter the Chinese New Year holiday. Despitecyclical highs in inventories, the primary nickelmarket balance is set to record a market deficit in2008. We also believe substitution risks will notbecome a major threat this year. We reducedour 2008 forecast by 10% to USD29,625/t(USD13.44/lb) and our 2009 numbers by 2% toUSD27,888/t (USD12.65/lb).

• Zinc: Although zinc consumption trends remainrobust in 2008, we are expecting the global zincmarket to record its first market surplus since2003, largely as a result of a surge in Chinesesmelting capacity in the second half of the year.However, given the recent shift in the Chinese

tariff regime among other base metals todiscourage exports, we recognise a degree ofrisk that such a move in the zinc market has thepotential to tighten supply. We dropped our2008 price forecast by 21% to USD2,304/t(USc104.5/lb) and the 2009 forecast by 7% toUSD2105/t (USc96.5/lb). However, we increaseour 2010 and 2011 forecasts by 14% and 22%,respectively.

• Lead: The impressive lead price performance lastyear occurred as a result of an unexpectedreduction in concentrate and refined supply. Weexpect prices to ease to a more sustainable levelin 2008 as a key mine in Australia restartsshipments although strong battery demand inChina will continue to support demand. Wemoderately increased our 2008 forecast toUSD2,326/t (USc105.5/lb) and left our 2009estimation unchanged at USD1,692/t(USc76.8/lb).

Figure 1: Industrial metals prices rebased

50

75

100

125

150

175

200

225

250

Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08

Aluminium

Copper

Nickel

Zinc

Lead

Tin

Source: Reuters, DB Global Markets Research

Last year the industrial metals sector was the worstperforming across the commodities complex, largely asa result of the credit crisis the ensuing poorperformance of global financial markets. Nevertheless,by historical standards, prices across the complexremain at elevated levels compared to their long-termmean as a result of supportive supply and demandfundamentals. In our view, these conditions willcontinue at least in the medium-term, avoiding areversion to mean averages. This year’s vigorous M&Aactivity in the sector demonstrates the convictionproducers hold over the on-going strength of this cycle.This view does not, however, exclude the existence ofprice volatility or cyclicality. Market trends in the lasthalf of 2007 served as a reminder of the influence thatmacroeconomic shocks hold over the industrial metalscomplex, often leaving fundamentals ignored. Thus inthe shorter-term, we think the complex will see morepressure in the first half of 2008 against global market

jitters.





Figure 2: Metallgesellschaft Metals Index vs DowJones Industrial avg

12,400

12,700

13,000

13,300

13,600

13,900

14,200

Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08320

340

360

380

400

420

440

460

Dow Jones Industrial Index (lhs)

MGMI (rhs)


Macro signals outside of the US point to strongdemand which we expect will be good for metalsOur favourable view of the metals complex in themedium term is based on a supportive globalmacroeconomic outlook. Providing the world continuesto realise sustainable growth, and particularly as long asthe developing markets make up an increasingly largerproportion of that growth, metals markets will remainstrong.

Figure 3: Global industrial production (yoy %chg)remain resilient – thus far

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07

USAJapanEUChina (6mma)

Source: CHR Metals, DB Global Markets Research

Thus far in 2008, much of the market’s focus remains

on the global implications of a possible US recession.While our global economics team rates the chances ofavoiding a recession is greater than entering one, it isclear the US economy is headed for a downturn. DBforecasts that the GDP growth of OECD economies willslow to 1.9% in 2008 from 2.2% in 2007.

At the same time, the outlook for most developingeconomies is less dire. For example, the World Bankrecently lifted its economic growth estimate for EastAsia in 2007 and 2008, predicting growth would reach adecade high of 8.4% for the region in 2007. Theupgrades were mainly due to the unexpected and largedomestic demand-led acceleration of growth in Chinawhich occurred despite a weakening in U.S. importdemand and a resulting slowdown in the region's

exports. We agree – recent research found that a 1%decline in US GDP translates into a 0.2% decline inemerging markets exports. In terms of the magnitudeof the impact of a US slowdown on China, we find thata 1ppt deceleration in the US will likely result in areduction less than 1ppt (on average at only 0.5ppt) inChina’s GDP growth. This implies that even if the USGDP growth falls from 2.2% in 2007 to 1.2% in 2008,the Chinese economy should continue to grow ataround 10.4%.

China: The driver of growthWe remain convinced that trends in China will continueto have a substantial impact on metals prices.Consumption growth in 2008 is likely to be highlyresilient given rapid income growth, rising wealth effectfrom the assets market, and progress in social sectorreforms. We expect investment growth to sustain atthe current pace (about 25% yoy).

Figure 4: China’s macro indicators remain strong

0

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36

45

Oct-97 Oct-99 Oct-01 Oct-03 Oct-05 Oct-07

%

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Chinese FAIG 6mma (lhs)Chinese Industrial Production 6mma (rhs)Chinese Retail Sales 6mma (rhs)

%


A consequence of this continued strong growth profileis an increase to the contribution of China to globalgrowth of demand for commodities, which we forecastwill reach 74% in 2008. We believe this is still aconservative estimate, as risks to Chinese growthappear to be biased to the upside.

Figure 5: China’s contribution of Chinese growthto global demand growth, 2007-08

0%

20%

40%

60%

80%

100%

I r o n O r e

A l u m i n i u m L e a

d

C r u d e

S t e e l

N i c k e l Z i n c

C o p p

e r

Source: Brook Hunt, UNCTAD, IISI, DB Global Markets Research





Chinese trends will influence metals marketsChina’s public profile in 2007 was not always positivewith headline-grabbing issues such as lead in toys,chemicals in seafood, an overvalued currency and unfairtrade practices. Given that 2008 is China’s “comingout” party with the Beijing Olympics, the centralgovernment is understandably keen to paint animproved picture, particularly in terms of issues such asthe environment, energy use and trade practices.

As such, we have identified several measures Chineseauthorities are undertaking that will have a significantimpact on commodities prices in 2008 and beyond.While many measures have been announced but largelyunsuccessful in the past, in our view, these particularpolicies will be taken more seriously as they areheadline issues, particularly in the year of the Olympics.

Over the last two years, the National Development and

Reform Commission (NDRC), China’s top economicplanning body, has made significant changes to tradetariffs in attempt to ease trade friction by curbing thecountry’s growing trade surplus, but also to furtherstrengthen its control over the growing metalsindustries which consume vast amounts of energy andare highly polluting. The NDRC hopes that reducingexports and increasing imports may solidify thepurchasing power of the yuan and help treat theoverheated economy. At the same time, these policychanges have serious implications on global marketbalances in many key commodities, namely aluminium,zinc and steel.

More recently, the NDRC in December issued newindustrial production stipulations as part of a drive toincrease scale and efficiency and reduce wasteful useof resources. The guidelines sets minimum capacityrequirements for a number of metals production suchas alumina, copper and galvanised steel projects,essentially weeding out the least efficient and dirtiestplants. New secondary aluminium plants must have aminimum capacity of 50Ktpy and new aluminiumfabrication plants one of 100Ktpy. Lead and zinc mineswith a lifespan of less than 15 years or annual output ofless than 30Kt were also restricted.

The cumulative effect of the these policy changes aswell as others which are sure to come effectivelyincreases exporters costs of production and will eitherforce domestic prices higher or trim production growthrates. Either scenario will have a material effect oninternational prices across the sector.

CopperThe copper market is set to remain tight over the nexttwo years. By historical standards, copper prices remainhigh while (also by historical standards) global stocksremain low. Essentially, concentrate production has notbeen able to keep up with demand growth.

Prices came under pressure last year from October inline with global market concerns over the health of theUS economy and the possible spillover effects. Furtherpressuring the copper price was a steady build in LMEinventories. However, the rise in LME stocks wasaccompanied by falling Chinese exchange stocks overthe same period. They fell by 65,020t over the secondhalf of the year as the temporary surplus arising fromstrong imports in Q2 was steadily worked off. By theend of the year, they were close to the 20,000t levelthat has tended to define the floor of Shanghai MetalsExchange stocks over the last few years. Indeed this isa primary factor in our confidence that Chinese refinedimports will re-accelerating in the coming months.

Figure 6: SFE, LME, and Comex copper stocks

10,000

50,000

90,000

130,000

170,000

210,000

250,000

Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-0710,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000Shaghai Futures Exchange, tonnes (lhs)LME stocks, tonnes (lhs)Comex, tonnes (rhs)

Source: Reuters

SupplyOver the last several years, market surpluses have beenforecast but failed to eventuate. In terms ofconcentrates, this is due to the delay and lack of anylarge-scale mine commencement as well as persistentsupply disruptions. As an illustration, a strike atSouthern Copper’s Cananea mine is now well over fourmonths old, leaving copper-in-concentrate production atone of the world’s largest mines down 33% in 2007over the previous year.





Figure 7: Brook Hunt copper market balanceforecast vs outcome

-81%

125.18%

107%

-2%-138%

-1000

-800

-600

-400

-200

0

200

400

600

2003 2004 2005 2006 2007 2008E

Forecast

Actual

Source: Brook Hunt, DB Global Markets Research

However, we expect the situation to begin turningaround only in 2010, when significant new concentrate

capacity comes on line.

Figure 8: Comparison of DB mined productionestimates in 2007 and 2008 Concentrate Production Capacity 2007 2010 % changeCongo 150 363 141%Zambia 340 675 99%USA 723 999 38%Kazakhstan 452 613 36%Indonesia 775 1,050 35%Australia 820 1,064 30%Total 12,547 14,590 16%SxEw Production Capacity

Congo 15 307 1947%Zambia 213 283 33%USA 507 612 21%Total 3,040 3,943 30%Total world productioncapacity 15,588 18,533 19%

Source: Brook Hunt, DB Global Markets Research

Refined supply growth has struggled primarily as aresult of the unequal growth rates betweenconcentrates capacity and smelter capacity. Against thebackdrop of constant supply disruptions and a lack ofany unused idled mine capacity, rapid expansion ofsmelter capacity has triggered a deficit in the global

concentrates market. As a consequence, refiners mustenter into low treatment and refining charges (TC/RCs),pressuring the least efficient smelters to reduce outputor even shut down for this reason we expect China’srefined output will grow at a slower pace in 2008.

Figure 9: Copper refined capacity by regionKt 2005 2006 2007 2008 2009 2010

China 2921 3406 4124 4712 5264 5519Capacity growth 16.3% 16.6% 21.1% 14.3% 11.7% 4.8%% of global supply 14.7% 16.5% 18.6% 20.3% 21.6% 21.9%W Europe 2081 2093 2124 2180 2242 2267Capacity growth -0.7% 0.6% 1.5% 2.6% 2.8% 1.1%% of global supply 10.4% 10.1% 9.6% 9.4% 9.2% 9.0%

Chile 2979 3075 3418 3568 3620 3615Capacity growth -1.2% 3.2% 11.2% 4.4% 1.5% -0.2%% of global supply 14.9% 14.9% 15.4% 15.4% 14.8% 14.3%USA 1927 1900 1926 2004 2069 2061Capacity growth -1.3% -1.4% 1.4% 4.0% 3.3% -0.4%% of global supply 9.7% 9.2% 8.7% 8.6% 8.5% 8.2%Japan 1605 1630 1750 1728 1728 1728Capacity growth 3.7% 1.6% 7.4% -1.3% 0.0% 0.0%% of global supply 8.1% 7.9% 7.9% 7.4% 7.1% 6.9%Total World SmeltingProduction 19,929 20,684 22,209 23,219 24,403 25,226

Capacity growth 5.2% 3.8% 7.4% 4.5% 5.1% 3.4%Source: Brook Hunt, ICSG, DB Global Markets Research

DemandOn the demand side, the US housing and constructiondownturn continues to reduce consumption levels and arecovery is not expected to occur until the end of theyear at the earliest. Fabricators in the US are reportingslow order books in the first quarter as the residentialhousing decline is showing no signs of recovery. TheJapanese construction sector is also likely to suffer thisyear in light of new stricter building regulations.

In the industrialising world, a very different scenario isplaying out. In China, demand for copper intensiveproducts such as electric motors, air conditioners,computers, motor vehicles and refrigeration remains

robust and shows no signs of slowing down. Wire andcable manufacturers continue to report full order booksagainst strong demand in the power sector. Similarly,India plans to vastly expand its power infrastructure tomeet surging demand. According to government data,India’s power production needs to grow by 15-20%annually to meet demand.

Figure 10: Primary copper demand by region

Kt 2005 2006 2007 2008 2009 2010China 3815 3967 4570 5027 5630 6137Demand growth 7.0% 4.0% 15.2% 10.0% 12.0% 9.0%% of global demand 22.5% 22.6% 25.2% 26.5% 28.3% 29.7%

EU 3537 3864 3678 3733 3771 3786Demand growth -6.2% 9.2% -4.8% 1.5% 1.0% 0.4%% of global demand 20.8% 22.0% 20.3% 19.7% 18.9% 18.3%USA 2270 2130 2083 2094 2110 2121Demand growth -6.2% -6.2% -2.2% 0.5% 0.8% 0.5%% of global demand 13.4% 12.1% 11.5% 11.1% 10.6% 10.3%Rest of World 7362 7574 7795 8090 8388 8612Demand growth 1.0% 2.9% 2.9% 3.8% 3.7% 2.7%% of global demand 43.3% 43.2% 43.0% 42.7% 42.2% 41.7%Total Primary Demand 16,983 17,535 18,126 18,943 19,899 20,656Demand growth -0.3% 3.2% 3.4% 4.5% 5.0% 3.8%Source: Brook Hunt, ICSG, DB Global Markets Research





Figure 11: DB Copper Supply/Demand Model

Mt 2005 2006 2007 2008 2009 2010

World refined production 16.54 17.32 18.13 19.10 20.22 21.11

World refined consumption 16.98 17.53 18.13 18.94 19.90 20.66

Market balance-0.45 -0.21 0.01 0.16 0.32 0.46

Stk-to-Consptn ratio (wks) 2.6 2.8 2.8 3.1 3.8 4.8

Average cash price (USc/lb) 167.0 305.1 321.6 325.0 310.0 250.0

Average cash price (USD/t) 3,682 6,725 7,090 7,165 6,834 5,512

Source: Brook Hunt, ICSG, WBMS, DB Global Markets Research

AluminiumWhile aluminium maintained its status as the laggard ofthe industrials metals complex in 2007, we find several

market fundamentals suggesting 2008 may prove to bedifferent. This conclusion comes from two factors:Chinese efforts to curb production and higher energycosts.

SupplyAlthough global exchange stocks of primary aluminiumare at a relatively high level by historical standards, thestock-to-consumption ratio is at all-time lows, indicatingthat despite strong production growth, consumptiongrowth is outpacing supply.

Figure 12: Aluminium stock-to-consumptionratio

-

1,000

2,000

3,000

4,000

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6,000

3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07

Kt

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4

6

8

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12

14

16WeeksTotal comm ercial stocks (LHS)

Long-term equillibrium ratio

Stock to consumption ratio (RHS)

Source: Brook Hunt, WBMS, DB Global Markets Research

Meanwhile, input costs for primary aluminium are set toclimb dramatically as a consequence of the steep rise inenergy costs. As energy costs make up around a thirdof total smelting costs, aluminium is extraordinarilysensitive to energy price shocks. It takes around 15,000kilowatts per hour to produce one tonne of the metal.

For example, Chalco recently announced it has shut160Kt of capacity at a plant in southern China due topower shortages because of lower production of

hydropower, which also threatened aluminiumproduction in Sichuan province where producers arealso making output cuts. While there is some spare

smelting capacity in North America and Europe, muchof it is proving to be uneconomical because of energycosts. Furthermore, the imminent greenhouse gasemissions legislation has serious implications onsmelting. According to a recent study by industryconsultant CRU, at 35/t CO2, a smelter using 100%coal fired electricity would need to add USD500/t(aluminium equivalent) to its costs.

Production growth is also at risk as a result of China’sattempt to curb production in energy intensiveindustries. The country’s trade governing body hasinstituted a series of policies aimed at reducing exportsand encouraging imports of primary aluminium.Consequently, we expect China will become a netimporter of aluminium this year

Figure 13: Changes to the Chinese aluminiumtariff regime Nov-06 Raised tax on exports of primary aluminium to from 5% to 15%Nov-06 Removal of tax exemption for tolling of primary aluminium

(importing alumina duty free) and exporting with a rebateJul-07 Cancelled 8-11% tax rebates on exports of rod, bar, extrusion,

profile and wire made of primary aluminiumAug-07 Imposed a 15% tax on exports of rod and bar made of primary

aluminiumAug-07 Cancelled a 5% tariff on imports of primary aluminiumSource: Bloomberg, DB Global Markets Research

Figure 14: China’s net primary aluminium trade

-80

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10

40

70

100

130

160


Net visible trade balance, Kt (+/- export/import)

12-month moving average


Other factors have also conspired to pressure Chinesealuminium output. After surging by 34% in 2007,

production growth is expected to come in at only 18%in 2008 and just 11% in 2009. The primary reason forthe sharp production growth in 2007 was betteravailability of domestic alumina at lower prices whichencouraged idled capacity to be reactivated. However, itis expected those smelters that were likely to restart ina more economically favourable environment will havealready done so. A decline in Chinese domesticaluminium production would drive up domestic prices,making exports unattractive.





the price. The key to understanding the degree of threatto substitution of primary nickel is the cost of nickel pigiron production. Through discussion with producers andindependent consultants, we estimate the average costin 2008 to be around USD22,200/t (USD10.10/lb).

Figure 20: Chinese imports of lateritic ore used innickel pig iron production

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1600.0

Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-070

10,000

20,000

30,000

40,000

50,000

60,000The Philippines (lhs)Indonesia (lhs)New Caledonia (lhs)LME nickel price (rhs)

USD/tKt

Source: INSG, DB Global Markets Research

So far, most pig iron produced has only really beensuitable for utilisation in the lower grade 200 series ofstainless steel, though some producers are usingelectric arc furnaces to make higher grades that can beused in the higher quality 300 series stainless. Althoughit is estimated greater production of higher quality pigiron for use in 300 series stainless will occur in 2008,there are a few caveats that help minimise the potential

for considerable substitution from primary nickel.

First is the sensitivity to the LME nickel price which inthe last quarter of 2007 showed more stability than anyother period in the year. Stainless steel producersrequire a certain level of price consistency. Also, therainy season in top importer the Philippines will likelylimit ore shipments to China between January andMarch. Perhaps more importantly, production of thehigher qualities of pig iron requires blast furnaces, manyof which are small-scale and significant polluters. Pigiron producers took over obsolete blast furnaces thatwere no longer producing steel because of a NationalDevelopment and Reform Council (NDRC) directiverequiring the closure of all furnaces smaller than 300cubic meters. As we noted above, China’s NDRC has

stepped up regulation of its policies of upgrading andimproving the efficiency of the country’s highestpolluters, many of whom are in the steel industry. Whilemany such measures have been announced but largelyunsuccessful in the past, in our view, these particularpolicies will be taken more seriously as environmentaldestruction becomes a top headline issue.

DemandStainless steel production fell by almost 17% yoy in thethird quarter of 2007 as a result of high nickel prices anda concerted de-stocking phase of global stainless steelinventories. Following these cutbacks, we expectproduction will recover this year. In, Europe, most millsdepleted their expensive depot stock and servicecentres reduced most of their inventories and ordersincreased in the last half of Q4. Like Europeanproducers, production began to ramp up in December,though the US mills did not appear to want to commit

to large scale production increases until more orderswere received, probably reflecting apprehension overhousing market and economic worries. In Asia, wherethe market initially appeared to recover more quicklythan in Europe and the US, the situation deteriorated inDecember and Chinese producers were forced to cutprices for the first time in four months against slowerthan expected demand and a sharp drop in the LMEnickel price in November/December. It is expected thata major upturn in Asian demand for stainless steel willnot occur until after the Chinese New Year.

Figure 21: Primary nickel demand by region Kt 2005 2006 2007 2008 2009 2010

China 195 249 311 380 422 486Demand growth 21.4% 27.3% 25.0% 22.2% 11.2% 15.1%% of global demand 15.5% 18.1% 21.7% 24.2% 25.5% 27.2%USA 135 142 151 153 154 155Demand growth 4.8% 5.2% 6.5% 0.8% 1.2% 0.7%% of global demand 10.7% 10.3% 10.6% 9.7% 9.3% 8.7%European Region 410 439 433 455 472 498Demand growth -7.1% 7.1% -1.3% 4.9% 3.9% 5.5%% of global demand 32.4% 31.9% 30.3% 29.0% 28.5% 27.9%Rest of World 524 546 534 583 610 647Demand growth -5.3% 4.3% -2.3% 9.1% 4.8% 6.0%% of global demand 41.4% 39.7% 37.3% 37.1% 36.8% 36.2%Total 1,264 1,376 1,429 1,570 1,659 1,787Demand growth -1.6% 8.8% 3.9% 9.8% 5.7% 7.7%Source: Brook Hunt, INSG, WBMS, DB Global Markets Research

OutlookIn summary, we think prevailing market fundamentalsare colluding to provide a more stable nickel price in2008, though supply-side risks always have thepotential to shock a market which is delicately balanced.From our last review in early September, we havereduced our 2008 forecast by 10% to USD29,625/t(1343.8USc/lb) and the 2009 expectation by 2% toUSD27,888/t (1265.0USc/lb).

Figure 19: DB Nickel Supply/Demand Model

Kt 2005 2006 2007 2008 2009 2010

World refined production 1288 1361 1463 1542 1674 1809

World refined consumption 1264 1376 1429 1570 1659 1787

Market balance 23.4 -15.4 33.5 -28.0 14.2 21.4


Average cash price (USc/lb) 14,751 24,237 37,208 32,794 28,440 19,842

Average cash price (USD/t) 6 .69 10 .99 16.88 14.88 12 .90 9 .00

Source: Brook Hunt, INSG, WBMS, DB Global Markets Research





SupplyIn 2008, we are expecting the global zinc market torecord its first market surplus since 2003, largely as aresult of a surge in Chinese smelting capacity in thesecond half of the year. Evidence of this is starting tomanifest as exchange stocks in China are rising and arecurrently at an all-time high of 55.5Kt.

This trend has also been reflected in recent annual zinctreatment charge (TC) negotiations which are expectedto swing in favour of smelters as a consequence of ananticipated concentrate surplus and lower zinc prices. In2007 the treatment charge benchmark was USD300/t.As a result of this year’s weakness, we expect terms tobe settled around the USD340/t level.

Figure 26: Refined zinc production by region

Kt 2005 2006 2007 2008 2009 2010China 2761 3163 3726 4448 5068 5278

Production growth 9.5% 14.6% 17.8% 19.4% 13.9% 4.1%North America 1056 1079 1072 1120 1195 1195Production growth -7.4% 2.2% -0.7% 4.5% 6.7% 0.0%Western Europe 2072 1971 2023 2106 2091 2063Production growth -5.8% -4.9% 2.6% 4.1% -0.7% -1.3%Australia and Asia 2243 2355 2405 2699 2766 2861Production growth -0.2% 5.0% 2.1% 12.2% 2.5% 3.4%Total 10,128 10,555 11,335 12,418 13,258 13,625Production growth -0.1% 4.2% 7.4% 9.6% 6.8% 2.8%Source: Brook Hunt, ILZSG, WBMS, DB Global Markets Research

Any swing factor in the zinc market in 2008 will comefrom production and exporting trends in China. Thecountry had traditionally been a large net exporter ofrefined zinc until 2004 when the government begantinkering with the tariff regime to discourage exportsand encourage greater imports. The effect wasimmediate and imports began in earnest, sending Chinawell into net import territory in 2004 and especially2005. Not incidentally, this was also the period in whichthe zinc price soared to all-time nominal price highs.

Figure 27: China’s net refined zinc trade balancevs price

-300

-150

0

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450

600

1996 1998 2000 2002 2004 2006 2008*500

1000

1500

2000

2500

3000

3500Annual net visiibl e trade balance

USD/t, (rhs)Kt

*2008 estimate Source: Brook Hunt, ILZSG, DB Global Markets Research

However, in mid-2006, Chinese exports began to

increase from 2006 as a consequence of the attractiveLME price and a sharp increase in Chinese concentratemining and smelting capacity. While the rest of the

world was unable to fill the zinc market supply gapevident from 2003, China brought more metal to theparty. The country recorded a small net export balancein 2006 and according to our estimates, China willremain a net exporter for the foreseeable future.

There is one important caveat to this scenario whichhas only recently developed. As detailed above, theChinese government is stepping up its efforts onrestricting the export of high energy consumption andpolluting industries. We expect authorities willeventually scrap the 5% export rebate on Special HighGrade (SHG) zinc with 99.995% purity (the grade ofmetal traded on the international market), as soon asmid-2008 as well as imposing an export duty later in theyear. There are two important implications to the tariffchanges. First, in the shorter-term, exporters will likelyrush to get as much material out on the market beforethe changes are made which will affect their bottom

line. A flood of metal will tip the global market balancedeeper into surplus territory than we are currentlyforecasting. The second implication is less bearish – inthe longer term, the export duties could prompt aslowdown in Chinese refined production growth andbegin to tip the global market balance in the otherdirection. It would require a substantial rise in zincprices before exports would again become attractive.

Figure 28: Changes to the Chinese zinc tariff regimeJan-04 Cut export rebate to 11% of 17% VAT

Jan-05 Cut export rebate to 8% of 17% VAT

Jan-06 Cut export rebate to 5% of 17% VAT

Sep-06 Cancelled a 5% tax rebate on exports of HG (lower quality) zinc

Jan-07 Imposed a 5% tax on exports of HG zinc

Jun-07 Increase tax on exports of HG zinc to 10%

mid-08 Considering imposing a 5 or 10% tax on SHG (high quality) zinc exports

mid-08 Considering removing a 5% tax rebate on exports of SHG zinc

Source: Bloomberg

Demand

Meanwhile, consumption trends remain robust. Zincdemand is driven by galvanized steel production andultimately construction. Trends in Chinese consumptiondominate global zinc consumption growth, nowrepresenting over 30% of demand for zinc. Whileconsumption growth in the United States fell in 2007and will likely drop even sharper in 2008, we believe thestrength in emerging market demand will more thanoffset those losses. China leads total global growthpatterns and with fixed asset investment representing>50% of GDP, we continue to see upside risk toChinese zinc demand estimates (11.5% in 2007 and11.0% in 2008).





Figure 29: Refined zinc consumption by regionKt 2005 2006 2007 2008 2009 2010

China 2853 3166 3531 3919 4370 4872Demand growth 18.0% 11.0% 11.5% 11.0% 11.5% 11.5%% of global demand 26.9% 28.4% 30.5% 32.2% 34.0% 36.3%USA 1182 1224 1163 1151 1181 1187Demand growth -5.1% 3.5% -5.0% -1.0% 2.6% 0.5%% of global demand 11.1% 11.0% 10.0% 9.5% 9.2% 8.9%

Western Europe 2233 2323 2346 2382 2441 2442Demand growth -4.7% 4.1% 1.0% 1.5% 2.5% 0.0%% of global demand 21.0% 20.8% 20.2% 19.6% 19.0% 18.2%Asia (excl Japan & China) 1980 1991 2025 2103 2180 2211Demand growth 4.1% 0.5% 1.7% 3.9% 3.7% 1.4%% of global demand 18.7% 17.8% 17.1% 16.3% 15.4% 14.8%Total 10,610 11,150 11,592 12,181 12,866 13,409Demand growth 3.0% 5.1% 4.0% 5.1% 5.6% 4.2%Source: Brook Hunt, ILZSG, DB Global Markets Research

While we remain relatively bearish on the price outlookin 2008 and 2009, our supply and demand model showsthat market conditions are set to improve in 2010against a forecast concentrate deficit that will tightenthe market. Mine supply is actually set to recordnegative growth in 2010 and 2011. We thereforeremain positive on the longer-term outlook for zinc.

Figure 30: Mined zinc production by region (Zn inzinc and bulk concentrate)

Kt 2006 2007 2008 2009 2010 2011Australia 1341 1526 1785 1886 1807 1616Production growth -0.3% 13.8% 16.9% 5.7% -4.2% -10.6%L America 2052 2437 2761 2907 2820 2731Production growth 2.2% 18.8% 13.3% 5.3% -3.0% -3.1%China 2937 3200 3440 3610 3610 3610Production growth 13.3% 8.9% 7.5% 4.9% 0.0% 0.0%N America 1331 1448 1708 1819 1591 1471Production growth -3.6% 8.8% 17.9% 6.6% -12.5% -7.6%Total 10,370 11,328 12,764 13,578 13,571 13,226Production growth 4.4% 9.2% 12.7% 6.4% -0.1% -2.5%Source: Brook Hunt, ILZSG, DB Global Markets Research

Figure 31: Zinc supply analysis

0

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12000

14000

16000

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20000

2004 2006 2008 2010 2012

Kt

Possible Expansions

Probable Expansions

Base Case Mine Capacity

World refined zinc consumption

Source: Brook Hunt, ILZSG, DB Global Markets Research

Figure 32: DB Zinc Supply/Demand Model

Mt 2005 2006 2007 2008 2009 2010



Market balance-0.51 -0.59 -0.26 0.33 0.53 0.22



Average cash price (USD/t) 1,383 3,277 3,407 2,315 2,094 2,315


LeadLead had one of the most remarkable price runs of theyear, largely as a result of two factors – a change in

Chinese export taxes and the termination of exportsfrom a mine in Western Australia which preventedaround 3% of global concentrates from entering themarket. Those factors, coupled with an already tightmarket balance against low supply and resilient demand– particularly out of China – made lead an attractiveinvestment destination. As a consequence, like nickel,lead joined the real price all-time high club in 2007,peaking in October at USD3989/t (180.9USc/lb), 136%above where prices began the year.

Figure 33: LME lead price vs stocks

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Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Kt

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4000USD/tLME total stock (lhs)LME 3-month closing price (rhs)


SupplyOne major factor affecting the lead market in 2007 waschanges in the Chinese tariff regime. The first changecame in December 2006 after the Ministry of Financeremoved the 13% export rebate on refined lead exportsas well as scrapping the 13% lead-acid battery rebateand reducing the rebate on some lead alloy products to5%. Chinese lead exports fell over 80% mom inJanuary 2007. Next, an export tax of 10% was imposedon refined lead which took effect from June 1.Furthermore, it is expected that export duty could beincreased to 15% in mid-2008. Between January andNovember 2007, Chinese refined lead exports weredown 54% yoy as producers obviously favour higherdomestic lead prices as opposed to increased exporting





costs. Given that China accounts for roughly 30% ofglobal lead exports, the physical manifestation of thisdevelopment is a tightening of refined metal supply inindustrialized countries.

Figure 34: China’s net refined lead trade

0

10

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30

40

50

60

70


Net visible trade balance, Kt (+/- export/import)

12 month moving averageRemoval of export rebate


The other major factor affecting supply-side dynamicsoccurred in March when the Australian Department ofEnvironment and Conservation suspended the leadexport license from the Western Australian port ofEsperance in March 2007 after thousands of birds dieddue to lead dust poisoning at and around the port. Italso investigated excessive levels of nickel dust duringloading. Ivernia’s Magellan mine, which is responsiblefor around 3% of global concentrate supply has beenunable to make shipments to its customers since then.However, in early December, Ivernia announced itexpects to get permission to ship lead in concentrate

via Fremantle port in March-April 2008. This news hadan immediate effect on lead prices and we expect therewill be a further correction once those exports resume.

DemandOn the demand side, consumption levels remain robust,largely on the back of battery demand in China. Growingdemand for cars, light vehicles and electric bicyclesreflect the continuing social and economictransformation occurring in china (as well otheremerging market economies). The level of Chinesedemand growth in 2007 was slightly lower than in 2006

as a result of the spike in price and the removal of theexport rebate for lead-acid batteries, but China stillremains by far the largest lead consumer. We expectdemand levels to ease against governmental efforts tocontrol monetary policy, though that risk profile of lowerdemand growth is clearly skewed toward the upside.

Figure 35: Primary lead demand by region

Kt 2005 2006 2007 2008 2009 2010China 1850 2169 2516 2893 3183 3437Demand growth 32.0% 17.2% 16.0% 15.0% 10.0% 8.0%% of global demand 24.2% 27.3% 30.4% 33.2% 34.9% 36.3%USA 1598 1605 1613 1621 1635 1646Demand growth 6.3% 0.4% 0.5% 0.5% 0.9% 0.6%% of global demand 20.9% 20.2% 19.5% 18.6% 17.9% 17.4%

W Europe 1662 1639 1639 1613 1610 1620Demand growth -0.7% -1.4% 0.0% -1.6% -0.2% 0.7%% of global demand 21.7% 20.6% 19.8% 18.5% 17.7% 17.1%Rest of World 2547 2545 2507 2586 2688 2774Demand growth -0.6% -0.1% -1.5% 3.2% 3.9% 3.2%% of global demand 33.3% 32.0% 30.3% 29.7% 29.5% 29.3%Total 7,657 7,958 8,275 8,713 9,115 9,477Demand growth 7.2% 3.9% 4.0% 5.3% 4.6% 4.0%Source: Brook Hunt, ILZSG, DB Global Markets Research

OutlookWe expect lead prices to ease to a more sustainablelevel in 2008 as Ivernia restarts concentrate shipments.Prices have staged a modest rebound since mid-December after news of the temporary closure ofrefined capacity in Yunnan province in China thatproducers blamed on high production costs as theresult of the removal of a local tax break and the sharpdecline in international and domestic prices. The plantsare not expected to resume operations before lateFebruary. These two supply constraints highlight thebiggest risk lead prices face in 2008 against a tightmarket balance. We moderately increased our 2008forecast to USD2326/t (105.5USc/lb) and left our 2009estimation unchanged at USD1692/t (76.8USc/lb).

Figure 36: DB Lead Supply/Demand Model

Mt 2005 2006 2007 2008 2009 2010



Market balance -0.09 -0.07 -0.23 0.01 0.10 0.21



Average cash price (USD/t) 977 1287 2584 2326 1692 1433






TinWhile most metals across the LME complex werechoppy in 2007, tin prices rose steadily throughout theyear, and closed the year up 67%. Annual averageprices are at their highest since 1980. This strengthfollows a similarly robust 2006, which saw prices

increase by almost 70% as well.

SupplyAccording to CRU estimates, world refined tinproduction fell 2% in 2007. Indonesian supply issuescontinued to dominate supply-side fundamentals in2007, as the government continued its efforts toconsolidate refined and concentrate tin production.Indonesia is the world’s second largest producer ofrefined tin, behind China. The Indonesian TradeMinister recently announced that there was no plan toenact official supply quotas to limit exports. In theplace of quotas, Indonesia would likely continue tostrictly implement its existing export licensing system.The politics of tin supply control have confoundedoutside observers, and continued Indonesian supplyuncertainty is expected in 2008.

Meanwhile, top producer China introduced a 10% taxon refined tin exports from January 1, 2008 in anapparent push to keep more for its own rampantdemand. This tax will likely dent exports, and in turnreduce global supply.

Figure 37: Global tin exchange stocks vs price

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Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0Global Exchange Stocks, Kt (lhs)

LME Cash Price, USc/lb (rhs)


DemandAccording to CRU estimates, consumption was flat in2007. Coupled with falling supply, this led to an annualsupply deficit of approximately 8,000t. Whileconsumption stagnated throughout the first threequarters of 2007, Q4 consumption picked up in everymajor market, which caused the supply and demandbalance to tighten at the end of the year. The electronicsolder business, the primary source of demand,continues to increase demand for tin as the growingtrend for lead-free solder persists. Consumption is

expected to continue to be strong in the first half of2008, causing further balance pressure.

Chinese refined tin demand was exceptionally strong inQ407, during which China actually became a netimporter of refined tin. This shift, along with the strongconsumption outlook, likely drove China to levy the tinexport tax described above.

Figure 38: Chinese refined tin net trade balance

-4.0

-2.0

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N et v isi bl e t rad e b al an ce, Kt (+/- ex po rt /i mp or t) 12 m on th m ov in g av er ag e

Kt


OutlookThere are a number of factors that could weaken tinprices in 2008. A US recession or a slowdown in globalgrowth could undercut tin demand. At the same time, ifIndonesia loosens its grip on its tin production, a surgein tin supply could enter the global market. Also, thecurrent price of tin relative to current stock levels isunprecedented in the last two decades, suggesting thata price correction might be in order.

However, the most likely scenario is that worldwidesupply will likely remain depressed in 2008 withcontinued Indonesian regulatory uncertainty and thenewly introduced Chinese tin export tax. This weaksupply outlook, coupled with strong 1H07 consumptionexpectations and an already tight supply and demandbalance all point to continued gains for tin prices in2008. We have increased our forecast in 2008 by 21%to USD14,716/t (667.5USc/lb) and by 7% in 2009 toUSD9,976/t (452.5USc/lb).

Joel Crane, (1) 212 250 5253

[email protected]





Figure 3: China’s arable land per head ofpopulation is on the decline

0.1

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1978 1985 1990 1992 1994 1996 1998 2000 2002 2004 2006140

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155

160Hectares of arable land per capita (lhs)

Total area under cultivation (millionhectares, rhs)

Source: China Statistical Bureau

These trends are leading to a sharp deterioration in thecountry’s agricultural trade balance, with the mostnoticeable deterioration in the country’s net tradebalance in soybeans, Figures 4. China is now theworld’s largest importer of soybeans in the world, withapproximately 40% of the world’s soybean exportsheading to China. The dramatic increase in soybeanoilseed imports has stemmed from rising demand forhigher protein foods and hence increased animal feeddemand. Moreover the country’s dominance in theglobal textile sector has also meant that the country isalso the world’s largest cotton importer.

Figure 4: The past few years has seen a dramaticincrease in Chinese net soybean imports

-40000

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China's net trade balance in:

Tonnes (000s)

Source: USDA

Aside form the rising trade deficit in soybeans andcotton, China may soon become a net importer of cornfor the first time in more than a decade, Figure 5. Webelieve such a shift in the country’s trade position willpropel the corn price to all time highs as it is coincidingwith the increasing use of ethanol production in the US.

Figure 5: China is moving to become a netimporter of corn and sustaining its high tradedeficit in cotton

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Sugar Corn

Wheat Cotton

China's net trade balance in:

Tonnes (000s)

Source: USDA

Global ethanol and biodiesel production is forecast togrow rapidly over the next few years, Figure 6.However, world ethanol production continues to beconcentrated in the US and Brazil.

Figure 6: Global ethanol and biodieselproduction

0

5

10

15

20

2006 2007 2008 2009 2010

G a l l o n s

( b i l l i o n )

World ethanol production

World biodiesel production

Source: Potash Corp

In the US, corn remains the primary feedstock forethanol production and has been an important source ofthe increase in global corn consumption during 2007.According to the USDA, an estimated 60% of cornconsumption growth globally last year was attributableto the US ethanol industry, Figure 7.





Figure 7: Contribution to the increase in globalcorn consumption (%)

-2

0

2

4

6

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

US ethanol productionChinaRest of the world

Source: USDA, IMF

Similarly the use of soybeans as a feedstock in the USand European biodiesel sector has been responsible forjust over 50% of global soybean consumption growthbetween 2005 and 2007, Figure 8.

Figure 8: Contribution to the increase in globalsoybean consumption

-2

0

2

4

6

8

10

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

U.S. and EU biofuelsChinaRest of the world

Source: USDA, IMF

The rising demand for agricultural commodities forhuman and animal consumption as well as ethanol andbiodiesel purposes has contributed to a significantdrawdown in inventories for these commodities. Wetrack inventory-to-use ratios, which illustrate howquickly (in days) the world would exhaust availablesupplies if production in these commodities ceasedtoday. It shows that corn and wheat inventory-to-useratios have been declining for the past six years andhave now reached multi-decade lows.

Figure 9: Global inventory to use ratios for corn,wheat and soybeans

0

20

40

60

80

100

120

140

160

180

1965 1970 1975 1980 1985 1990 1995 2000 2005

D a y s o f u s e

Corn stock-to-use ratio

Wheat stock-to-use ratio

Soybean stock-to-use ratio

Total available stocksdivided by daily consumption

Source: USDA

Despite the significant tightening in fundamentalsacross the agricultural sectors as well as recent priceappreciation we believe prices have significant upsidepotential. Indeed price rallies appear to be still in theirinfancy in both magnitude and duration terms.

Indeed price appreciation for many agriculturalcommodities so far in this cycle is still close to historicalaverages. Figure 10 compares rallies across a variety ofagricultural commodities and examines the averageduration and magnitude of each rally since 1970. Wecompare what has happened today not only versushistorical averages, but, also with the most powerfulrally that has taken place over the past 40 years.

Figure 10: Agricultural commodity ralliescompared

Cycle type MagnitudeDuration(months)

Corn Average 131% 20

Most powerful 237% 41

Current 150% 24

Cotton Average 113% 22


Current 49% 18

Soybean Average 118% 15


Current 137% 16

Sugar Average 244% 25


Current 34% 7

Wheat Average 139% 26


Current 218% 24The average rally excludes the current cycle. The most powerful rally interms of magnitude and duration are not necessarily occurring at the same time.Source: DB Global Markets Research, Bloomberg





We find that soybean prices would need to rise afurther 69% and the rally to extend beyond October2008 for it to be the most durable and powerful rally onrecord while cotton prices would need to double andthe rally to extend beyond 2012 for it to be the mostpowerful and durable rally on record, Figure 11.

Figure 11: What prices have to do in this cycle tobecome the most durable and powerful rallies inhistory

USDCurrentprice

Targetprice

Price gain(%) Peak date

Sugar 0.11 0.30 165% February 2012

Cotton 0.69 1.40 104% June 2012

Soybeans 12.49 21.10 69% October 2008

Wheat 9.32 13.30 43% March 2009

Corn 4.67 6.27 34% June 2009Source: DB Global Markets Research

However, these targets may still be too conservative inour view. One of the lessons from the energy andindustrial metals complex has been that at some pointduring the current cycle prices in real terms have hit alltime highs. Figure 12 examines the degree of priceappreciation form current levels that would be requiredfor a selection of commodities to hit their all time highsin real terms reached over the past 40 years.

Figure 12: How far prices today are from their alltime highs in real terms

Difference between the current priceand the all time high in real terms (%)

816

474 439375

240174 156 145 129 128 101 68 63 56

0

1510

0

200

400

600

800

1000

1200

1400

1600

S u g a r C o

f f e e C o

c o a S i l v e r C o

t t o n S o

y b e a n s C o r n Z i n c

A l u m i n i u m

W h e a t T i n N i c k e l G o l d L e a d C o

p p e r C r u

d e o i l

Cheap Expensive

Source: DB Global Markets Research, IMF, Bloomberg

Not surprisingly, crude oil is currently the mostexpensive commodity if priced on this basis while sugaris the cheapest. Indeed of the 10 cheapestcommodities valued on this basis, seven are in theagricultural complex. For example corn and soybeanswould need to rise approximately 170% and 240% fromcurrent levels to surpass their all time highs in realterms hit during the 1970s.

ConclusionWe believe fundamentals across the agricultural sectorare set to tighten further this year. We believe the rapidincrease in agricultural imports in China is particularlybullish for soybeans, cotton and corn.

Moreover land and water constraints globally as well asthe expected growth in world ethanol and biodieselproduction at a time when global grain inventory-to-useratios are falling to critically low levels are mixing acocktail of substantial upside price shocks in this sector,in our view. We are therefore maintaining our bullishoutlook for this sector.

Aside from index and futures plays to express a bullishagricultural view, Figure 13 outlines a selection of equityroutes.

Figure 13: Possible companies that wouldbenefit form higher agricultural prices

CompanyPrice &Ticker DB Comment & View

Agrium Inc.

USD67.9

AGU US

US nitrogen fertilizer.

NR

Archer-Daniels-Midland Co.

USD45.0

ADM US

Leader in agribusiness andgrain processing, mainlywheat and oilseeds. Hold

Bunge Limited

USD127.0

BG UNLeader in US/Latamagribusinesses, soyaprocessing. Buy

K+S AG

EUR171.0

SDF GR

European potash fertilizer

Hold

Monsanto Co.

USD120.0

MON US

Global leader in biotech,seeds and traits. Corn, soyaand cotton exposed NR

Potash Corp.

CAD138.0

POT CNWorld leader in potashfertilizer NR

Syngenta AG

CHF307.8

SYNN VX

Global wheat/cornagrochemical and seed playBuy

Yara International

NOK278.5

YAR NOGlobal leader in nitrogenfertilizer Buy

Prices as of cob January 8, 2008 Source: DB Global Markets Research





Figure 14: Equity routes to gain agriculturalexposure

0

50

100

150

200

250

300

350

400

450

500

Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07

SygentaAgriumBungeMosantoPotash

30 December 2005=100


Trade recommendations:Theme 1: Farmland

• Long corn, cotton, soybeans &wheat

• Long corn farms, farmland REITS, grainelevators

Theme 2: Farming services

• Long faming machinery, fertilizers,water resources, GM crop tech

Theme 3: Farming economies

• Long the agricultural exports such asBrazil and Argentina

Theme 4: Margins squeezed

• Short the grain users: bakert, soft drinkscompanies, beer and food industry,distilleries, ethanol producers

Theme 5: Cattle time spread

• Short the nearby and long the farforward of the cattle future on anydrought

These 6: RV curve play• Long May’08 vs. short Jul’08 corn time

spread to position for the curve to flipinto backwardation






#17 Emissions

Banking on Higher Prices: We SeeEUAs at EUR35/tonne over 2008-20•

The EU has a very ambitious energy-policypackage out to 2020 which we think points tosignificantly higher carbon prices over 2008-20.The package comprises three main pillars:

• First, achieving a 20% reduction in the EU’sgreenhouse-gas (GHG) emissions against 1990levels by 2020;

• Second achieving a 20% improvement in theEU’s energy efficiency by 2020, thereby reducingprimary-energy consumption by 20% againstbusiness-as-usual (BAU) assumptions;

• Third, consuming 20% of all primary energy by2020 from renewable sources, and building 12large-scale carbon-capture and storage (CCS)plants in the EU by 2015.

• These policy targets imply a very tough ETS capfor Phase-3 of the scheme, and we estimate a cutof 17% -- or 366Mt per year – to the EU-wide capfrom 2013.

• Moreover, the fact that EUAs are bankablebetween Phases 2 and 3 of the ETS means thatarbitrage should ensure a common price(adjusted for the cost of carry) over 2008-20.

•

As a result, we are forecasting an EUA price ofE35/t for 2008, and, after adjusting for the cost ofcarry, the same price over both Phase 2 andPhase 3.

• Furthermore, the EU Parliament’s proposals forregulating the emissions of the aviation industryfrom 2011 are very tough, and although we donot think that these proposals will beimplemented in full, we nonetheless think thatthe aviation industry will be a significant netbuyer of EUAs from 2011. This reinforces ourprice target for EUAs.

•

Potential catalyst: Of key importance will be theEuropean Commission’s announcement on 23January 2008 concerning its plans for improvingthe ETS from 2013.

(1) EU Target: A 20% reduction in GHGemissions by 2020

The EU is now committed to achieving a reduction in itsGHG emissions of 20% relative to 1990 levels (Figure 1).Although this is not a commitment to an absolute cut –the target allows for the continuing use of credits fromCDM/JI projects as offsets against excess emissions –it is nonetheless an extremely ambitious target, and thisis for three main reasons.

First, taking 2010 as the mid-point of the Kyotocompliance period and hence the baseline forcalculating the “effort required” to the new target of20% below 1990 levels, then on current projections theEU will have to achieve a reduction in emissions over2010-20 of almost the same absolute magnitude as thatexpected over 1990-2010.

Figure 1: EU GHG emissions targets 1990-2020(Mt)

1,039 1,225

4,157 3,423

1,531

4,279

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1 990 Ky oto Ba sel in e 2 010E P ro jec ted lev els 2 020E Targ et

eastern Europe EU 15

5,8105,196

4,648Expectedreductionachieved

-614

Reductionrequired

-548

Source: European Environment Agency, DB Global Markets Research

Second, the reduction over 2010-20 will have to occurwithout the one-off factors that largely explain theactual reduction in emissions projected to be achievedby the EU over 1990-2010 . The main factors here are (i)the step reduction in eastern European emissions in the1990s that occurred as a result of the collapse of theSoviet system and the ensuing industrial recession inthese countries (including the former East German), and

(ii) the so-called “dash for gas” in the UK in the 1990s.

Third, we then need to factor in the BAU emissionsgrowth that would occur as the EU economy growsover 2010-20.





Figure 2: Projected EU emissions to 2010 and2020 (Mt)

1,039 1,092

4,157

1,531

4,4604,279

0500

1,0001,500

2,0002,5003,000

3,5004,0004,500

5,0005,5006,000

EU 27 Kyoto Baseline 2010E 2020E BAUeastern Europe EU 15

5,1965,5525,810

Expectedreductionachieved

-614

ExpectedBAU increase

+356


We assume annual emissions growth of 0.7% over2010-20, which means that by 2020 annual emissions

would be 904Mt above the EU’s target on a BAU basis(Figures 2 and 3).Adding the implied effort required ineach year over 2011-20 together and then dividing byten gives us an average “effort required” over 2010-20of 746Mt, Figure 3.

However, notwithstanding the very ambitious scale ofthe EU’s 20% emissions-reduction target by 2020, theCommission has developed a much more coherentenergy policy than it had in the past to help meet thisobjective.

Figure 3: EU gap between 2020 BAU emissionsand 2020 target (Mt)

-133

1,037

734

-186

-200-100

0100

200300

400500

600700

800900

1,000

EU 15 eastern Europe

Gap aga inst 2010 Gap against BAU

548

746

Average Gap

904


This policy comprises three main elements: (i) a targetto improve energy efficiency in the EU by 20% by 2020;(ii) a target stipulating that 20% of the EU’s primary-energy consumption by 2020 should come fromrenewable sources; and (iii) a target to develop 12 large-scale CCS plants by 2015.

Figure 4: EU projected “effort required” by 2020after efficiency savings (Mt)

746

549

-197

0

100

200

300

400

500

600

700

800

Assumed BAUEmissions by 2020E

Assumed "EffortRequired"

Assumed averagereduction from

Efficiency Target by 2020


We assume that the demand-side target of reducingprimary-energy consumption by 20% by 2020 willreduce the average annual “effort required” over 2010-20 by 197Mt (Figure 4). As a result, we assume that theEU’s other policy measures will have to reduceemissions by an average of 549Mt per year over 2011-20 if the target of a 20% reduction in GHG emissions by2020 is to be achieved.

(2) We expect a much tougher ETS cap from2013…

We assume that although the ETS currently accountsfor only about 45% of total EU emissions, and that evenwith the full addition of the aviation sector from 2012 itwill still only account for about 50% of total emissions,a disproportionately large burden of the “effortrequired” to reach the 2020 emissions target will beplaced on the ETS in general, and the power-generationsector in particular.

As a result, we assume that 67% of the burden formeeting the “effort required” over 2010-20 will beassumed by the ETS, and 33% by the non-ETS sectors

of the EU economy. In terms of the impact this has onthe size of the ETS cap over Phase 3 of the scheme,then on our estimates it would imply a reduction of366Mt per year relative to the Phase-2 cap over 2008-12, Figure 5.





Figure 5: ETS assumed sectoral burden sharing,2013-20 (Mt)

366

247

183

141

549

Non-ETS

0

100

200

300

400

500

600Annual average

"Effort Required"

Non -ETS

ETS

TotalCERs/ERUs

allowed

1/3

2/3

AssumedSupplementarityCriterion of 45%

AssumedCERs/ERUs

allowed

43%

57%

AssumedBurden-Sharing

106

ETS


At the same time, we think that the Commission willinterpret the supplementarity criterion governing theuse of CDM/JI credits in the ETS more strictly beyond2010 in order to reflect the increased reliance on itssupply-side targets for renewable energy and theconstruction of CCS plants laid down in its energy policyout to 2020. We therefore assume the Commission willallow only 45% of each Member State’s “effortrequired” to be met via the use of CDM/JI credits over2013-20.

(3) and this is bullish for EUA prices in bothPhase 2 & Phase 3

In order to work out the EUA price implied by ourassumed “effort required”, we need to calculate theresidual amount of abatement required within the ETS.To do this, we need to answer two questions:

(i) What will be the impact of the policy measuresrelating to the target for sourcing 20% of allprimary-energy consumption from renewablesources by 2020? If we assume that this fullsaving is achieved by 2020, then this translatesinto average annual emissions savings over 2011-20 of 143Mt if we further assume that this isachieved in linear fashion over this period.

In turn, this would mean that of the 366Mtaverage annual “effort required” for the ETSsector, 143Mt would be expected to be achievedthrough the Commission’s renewable-energytargets, leaving a gap of 223Mt to cover.

(ii) How many CERs/ERUs will be available to the ETSsector? We assume that Member States will use106Mt of CERs/ERUs per year over 2008-12. Sincewe have assumed a total annual CER/ERU limit of247Mt (Figure 5), this means that the remainingamount available for the ETS sector on ourestimates would be 141Mt per year, Figure 6.

Figure 6: ETS, assumed average residualabatement required, 2013-20 (Mt)

141

143

366

82

0

50

100

150

200

250

300

350

400Remaining

gap to cover

fromRenewables/

CHP

Assumeduse of

CERs/ERUs

ETS reductionrequired


As a result, assuming that the full renewable-energytarget were met by 2020, the ETS sector would have aremaining gap to cover via domestic abatementmeasures within the ETS of 82Mt per year over 2008-12, Figure 6.

Indeed, the 82Mt number is conservative to the extentthat we have above assumed that the target forachieving 20% of primary-energy consumption fromrenewable sources by 2020 is achieved in full. Evidently,if the target is not achieved in full, then other thingsbeing equal the emissions savings will be lower and theresidual abatement required by the ETS sectorcorrespondingly higher. As a result, a range of 80-100Mt per year for the residual abatement requiredwithin the ETS seems a reasonable assumption tomake.

Moreover, we do not think it will be possible for ETSinstallations to cover their entire EUA shortfall overPhase 2 from CERs/ERUs either, and that up to 30Mtper year of abatement will have to be achieved via fuelswitching in the power-generation sector over 2008-12.

And crucially, Phases 2 and 3 of the ETS are linkedvia the bankability of Phase-2 EUAs into Phase 3.

In other words, any EUAs that are not used in Phase 2are carried over as a matter of course into Phase 3. Inother words, there is mandatory 100% banking ofsurplus permits between Phase 2 and Phase 3, as isclear from Article 13 of Directive that governs the ETS(Directive 2003/87/EC, 13 October 2003, available athttp://europa.eu.int/comm/environment/_en.htm ).

The relevant paragraphs of this article are 13.2 (whichrelates to banking arrangements between Phases 1 and2), and 13.3 (which relates to banking arrangementsbetween Phases 2 and 3). The big difference in thesearrangements is that the Directive states that bankingof surplus Phase-1 permits into Phase 2 is at the





discretion of Member States between Phases 1 and 2,but is mandatory between Phases 2 and 3:

“ 13§2. Four months after the beginning of the first five-year period referred to in Article 11(2),

allowances which are no longer valid and have not been surrendered and cancelled in accordance with Article 12(3) shall be cancelled by the competent authority. Member States may issue allowances to persons for the current period to replace any allowances held by them which are cancelled in accordance with the first subparagraph.

13§3. Four months after the beginning of eachsubsequent five year period referred to in Article 11(2), allowances which are no longer valid and have not been surrendered and cancelled inaccordance with Article 12(3) shall be cancelled by the competent authority. Member States shall issue allowances to persons for the current period to replace any allowances held by them which are cancelled in accordance with the first subparagraph.” (Our emphasis.)

What this means is that we effectively need toconsider the entire 13 years covered by Phases 2and 3 as one period, and thus to average ourprojected annual deficit over 2008-20. This results ina total expected residual abatement requirement in

the ETS of 950Mt over the 13-year period, andhence an average annual residual abatementrequirement over 2008-20 of 73Mt.

We think a residual abatement requirement over thisperiod of 73Mt is a very material amount of emissionsto be abated each year, and that it will largely have tobe achieved via fuel switching in the power-generationsector.

We estimate that the opportunities for large-scale fuelswitching are limited in the EU at the moment to threemain markets:

(i) Germany, where we estimate that up to 40Mtper year of abatement can be achieved viaswitching to coal plant (and to, a lesser extentto older gas plant) from lignite plant;

(ii) The UK, where we estimate that up to 30Mtper year of abatement can be achieved viaswitching to gas plant from coal plant;

(iii) Spain, where we estimate that up to 25Mt peryear of abatement can be achieved viaswitching to gas plant from coal plant.

We have set out these estimates in much more detail ina previous research report ( What If? The risk of muchhigher carbon and power prices , 1 November 2005, seeespecially pages 35-41), the point being that switching

opportunities at the moment would allow for nearly100Mt per year of emissions abatement per year.

Over time, however, as more gas plant is built acrossEurope, this number will increase, so we would arguethat it is reasonable to assume that the full residualabatement required by the ETS sector over 2013-20 will

be achievable via fuel switching.So what are the economics of fuel switching, andhence the implications for carbon prices in the ETS overPhase 3? To answer this question we make thefollowing assumptions on the key variables:

(i) An average oil price over 2013-20 of$60/boe, this being the long-term forecastof DB’s Commodities Research team.

(ii) A gas price of Euro 0.64/therm. At $60/boethis represents the average of the thermalequivalent gas price (Euro 0.72/therm) and

the Troll index price (Euro 0.56/therm).(iii) A coal price of $60/t with transportation

costs of $20/t

(iv) A carbon price of EUR35/tonne

(v) Thermal efficiency of 57% for UK gasplant, 37-43% for coal, and 37% for lignite

(vi) A Euro/$ exchange rate of 1.38, and a£/Euro exchange rate of 1.48

On our assumption of a carbon price of EUR35/tonne,we believe gas would start to look economic againstcoal in the UK, and fuel switching would therefore startto happen at this level.

In short, our assumption that the ETS will have toachieve residual abatement of 30Mt per year over2008-12, and 80-100Mt per year over 2013-20 impliesa price for 2008 EUA allowances of EUR35/tonne.Adjusted for the cost of carry, we project the sameprice over the rest of Phases 2 and 3.

(4) The impact of including the aviationindustry

With emissions from aviation growing faster than thoseof any other industry in the EU, the EuropeanParliament voted on the 13 th of November to tighten upthe proposals made by the Commission to regulate theindustry.

In reviewing the Commission’s draft legislation for theAviation Trading Scheme (ATS) that will exist in parallelto the ETS from 2011, the EU Parliament has been veryradical. Most notably, it has voted to allocate EuropeanAviation Allowances (EAAs) to the industry at only 90%of its average emissions over 2004-06 rather than





100%, and to cap the use not only of CERs/ERUs, butalso of EUAs.

We do not expect Parliament’s proposals to beaccepted in full, and assume in particular that the ideaof capping the use of EUAs in the ATS will be rejected.On our estimates, the demand from airlines for EUAswill increase the average annual residual abatementrequirement in the ETS over 2008-12 to 60Mt from30Mt.

Moreover, with Parliament clearly signalling thataviation’s emissions will have to be aggressively limitedover Phase 3 as well, we now assume an increase of60Mt in the average annual abatement required withinthe ETS over 2013-20, to 160Mt from 100Mt.

Overall, this means we now project an averageannual abatement requirement within the ETS over

2008-20 of 122Mt, compared with the 73Mt weproject for the other industries covered by thescheme before taking aviation into account.

(5) Conclusion: Banking on higher prices

Expectations about a much tighter cap in Phase 3 willmake Phase-2 allowances more valuable given that theycan be carried over into Phase 3. In effect, thebankability of Phase-2 EUAs means that the moredrastic shortage of EUAs foreseen by the market inPhase 3 will already be anticipated in Phase 2.

In other words, bankability means that we have toconsider the expected residual abatement requirementin Phases 2 and 3 together rather than separately. Onour assumptions, this results in a total expectedresidual abatement requirement in the ETS of 1,580Mtover the 13-year period 2008-20, and an averageabatement requirement of 122Mt per year.

We think this level of abatement implies that in theshort term the marginal cost of carbon will be set byfuel switching to gas from coal in the UK, and, longerterm, by the carbon price required to incentivise newgas and/or carbon-capture and storage (CCS) coal plantto be built ahead of conventional coal. Based on ourassumptions for long-term oil, gas, and coal prices thisimplies a carbon price of EUR35/tonne.

Trade Recommendation:• We are bullish on Phase-2 EUAs, as they

currently trade at around E23.5/t for2008 delivery and we think they areworth Euro 35/t on fundamentals

Mark Lewis, (33) 1 4495 [email protected]





#18 US Carbon TradingClimate Legislation Outlook• Despite the US failure to ratify the Kyoto

Protocol, and a recalcitrant role at the recent

Bali Conference, a national system to regulateemissions of GHGs is likely to take effect inthe US by the start of year 2012.

• The Lieberman-Warner (L-W) proposal for a UScarbon cap-and-trade system is the likelytemplate for final US legislation on this topic.

• L-W was approved by a key US Senatecommittee in December 2007 and is likely tobe scheduled for a full Senate vote in 2008. Itcovers six primary GHGs: CO 2, methane,nitrous oxide, sulfur hexafluoride, as well ashydro- and per-fluorocarbons

• L-W would set caps on CO 2 equivalentemissions in the electric power, industrial,commercial, and transportation sectors, Itprovides for partial auctioning of entitlements,and allows some use of both domestic andinternational GHG allowances.

• The consensus view in Washington is that“final” law on this topic is likely to be signedby the new President in 2010.

• We believe that curbing CO 2 emissions will

alter the energy mix, increase energy-relatedcosts, and require reductions in demandgrowth.

A political consensus is forming in the US around acentral set of climate law provisions that includefederally-enforced caps on GHGs and “traded” marketsin carbon dioxide (CO 2) and equivalents (CO 2e ).Although the US never ratified the Kyoto Protocol,public pressure for the US to actively participate in theUN Framework Convention on Climate Change(UNFCCC) is growing rapidly.

During the course of 2007, the Intergovernmental Panelon Climate Change (IPCC) issued four reports thatassessed the scientific aspects of the climate systemand climate change, the vulnerability of economic,social and natural systems, and options for limiting ormitigating GHGs. A synthesis report was published inNovember 2007, in time to provide key conclusions forpolicy makers attending the UNFCCC conference in Bali,Indonesia.

Bali RoadmapThe Kyoto Protocol binds virtually every industrializedcountry (but not the US due to its refusal to ratify) toreduce their collective emissions of greenhouse gasesby 5.2% compared to the year 1990. Kyoto expires in2012. The Bali meeting was intended to work out thedetails of an agreement with a goal of having a newprotocol in place by 2009. Based on a recommendationin the IPCC synthesis report, the European Unionwanted reductions of 25% to 40% by 2020. The lack ofbinding targets for developing countries persuadedrepresentatives from the US, Canada, Australia andJapan to object to text that included any directreference to the 25% to 40% reduction. Nevertheless,Bali marked the first such international negotiation atwhich the US did not rule out accepting binding limits inthe future. Despite the continued foot-dragging of thecurrent Administration, the timetable for the negotiatingprocess is set to culminate in 2009 when a new

President will be sitting in the White House. The USdid agree to language that approves "measurable,reportable and verifiable nationally appropriatemitigation commitments or actions" and calls for"quantified emission limitation and reduction objectives,by all developed country Parties".

Spurs to US ActionIn October 2007, former US vice president Al Gore andthe IPCC were jointly awarded the Nobel Peace Prize.Gore’s documentary film An Inconvenient Truthpopularized the scientific message of the IPCC, andpoliticians in Washington and industry executives were

taking note.

Earlier in the year (April 2007), the US Supreme Courtruled that “the harms associated with climate changeare serious and well recognized” in a case involving therefusal of the US Environmental Protection Agency(EPA) to regulate GHG emissions from motor vehicles.The Supreme Court found that GHGs fit well within theClean Air Act’s definition of an “air pollutant” and thatthe EPA has a statutory mandate to regulate suchemissions from new motor vehicles.

During the course of 2007, a number of state

governments began to implement their own individual(and regional) GHG emission initiatives and theopposition of many industrial and commercial firms tofederal GHG regulation began to turn in favor ofCongressional action in order to avoid the potentialchaos of numerous and conflicting state mandates.

Congressional ActivityIn August 2007, Senators Joseph Lieberman (I-CT) andJohn Warner (R-VA) released a detailed outline for afederal GHG cap-and-trade system. The Lieberman-Warner proposal drew ideas from other climate changebills, including the Bingaman-Specter bill introduced

earlier in the year by Senators Jeff Bingaman (D-NM)and Arlen Specter (R-PA). The Lieberman-Warner billwas debated and fine-tuned over the course of





September and October, and on December 5 wasapproved by the full Senate Committee on Environmentand Public Works (EPW), chaired by Senator BarbaraBoxer (D-CA).

America’s Climate Security Act (“ACSA”), as the bill istitled, is currently seen as the most likely vehicle for any

federal legislation on climate change in the US and thepreferred template for further Congressional action.According to attorneys at VanNess Feldman, ACSAwould place a declining cap on US emissions of the sixprimary greenhouse gases. A general cap applies tocertain emissions of CO 2, methane, nitrous oxide, sulfurhexafluoride, perfluorocarbon, and certain byproductHFCs. A separate cap applies to HFCs produced in, orimported into, the United States. The cap is expressedin metric tons of CO 2 equivalents (CO 2e ). In 2012, totalemissions attributable to covered facilities would becapped at 2005 levels. In 2020, the cap would be set at1990 levels. By 2050, the cap would drop to 70%below 2005 levels. Between 2012 and 2050, the capdeclines from 5.775 billion tons in 2012 to 1.732 billiontons in 2050. During the 38 intervening years, the capwould decline by 106 million tons each year.

ACSA provides for a combination of allocation andauctions for distributing allowances . It wouldimpose direct allowance surrender requirements on theowners and operators of the following facilities andentities:

(1) that uses more than 5,000 tons of coal in a year; (2)that is a natural gas processing plant or that produces

natural gas in the State of Alaska, or any entity thatimports natural gas (including liquefied natural gas; (3)that in any year produces, or any entity that in any yearimports, petroleum- or coal-based liquid or gaseous fuel;(4) that in any year produces for sale or distribution, orany entity that in any year imports, more than 10,000CO2 equivalents of chemicals that are GHGs; and (5)that in any year emits as a byproduct of the productionof hydrochlorofluorocarbons (HCFCs) more than 10,000CO2 equivalents of HFCs.

Coal combustion is regulated downstream, based onthe CO2 emissions of the coal-burning facility. Naturalgas and petroleum fuels (and coal-based liquid orgaseous fuels) would be regulated upstream.

The bill would establish a Carbon Market Efficiency Board to oversee the carbon trading market and makeadjustments to the emissions cap and borrowing termsif the price of emission allowances exceedsexpectations. The legislation also directs the US EPA toestablish a clear legal and regulatory framework forcarbon capture and sequestration (CCS). Carbonconstraints could dramatically alter the energy mix –favoring gas at the expense of coal – and CCS) isdeemed necessary by virtually all economists topreserve some balance in the existing globalinfrastructure for energy supply and delivery.

The direct allocation provision of ACSA provides forissuance of allowances each year in a total amountthat equals the cap for that year. Each year, a shareof the allowances are allocated, at no cost, for a numberof purposes, including a long and complicated list thatincludes allocations for early adopters, individual states,low-income electricity and natural gas consumers,carbon capture and sequestration, power plants,agricultural and forestry programs, energy intensivemanufacturers (iron, steel, aluminum, pulp, paper,cement, chemicals and such other products as EPAmay specify), landfill and coal mine methane reductionprojects.and others. The remainder are allocated to theClimate Change Credit Corporation to be auctioned,with the proceeds to be devoted to funding energytechnology deployment, including advanced vehicletechnologies and advanced coal and sequestrationtechnologies; energy assistance to consumers; aClimate Change Worker Training Program; an adaptation

program, and sustainable energy programs.

ACSA provides for limited offsets and internationaltrading. “Domestic Offsets” under which a coveredfacility would be able to satisfy up to 15% of a givenyear’s compliance obligation with domesticallygenerated offset allowances. The legislation providesfor “International Trading” via a mechanism to allow upto 15% of emission allowances to be obtained on aforeign GHG emissions trading market certified by EPA.This provision would foreclose use of credits from

project-based reductions from developing countries,including through the Clean Development Mechanism(CDM). According to experts at Van Ness Feldman, itappears that only European Union (EU) allowanceswould be eligible.

ConclusionsThe momentum behind US climate legislation has builtrapidly, although the consensus view in Washington isthat “final” law on this topic is unlikely to be signedahead of the US elections in 2008. It is becomingincreasingly likely that a national system to regulateemissions of GHGs will take effect in the US by thestart of year 2012, and the shape of that system isbeing moulded now. We believe that curbing CO 2 emissions will alter the energy fuels mix in the US,increase energy-related costs, and could requirereductions in demand growth if carbon technology isslow in being developed.

Adam Sieminski (1) 212 250 2928 [email protected]





#19 UraniumMore Excitement In 2008• Uranium delivered an unprecedented

performance in 2007, with prices reaching an

all-time nominal high of USD136.00/lb in June.Although prices have since fallen belowUSD100/lb, we believe market fundamentalsin 2008 could provide another exciting priceperformance and test the 2007 highs.

• In our view, supply-side developmentsrepresent the most significant sensitivity touranium prices as production disruptions andnew mine delays have been the primarydrivers of price volatility over the past twoyears.

• The global clamour over greenhouse gasemissions has bred a mounting interest innuclear generated electricity which is likely tomakeup an increasingly larger proportion ofnew power capacity.

• Although spot volumes tend to be lower in thefirst quarter of the year and often pressureprices lower, we expect discretionarypurchasing to become as robust as volumes in2007.

• In 2008 we are forecasting an average U3O8spot price of USD119.00/lb and USD116/lb in

2009.

Supply: Production disruptions and delays remainthe greatest riskMuch like in 2006, production disruptions were one ofthe primary drivers of price volatility and dominateduranium market headlines. In the first quarter of 2007,we estimated primary mine supply for the year to be at47.7KtU (124.1Mlbs) but have now revised that figureto 44.5Ktu (115.6Mlbs). In fact, due to producerproduction revisions we have adjusted our primary minesupply estimates every year.

Figure 1: Comparison of DB production estimatesin 2007 and 2008

tU 2007 2008 2009 2010 2011 2012Estimate in 2007 47,727 45,273 49,756 51,385 51,462 52,224Estimate in 2008 44,450 44,450 44,450 44,450 44,450 44,450Difference tU -3,276 -823 -5,306 -6,935 -7,012 -7,774Difference % -6.9% -1.8% -10.7% -13.5% -13.6% -14.9%Source: WNA, UxC, Deutsche Bank Global Markets Research

The strong demand outlook and sharp price appreciationpiloted a resurrection of the uranium mining sector.Since the late 1980s, secondary supply (ie recycled

material and downgraded highly enriched uranium) hasfilled the gap between primary mined supply of U3O8and demand. Given secondary supply is finite, mined

supply will have to increasing become a greater sourceand there are several players in the market vying to takethat position.

The bulk of new mine supply will come from Canadaand Kazakhstan. Cameco’s Cigar Lake project inSaskatchewan province in Canada was expected to fill alarge proportion of the gap from 2007 and ramp up toproviding around 10% of total world mined productionby 2008, but has fallen well behind schedule. InOctober 2006, a rock fall caused the mine to flood anddue to environmental sensitivities, the water has yet tobe removed. There are also several other technicalassessments that need to be made before the companyreceives regulatory approval to dewater the mine andCameco is targeting the second half of 2008 forcompletion and does not expect Cigar Lake to beginproduction until 2011 – at the earliest. Given themultiple complexities surrounding this large-scale

project, we expect more delays will be eventuallyannounced which will continue have a serious effect onthe global market balance.

Producers in Kazakhstan have also faced difficultygetting material to the market as scheduled. One of theworld’s top producers, Toronto-listed Uranium One, cutits 2008 production estimate by 38%, citing a shortageof sulfuric acid needed to process ore in Kazakhstan.

While we are forecasting the global market balance torevert to a surplus between 2009 and 2013, we aremindful of the potential of more delays to new mineproduction and supply disruptions.

Figure 2: New mines are coming – but will it beenough?

0

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100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

K t U

New MinesOther Secondary SupplyHEU FeedPrimary mine supplyDemand

Source: WNA, UxC, DB Global Markets Research

Demand – The growing popularity of nuclear power

Amid the global clamour over greenhouse gasemissions, nuclear generated electricity – which emitsalmost none – is currently undergoing a resurgence inpopularity. We expect that as the world progressivelyturns to placing a price on carbon emissions, more andmore energy policy makers will look to nuclear poweras an alternative. There are multiple economic, political,





social and environmental dimensions to this discourseand we believe that greater awareness of the effects ofpollutants emitted from the traditional sources ofenergy generation is a positive development for theprospects of greater uptake of nuclear generatedelectricity. Many studies (including our own) haveshown that in the absence of financial penalties foremitting pollutants, nuclear power plants are noteconomically competitive to other electricity generatingtechnologies. However, given the increasingacceptance and eventual adoption of carbon taxes andinternational carbon trading schemes, we think nuclearpower will become more economically attractive.

Currently, there are 95 new reactors with regulatoryapproval scheduled to come on-line between now and2015 with dozens more planned and/or waiting forapproval. While North America and Europe have thehighest concentration of current installed capacity, the

real growth story is in Eastern Europe and Asia,particularly in China and India – as well as in the US. Thegrowing popularity of nuclear power is highlighted bythe recent decision by Russian aluminium giant Rusal touse two nuclear reactors to power a new aluminiumsmelter.

Figure 3: Distribution of current nuclear capacity

South America &Africa

1%

Eastern Europe &Russia

13%

North America30%

Western Europe34%

Asia22%

Source: UxC, WNA, DB Global Markets Research

Figure 4: Distribution of nuclear power plant

new builds, 2008-2015

South America &Africa

3%

Eastern Europ e& Russia

27%

North America10%

Western Europe4%

Asia56%

Source: UxC, WNA, DB Global Markets Research

Figure 5: Existing and projected nuclear powerplants, 2007-2015

Currentreactors MWe New

Builds

2015Reactor

Shutdowns

TotalCapacity by2015

% ChgMWe

Asia

China 11 8828 16 0 24888India 19 4183 5 0 8755

Japan 55 47591 10 0 60099

Korea 20 17606 7 0 25456

Pakistan 2 425 1 0 725

Taiwan 6 4884 2 4 10840

Total 113 83517 42 4 125166 50%

South AmericaArgentina 2 935 1 0 1635

Brazil 2 1901 1 0 3125

South Africa 2 1842 5 0 2667

Total 6 4678 7 0 7427 59%

Eastern EuropeArmenia 1 376 0 1 752

Czech Rep 6 3472 2 0 3524

Bulgaria 4 2722 2 2 5538

Hungary 4 1755 0 0 1755

Lithuania 1 1185 1 1 3370

Romania 2 1361 0 0 1361

Russia 31 21743 17 2 37530

Slovakia 6 2442 2 2 4098

Slovenia 1 686 0 0 686

Ukraine 15 13330 3 0 16330

Total 71 49072 27 8 68514 40%

Western Europe

Belgium 7 5761 1 3 7508

Finland 4 2656 1 0 4256

France 59 63363 1 0 64963

Germany 17 20384 0 7 28750

Netherlands 1 452 1 0 452

Spain 8 7430 1 1 7876

Sweden 10 8933 1 1 9700

Switzerland 5 3220 0 0 3220

United Kingdom 23 12062 1 16 20286

Total 134 124261 7 28 108511 -13%

North America Canada 18 12606 2 0 14144

Mexico 2 1364 2 0 1626

USA 104 100466 8 0 107246

Total 124 114436 12 0 123016 7%

Global Total 448 375964 95 40 15%Source: DOE, EIA, Reuters, Bloomberg, Ux, WNA, Deutsche Bank Global MarketsResearch

In 2007, five reactors began commercial operation andten started construction. Significantly, the US nuclearRegulatory Authority has received applications for newbuilds. Before 2007, no company had applied to build anew reactor in the USA since the Three Mile Islandnuclear accident in Pennsylvania in 1979. The NuclearRegulatory Commission says it expects to receive





applications for 25 more reactors from 13 additionalcompanies by the end of 2009. American energy policyplanners have created a very amenable environment fornew nuclear power generation. Under the 2005 EnergyPolicy Act, the US Department of Energy will guaranteethe full amount of loans covering up to 80% of the costof new clean energy projects including nuclear power, aprogram that was recently extended. The US EnergyInformation Administration's 2008 Outlook referencecase expects 20 GWe of newly-built US nuclearcapacity on line by 2030, almost half of it supported byproduction tax credits at the same level as for windgeneration. This is 63% above previous estimates. Inaddition, there is 2700 MWe in nuclear plant uprates,offset by 4300 MWe retirements.

Investment demandInvestor interest in the uranium market continues togain momentum. So far, there are two Exchange

Traded Funds (ETFs) – Nufcor Uranium and UraniumParticipation Corporation – which provide an opportunityfor investors to leverage the uranium price. While thetwo funds over the last three years secured around3.5% of annual uranium consumption, there have beenother parties who have secured material to gainexposure. Although financial investors can not obtainthe proper license requirements to actually holduranium, they have secured ownership rights ofmaterial stored at licensed repositories in NorthAmerica and Europe, essentially exploiting legalchannels previously used only by utilities and suppliers.Outside of the ETFs, most fund controlled material hasderived from the US DOE, which makes no distinctionbetween financial investors and end users whenauctioning the fuel.

While this new element of demand is difficult toestimate, we think the growing popularity ofcommodities as an asset class will only increaseinvestor interest in uranium, particularly given it has oneof the most favourable market outlooks among theother mainstream commodities.

Figure 6: Nufcor NAV and implied uranium price

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5.00

Aug-06 Dec-06 Apr-07 Aug-07 Dec-0760.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00Implied U 3O8 price, USD/lb, (rhs)Month-end NU.L share price, GBP (lhs)NU.L NAV, GBP (lhs)

Source: UxC, DB Global Markets Research

Model reviewWe have undertaken a detailed review of our supplyand demand model that has resulted in some significantchanges to our global market balance and therefore toour price forecasts. The World Nuclear Association(WNA) in September released its biennale Global FuelMarket Report which provides the industry standarddemand projections for all of the world’s nuclearreactors.

In our model, we account for demand of U3O8 fromutilities and investors. The exercise of forecastinguranium demand is an exercise in estimating when,where and size of new builds over the outlook period,and estimating when and where old reactors will bedecommissioned. Both of these tasks are subject to asignificant degree of uncertainty, primarily caused byvolatile political situations. When evaluating theprospects for nuclear power we have considered the

following factors:

• The prospects for energy demand in theregion;

• Alternative energy sources available; and• Political atmosphere and public support.

We have considered these factors on a country bycountry basis for the 31 countries currently usingnuclear power or seriously considering new build in ouroutlook period. We only assessed nuclear electricityprograms in which reactors already existed, were under

construction and/or guaranteed to be constructed. Newbuild programs in provisional stages were notconsidered, nor did we attempt to model probablecases in our demand scenario, thus this category ofdemand is only viewed as an upside risk to the marketbalance.

The key assumption we have made to determinedemand by tonnes of uranium was to take the totalwattage of all reactors in our database and use aconversion factor to convert capacity into physicalvolumes. That conversion factor is determined by

calculating the ratio between an average of the WNA’sreference and upper case scenarios in their annualprojections of demand by MWe and tonnage. Althoughthis assumption is broad, we believe this is areasonable estimate as it inherently accounts for everyreactor currently operating around the world.

The most significant change to our model during thisreview is an expectation of a market surplus between2009 and 2013. What tipped this estimation away fromour previously forecast deficit was a trimmed downdemand scenario by the WNA from their previousprojection in 2005. We note, however, that the WNAconsistently underestimates demand, even in theirupper case scenarios. Therefore we believe the risk inthis outlook lies to the upside.





Figure 7: DB U3O8 market balance vs price

-8500

-4500

-500

3500

7500

2005 2006 2007 2008 2009 2010 2011 2012 2013 201420.00

50.00

80.00

110.00

140.00

Market Balance, tU (lhs)

U3O8 Price, USD/lb (rhs)

Source: WNA, UxC, DB Global Markets Research

Price outlookAkin to the past two years, production trends willcontinue to have significant impact on prices in 2008. Ifthe current primary mined supply comes to market as

guided by the world’s producers, we are unlikely to seea sharp move upward. However, if production againends up falling short of target in 2008 similar to the pasttwo years, we expect spot prices could easily re-testthe highs of 2007.

The uranium price certainly has the propensity to risesharply, what remains to be seen is if the price can stayhigh for a longer period of time. We have argued in thepast that the last time prices tracked above the long-term real price average, it lasted for 10 years. If historyis to repeat itself, this cycle is only in its infancy, FigureXX.

We have moderately decreased our price forecast fromour previous update last September, dropping the 2008expectation by 8% to USD119.00/lb and the 2009forecast by 11% to USD116/lb.

Figure 8: Real vs nominal U3O8 prices, annual

-

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100.00

120.00

140.00

160.00

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

NominalReal (2006 constant)LT Real Average Price

USD/lb

Period above LT Real Average Price

2006 - ????1974 - 1984


Figure 9: Prices will continue upward trajectory

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60

80

100

120

140

160

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

Month-end spot, USD/lb

Month-end LT price, USD/lb

Linear (Month-end spot, USD/lb)

DB Forecast


ConclusionGiven the profile of new reactor builds alreadyannounced and the prospects for an even greaterresurgence in atomic power’s popularity, the demandfor U3O8 will remain strong in the coming years. At thesame time, persistent delays on the supply-side willkeep the market balance tight. In the longer-term, weexpect that prices will eventually head back downcloser to long-term average as a result of increasedinvestment in exploration and production. However untilthen, prospects in the uranium market certainly remainpositive.

Joel Crane (1) 212 250 5253 [email protected]





#20 Bulk Commodities

• Bulk commodities like iron ore, coking coaland thermal coal are making new price highsdriven by shortages in supply, infrastructure

bottlenecks and strong demand. This patternof rising bulk commodity even after the peakin industrial metal prices may have beenreached has been evident in preceding cycles.

• We believe the iron ore market will continueto tighten over the next two years. We haveadjusted both short and medium term pricesupwards to reflect both the tightness in theiron ore market, cost pressures and alsorising capital costs. We expect that JFY2010will be the year that the supply side catchesup to demand and expect to see pricesdeclining at that point, but, remaining atelevated levels by historical standards.

• Coke prices are also on the rise reflectingstrong underlying demand for carbon units inkey Asian markets. As a result of thecontinuing tightening in coking coal marketdynamics we are now forecasting a +60%increase for premium hard coking coal pricesin JFY 2008 (prev +25%) to USD150/t and forJFY2009.

The bulk commodities of iron ore and coal are takingcentre stage in this commodity review. While webelieve that base metal prices have generally seen thepeak this cycle, bulk commodities like iron ore, cokingcoal and thermal coal are making new price highs drivenby shortages in supply, infrastructure bottlenecks andstrong demand. This pattern of rising bulk commodityprices after peaks in base metal prices has been evidentin preceding cycles and we believe will also be the casein this cycle. The chart below highlights this case withthe Australian fines iron ore price used as the example.We see here that it took between 30 and 44 monthsfrom the downturn in base metal prices to reach thedownturn in iron ore prices.

Figure 1: Iron ore and the base metal cycle

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150

200

250

300

350

400

450

Aug-69 Feb-75 Jul-80 Jan-86 Jul-91 Dec-96 Jun-02 Dec-07

Base M etal Index Australian iron ore fines

Base metal index weightings:Al 42.6%, Cu 25.4%, Zn 16%, Pb 13.6%,

Ni 1.9%, Sn 0.5% .

37months

44months

44months

30months

Source: Datastream, TEX Report, CRU, Deutsche Bank estimates.*Prices referenced to October 2001 (the base metal trough)

We believe that this delay is driven by two key factors,1) the bulk commodity contract prices are negotiatedannually so this can lead to up a year lag and 2) The bulkcommodities are not screen traded like the base metalsand not subject to as much speculation or anticipation.That is, if the market anticipates a loosening in one ofthe base metals, it will be sold off early (zinc is a primeexample of this, in early 2007 the market expected that2008 would bring a surplus and the price decline rightthrough 2007 despite continued low inventory levels).The negotiated outcomes for the bulk commoditiestend to more readily reflect the supply demand balanceof the bulk commodities at the time of the negotiationsin our opinion.

In Figure 2 we track the value of the seaborne bulkcommodity markets including the significant priceincreases we have put through in this review. Weexpect that the continuing demand for the bulkcommodities combined with continuing impediments toproducer growth will mean that bulk consumers willneed to pay even more for the products over thecoming years. It is worth noting that these figuresperhaps understate the total value as we have assumedall trades are priced on contract pricing terms.

Figure 2: Global seaborne bulks market and

value, 2000 -2009

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120

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2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E

Seabor ne ir on o re Seabor ne metallurgic al c oal Seabor ne ther mal c oal

US$bn

Source: CRU, TEX, UNCTAD, McCloskey, AME, DB estimates





The spot/ short-term contract prices remain significantlyabove the 2007 term contract prices and provide aready barometer of the short-term supply demandstatus for the markets…ie. A high pressure zone! Thisdifference provides a positive bargaining chip for theproducers in the current price negotiations. We expectthat the ongoing market tightness into the mediumterm will mean that the steel producers and utilities willbe required to pay up for raw materials in 2008 and into2009.

Figure 3: Spot prices vs 2007 contract prices

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Iron ore fines Coking coal Thermal coal

Source: CRU, McCloskey, DB estimates

Shipping rates also continue to pressure prices. Bulkcommodities are by definition “bulky” and require largeamounts of shipping capacity to move around.Increasing demand for bulk commodities globally and ashipping industry that has not been able to increasecapacity as rapidly as needed has driven shipping ratesup by as much as 16x over the last 5 years as shown inthe chart below. In this decade, the capesize freightrates from Brazil to China have risen from below US$6/tin September 2001 to over US$95/t in November of2007. These rates are comparable with the bulkcommodity prices themselves.

Increases in shipping rates have not been equal acrossregions and has led to some key rate differentialincreases – in particular the freight rate differentialbetween the Brazil/China route and the WA/China route,

which blew out to >US$55/t in November 2007 and hasgenerated a significant landed price disparity betweeniron ore from Brazil and Iron ore from Australia thatcurrently remains unresolved.

Figure 4: Baltic capesize freight rates on keyroutes

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100

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07

U S D / t o n n e

Australia to ChinaBrazil to ChinaFreight Differential

Source: Reuters, Deutsche Bank estimates

Direct tightness in shipping capacity is not the onlydriver of the higher freight rates. Infrastructurecongestion globally has meant that ships are oftenunable to be loaded in planned timetable resulting inmany ships being held up at port – reducing theeffective shipping capacity even further. The export coalport of Newcastle in Australia is a prime example of theimpacts of infrastructure congestion with the vesselqueue reaching ~80 ships in June of 2007 and still wellabove long-term levels with the queue sitting at 52ships in mid December as shown in the chart below.

Figure 5: Newcastle vessel queue size

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Jan- 03 Jul-03 Jan- 04 Jul -04 Jan-05 Jul-05 Jan-06 Jul -06 Jan-07 Jul -07

Source: Hunter Valley coal chain logistics team, Deutsche Bank estimates

Newcastle is not the only port seeing the tightness inthe market. Richard’s Bay Coal Terminal (RBCT)exported its largest monthly volume of coal for the 2007calendar year in December (6.77mt) but problems in theinterface between the rail and the port meant portstocks had to be drawn down to the lowest level in 15years and pushed short term steaming coal prices fromRBCT to USD99.35/t (compared with a 2007 contractprice of USD55/t)

Clearly we see upcoming price increases for the bulkcommodities and in the next section we review thethree major bulk commodity markets in more detail.





The iron ore market continues to tighten with recentspot price movements again highlighting strongdemand while providing a positive lead for iron oreproducers in the current contract negotiations. We haveraised our price assumptions to +45% for lump andfines (prev +25%) for JFY 2008 and remain at +10% forJFY 2009, implying contract prices in 2009 will bearound 60% higher than those being received currently.For pellets we assume a broadly similar profile. Wemaintain our previous view of the profile of pricedeclines from 2010-2012 but from a higher base. Weexpect that JFY2010 will be the year that the supplyside catches up to demand and expect to see the pricesdeclining from then but remaining at elevated levels byhistoric standards. Our long term prices remainunchanged following the review in Q3 when weincreased our LT assumptions by around 58%.

Figure 6: Iron ore price forecasts2008 2009 2010 2011 2012 LT

Iron Ore Lump Australian

export (JFY) (USc/dlt)

151.2 166.3 145.5 123.7 105.2 82.2

US$/t (62% grade, 2%

moisture)

91.9 101.1 88.4 75.2 63.9 49.9

% Chg from previous year 45% 10% -13% -15% -15%

% Chg from previous forecast 16% 16% 13% 10% 10% 0%

Iron Ore Fines Australian export

(JFY) (USc/dltu)

118.5 130.3 114.0 96.9 82.4 63.9

US$/t (62% grade, 2%

moisture)

72.0 79.2 69.3 58.9 50.1 38.8

% Chg from previous year 45% 10% -13% -15% -15%

% Chg from previous forecast 16% 16% 13% 10% 10% 0%Source: IISI, UNCTAD, TEX, SSY Group, Deutsche Bank Global Markets Research

The benefits that such a re-based price delivers toindustry profitability have been partially offset by higherassumed industry costs, both operating and capital.According to AME the industry’s total project pipelinecontains over 400Mt of new capacity to come onstream from 2007-2009. Despite this, Chinese domesticproduction remains constrained while its marketcontinues to require increasing volumes. Outside ofChina, shortages of skilled personnel and equipment arecontinuing to limit the quantum of the supply response.

We acknowledge that the current iron prices are wellabove the inducement price as evidenced by thenumerous small players attempting to bring productionto market and this is borne out in our long-term pricingassumptions (below current levels). However, webelieve that prices will continue to go up over the nexttwo years, before coming down again.

We outline key points on this bullish assessment:

Spot iron ore prices into China from India have beentrending higher and are currently close to US$190/t CIF,but slightly below the US$210/t recorded in November.Freight rates have remained at close to record highs inDecember. By comparison Brazilian iron ore on adelivered contract basis (CIF) is selling for aroundUSD137/t CIF and Australian production for aroundUSD87/t. The FOB price for iron ore fines is aroundUSD50/t in JFY 2007. An increase of +45% in contractprices would lift the delivered price of Australian ore toaround US$110/t and Brazilian to around US$150/t – stillbelow the price being paid for iron ore from India atspot prices.

Figure 7:Spot iron ore prices go stratospheric

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180200

220

May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07

U S D / t o n n e

China CiF (spot)

Australian CIFBrazilian CIF

Source: CRU, Reuters, Deutsche Bank estimates

Spot iron ore sales have usually been a very smallcomponent of the major iron ore producers’ portfoliosand have typically been used only as a pointer for ironore demand in the negotiations – this position ischanging with the spot market becoming larger and anumber of the majors announcing that they are lookingto increase sales into this market. Rio Tinto recentlyannounced on 18 December it had sold 1Mt of iron orein the month of December 2007 at US$190/t CIF andthat a similar amount had been sold for Januaryshipment at a price of US$187/t. With the freight costaround US$35/t to China, Rio is netting around

US$150/t compared with ~US$50/t under contract salesfor fines! Rio Tinto also announced that it plans to sellup to 15Mt of iron ore on to the spot market during2008. We believe this highlights the readiness of majorproducers to extract higher price outcomes through thespot market and signals a significant price increase incontract prices in JFY 2008.

The demand side continues to look robust. The mostrecent IISI release for November showed global steelproduction grew only 4% YoY in November, with YTDat +7.7%. This was largely due to a slowdown in China

with steel production growth of only +4.3% YoY inNovember and 16.7% YTD. However, strong iron orespot prices suggest reducing availability of domestic





iron ore. Furthermore, the slowing growth in steelproduction appears to be more a productionphenomenon than a drop in steel demand with steelprices continuing to rise. In our opinion, it will bedifficult for the key steel producers to “cry poor” in thecurrent iron ore price negations with steel pricescontinuing to climb as shown in the chart below.

Figure 8: CRU steel price index – Domestic HRCprices

0

100200300400500600700800900


Japan China Germany

Source: CRU

Currency movements will also be providing a spur forproducers at the negotiating table in the current pricenegotiations in our opinion. Since the contract priceswere last agreed (24th December 2006) themovements in the relative currencies has meant thatBrazilian producers are now receiving 9% less for theirore in the local currency (despite a 10% price rise in

April 2007!), Australian producers are receiving 2% lesswhile the Chinese and Japanese consumers are paying2% and 5% more respectively (not a bad outcome forthe consumers in a tightening iron ore priceenvironment). The chart below shows the relative pricemovements for contract iron ore fines in localcurrencies since the last price settlements (prices set to1 on 24th December 2006).

Figure 9: Relative fines iron ore price movementsin varying currencies

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1.10

1.15

1.20

Dec-06 Mar-07 Jun-07 Sep-07 Dec-07

Australia

JapanBrazilChina

Source: Datastream, Company data, Deutsche Bank estimates

Recent Chinese customs statistics on the iron ore andsteel side show no let up in demand for iron ore.China's iron ore imports rose 24% YoY in November to35.4Mt. YTD imports are +17% to 349Mt. We expect astrong finish to the year if supply is willing and still seearound 385Mt of imports for 2007.

Domestic iron ore production in China is struggling tomatch demand and grades are declining. Productionduring the January – October 2007 period increased22% YoY to 566Mt, while in October output rose13.6% YoY to 60Mt. We see domestic outputincreasing to around 720Mt in 2007 and are forecastinga further 11% increase in 2008.

Figure 10: Domestic iron ore production isleveling out and grades are lower

0

200

400

600

800

1000

1998 2001 2004 2007E 2010E 2013E

M t

Source: IISI, UNCTAD, TEX, SSY Group, Deutsche Bank Global Markets Research

On the back of 12.5% growth in crude steel productionin 2008 we expect imports to increase by 55Mt to440Mt. Beyond this, we expect China to continue togrow its imports by around 50-70mt pa between 2009and 2013. For this reason the major iron ore producershave announced capacity expansions with around400Mt of capacity coming on stream between 2007-2009, according to AME, with additional expansionplans beyond this articulated.

Figure 11: Chinese iron ore imports, 1997-2007

0

10 0

20 0

30 0

40 0

Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07-20

-10

0%

10

20

30

40

50

12 month rolling tot al, Mt (lhs) % chg (rhs)

Mt

Source: Reuters





In the chart below we highlight the anticipated growthin seaborne trade of iron ore primarily driven by thestrength of demand from China.

Figure 12: Iron ore seaborne trade vs benchmarkprice (FOB), 2000-2010

400

500

600

700

800

900

1000

2000 2002 2004 2006 2008E 2010E25

45

65

85

105

125

145

Seaborne trade Iron Ore Fines Benchmark Price

Mt USc/Dmtu

Source: TEX, UNCTAD, Deutsche Bank Global Markets Research

Our near-term forecasts continue to reflect the strengthin the iron ore market. We have adjusted both short andmedium term prices upwards to reflect both thetightness in the iron ore market, cost pressures andalso rising capital costs.

Figure 13: Iron ore fines and lump prices

0

20

40

60

80

100120

140

160

180

200

2000 2002 2004 2006 2008E 2010E 2012E

U S c / D

l t u - F O

B

Hamersley lumpHamersley finesTubarao pellets


In the chart below, we show our LT profile expectationsof Chinese iron ore imports. Our base case assumes

continued growth to around 750Mt by 2013. If lowergrades are assumed with steel volumes higher thancurrently factored in, numbers of >900Mt could beachievable, in our view.

Figure 14: Chinese iron ore imports LT

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E

Mt


The figure below has a summary version of our updatedsupply and demand model for iron ore.

Figure 15: DB Iron Ore Supply/Demand Model

Mt 2005 2006 2007E 2008E 2009E 2010EApparent Demand

for Iron Ore1545 1695 1830 1941 2062 2162

Total World

Production1525 1789 1989 2159 2309 2423

Demand satisfied

by Imports703 750 828 893 964 1032

Fines Prices -

Benchmark

(USc/Dltu - FOB)

62.7 74.6 81.7 122.6 134.8 118.0

Source: IISI, UNCTAD, TEX, SSY Group, Deutsche Bank Global Markets Research

Since our Q3 review developments in hard coking coal have continued to be very positive. Amid tighteningfundamentals, spot sales of premium hard coking coalfrom Australia have risen toward USD180/t FOB(>USD80/t above last year’s contract settlements) andlow vol PCI coal prices have risen to USD160/t,according to CRU. The Chinese Government hasrecently announced plans to increase export tariffs oncoke to +25%. The continuing robust demand outlookcoupled with continued supply-side issues within theindustry set the scene for a tight market over the next12-24 months.

Aside from the continued strong Indian demand that isstretching suppliers in Australia, Canada and the US,China continues to pull back from its position as anexporter of coking coal. YTD (to November) China is anet importer of coking coal of 3Mt versus a balancedposition during the same period last year.





Figure 16: Chinese metallurgical coal exports vsprice, 2003-2007

0

20 0

40 0

60 0

80 0

1,000

1,200

1,400

1,600

Nov-03 Nov-04 Nov-05 Nov-06 Nov-07

Exports

Imports

Kt

Source: Reuters, CRU

Coke prices are also on the rise reflecting strongunderlying demand for carbon units in key Asianmarkets. The tightness in the coke market is highlightedbelow with Chinese export prices increasing byUS$150/t since our last quarterly review and arecurrently tracking close to US$400/t. Coke prices areexpected to rise further due to the export tax. Weexpect Chinese exports of metallurgical coke and semi-coke to exceed 15Mt in 2007, up around 6% YoY.

Figure 17: Chinese metallurgical coke exports vsprice, 2002-2007

-

500

1,000

1,500

2,000

2,500

Jan-02 Sep-02 M ay-03 Jan-04 Sep-04 M ay-05 Jan-06 Sep-06 M ay-070

50

100

150

200

250

300

350

400

450

Chines e c ok e expo rt s (LHS) Chines e expo rt co ke pric e (RHS)

US$/tKt

Source: Reuters

As with iron ore, there is a supply response underway

but it will continue to take time to filter into the systemgiven ongoing infrastructure constraints (both rail andport). This is particularly the case on the East coast ofAustralia. According to CRU Australian exports of cokingcoal are expected to rise by around 10-12Mt next year,although the majority of this (>80%) is expect to be inthe semi-hard and semi-soft coal category, which islikely to result in the premium in the hard coking coalmarket staying at elevated levels for longer than thelower quality coals.

Figure 18 shows the exports of coal from Australia overthe last 8 Australian fiscal years as reported by theAustralian Bureau of Agriculture and ResourceEconomics (ABARE). It is worth noting that the large

increase in metallurgical coal exports in 2007 was at theexpense of growth in thermal coal exports.

Figure 18: Australian coal exports

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007Metallurgical Thermal

Mt

YE Jun

Source: ABARE, Deutsche Bank estimates

Australia remains the dominant supplier of metallurgicalcoal to the global markets as shown in the chart below– consequently Australia’s ability to grow its exportsthrough its infrastructure will be a key component in thesupply/demand mix for coking coal.

Figure 19: Australia – dominant in the premiumhard coking coal market

Australia62%

USA16%

Canada

16%

Poland1%

Other5%

Source: Reuters

As a result of the continuing tightening in the cokingcoal market dynamics we are now forecasting a +60%increase for premium hard coking coal prices in JFY2008 (prev +25%) to US$150/t and for JFY2009 areduction of -5% to US$143/t, although still 28% higherthan our previous assumption. We expect a similarprofile for standard hard coking coal.

For premium hard coking coal the demand outlookcontinues to be robust for 2008. Indian imports areexpected to increase further (by 4-5Mt) while Ukrainianimports could also see significant growth. US cokingexports will partially offset this demand but we expectthe market to remain acutely tight into 2009.





Figure 20: Metallurgical coal price profiles

0

20

40

60

80

100

120

140

160

P remium hard coking co al Standard hard coking coalSemi-Soft Coking Coal Low Volatilie PCI Coal

M t

Source: IISI, MCIS, TEX, WEFA, Deutsche Bank Global Markets Research

In addition we have also made significant revisionsacross the profile to semi-soft coking and low volatilepci coal prices. We continue to see supply side issues,

particularly in Australia, and also strong demand for PCIcoals as steel makers look to increase injection ratesgiven the tight coke market. For semi-soft and low volPCI coals we do see increased supply during 2008/2009which should translate into weaker but still elevatedprices during FY09.

Figure 21: Seaborne coking coal trade vs prices

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E

0

20

40

60

80

100

120

140

160

Seaborne coking im ports (LHS) Hard coking coal price (RHS)

Mt


In the table below we show our revised supply demandmodel which incorporates some significant adjustments

reflecting market developments in H207 and furtherupdates on actual traded volumes.

Figure 22: DB Metallurgical Coal Supply/Demand Model

Mt 2005 2006 2007E 2008E 2009E 2010E

Total metallurgical coal

imports for coke making228 223 236 243 254 259

Total seaborne

metallurgical coal trade172 175 183 191 202 207

Surplus/Deficit inseaborne market

-2.6 -2.9 -3.6 -4.6 -0.4 1.0

Premium hard coking

coal (JFY)(US$/t)127 114 94 150 143 129

Standard hard coking

coal (JFY)(US$/t)125 105 85 139 132 118

Semi-Soft Coking Coal

(US$/t)80 58 62 93 80 72

Low Volatilie PCI Coal

(US$/t)102 68 68 107 92 83


Mined Energy

Thermal Coal

A combination of positive Asian thermal coal marketdevelopments, supply infrastructure issues and risingA$ and Rand through 2007 have been positiveinfluences on thermal coal prices with spot prices atrecord highs.

Congestion at the Port of Newcastle due to a shortageof capacity in the Hunter Valley coal chain has continuedwith few immediate signs of easing. The AustralianCorporate Regulator (ACCC) has approved acontinuation of the existing export quota system (CBS)for 2008, rejecting the proposal by the terminaloperators for a new system based on rail contracts. Thecontinued use of the export quota system and the lackof immediate capacity growth will limit thermal exportsin Australia to just 2.5% growth of 114Mt, in our view,which should help underpin coal prices into 2009.During 2007 shipping allocations in the port of

Newcastle were cut by 9Mt to 82Mt and if achieved willrepresent only 2% grow over the year.

As highlighted in our review of the coking coal market,our expectations of increasing demand for all types ofcoking coal including PCI and semi-soft could see theremoval of some of the current thermal coal productionthat can make the semi-soft coking coal graderequirements.

The continuing strength of demand from China ishighlighted by the lower level of net exports in 2007versus 2006, albeit producers are closely eyeing theexport market given the differential between spot andcontract prices. In China, according to McCloskey Coal,Chinese domestic term contracts are due to be settled





shortly with but prediction that prices would be up by($4- $7/t) which would mean a new QHD price fordomestic coal in the mid-late 60s per tonne adjusted toan export quality of 5,800kc NAR and while it wouldseem logical to expect higher exports given the strongAsian spot price at greater than US$90/t, strongdomestic demand and tightening rail capacity couldkeep exports relatively constrained. Recent exportprices ex Qinhuangdao are being quoted in the US$96-98/t range.

Figure 23: Chinese thermal coal net exports,2002 - 2007

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

J an -02 A ug -0 2 M a r- 03 Oc t- 03 M a y- 04 D ec -0 4 J ul -05 F eb -06 S ep- 06 A p r- 07

Kt

Source: CRU, Reuters, Deutsche Bank Global Markets Research

We expect global import demand to grow by +3.7% in2008 to just over 600Mt and by a further 3.9% in 2009.This is being driven almost entirely by stronger Asiandemand growth with India, Japan, China, Thailand,

Philippines all showing stronger demand. For India inparticular we see up to 15% YoY CAGR out to 2012given coal shortages domestically. We highlight thistrend in the chart below. In Europe we see little growthin demand, with only modest growth in North America.

Figure 24: Global Import demand growth drivenby Asia

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E4%

6%

8%

10%

12%

Asian import demand for thermal coal YoY % chg (RHS)

Mt

Source: CRU, Reuters, Deutsche Bank Global Markets Research

Price developments during 2007 were all one-waytraffic. Key developments are highlighted below:

• In March contract negotiations betweenJapanese utilities and Australia suppliers weresettled +6% to US$55.7/t.

• In May, China-Japan LT contracts for JFY2007were partially settled at a price of US$67.9/t,+28% on the previous year. Tonnageallocations were also cut reflecting loweravailability.

• In October, Xstrata settled mid year contractswith the JPU’s at US$78/t reflecting thecontinued run up in spot prices.

• In late 2007, AME highlighted Korea WesternPower awarded contracts for 1Mt from

Russian, Australian and Indonesian producersfor 2008 deliveries with the Russian priced atUS$80/t.

Spot prices increased from around US$52/t in January2007 to close the year at US$90/t ex Newcastle, andUS$96/t in Europe. Chinese export prices are currentlyclose to US$100/t.

Asian tightness has fed through to European spot pricestopping US$95/t, +87% over the year. Strong demandfrom India in particular, a lack of meaningful Russiansupply growth and continued difficulties in gettingtonnes out of South Africa all pushed prices higher.South African exports, flat at around 67Mt, were againdisappointing, despite a strong performance inDecember. Late 2007/early 2008 has not started well,according to McCloskey with >1Mt lost due to rail lineclosures while RBCT coal stocks are only 1.1Mt.

Figure 25: Spot prices in Asia and Europe

20

30

40

50

60

70

80

90

100

J an-02 N o v-02 Sep-03 J ul-04 M a y-05 M a r-06 J an-07 N o v-07

fo b - Richards B ay fo b - Newcastle

US$/t

Source: Reuters





With tight conditions expected to continue into 2008we have raised our contract price assumption forecastfor JFY2008 to USD85/t which is +53% YoY and 33%higher than our previous assumption. For JFY 2009 welifted our forecast by 19% to USD74/t, yet lower assupply conditions improve modestly. We make nochanges to our long term price forecast given theadjustments made in the previous quarter when welifted our LT thermal coal price +32% to USD52.9/t.

The table below is a summarised version of our globalsteam coal model following a full review and updatedtrade statistics.

Figure 26: DB Thermal Coal Supply/Demand Model

Mt 2005 2006 2007E 2008E 2009E 2010E

Supply of

Internationally Traded

Coal

502 570 587 606 630 655

Demand for


Thermal Coal

512 558 582 604 628 651


Market Balance-9.2 12.1 5.1 2.2 2.2 3.4

Newcastle Contract -

Japanese Guide Price

(US$/t - FOB shipment

port) (JFY)

53 52 56 85 74 67


Tama Willis (44) 20 754 58170 [email protected]

Rob Clifford (44) 20 754 58339 [email protected]





Commodities ChartbookCommodity consumption around the world relative to per capita income

Figure 1: Oil consumption intensity Figure 2: Gold consumption intensity

ChinaIndia

Brazil

US

UK

Canada

Sweden

Mexico Russia

Thailand

Indonesia

Venezuela

Japan

Italy

Australia

FranceGermany

South Korea Taiwan

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 5 10 15 20 25 30 35 40 45 50

O i l c o n s u m p t i o n p e r c a p i t a

( g a l l o n s p e r

d a y )

GDP per capita ('000 USD)

Brazil

USUK

Japan

Canada

SwedenChina

IndiaMexico

Russia

Thailand

IndonesiaVen

Italy

AusFrance

Germany

South Korea

Taiwan

0

1

2

3

4

5

6

0 5 10 15 20 25 30 35 40 45 50GDP per capita ('000)

G o l d

f a b r i c a t i o n d e m a n d

( K g p e r c a p i t a )

Source: DB Global Markets Research, IMF, BP Yearbook (2006) Source: DB Global Markets Research, CPM Group, IMF (2006)

Figure 3: Aluminium consumption intensity Figure 4: Copper consumption intensity

India

Brazil

Mexico

US

UK

Australia

Sweden

China Russia

Thailand

Indonesia

Venezuela

Japan

Italy

France

Germany

South KoreaTaiwan

Canada

0

5

10

15

20

25

30

0 5 10 15 20 25 30 35 40 45 50GDP per capita ('000)

A l u m i n i u m

c o n s u

m p t i o n ( K g p e r c a p i t a )

US

UK

Japan

Germany

Canada

Sweden

China

India BrazilMexico

RussiaThailand

Indonesia

Italy

Australia

France

Korea

Taiwan

0

5

10

15

20

25

30

0 10 20 30 40 50GDP per capita ('000)

C o p p e r c o n s u


Source: DB Global Markets Research, IMF, Brook Hunt (2006) Source: DB Global Markets Research, IMF, Brook Hunt (2006)

Figure 5: Nickel consumption intensity Figure 6: Zinc consumption intensity

USUK

Italy

Australia

Canada

China

India BrazilRussia

Japan

France

Germany

South Korea

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0 5 10 15 20 25 30 35 40 45 50GDP per capita ('000)

N i c k e l c o n s u m p t i o n


BrazilVenezuela

US

UK

Japan

Australia

Canada

SwedenChina

India

MexicoRussiaThailand

Indonesia

Italy

France

Germany

South Korea

Taiwan

0

2

4

6

8

10

12

14

0 5 10 15 20 25 30 35 40 45 50GDP per capita ('000)

Z i n c c o n s u


Source: DB Global Markets Research, IMF, Brook Hunt (2006) Source: DB Global Markets Research, IMF, Brook Hunt (2006)





Commodities ChartbookCommodity consumption around the world relative to per capita income

Figure 7: Iron ore consumption intensity Figure 8: Uranium consumption intensity

India

US

UK

Australia

Sweden

China Brazil

RussiaVenezuela

Japan

Italy

France

Germany

South Korea

Taiwan

Canada

0

200

400

600

800

1000

1200

0 5 10 15 20 25 30 35 40 45 50GDP per capita ('000)

I r o n O r e c o n s u


Brazil

US

UK

JapanCanada

Sweden

ChinaIndia

Russia

France

Germany

South Korea

Taiwan

0

2

4

6

8

10

12

14

0 5 10 15 20 25 30 35 40 45 50

GDP per capita ('000)

U r a n i u m

c o n s u


Source: DB Global Markets Research, Brook Hunt (2005), IMF Source: DB Global Markets Research, (2006)

Figure 9: Meat consumption intensity Figure 10: Sugar consumption intensity

China

India

Brazil

Mexico

US

JapanSouth Korea

Taiwan

CanadaAustralia

0

5

10

15

20

25

30

35

40

45

0 10 20 30 40 50GDP per capita ('000)

M e a t c o n s u m p t i o n


Mexico

Russia

US

Japan

Australia

Korea

Canada

China

India

Brazil

Thailand

Indonesia

VenezuelaTaiwan

0

10

20

30

40

50

60

0 5 10 15 20 25 30 35 40 45 50GDP per capita ('000)

S u

g a r c o n s u


Source: DB Global Markets Research, USDA (2006), IMF Source: DB Global Markets Research USDA (2006), IMF

Figure 11: Corn consumption intensity Figure 12: Wheat consumption intensity

China

India

Brazil

Mexico

Russia

ThailandIndonesia

Japan

Australia

Taiwan

Canada

Venezuela

South Korea

0

50

100

150

200

250

300

350

400

0 5 10 15 20 25 30 35 40GDP per capita ('000)

c o r n c o n s u


Mexico

Russia

US

Japan

Australia

Korea

Canada

China

IndiaBrazilThailandIndonesia

Venezuela

Taiwan0

50

100

150

200

250

300

350

400

0 10 20 30 40 50

GDP per capita ('000)

W h e a t c o n s u m p t i o n


Source: DB Global Markets Research, USDA (2006), IMF Source: DB Global Markets Research, USDA (2006), IMF





Commodities ChartbookCommodities relative to G7 per capita income

Figure 1: Crude oil prices relative to per capitaincome

Figure 2: Gold & silver prices relative to per capitaincome

0

500

1000

1500

2000

2500

3000

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

N u m

b e r o f b a r r e l s o f o i l

Higher oil prices cutthe purchasing powerof a G7 consumer

Oil price decline helps toboost the purchasingpower of a G7 consumer

G7 per capita income divided by the price of oil

0

20

40

60

80

100

120

1972 1977 1982 1987 1992 1997 2002 2007

O u

n c e s

0

1000

2000

3000

4000

5000

6000

7000

O u

n c e s

Gold

Silver

`

G7 per capita income divided by precious metal prices

1970-2007 average

Source: DB Global Markets Research, IMF Source: DB Global Markets Research, IMF

Figure 3: Industrial metal prices relative to percapita income

Figure 4: Lead & tin prices relative to per capitaincome

0

5

10

15

20

25

30

35

40

45

1970 1975 1980 1985 1990 1995 2000 20050

1

2

3

4

5

6

7

CopperZincAluminiumNickel (rhs)

G7 per capita income divided by respective metal prices

0

1

2

3

4

5

6

7

8

9

1970 1975 1980 1985 1990 1995 2000 2005

N u m

b e r o f t o n n e s

0

10

20

30

40

50

60

70

80

N u m

b e r o f t o n n e s

TinLead

G7 per capita income divided bylead and tin prices


Figure 5: Grain prices relative to per capita income Figure 6: Coal prices relative to per capita income

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1972 1977 1982 1987 1992 1997 2002 2007

N u m

b e r o f b u s h e l s

Corn

Wheat

`

G7 per capita income divided by grain prices

Wheat: 1970-2007 avg

Corn: 1970-2007 avg

0

200

400

600

800

1000

1200

1970 1975 1980 1985 1990 1995 2000 2005

T o n n e s

G7 per capita income divided by coal

1970-2007 average






Commodities ChartbookCommodity inventory-to-use ratios

Figure 1: Crude oil Figure 2: Aluminium stock-to-consumption ratio

15

17

19

21

23

25

27

1995 1997 1999 2001 2003 2005 2007

US crude inventory cover of refinery runs (days)

0

1000

2000

3000

4000

5000

6000

3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07

Kt

0

2

4

6

8

10

12

14

16WeeksTotal comm ercial stocks (lhs)

Stock to consumption ratio (rhs)

Long-term equillibrium ratio (rhs)

Source: DB Global Markets Research, EIA Source: Reuters, WBMS, DB Global Markets Research

Figure 3: Copper stock-to-consumption ratio Figure 4: Nickel stock-to-consumption ratio

0

500

1000

1500

2000

2500

3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07

Kt

0

2

4

6

8

10

12WeeksTotal commercial stocks (lhs)



0.0

50.0

100.0

150.0

200.0

250.0

300.0

3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07

Kt

0

4

8

12

16

20WeeksTotal commercial stocks (lhs)

Long-term equillibri um ratio (rhs)Stock to consumption ratio (rhs)

Source: Reuters, ICSG, DB Global Markets Research Source: Reuters, INSG, DB Global Markets Research

Figure 5: Zinc stock-to-consumption ratio Figure 6: Corn, soybeans & wheat

0

400

800

1200

1600

2000

3Q87 3Q89 3Q91 3Q93 3Q95 3Q97 3Q99 3Q01 3Q03 3Q05 3Q07

Kt

0

3

6

9

12

15

18Weeks

Total commercial stocks (lhs)



0

20

40

60

80

100

120

140

160

180

1965 1970 1975 1980 1985 1990 1995 2000 2005

D a y s o f u s e

Corn stock-to-use ratio

Wheat stock-to-use ratio

Soybean stock-to-use ratio

Total available stocksdivided by daily consumption

Source: Reuters, ILZSG, DB Global Markets Research Source: DB Global Markets Research, USDA





Commodities ChartbookCommodities prices in real terms

Figure 1: Crude oil prices in real terms Figure 2: Precious metal prices in real terms

0

10

20

30

40

50

60

70

80

90

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Real crude oil price (2005 US dollars) Deflated by US PPI

0

200

400

600

800

1000

1200

1400

1970 1974 1978 1982 1986 1990 1994 1998 2002 20060

10

20

30

40

50

60

70

80Real gold price (2005US dollars, lhs)

Real silver price (2005US dollars, rhs)

Deflated by US PPI

Source: DB Global Markets Research, IMF, Bloomberg Source: DB Global Markets Research, IMF, Bloomberg

Figure 3: Aluminium & zinc prices in real terms Figure 4: Copper & nickel prices in real terms

0

1000

2000

3000

4000

5000

6000

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Real copper price(2005 US dollars)

Real nickel price(2005 US dollars)

Deflated by US PPI

0

10000

20000

30000

40000

50000

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Real copper price(2005 US dollars)

Real nickel price(2005 US dollars)

Deflated by US PPI


Figure 5: Lead & tin prices in real terms Figure 6: Corn & wheat prices in real terms

0

1000

2000

3000

4000

1960 1965 1970 1975 1980 1985 1990 1995 2000 20050

5000

10000

15000

20000

25000

30000

35000Real lead price (2005

US dollars, rhs)Real tin price (2005US dollars, lhs)

Deflated by US PPI

`

0

5

10

15

20

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

U S D b u s h e l

Wheat price in real terms

(2005 US dollars)Corn price in real terms(2005 US dollars)

Deflated by US PPI






Commodities ChartbookCommodity Forward Curves

Figure 1: WTI crude oil forward curve Figure 2: Aluminium forward curve

January 2008

June 2007

September 2007

January 2008

June 2007

September 2007

Source: DB Global Markets Research Source: DB Global Markets Research

Figure 3: Copper forward curve Figure 4: Nickel forward curve

January 2008

June 2007

September 2007

January 2008

June 2007

September 2007


Figure 5: Zinc forward curve Figure 6: Wheat forward curve

January 2008

June 2007

September 2007

Wheat forward curve

500

550

600

650

700

750

800

850

900

950

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Dec 2007

Sep 2007

Jan 2008






Commodities Chartbook

Credit Focus: Energy

Crude oil price vs. CDS spreads US natural gas price vs. CDS spreads

Figure 1: Occidental Petroleum CDS spreads andthe WTI crude oil price

Figure 3: Burlington Resources, Inc. CDS spreadsand the US natural gas price

0

10

20

30

40

50

60

70

80

Jan- 03 Jul- 03 Jan- 04 Jul- 04 Jan-05 Jul-05 Jan-06 Jul- 06 Jan- 07 Jul-07

15

25

35

45

55

65

75

85

95

105

5Y CDS spread (bp, lhs)Oil prices (WTI USD/bbl, inverted rhs)

0

10

20

30

40

50

60

70

Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

2

4

6

8

10

12

14

16

5Y CDS spread (bp, lhs)

US natural gas price (USD/mmBtu, inverted rhs)


Figure 2: Conoco Phillips CDS spreads and the WTIcrude oil price

Figure 4: Devon Energy Corporation-CDS spreadsand the US natural gas price

0

10

20

30

40

50

60

70

Jan- 03 Jul-03 Jan- 04 Jul-04 Jan-05 Jul-05 Jan- 06 Jul-06 Jan-07 Jul-07

15

25

35

45

55

65

75

85

95

105


Oil prices (WTI USD/bbl, inverted rhs)

0

10

20

30

40

50

60

70

80

90

100

110

Jan-03 Jul-03 Jan-04 Jul -04 Jan-05 Jul-05 J an-06 Jul-06 Jan-07 Jul-07

0

2

4

6

8

10

12

14

16


US natural gas price (USD/mmBtu, inverted rhs)

Source: DB Global Markets Research S ource: DB Global Markets Research

* A credit default swap allows one party to “buy” protection from another party for losses that might be incurred as a result of defaultby a specified reference credit (or credits). The “buyer” of protection pays a premium for the protection, and the “seller” of protectionagrees to make a payment to compensate the buyer for losses incurred upon the occurrence of any one of several specified “creditevents.” Source: Moody’s





Commodities ChartbookCredit Focus: Metals & Mining

Metals Commodity Prices vs. CDS Spreads

Figure 1: Alcoa CDS spreads and the LMEaluminium spot price

Figure 3: Phelps Dodge CDS spreads and the LMEcopper spot price

10

20

30

40

50

60

70

80


1,050

1,300

1,550

1,800

2,050

2,300

2,550

2,800

3,0503,300

Alcoa 5Y CDS spread (bp, lhs)

Aluminium spot price (USD/metric ton, inverted rhs)

16

46

76

106

136

166

196

226

256

286


1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Phelps Dodge 5Y CDS spread (bp, lhs)

Copper spot price (USD/metric ton, inverted rhs)

Source: DB Global Markets Research, LME Source: DB Global Markets Research, LME

Figure 2: Inco CDS spreads and the LME nickelspot price

Figure 4: Barrick Gold CDS spreads and the goldspot price

20

40

60

80

100

120

140


2,000

10,000

18,000

26,000

34,000

42,000

50,000

Inco 5Y CDS spread (bp, lhs)

Nickel spot price (USD/metric ton, inverted rhs)

10

15

20

25

30

35

40

45

50

55


320

420

520

620

720

820

Barrick Gold 5Y CDS spread (bp, lhs)Gold spot price (US$/troy ounce, inverted rhs)

Source: DB Global Markets Research, LME S ource: DB Global Markets Research, LME

* A credit default swap allows one party to “buy” protection from another party for losses that might be incurred as a result of defaultby a specified reference credit (or credits). The “buyer” of protection pays a premium for the protection, and the “seller” of protectionagrees to make a payment to compensate the buyer for losses incurred upon the occurrence of any one of several specified “creditevents.” Source: Moody’s





Commodities ChartbookEquity Focus: Metals & Mining

Metals’ commodity prices versus stock market price

Figure 1: Alcoa stock price and the LME aluminiumspot price

Figure 4: Freeport McMoRan stock price and theLME copper spot price

25

30

35

40

45

50

55

Jan-06 Jul-06 Jan-07 Jul-072000

2300

2600

2900

3200

3500Alcoa share price (USD, lhs)

Aluminium spot price (USD/tonne, rhs)

30

405060708090

100110120130

Jan-06 Jul-06 Jan-07 Jul-074000

5000

6000

7000

8000

9000

10000

11000Freeport McMoran share price (USD, lhs)Copper spot price (USD/tonne, rhs)


Figure 2: CVRD stock price and the LME nickel spotprice

Figure 5: Newmont Mining stock price and the goldspot price

5

10

15

20

2530

35

40

45

50

Jan-06 Jul-06 Jan-07 Jul-0710000

20000

30000

40000

50000

60000

70000CVRD share price (USD, lhs)Nickel spot price (USD/tonne, rhs)

3035404550556065707580

Jan-06 Jul-06 Jan-07 Jul-07400

500

600

700

800

900Newmont share price (lhs)

Gold price (USD/oz, rhs)


Figure 3: Lonmin stock price and the platinum spot

price

Figure 6: Xstrata stock price and spot thermal coal

prices (Asia & Europe)

20

30

40

50

60

70

80

90

100


950

1050

1150

1250

1350

1450

1550

1650Lonmin share price (USD)Platinum price (USD/oz, rhs)

10

20

30

40

50

60

70

80

90


50

60

70

80

90

100

110

120

130Xstrata share price (lhs)API#2 Coal price (Cal 07, USD/tonne, rhs)API#4 Coal price (Cal 07, USD/tonne, rhs)






Price ForecastsEnergy Price Forecasts

USD/barrel Q108 Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT

WTI 90 80 85 85 72.4 85.00 80.00 75.00 77.00 79.00 81.00

Brent 90 80 85 85 72.7 85.00 80.00 75.00 79.00 79.00 81.00

Spreads(USD/barrel) Q307 Q407 Q108 Q208 2007 2008 2009 2010 2011 2012 LT

WTI-Brent 0.00 0.00 0.00 0.00 -0.70 0.00 0.00 0.00 0.00 0.00 0.00

WTI-Maya 10.00 10.00 10.00 10.00 10.75 10.00 10.00 10.00 10.00 10.00 10.00

Brent-Dubai 4.00 4.00 4.00 4.00 3.75 4.00 3.50 4.00 4.00 4.00 4.00

USD/mmBtu Q108 Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT

Natural gas 8.00 7.50 7.75 7.75 7.26 7.75 8.00 8.75 9.50 9.75 10.00

U308 USD/lb Q108 Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT

Uranium 105.0 120.0 125.0 125.0 97.8 119.0 116.0 95.0 75.0 65.0 46.0

Figures are period average; Source: DB Global Markets Research forecasts

US Refining Margins

USD/barrel Q108 Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT

East Coast 2-1-1 9.00 14.00 12.00 10.00 13.5 11.000 10.00 11.00 - - -

Midcontinent 10.00 19.00 14.00 9.00 18.9 13.00 12.00 13.00 - - -

Gulf Coast 8.00 15.00 11.00 6.00 15.1 10.00 9.00 10.00 - - -

US GC Complex 16.00 23.00 21.00 15.00 21.5 18.00 16.00 18.00 - - -

West Coast 5-3-2 18.00 28.00 22.00 16.00 23.70 18.00 21.00 21.00 - - -


Precious Metals’ Price Forecasts

USD/oz Q108 Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT

Gold 850 900 925 965 698 909 863 780 650 600 525

Silver 15.50 16.20 16.60 16.80 13.4 16.28 15.7 14.2 12.0 10.7 9.00

Platinum 1560 1600 1630 1700 1305 1623 1540 1400 1210 1150 1081

Palladium 380 400 420 440 356 410 405 410 420 405 400






Price Forecasts

Industrial Metals’ Price Forecasts

Q108 Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT

Aluminium

US cents/lbUSD/tonne

Price revision

114.02513

-10%

120.02646

-7%

125.02756

-2%

127.02800

2%

119.82641

121.52679

-4%

121.82684

11%

110.02425

5%

105.02315

2%

100.02205

0%

98.02161

0%

Copper

US cents/lb

USD/tonne

Price revision

315.0

6945

-11%

320.0

7055

-9%

335.0

7385

5%

330.0

7275

8%

321.6

7091

325.0

7165

-2%

306.3

6752

12%

250.0

5512

19%

230.0

5071

15%

200.0

4409

11%

150.0

3307

0%

Lead

US cents/lb

USD/tonne

Price revision

115.0

2535

0%

108.0

2381

-2%

102.0

2249

7%

97.0

2138

8%

117.2

2583

105.5

2326

3%

76.8

1692

0%

65.0

1433

0%

55.0

1213

0%

50.0

1102

0%

45.0

992

0%

Nickel

US cents/lb

USD/tonne

Price revision

1300.0

28660

-15%

1350.0

29762

-10%

1400.0

30865

-5%

1325.0

29211

-9%

1681.0

37060

1343.8

29625

-10%

1265.0

27888

-2%

1110.0

24471

23%

1050.0

23149

35%

1000.0

22046

39%

800.0

17637

0%

Tin

US cents/lb

USD/tonne

Price revision

730.0

16094

22%

690.0

15212

20%

650.0

14330

23%

600.0

13228

18%

655.7

14456

667.5

14716

21%

452.5

9976

7%

400.0

8818

0%

380.0

8378

0%

375.0

8267

0%

350.0

7716

0%

Zinc

US cents/lb

USD/tonnePrice revision

110.0

2425-21%

105.0

2315-22%

103.0

2271-21%

100.0

2205-20%

147.9

3262

104.5

2304-21%

95.5

2105-7%

105.0

231514%

107.0

235922%

110.0

242529%

82.0

18080%

Figures are period average and relate to the spot price; Source: DB Global Markets Research forecasts

Steel Making Raw Materials, Minor Metals & Mineral Sands

Q108 Q208 Q308 Q408 2007 2008 2009 2010 2011 2012 LT

Iron ore lumpAustralian export(JFY) (USc/dlt)

Price change

104

9.5%

151

45%

151

45%

151

45%

102.02 151

45%

166

10%

146

-12.5%

124

-15%

105

-15%

82

-22%

Iron ore finesAustralian export(JFY) (USc/dlt)

Price change

82

9.5%

118

45%

118

45%

118

45%

79.94 118

45%

130

10%

114

-12.5%

97

-15%

82

-15%

64

-22%

Premium hardcoking coal (JFY)(USD/tonne)

Price change

94

-19%

150

60%

150

60%

150

60%

99.50 150

60%

143

-5%

129

-10%

113

-12.5%

98

-12.5%

84

-15%

Standard hardcoking coal (JFY)

(USD/tonne)Price change

85

-19%

139

63%

139

63%

139

63%

90.00 139

63%

132

-5%

118

-10%

104

-12.5%

91

-12.5%

79

-13%

Figures are period average; Source: DB Global Markets Research





Global Economic Indicators2006 2007F 2008F 2009F 2006 2007F 2008F 2009F 2006 2007F 2008F 2009F

US 2.9 2.2 2.2 2.6 3.2 2.8 3.3 2.5 -6.2 -4.9 -4.1 -3.9

Japan 2.4 1.6 1.2 2.4 0.2 0.0 0.6 0.7 3.9 4.9 5.4 5.8

Euroland 2.9 2.6 1.6 1.9 2.2 2.1 2.3 1.8 -0.2 0.3 0.4 0.2Germany 3.1 2.6 1.7 2.2 1.8 2.3 2.3 1.8 4.9 5.2 4.7 4.9France 2.2 1.9 1.6 2.2 1.9 1.5 2.0 1.8 -1.5 -1.2 -1.0 -1.2Italy 1.9 1.8 1.3 1.5 2.2 1.8 2.3 2.3 -2.6 -2.4 -2.6 -2.6Spain 3.9 3.8 2.3 2.4 3.6 2.8 3.4 3.2 -8.7 -9.4 -10.1 -9.8Netherlands 3.0 3.1 2.5 2.3 1.7 1.6 2.0 2.6 8.3 7.0 6.8 6.8Belgium 2.9 2.6 1.8 2.0 2.3 1.5 1.7 1.5 2.0 2.2 2.4 2.3Austria 3.3 3.3 2.4 2.4 1.7 2.1 2.3 1.9 3.2 3.9 3.7 3.6Finland 4.9 4.3 2.7 3.1 1.3 1.6 2.3 2.0 5.2 5.8 5.6 5.8Greece 4.3 4.0 3.5 3.3 3.3 3.0 3.3 3.1 -11.1 -12.8 -13.0 -12.8Portugal 1.3 1.8 1.7 1.7 3.0 2.4 2.2 2.2 -9.9 -9.4 -9.2 -9.2Ireland 5.7 4.5 3.0 3.5 2.7 2.7 2.8 2.5 -4.2 -3.3 -3.0 -3.2

Other Industrial CountriesUnited Kingdom 2.8 3.1 1.8 2.1 2.3 2.3 2.1 1.8 -3.2 -3.0 -3.0 -3.3Denmark 3.5 1.7 1.7 2.1 1.9 1.7 2.1 2.0 2.6 1.3 1.0 1.2Norway 2.2 3.0 3.0 2.7 0.8 1.4 1.7 1.9 16.4 15.0 14.0 13.8Sweden 4.1 2.7 2.7 2.9 1.2 1.2 1.8 2.0 7.0 6.5 6.0 6.0Switzerland 3.2 2.8 2.1 2.2 1.1 0.7 1.5 1.2 15.1 16.0 15.0 14.5Czech Republic 6.1 6.2 4.9 4.8 2.5 2.8 5.0 3.1 -4.2 -3.4 -3.8 -4.4Hungary 3.9 1.5 2.3 3.2 3.9 8.0 5.2 3.4 -6.5 -5.0 -4.9 -4.8Poland 6.2 6.5 5.0 5.0 1.0 2.5 3.7 2.8 -3.2 -4.4 -4.9 -5.6

Slovak Republic 8.5 9.0 7.7 6.8 4.5 2.7 3.2 3.3 -8.1 -4.4 -3.8 -3.4Canada 2.8 2.6 2.3 2.7 2.0 2.2 2.1 2.0 1.3 0.3 0.2 n.a.Australia 2.8 3.9 3.5 3.3 3.5 2.3 3.2 3.0 -5.5 -5.9 -5.2 -5.2New Zealand 1.6 3.0 1.9 3.0 3.4 2.3 3.2 3.2 -8.6 -7.7 -6.0 -6.4

Emerging Europe/AfricaEgypt 6.8 7.1 6.5 5.7 12.3 7.4 5.2 5.7 1.6 2.1 1.7 0.5Israel 5.1 5.1 4.2 4.6 -0.1 2.3 2.6 2.5 5.7 3.4 2.2 2.2Kasakhstan 10.6 8.3 6.0 6.5 8.4 17.3 7.9 7.6 -2.2 -4.5 -2.2 -0.1Romania 7.7 5.7 4.2 4.6 4.9 6.3 4.9 4.9 -10.3 -13.5 -13.0 -12.6Russia 6.7 7.5 7.4 7.4 9.1 11.3 10.4 9.4 9.6 7.1 3.7 2.3Turkey 6.1 5.0 5.5 6.0 9.7 8.5 6.0 4.5 -8.2 -7.6 -8.1 -7.3Ukraine 7.1 7.3 6.7 6.3 11.6 14.1 10.8 9.1 -1.5 -2.6 -2.1 -4.9South Africa 5.0 4.7 4.7 4.8 4.6 9.0 5.0 5.0 -6.5 -7.0 -8.0 -7.5

Asia (ex-Japan)China 11.0 11.5 10.4 10.0 1.5 4.7 4.0 3.2 9.4 9.5 9.2 8.6Hong Kong 6.8 6.0 5.0 6.5 2.0 2.0 2.8 2.0 10.8 13.6 13.5 14.3India 9.7 9.0 8.2 8.6 5.2 4.6 4.5 4.3 -1.0 -0.8 -1.2 -0.9Indonesia 5.5 6.1 6.5 6.5 13.3 6.5 6.5 6.5 2.6 2.7 1.2 1.3Korea 5.0 4.8 3.9 4.0 2.2 2.5 2.9 2.8 0.7 0.8 -0.1 -0.2Malaysia 5.9 6.0 5.2 5.5 3.6 2.0 2.7 2.8 16.3 14.7 11.2 6.2Pakistan 6.6 7.0 6.5 6.2 7.9 7.9 7.9 7.9 -3.9 -4.9 -5.1 -5.3Philippines 5.4 6.7 6.3 6.3 6.3 2.8 4.5 4.5 4.7 5.2 5.8 4.1Singapore 7.9 8.0 7.1 7.2 1.0 2.2 4.3 2.0 28.8 31.4 25.6 25.6Taiwan 5.0 5.2 3.9 4.0 0.6 1.8 2.1 2.0 6.7 8.0 7.2 7.6Thailand 5.1 4.6 4.0 4.8 4.7 2.3 3.0 2.0 1.6 6.0 4.4 3.5Vietnam 8.2 8.3 7.5 7.9 7.5 7.9 7.7 7.6 -0.3 -4.0 -4.5 -3.4

Latin AmericaArgentina 8.5 8.1 5.1 3.6 10.0 17.0 16.3 13.6 3.9 2.6 1.6 0.7Brazil 3.8 5.3 4.6 4.5 3.1 4.2 4.0 4.2 1.3 0.5 -0.2 -0.7Chile 4.0 5.3 5.0 5.0 2.6 7.4 3.8 3.4 3.6 4.6 2.5 0.3Colombia 6.8 6.5 5.5 5.3 4.5 5.3 4.2 3.7 -2.1 -4.0 -4.3 -3.8Mexico 4.8 3.1 3.4 3.9 4.0 3.9 3.7 3.4 -0.2 -1.0 -1.3 -1.4Venezuela 10.3 8.4 5.4 4.0 17.0 21.0 23.0 25.0 15.4 7.4 5.6 1.1

World 5.4 5.2 4.6 4.8 3.1 3.6 3.6 3.1

QUARTERLY GDP

Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008US 4.8 2.4 1.1 2.1 0.6 3.8 4.9 0.5 1.7 2.0 2.4 2.4

Japan 1.8 3.2 -0.4 5.3 3.3 -1.8 1.5 -2.2 2.0 2.9 2.5 2.4

Euroland 3.6 3.9 2.3 3.3 3.2 1.2 2.9 1.5 1.0 1.4 1.7 2.0Germany 3.5 5.4 3.0 4.0 2.2 1.0 2.8 1.1 1.2 1.7 2.2 2.4France 2.9 3.8 -0.2 1.9 2.3 1.4 2.9 1.5 1.0 1.5 2.0 2.0Italy 3.1 2.4 1.3 4.4 1.3 0.2 1.7 2.0 -0.4 2.8 1.6 1.2Spain 3.8 4.3 3.6 4.5 4.1 3.8 2.7 2.0 2.3 2.1 2.1 2.2

United Kingdom 3.3 3.3 2.7 3.3 3.2 3.3 3.0 2.1 1.3 1.3 1.4 1.8

Dollar BlocCanada 3.4 1.5 1.3 1.5 3.5 3.8 2.9 1.3 1.9 2.1 3.0 3.2Australia 2.4 2.3 1.9 4.8 5.4 2.8 4.1 3.9 3.1 2.9 3.6 4.5New Zealand 3.5 0.1 1.6 3.3 4.9 3.0 2.2 2.2 1.5 1.6 1.7 2.5

Growth of real GDP (% yoy) Inflation, CPI (% yoy) Current Account (% of GDP)

(% qoq annualised)

Sources: Deutsche Bank Global Markets Research, National Statistical Authorities





Long Term Forecasts

2006 2007F 2008F 2009F 2010F 2011F 2012F 2006 2007F 2008F 2009F 2010F 2011F 2012FIndustrial countriesUSA 2.9 2.2 2.2 2.6 2.7 2.7 2.7 3.2 2.8 3.3 2.5 2.4 2.3 2.3Japan 2.2 1.6 1.4 2.4 1.7 2.5 2.5 0.2 0.0 0.6 0.7 2.1 0.8 1.0Euroland 2.9 2.6 1.6 1.9 2.0 2.0 2.0 2.2 2.1 2.3 1.8 2.0 2.0 2.0

Germany 3.1 2.6 1.7 2.2 1.4 1.4 1.4 1.8 2.3 2.3 1.8 1.3 1.3 1.3

France 2.2 1.9 1.6 2.2 1.8 2.0 2.0 1.9 1.5 2.0 1.8 1.8 2.0 1.8Italy 1.9 1.8 1.3 1.5 1.5 1.5 n.a. 2.2 1.8 2.3 2.3 2.0 2.0 0.0

United Kingdom 2.8 3.1 1.8 2.1 2.8 2.8 2.8 2.3 2.3 2.1 1.8 2.0 2.0 2.0Switzerland 3.2 2.8 2.1 2.2 2.0 1.8 1.8 1.1 0.7 1.5 1.2 1.0 1.0 1.0Canada 2.8 2.6 2.3 2.7 n.a. n.a. n.a. 2.0 2.2 2.1 2.0 n.a. n .a. n .a.Australia 2.8 3.9 3.5 3.3 3.3 3.3 3.3 3.5 2.3 3.2 3.0 2.7 2.5 2.5Emerging Market sRussia 6.7 7.5 7.4 7.4 7.3 7.1 7.1 9.1 11.3 10.4 9.4 8.8 7.7 7.0South Africa 5.0 4.7 4.7 4.8 5.0 5.0 5.0 4.6 9.0 5.0 5.0 4.5 4.5 4.5China 11.0 11.4 10.2 10.0 9.5 9.2 9.0 1.5 4.5 3.8 3.2 3.0 3.0 3.0India 9.7 9.0 8.2 8.6 8.2 8.5 n .a. 7.1 6.6 4.5 4.5 4.5 4.5 n .a.Indonesia 5.5 6.1 6.5 6.5 6.0 6.0 6.0 13.3 6.5 6.5 6.5 5.0 4.0 4.0Brasil 2.3 4.8 4.4 4.0 4.0 4.0 n .a. 3.1 4.2 3.7 4.2 4.2 4.0 n .a.Mexico 4.8 3.1 3.4 3.0 3.0 3.0 n .a. 4.0 3.9 3.7 3.3 3.3 3.3 n .a.

2006 2007F 2008F 2009F 2010F 2011F 2012F 2006 2007F 2008F 2009F 2010F 2011F 2012FIndustrial countriesUSA 1.9 1.2 1.2 1.6 1.7 1.7 1.7 1.0 1.0 1.0 1.0 1.0 1.0 1.0Japan 2.1 1.7 1.5 2.5 1.9 2.7 2.7 0.0 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2Euroland 2.4 2.1 1.0 1.4 1.5 1.5 1.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Germany 3.2 2.7 1.8 2.3 1.5 1.5 1.5 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1France 1.8 1.6 1.3 1.9 1.5 1.7 1.7 0.4 0.3 0.3 0.3 0.3 0.3 0.3Italy 1.7 1.6 1.1 1.4 1.4 1.4 n.a. 0.2 0.2 0.2 0.2 0.1 0.1 n .a.

United Kingdom 2.5 2.8 1.5 1.8 2.4 2.4 2.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3Switzerland 2.6 2.2 1.4 1.5 1.5 1.2 1.2 0.7 0.7 0.6 0.6 0.5 0.5 0.5Canada 1.8 1.7 1.5 1.9 n.a. n.a. n.a. 0.9 0.8 0.8 0.8 n.a. n .a. n .a.Australia 1.3 2.3 2.0 1.9 2.1 2.1 2.2 1.5 1.5 1.4 1.3 1.2 1.2 1.2Emerging Market sRussia 7.1 8.0 7.8 7.8 7.7 7.5 7.6 -0.4 -0.4 -0.4 -0.4 -0.4 -0.4 -0.5South Africa 3.4 3.4 3.6 3.6 3.8 3.8 3.8 1.5 1.3 1.1 1.2 1.2 1.2 1.2China 10.2 10.6 9.4 9.2 8.7 8.5 8.3 0.8 0.8 0.8 0.8 0.7 0.7 0.7India 8.3 7.6 6.8 7.2 6.9 7.2 n .a. 1.4 1.4 1.4 1.4 1.3 1.3 n .a.Indonesia 4.2 4.8 5.3 5.3 4.8 4.8 4.8 1.3 1.3 1.3 1.3 1.2 1.2 1.2Brasil 1.0 3.5 3.1 2.5 2.7 2.7 n .a. 1.3 1.3 1.3 1.3 1.3 1.3 n .a.Mexico 3.4 1.7 2.0 1.6 1.6 1.6 n .a. 1.4 1.4 1.4 1.4 1.4 1.4 n .a.

2006 2007F 2008F 2009F 2010F 2011F 2012F 2006 2007F 2008F 2009F 2010F 2011F 2012FIndustrial countriesUSA 5.25 4.25 3.75 4.25 4.75 4.75 4.75 4.40 4.25 4.50 5.00 5.25 5.50 5.50Japan 0.25 0 .50 1 .00 1 .50 2 .25 3 .00 3 .50 1.68 1 .60 2 .00 2 .60 2 .90 3 .50 3 .75Euroland 3.50 4.00 3.50 4.00 4.00 4.00 4.00 3.92 4.30 4.20 4.75 4.75 4.75 4.75

Germany 3.50 4.00 3.50 4.00 4.00 4.00 4.00 3.92 4.30 4.20 4.75 4.75 4.75 4.75France 3.50 4.00 3.50 4.00 4.00 4.00 4.00 3.95 4.30 4.20 4.75 4.75 4.75 4.75Italy 3.50 4.00 3.50 4 .00 4 .00 4 .00 4 .00 4.22 4.55 4.45 5 .00 5 .00 5 .00 5 .00

United Kingdom 5.00 5.50 5.00 5.25 5.25 5.25 5.25 4.74 4.80 4.80 5.50 5.50 5.50 5.50Switzerland 2.00 2.75 2.50 2.50 2.50 2.50 2.50 2.48 3.10 3.05 3.55 3.55 3.55 3.55Canada 4.25 4.25 4.00 n.a. n.a. n.a. n.a. 4.09 4.25 5.50 n.a. n.a. n.a. n.a.Australia 6.25 6.75 7.00 6.00 5.75 5.75 5.75 5.71 6.00 6.50 6.25 6.25 6.25 6.25Emerging Market sRussia 11.00 11.00 10.00 9.00 9.00 9.00 9.00 7.60 6.50 6.50 6.50 6.50 6.50 6.50South Africa 9.00 11.00 10.00 8.50 8.00 8.00 8.00 8.00 8.25 8.25 8.00 8.00 8.00 8.00China 2.52 4.14 4.41 4.41 4.41 4.41 4.41 n.a. n.a. n.a. n.a. n.a. n.a. n.a.India 7.25 7.75 6.75 6.00 6.00 6.00 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Indonesia 9.75 8.25 8.50 8.25 7.75 7.00 7.00 9.94 9.90 10.80 10.00 9.50 9.00 8.50Brasil 13.00 11.25 10.75 10.25 10.25 10.00 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Mexico 7.00 7.00 6.75 6.75 6.75 6.75 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

2006 2007F 2008F 2009F 2010F 2011F 2012F 2006 2007F 2008F 2009F 2010F 2011F 2012F

Industrial countriesUSA 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.32 1.45 1.40 1.35 n.a. n.a. n.a.Japan 119 115 96 85 90 n.a. n.a. 157 167 134 115 n.a. n .a. n .a.Euroland 1.32 1 .45 1 .40 1 .35 n.a. n.a. n.a. 1.00 1 .00 1 .00 1 .00 1 .00 1 .00 1 .00United Kingdom 1.96 2.05 1.88 1.78 n.a. n.a. n.a. 0.67 0.71 0.74 0.76 n.a. n.a. n.a.Switzerland 1.22 1.11 1.12 1.16 n.a. n.a. n.a. 1.61 1.61 1.57 1.57 n.a. n.a. n.a.Canada 1.15 1.00 1.04 1 .10 n.a. n.a. n.a. 1.51 1.45 1.46 1 .49 n.a. n.a. n.a.Australia 0.79 0.90 0.78 0 .76 0 .76 n.a. n.a. 1.68 1.61 1.79 1 .78 n.a. n.a. n.a.Emerging Market sRussia 26.33 24.50 24.50 24.19 24.19 24.01 23.90 34.68 35.53 34.30 32.66 n.a. n.a. n.a.South Africa 6.95 7.50 8.00 8.25 8.50 8.75 9.00 9.15 10.88 11.20 11.14 n.a. n.a. n.a.China 7.86 7.36 6.92 6 .56 6 .23 5 .98 5 .80 10.35 10.67 9 .69 8 .85 n.a. n.a. n.a.India 44.40 39.40 40.50 43.00 44.20 46.00 n.a. 58.47 57.13 56.70 58.05 n.a. n.a. n.a.Indonesia 9020 9300 9000 8800 8500 8200 8000 11879 13485 12600 n.a. n.a. n.a. n.a.Brasil 2.14 1.70 1.75 2.10 2.20 2.24 n.a. 2.82 2.47 2.45 2.84 n.a. n.a. n.a.Mexico 10.85 11.05 11.05 11.40 11.57 11.68 n.a. 14.29 16.02 15.47 15.38 n.a. n.a. n.a.

FX rate vs. EUR (eop)

Key official interest rate, % (eop)

FX rate vs. USD (eop)

10Y bond yields (eop)

Population growth, % yoyGDP per head, % yoy

GDP growth, % yoy CPI inflation, % yoy

Sources: National authorities, DB Global Markets Research





GlossaryAPI: American Petroleum Institute – sets standards forspecific gravity of crude oil.

API#2 – TFS API#2 ® average price index for coal deliveredCIF ARA.

API#4 – TFS API#4 ® average price index for coal loadingFOB Richards Bay, South Africa.

ARA: Amsterdam-Rotterdam-Antwerp – major delivery hubfor cargo entering Northwest Europe.

Backwardation – Market condition in which forwardprices decline as tenor increases.

Barrel (bbl) : liquid measure of 42 US gallons.

Bcf: Billion cubic feet – macro measure of natural gasvolume.

Bpd : Barrels per day – measure for oil production or use.Bunkers – Fuel oil used to power ships.

CAT : Cumulative average temperature. The sum of dailyhigh + low)/2, usually over a month or season.

CDD: Cooling degree day – excess of daily averagetemperature over 65°F; usually cumulated over time.

CIF: Cost, Insurance, and Freight – denotes commodityprice delivered to destination, e.g. fuel oil CIF Rotterdam.

Clean Spread : The spark spread minus the cost ofemissions.

Contango – Market condition in which forward pricesincrease as tenor increases.

Crack – Price spread between crude oil and refinedproduct (after the refining process of “cracking” largemolecules to make smaller).

DBLCI: Deutsche Bank Liquid Commodities Index – trackssix commodities, rolling positions in crude oil and heatingoil monthly, and in gold, aluminum, corn and wheat onceper year. Reuters: DBLCI. Bloomberg: DBCM. DBLCI-MR:DBLCI-Mean-reverting – rule-based variant of the above;under-weights those commodities amongst the six which

are expensive relative to their long-term average, and over-weights those which are relatively cheap.

Distillate : Class of refined oil products including heating oil(aka gasoil) and diesel, and usually jet fuel and burningkerosene.

DOE : US Department of Energy. Often used as synonymfor its EIA arm. EIA: Energy Information Administration.Statistical arm of the US DOE, which releases weekly andmonthly data.

FOB : Free on Board – denotes commodity price loaded andcleared for export at load port, e.g. coal FOB Richards Bay,

South Africa.Fuel oil (FO) – Dense refined oil product used to fuel shipsand generating stations.

German Dark Spread : The spread between Germanpower and coal -- Dark Spread = German power –coal/(2.65*EURUSD)

HDD: Heating degree day – deficit of daily averagetemperature below 65°F in US, 18°C elsewhere.

Henry Hub : Louisiana delivery point for NYMEX naturalgas.

HSFO : High sulphur fuel oil.

LNG : Liquefied natural gas – can be shipped on special-purpose tankers.

mmBtu : million British Thermal Units – Natural gas heat-content measure, approx. 1000 cubic feet.

PADD : Petroleum Area of Defense District – US regionsfor petroleum market data, defined approximately as:

PADD1 – East coast

PADD2 – Midwest

PADD3 – Gulf coastPADD4 – Inter-mountain west

PADD5 – West coast

Spark Spread : Price spread between electricity and thefuel (see also UK Spark Spread and German Dark Spread).

UK Spark Spread: The spark spread represents themarginal value of selling UK electricity and buying UKnatural gas for a gas fired power station. Market standardUK Spark Spread = UK power – UK Natural Gas * 0.6944

Therm : 100,000 British Thermal Units, or 0.1 mmBtu

WTI: West Texas Intermediate – benchmark US crude oil;for NYMEX futures, delivered Cushing, Oklahoma.

ContactsName Title Telephone Email Location

Richard JeffersonHead of Commodity Sales,Europe, Asia 44 20 7547-7689 [email protected] London

Louise KitchenGlobal Head of CommoditiesStructuring & Sales 44 20 7547-5395 [email protected] London





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