Sucden Financial Quarterly Metals Report October 2013

8/13/2019 Sucden Financial Quarterly Metals Report October 2013

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QuarterlyMetals Report

Q4 October2013Analysis & forecasts for Base &Precious Metals, Iron Ore & Steel

Contents

Summary 2

Economic Overview 3

Metal Market Overview 6Precious Metals 9

Aluminium 20

Copper 27

Lead 33

Nickel 38

Tin 43

Zinc 48

Steel 53

Iron Ore 57

Compiled and Published by Sucden Financial Limited

Metals Comments/Analysis:

illiam Adams,Head of Research, FastMarkets.com

Steve Hardcastle,Head of Client Services, Sucden Financial Limited

www.sucdenfinancial.com

Sucden Financial Limited is authorised and regulated byhe Financial Conduct Authority.


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Quarterly Metals Report

SummaryOctober 2013

Sucden Financial Limited is authorised and regulated by the Financial Conduct Authority.

The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Privatecustomers should not invest in these products unless they are satisfied that the products are suitable for them and they have sought professional advice. All information in this report is obtainedfrom sources believed to be reliable and we make no representation as to its completeness or accuracy. The information may have been acted upon by us for our own purposes and has notbeen procured for the exclusive benefit of customers. Sucden Financial believes that the information contained within this re port is already in the public domain.

Summary

Gold

Range $1,2701,350 with possible higher prices, contingent on debt ceiling negotiations.

Silver

Solid fundamentals supportive, but expect producer selling above $25. Range $20-25.

Platinum

Well supported at $1,280 marginal cost area. Upside limited to $1,650.

Palladium

Wide range anticipated, well supported at $600. Possible spike to $850.

AluminiumSupported at marginal cost level of $1,750, dependent on premium movements but stock overhang may hinder any

increases above $2,100.

Copper

Balanced to small surplus for fundamentals, but supported by financing deals. Range likely to be $7,000 $7,500

with an average of $7,250.

Lead

Holding up well, with supply deficit anticipated shortly. Supported at $2,050 with initial target $2,250.

NickelSupply/demand balance deteriorating, but bearish outlook clouded by Indonesia. Anticipated range of $13,800

15,000.

Tin

Balanced fundamentals but rangebound by Indonesian announcements, discouraging price increases above

$25,000. Anticipated range of $22,000$25,000.

Zinc

Supply surplus availability held in check by stock financing but with little upside incentive. Expected range of

$1,8002,050.

Steel

Wellto-oversupplied with capability of matching increased demand from stocks and higher existing capacity

utilisation. Fairly tight range for HRC with average $640 anticipated.

Iron Ore

Subdued following supply increases alongside weaker steel consumption will lead to tighter ranges. Anticipate

support at $120 and resistance at $138 for this quarter


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Economic OverviewOctober 2013

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Economic Overview

Our outlook for global growth has two themes: mixed engines of growth in the global economy and politics versus

the economic fundamentals. Economic growth in the world has been largely stable at a relatively low level over the

past three years, despite various economic headwinds and regional shifts in economic growth. Some emerging

economies have moved from being the drivers of growth to becoming the laggards over this time while some of the

more lacklustre developed economies have returned to positions of influence.

Macroeconomic outlook

Markets have had to contend with several changes to regional economic outlooks over the third quarter when

politics and central bank politicisation drove markets and economic recoveries. Europe continued to drag on

economic growth; while there is insufficient evidence to suggest a change in this outlook over the third quarter, the

fourth quarter may be slightly more positive. In the US, stronger economic fundamentals, working credit channels

and hefty support for the housing market had given the impression that it was ready to start to wean itself off

quantitative easing (QE). But the consideration of life after QE may have been enoughto send US 10-year swap

rates to 3.0 percent from 1.8 percent, closing the gap between nominal growth rates and (long-term) nominal

interest rates, suggesting that monetary policy is now significantly less effective a stimulant than it was. This comes

against a backdrop of extreme political polarisation.

In China, fears of a hard landing were averted by astute government policy driving a bounce in third-quarter GDP.

Still, improvements in monthly data must be read in the context of last year's softer summer. In other emerging

markets, the most pertinent reaction to Federal Reserve policy guidance over the past six months was the flight of

capital, forcing the implementation of higher interest rates in many developed economies, following the US central

bank's indication that it was looking to taper its QE programme from the second half. Meanwhile, major export-

driven economies, such as Germany and South Korea, had to compete with a resurgence in competiveness from

Japan thanks to Abenomics.

China

With China's third-quarter GDP growth having rebounded to 7.8 percent from 7.5 percent in Q2, the country's new

leadership seems well placed to embark on the next phase of economic reform and rebalancing following several

turbulent quarters. A growth range of 6.5-8.0 percent would seem to be the new normal now that the new

authorities have started to curb the credit binge and with the stimulus packages of 2009 and 2012 having faded.

Recent days have shown that the Chinese authorities are keen to subside the bout of house price inflation, makinghawkish comments about interest rates and availability of funding, and dampening sentiment.

In exchange for accepting lower growth, Premier Li Keqiang will be allowed to pursue a cautious, yet

simultaneously ambitious plan to liberalise certain parts of the financial system, such as the yuan, to increase

China's global economic and financial influence. The Third Plenum of the 18th Chinese Communist Party Central

Committee in November will tell us more. While usually focused on the economy, this Plenum may be a mixture of

economic reform and environmental protection reform, allowing it to deal with some economic issues, such as

overcapacity in energy-intensive industries, through the prism of environmentalism. Two areas that will be central to

the government's announcement will be the reform of the financial system, in particular the shadow banking system

and currency liberalisation, and industrial overcapacity. The clampdown on overcapacity and financial sector reform

would both have a major impact on metals markets.


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The recent political upheaval in Washington could prove the catalyst for faster liberalisation of the yuan, with the

Chinese currency hitting a 20-year high against the dollar and Chinese officials willingness to comment on the

record on US internal politics. Finally, sequential economic data from China points to another moderate slowdown,

with the Chinese economy moving back towards growth of 7.0 percent in the coming quarters.

The US

QE3 clearly drove the US recovery in 2013. Lower long-term interest rates increased access to mortgages, fuelling

a 19 percent rise in house prices since the March 2012 low. This rise in prices boosted new home sales and

construction and lowered the proportion of houses in negative equity, thus increasing access to credit, improving

consumer spending and confidence. But this positive feedback loop forced the Fed to start the QE tapering

conversation in June, which in turn took some positive momentum out of the housing market over the summer.

Aside from housing, the US economy appears to be founded on solid fundamentals. We forecast US growth of 1.8

percent in 2013 and think the US current account deficit will fall to 4.3 percent in 2013 from 6.7 percent in 2012.

Sequestration caused a fiscal drag of about 1.5 percent in 2013; GDP growth excluding the effects of sequestration

was closer to 3.0 percent. We expect this fiscal drag to lessen next year and growth to strengthen gently to 2.6-2.8

percent, well below the Fed's present forecast.

Despite the improving underlying fundamentals, the major risk for the US over the next six months is the deferral of

capex decisions and releveraging by major corporations until they have more clarity over the debt ceiling. This

issue is likely to remain a source of significant uncertainty until well into the New Year and again suggests that QE

tapering will be kicked down the road. We would define our balanced outlook for the next three months as "political

uncertainty versus a firmer economic footing".

Europe

The EU finally rebounded in the second quarter, recording GDP growth of 0.3 percent, but it remains on course to

contract at a rate of -0.6 percent over the full year. While the recent political calm seems positive, the German

election has paralysed the EU political process and we expect volatility to return once a coalition has been formed.

Why? The EU is no closer to a banking union so financial fragmentation remains a problem. A resolution seems far

off and the issue is more likely than not to flare up again in 2014.

Ultimately, EU growth is more likely to remain anaemic rather than negative into 2014 after Brussels recognised

that fiscal austerity can only produce growth if carried out alongside structural reform; in the absence of major

structural reform, deficit reduction targets have been relaxed, which should aid growth. The ECB is likely to enact

another LTRO process to offset the horrendously low loan and money supply data, the result of a lack of demand

and by major banks continuing to deleverage. We foresee flat growth and potential for flashpoints while

unemployment rates exceed 20 percent in some eurozone countries.

Japan

The Japanese economy continues to improve at a steady rate. Headline inflation has shot higher - it is now at 0.7

percent and is on course for the target of 2.0 percent in 18 months - which has buoyed growth. But core CPI

remains at -0.1 per cent. There is a sizable gap between the headline and core rate, which can mostly be explained

by the surge in the cost of oil and other raw material imports owing to the depreciation of the yen. While some have


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seen this is a shortcoming in Abenomics, we believe that higher import prices from a depreciating yen are part of

the first phase and that this should feed through into a higher core inflation rate at a later date via higher wages.

But this is not without risks. A higher sustainable inflation rate of 2.0 percent cannot be achieved without

commensurate growth; to achieve this, we believe that the Bank of Japan (BoJ) will need to increase the size of its

balance sheet again to weaken the yen by another 20 percent, increasing headline inflation and supporting Japans

export-driven economy. But Japan is already running a current account deficit of more than 10 percent, while the

BoJs balance sheet continues to expand rapidly and the country's debt-to-GDP ratio far exceeds 200 percent. We

forecast GDP growth of 2.0 per cent in 2013.

Global Outlook

At the start of the third quarter, the credit crunch in China and rapid movement in US real rates suggested that base

metals and precious metals could both remain in trouble for the rest of the quarter, especially given the reaction in

other emerging markets with sizeable appetites for raw materials to possible QE tapering. But the Fed's hesitation

over tapering and an unexpected relative improvement in the Chinese economy since the middle of the quarter

supported prices. All of the above and the countdown to the US debt ceiling expiry kept metal markets relatively

rangebound and many investors, who had had their fingers burned earlier in the year, sat on the side-lines or

rotated back into equities where the positive effects of QE3 were still being felt.

Overall, policymakers across the globe have shown they will do whatever it takes to avoid triggering more crises

while often generating new long-term issues. One example is of the abundant liquidity put to use in emerging

markets in the past couple of years, which is now being pulled out and reinvested in the US. This is a theme that

we suspect will continue to play out in 2014.

On balance we are looking for global economic growth to continue to heal but at a glacial pace, with different

regions taking varying responsibility for driving growth. We therefore expect base metals to remain rangebound -

higher prices will encourage producer hedging and lower prices will encourage producer cuts and bargain hunting.

There may well be some downward spikes but, with many of the base metals prices now back into or around their

marginal cost curves, lower prices should force producers' hands. Bullion should be buffeted by physical demand

from emerging markets at lower prices and downward pressure associated with higher US real rate.


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Metal Market OverviewOctober 2013

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Metal Market Overview

Recap

Since our last report, base metals

formed a decent base over the

summer, albeit below last

summer's lows, leaving them

vulnerable to another down leg.

This summers base coincided with

a three-year high for the US dollar

index. Subsequently, the LMEX

came off aggressively, falling to

three-year lows. But the short

covering rallies in base metals

rather than the dollar were the

more dominant force; when these

rallies faded, the metals were

constrained through September

and into October despite a continued fall in the dollar index. Copper and nickel have both been relatively

rangebound over the past two months, while aluminium, zinc and lead enjoyed more protracted rallies into August

and early September before returning to their summer ranges. Tin has been the standout performer, retracing more

than 61.8 percent of the sell-off from the January 2013 highs to 2013 lows.

Current situation

One of the most important trends has been the noticeable shift in drivers and correlations for base metals over the

summer, in particularly the role of fundamentals in each metal's price performance. The metals have been less

reliant on the dollar, macroeconomic issues and liquidity, as the correlation between the dollar index and the LMEX

shows (see chart). Looking ahead, the fundamentals of each metal in conjunction with changes to warehousing

rules will have an increasing role on their price performance while investors again consider life after this liquidity-

drunk world.

Fundamentals largely bearish

The fundamentals for the base metals, with the exception of tin and possibly lead, remain bearish in that supply

surpluses continue and, in the case of many of the metals, the laws of supply and demand have been flouted over

the last couple of years. This had come about because the financial environment and the structure of the market

have enabled metal to be profitably held off market in cash-and-carry deals. This has had the effect of reducing

availability, in effect keeping supply tight enough to underpin prices and premiums, but less liquidity and the LMEs

determination to cut large exit queues at registered warehouses may start to change this.

These potential changes come while some of the formerly tighter metals, such as copper, are moving into structural

surpluses for the first time in a decade. Again we wonder whether this is the kind of environment that will finally


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force an unravelling of the status quo, triggering widespread production cuts. The key events in the process will be

the release of the new warehousing rules and the start of QE tapering in 2014, we think.

A dangerous set-upWe have in the past viewed the build-up of inventory and the breakdown of negative feedback loops that would

normally prompt production cuts as a dangerous aberration and one that could unfold in a disorderly manner. For a

long time, traders, producers, banks and warehouse operators have managed to keep a grip on availability, thereby

avoiding a meaningful price correction - one that prompts sufficient production cuts to rebalance the markets.

Whether the trend remains intact is less open to debate than it was three months ago - the new owners of the LME

will be keen to move out of the political spotlight. There is evidence of this in aluminium where physical demand

has indeed fallen recently because consumers hope that purchases down the line will have reduced premiums.

Marginal costs of production and production cuts

Other than copper and lead, metals prices are close to or below their marginal costs of production but there havebeen few announcements of major cuts so far. Some aluminium and nickel producers have promised to stem

output but not at sufficient levels to create supply deficits or erode large stock overhangs. Even where cuts are

being made, new lower-cost capacity is being brought on stream, diluting the effects of the cuts. There is a danger

that prices will have to fall even further to trigger sufficient cuts to create the supply shortfalls that are needed to

rebalance the markets - a theme that we suspect could play in out in 2014.

Lower prices look likely but they may turn into spikes

Our general view of the metals has changed little since our last report - the past three months have felt like

suspended animation as a confluence of drivers have left the marketplace looking like a deer in headlights. Still, the

eventual onset of QE tapering - we think it likely after the next raising of the debt ceiling - will occur at a time of

increasing structural surpluses and when new warehousing regulations could increase the supply of available metal

and perhaps as a stronger dollar emerges after the first quarter. We would expect another downward spiral in

prices to force the output cuts needed to attract longer-term investment buying and we would expect astute

Chinese traders, including the SRB, to take advantage of lower prices.

Conversely, where metals face an oversupply situation, we would expect producers to watch for hedging

opportunities into price rallies, which is likely to keep most of the metals capped at least until sufficient cuts have

been implemented. Prices should generally remain rangebound with a downward bias until cuts have brought the

market back into balance.

Dollar has mixed outlook

As confidence in the US economy grows and the Fed starts to rein in QE, the dollar is likely to climb in 2014. But

the extent of the political divide in Washington makes us wonder who will replace the Fed as the largest buyer of

newly issued T-bills after the recent chaos. Increased political polarisation suggests that dollar rally might be

capped as major dollar investors look to diversify into other currencies and maybe even some gold.

Euroexpecting volatility

The present calm within the euro political system and the green shoots of growth point to a strong euro into 2014.

While we agree that the euro should remain well supported into the first quarter, teething problems over a banking

union might make the currency less attractive later in the year. But the continued devaluation of the yen, partisan


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politics in Washington and the ECBs sterner line on monetary financing should keep the euro relatively well

supported. We see the EUR/USD generally in a range of 1.3200-1.3750, with possible spikes upwards.

PMI data generally supportiveThe global manufacturing outlook

remained mixed over the past nine

months but, as of three months ago,

all four of the major PMIs we follow

moved above the all-important line

dividing contraction from expansion.

However, the divergence in the US

ISM manufacturing PMI and the US

manufacturing PMI - have moved inopposite directions over the last

three months. Which trend proves

to be correct will be very important

to the outlook for global economic

sentiment.

As the previous chart shows, the Chinese and European PMIs are above 50 but are weak, the US ISM is strong

and the Japanese PMI is trending higher. The JPM global PMI (not on chart), which takes into account the more

recent negative effects of EM manufacturing output, has also recently started to trend higher after a lacklustre

summer. This all points to a marginal yet positive manufacturing outlook while also acting as a reminder of how

disappointing real output remains across the globe in the aftermath of the great recession.

Outlook far from bullish

On balance, we have become less optimistic for metals prices as 2013 has progressed but we have also had to

push this bearish view back because of the delay to QE tapering and also the temporary boost to Chinese

economic growth as a result of its leadership's support for the domestic economy.

Earlier this year, we thought prices would trade in a sideways-to-higher range as consumers switched from

destocking to hand-to-mouth buying and possibly to restocking later in the year. Chinas slower-than-expected

recovery and the harder stance that government has adopted alongside the fallout from QE tapering now look setto keep metal prices under pressure, especially while most are in a supply surplus and insufficient cuts to output

have been made.

Although we are optimistic that better times lie down the road, oversupply and high stock levels in most of the

metals need to be addressed; we feel it will take weaker prices to bring that about. Further price weakness would

come as no surprise. Still, our general conclusion is that the metals are likely to remain rangebound - the upside is

likely to be capped by producer hedge selling and the downside, although downward spikes may be seen, by

bargain hunting and production cuts in response to lower prices.


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Precious MetalsOctober 2013

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Precious Metals

Gold

Introduction

Following the volatile sell-off in the second quarter, initial rallies early in the third quarter drew further selling from

stale institutional investors as well as fund players.

The selling abated in mid-July when oversold technical indicators and heightened geopolitical tensions amid

escalating rhetoric from Western leaders towards Syria prompted a rebound.

Gold traded just shy of $1,434 per ounce in response to reports that Syrian forces had used chemical weapons in a

suburb outside Damascus. The gains came from both safe-haven and anti-inflationary hedges - oil prices rallied,

with WTI crude trading above $110 per barrel for the first time in more than a year.

Prices peaked late in August but turned lower when Russian and Western leaders reached a deal over Syrias

chemical weapon stocks. Additional pressure emerged ahead of the September FOMC meeting. While its decision

not to taper caught markets wrong-footed and prompted a brief bounce in gold, the overall trend remained lower -

investors continued to liquidate in search of higher-yielding assets but also to bolster cash positions against a

potential US sovereign default.

The robust physical buying peaked in the second quarter because of the price correction, with large volumes ofmetal continuing to flow to physical markets in Asia and the Middle East at the start of the period. Premiums


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remained elevated but demand slowed as prices recovered and the market entered a seasonal low point for

physical demand. In addition, the Indian government further increased import duties to reduce the nations current

account deficit, while sharp falls in emerging market currencies saw local gold prices surge, hitting lifetime peaks in

the rupee.

The backwardation that emerged at the end of June remained in place across most of the third quarter. Much of

this was attributed to London good delivery metal being returned to refiners to be recast into kilo, teal and tola bars

favoured in the Asian markets. While rates have since eased, nearby prompts remain tight.

Central banks remained net buyers during the period, adding a net 75.7 tonnes of metal in July-August, according

to IMF figures, although 45.9 tonnes of this total was related to the Turkish policy of accepting gold in its reserve

requirements from commercial banks

Gold closed the quarter around $1,329, up 7.3 percent.

Current situation

Gold has made a choppy start to the fourth quarter, initially dipping back below $1,300. Dip-buying has again been

evident but expectations of a debt deal in the US and the nomination of Janet Yellen as the next chair of the

Federal Reserve seems to have prompted further liquidation by ETF investors. In addition, the federal shutdown in

the US and the knock-on macroeconomic implications have seen FOMC tapering expectations shift further out.

Summary of outlook

We have made several downward price revisions over the year, particularly in light of the substantial price

weakness that emerged in April. We lowered our initial forecast of $1,750 to $1,600 and subsequently to $1,420

after the breach of $1,480, which marked a key profit level for ETF investors. We maintain our view that gold will

average $1,420 this year, down 15 percent from the 2012 average of $1,668.92.

Looking into 2014, gold should maintain a downward bias as the global economic recovery gathers pace,

prompting a continued shift away from gold and towards higher-yielding assets. Still, hurdles remain, which still

have the potential to encourage investment into gold as a means of diversification. US politicians have only

succeeded in kicking the debt can down the road and have yet to tackle the underlying issues; the recovery in

Europe remains fragile, with Greece facing a further multi-billion euro shortfall; emerging market growth may

continue to falter; and debt levels globally remain elevated and pose a threat to inflation and currency debasement.

The shift for higher yields will see institutional investors shy away from gold but we expect individual and retail

investment demand to remain steady. We expect Chinese demand to grow in particular, with physical demand -

jewellery, coins and bar - to run close to 1,000 tonnes.

Overall, we see gold trading within a broad $1,100-1,500 range and averaging $1,280.


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Fund activity

The net long fund position (NLFP)

declined initially - the price pressure

at the start of July extended the trend

of long liquidation and short selling

among Comex funds.

The NLFP stood at just 16,557 lots

(51.5 tonnes) in the week of July 9,

the lowest since February 2005. But

as prices recovered, funds began to

cover their short exposure - open

shorts were more than halved from

the end-June level to the end-August

low, which corresponds to the peak in

the NLFP of 78,289 lots (243.5 tonnes).

The NLFP totalled 67,139 lots (208.8 tonnes) by the end of the quarter while the ratio of longs to shorts has

widened to 1.92 from 1.18. But open interest remains down on levels at the start of the year, reflecting a lack of

conviction from both bulls and bears.

ETF investment activity

In contrast to the aggressive investorliquidation carried out during the

second quarter the pace of liquidation

over the July-September quarter was

far more modest. That said, net

holdings across the various ETF

platforms we monitor continued to

decline in anticipation the Federal

Reserve would being to taper its

quantitative easing programme, whichcontinued the shift towards higher-

yielding assets.

The initial test back towards $1,200

early in July drew an influx of buying

from Swiss investors, who added 5.1 tonnes of metal in the Zurcher Kantonal Bank fund. By contrast, US investors

in the SPDR fund continued to reduce their exposure, selling as gold recovered back towards $1,350.

Pockets of buying were seen across the various funds over the remainder of the quarter but liquidation outweighed

fresh investment, leading to a further 103.7-tonne reduction in net holdings to their lowest since May 2010. Net gold

holdings declined 5.1 percent while net


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silver holdings increased 5.0 percent, which continues to reflect the exposure of institutional investors to gold funds,

primarily the NYSE-listed SPDR, while silver investors tend to be smaller retail-level/individual investors.

Interestingly, the launch of the first physically backed ETFs in China failed to tempt significant investment interest,

raising $261 million - equivalent to 6.2-tonnes - in their initial funding, just over half the targeted $400 million. This

reflects investor appetite for physical metal but also the relative immaturity of the derivatives market in China. Still,

we suspect demand will increase as confidence in products improves over time.

Physical interest

Demand for physical gold, both for jewellery and investment (coin/bar) purposes, remained strong at the start of the

quarter, building on the phenomenal demand in the second quarter. Demand from these sectors was 1,083 tonnes,

according to the World Gold Council.

Demand fell off as the quarter progressed, though, reflecting steadier price sentiment, the rebuilding of stocks,slower seasonal demand and weakness in emerging market currencies - particularly the rupee and the rupiah.

Official intervention was another factor - the Reserve Bank of India made further efforts to temper gold imports. The

government raised import duties for all gold forms to 10 percent from 8 percent in August and further raised the

duty for jewellery imports to 15 percent in September. In addition the linking of imports to exports levels and the

confusion this created also hurt gold demand. The Indian finance ministry reported gold imports of 58.37 tonnes

between July 1 and September 25 compared with 335.31 tonnes in the three months ended June 30.

Having surged in the prior quarter, premiums eased back to more normal levels in areas such as Hong Kong and

Singapore. Rates for Shanghai remained elevated, though, reflecting consistent demand. The Indian dutyincreases pushed premiums away from their recent peak and briefly into a discount.

Despite the RBI's efforts, gold is likely to find further background support as the market enters what is traditionally

the strongest period for physical demand with a host of auspicious dates for Hindus between November 13 and

December 11. In addition, with physical premiums into China still elevated in an environment of strong imports

(from Hong Kong, these rose 130 percent over the first eight months of the year) and surging domestic production

(up 11.5 percent in the first seven months of the year, according to the China Gold Association), Chinese gold

consumption is well on its way to surpassing India, offsetting slower demand from the sub-continent.

The big-picture view

Geopolitical tensions escalated during the quarter after the use of chemical weapons on civilians in the Syrian

conflict, prompting strong rhetoric from Western political leaders, with President Obama calling on Congress to vote

in favour of military action.

Russia clashed with the US over the legality of military intervention, with sabre-rattling between the two lifting oil

above $110 per barrel for the first time in 18 months. Syria's subsequent agreement to place its chemical weapon

stocks in UN hands saw oil and gold turn lower as safe-haven positions were unwound.

Meanwhile, mixed economic signals emerged. Chinese data and anecdotal indicators suggested the economy

exited its recent dull patch and European numbers also pointed towards stronger manufacturing and service activity

over the period, with a draft budget from Greece suggesting the economy could emerge from a six-year recession


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in 2014. But a rift emerged between Germany and the ECB over banking oversight, with Germany opposing

proposals to centralise control of failing lenders.

Speculation surrounding the Federal Reserves asset purchase programme intensified during the period - markets

increasingly priced in an announcement of tapering at the September FOMC meeting. The decision not to taper

came as a surprise and saw risk sentiment pared back, leading the DJIA to fall more than 500 points from a record

15,709.6 points.

The bigger issue that emerged at the end of the third quarter and has dominated sentiment early in the fourth has

been the US debt ceiling - negotiations between Republicans and Democrats over this topic and the 2013-2014

budget took 16 days to resolve. The deal will extend the Treasury's borrowing authority until 7 February and fund

the government to January 15, but will only be another stopgap measure.

The currency impactOf particular note during the period were currency fluctuations in emerging markets such as India, Brazil, Turkey

and Indonesia, which had a dramatic impact on locally denominated gold prices. Gold in the Indian Rupee peaked

at a record 98,840 rupees per ounce late in August, gaining 13.3 percent across the quarter compared with 7.6

percent in dollar gold.

Turbulence in emerging market currencies together with US debt troubles could prompt further diversification into

gold.

Conclusion

The stalemate in US debt negotiations saw gold slip lower amid further investor and fund liquidation. While this has

again led some to question the yellow metal's role as a safe-haven asset, we feel gold is merely fulfilling the role of

providing liquidity in times of duress as well as acting as a proxy to the dollar.

The agreement to raise the US debt ceiling has allowed gold to recover; it should hold within a $1,270-1,350 range

across the remainder of the year. However, the deal will only raise the ceiling until early February and, since the

underlying issues remain, we suspect retail/individual investors could favour gold again as a

debasement/diversification hedge.

While institutional investors have turned away from gold, solid physical demand from Asia and central bank

diversification are all supportive for the medium and longer terms. In addition, several producers such as Agnico-

Eagle Mines and IAM Gold have announced capex spending reductions, leading to lower supplies further down the

road.


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Silver

Introduction

Silver recovered from its end-June low of $18.21 into July but, despite solid physical and ETF investment demand,

the metal struggled to hold above $20, trading broadly between $18.71 and $20.60 across the month.

Silver finally found upside momentum during August when robust investment demand was joined by fund short

covering, leading the metal to a peak of $25.12

Strong resistance, possibly producer-related, prevented further gains; silver gradually lost ground on speculation

surrounding the FOMC meeting and a possible start to the tapering of quantitative easing, establishing a base mid-

month around $21.25.

Current situationSilver ended September with a 10.3 percent gain although it was down 28.5 percent on the start of the year - the

largest decline among the precious metals.

Trade so far in the fourth quarter has been choppy although the metal remains above $20, capped by resistance so

far at $22.50.

Gold/silver ratio

The AU/AG ratio initially tracked higher in July, peaking at 67.4:1, itshighest in almost three years after silver

underperformed golds initial correction higher. But the ratio fell sharply lower across August to below 57 from 65

when silver rallied amid fund short-covering and solid investment demand.


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The ratio has since risen back to 60:1, which we still see as fair value given that the 20-year rolling average lies

around 60-65:1.

Fund activity

The fund net long position (NFLP) rose

from an end-June low of just 837

contracts to a peak of 18,834 contracts

in early September. But the increase

came from short covering - open funds

dropped by more than half between the

end of June and early September. The

long/short ratio increased to 2.2 from a

low of just 1.02.

As of late September, the ratio stood at

1.8, suggesting funds maintain a

bullish stance although fund players

will continue to act as a swing factor.

ETF/Investment Activity

Investment interest via silver ETF platforms proved far more robust compared with gold. After the sizeable

redemptions during the second quarter, investors took advantage of the price correction to post the largest monthly

net inflow in two years during July, adding 17.5 million ounces. The strong pace continued during August and wasin part responsible for silver's outperformance of gold, as reflected by the shift lower in the AU/AG ratio.

Net holdings increased a further 14.4 million ounces during August and, despite a slight reduction during

September, enjoyed their largest quarterly increase since the fourth quarter of 2010.

Investment interest for coins and bars compared to gold were also notable. Silver coin sales under the US Mint

Eagle programme ran some 32 percent higher on last year while gold sales were down 45 percent.

Meanwhile, trade data suggests Indias interest in silver has been aroused this year owing to record gold prices and

the surge in import duties. India imports stood at 4,073 tonnes in the first eight months of the year compared with

1,921 tonnes for the whole of 2012.

Summary of outlook for 2014

Silver has been forming a base around $20 following the second-quarter correction, finding good levels of support

from investors as well as improving demand from the electronics and battery sectors. Demand from green

initiatives will also absorb metal. Solar panel demand, particularly from Asia, will remain a feature - strong demand

from China and Japan, following the closure of its remaining nuclear power stations, will offset weaker European

demand while austerity forces governments to remove subsidies. Physical demand from India is also notably

stronger while record prices and tax hikes on gold lead to substitution demand.


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Page | 16

Investment demand, which has also been supportive this year, will probably remain a swing factor for prices. Gold

ETF holdings have succumbed to heavy pressure this year while silver holdings have increased, reflecting the

exposure of institutional investors to gold compared with smaller retail/individual investors to silver.

Conclusion

Solid demand from numerous industrial sources and photovoltaic panels will remain a strong demand stream. The

weaker price sentiment that has emerged in silver as well as by/co-products such as zinc and lead is also

supportive, reducing capex expenditure and potentially leading to some production closure from unprofitable

facilities. Still, mine production will continue to expand while the selling that emerged towards the $25 level

suggests producers may act as a price cap; silver is therefore likely to hold a broad $16.50-26.00 range in the year

ahead.

The threat for silver remains the scale of ETF holdings, which so far this year have increased 3.3 percent while gold

holdings have declined. A similar scale of liquidation could see as much as 2,500 tonnes of silver flood back into

the market.

.


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Page | 17

PGMs

Introduction

The PGMs broadly tracked the underlying moves seen across the precious metal complex.

Platinum recovered to $1,450 by the end of July from an early July low around $1,310. The white metal posted a

one-day rally of $60 on August 8 on technical and fundamental drivers, extending to a peak of $1,555 late in

August. September was dominated by trade and fund selling - overall metal sentiment weakened.

Palladium moved largely in tandem with sister metal platinum. In relative terms, however, the metal proved mixed.

Palladium initially outperformed, driving the PT/PD ratio to a fresh low of 1.87 on July 18, before it lost ground into

early September amid stale ETF and fund liquidation. The ratio peaked at 2.16 when palladium struggled to hold

onto $700 but that level would provide support over the remainder of the quarter, with the ratio back below 2.0 by

the end of September.

Current situation

Both metals have rallied into early September, bolstered by fresh wildcat strikes in South Africa and strong

investment demand in platinum.


While the PGMs have succumbed to the price weakness witnessed across the metal complex, divergence hasemerged across the year as the tighter fundamental picture provides strong background support. Palladium gained

three percent across the first three quarters while gold fell 20.7 percent, silver an even larger 28.5 percent.

We suspect this trait will continue into the year ahead owing to the growth in global vehicle sales, lower supply

outlook from South Africa and exhausted Russian state stocks. While the scale of fund and investment longs is a

bearish factor, we see these posing minimal risks given the likely supply shortfalls. In addition the approval for the

Absa palladium ETF could bolster the upside potential into 2014, given the level of interest in the platinum fund.

Supply outlook

Disruptions to South African mine supplies continued during the period, although the anniversary of the Marikana

shootings passed without incident. The more militant Association of Mineworkers and Construction Union (AMCU)


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called for industrial action at Anglo Platinums Rustenburg works to protest against planned restructuring. Workers

downed tools on September 27 and remained on strike till October 10, resulting in the loss of 44,000 ounces in lost

production.Zimbabwe's re-elected Robert Mugabe government is set to push ahead with plans to seize control of $7 billion of

foreign-owned mines assets unless they cede 51 percent of their assets to black investors or the government.

Swiss trade data showed minimal palladium exports during the period, compared with spikes in March and May at

an average of 6,400 ounces per month. Meanwhile speculation emerged early in July that Gokhran, the Russian

State Repository, might look to rebuild its state stocks.

As with gold, we also anticipate weaker prices to slow jewellery scrap flows, although scrap from spent auto-

catalysts will continue apace, owing to its price inelasticity.

Demand outlook

PGM demand from several industrial applications is expected to increase over the year amid improving economic

conditions. Demand growth in particular will again come from the automotive sector despite the impact that

turbulence in emerging markets has had on vehicle sales.

The Society of Indian Automobile Manufacturers (SIAM) recently forecast the Indian market to contract in 2013 for

the second consecutive year. But global vehicle sales continue to expand, led by strong growth in the US and

Chinalight vehicle sales are up 8.1 percent and 11.8 percent year-on-year respectively in the year to date,

according to the latest data.

Still, automakers have been increasing the platinum loading within gasoline auto-catalysts, substituting away from

palladium.

Jewellery demand may also be

stimulated owing to the recent price

corrections, and will certainly temper

scrap sales. Demand for PGM jewellery

in India could again take some market

share given the import duty increase for

gold.

We continue to see investment demand

as the major swing factor for PGM

fundamentals. Net platinum holdings

had increased to a record 2.283 million

ounces by the end of the quarter.

Interestingly, though, we note a shift in

sentiment - holdings in most European

and US-listed funds declined while

holdings in the Johannesburg-listed

NewPlat fund increased 54 percent or 231,000 ounces to a record 658,800 ounces.


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Page | 19

Net palladium holdings declined some 106,500 ounces by contrast although Absa bank has been granted

regulatory approval to list its palladium fund - given the popularity of the NewPlat fund, this could add a new

demand stream.

Conclusion

The bearish sentiment in gold will probably overhang the PGMs, although the absence of any sizeable exodus of

investment monies - certainly from ETFs - reflects the positive fundamental picture currently unfolding. We feel this

trend will continue, given the strong growth in vehicle sales, particularly in China and the US, and the potential for

supply disruptions.

Platinum should find further support around $1,280, below the cost of production for several South African

producers, while resistance towards $1,650 will provide the top of the range. Palladium will continue in a wide

range, with support at $600, while the metal could surpass the February 2011 high of $862 should investment

demand prove strong, retesting levels not seen since 2001.


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AluminiumOctober 2013

Page | 20

Aluminium

Introduction

Aluminium prices set a low at $1,758 per tonne late in June and have since largely oscillated sideways, although

there was a significant 10.9 percent short-covering rally in August that was prompted by the combination of better-

than-expected data out of China and some dovish comments from the Fed. The rally did not last and prices quickly

returned to lower levels, which we take as a sign that there is not much appetite or, indeed, a need to chase prices

higher. Given the plentiful supply, high levels of inventory and only limited production cuts so far, it seems likely that

the upside potential for prices will be limited to bouts of short-covering.

Fundamentally, prices should head lower - we feel they will end up doing so - but for now the mechanics of the

LME and abundant and cheap liquidity are enabling sufficient metal to be kept off market to underpin the markets

price structure. How long these factors remain in force is debateable - there are numerous crosscurrents at workthat could bring about meaningful change. Overall, the demand outlook for aluminium remains second to none, but

the market is in chronic oversupply as it has been for seven years and market forces are likely to change that

before too long.


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Page | 22

physical premiums have also helped producers obtain a higher price for their output. Interestingly, rallies in

aluminium prices have been short-lived, suggesting that any rally is seen as an opportunity to put on more hedges

by producers. This practice is likely to continue.

In the first eight months of 2013, primary global aluminium production recorded by the International Aluminium

Institute (IAI), including data for China, was 32.901 million tonnes, up 3.9 percent on the 31.672 million tonnes

produced in the same 2012 period. The daily average rate of production in the January-August period was 135,438

tonnes, which was higher than the 130,583 tonnes per day seen over 2012 as a whole, so the picture is one of

rising global production, although regionally the picture is more mixed.

Production is rising in Africa, China, the Arabian Gulf, East and Central Europe and North America and it is falling

in Oceania, South America, Western Europe and Asia (ex-China). Collectively, production in the world ex-China

totalled 17.06 million tonnes in the first eight months of the year period, down from 17.131 million tonnes in the

same period of 2012 - all the growth is in China, where production climbed to 15.841 million tonnes in the first eight

months of the year from 14.541 million tonnes a year previously.

What is interesting is that very little primary production is exported from China despite all the growth there, although

exports of semis are on the rise. Therefore, some of the new production is being exported in the form of aluminium

products; this might become a bigger problem for Western smelters as capacity continues to build in China.

Despite low prices, there seems to be no stopping the growth in aluminium capacity in China, with new capacity

tending to be built in Chinas western provinces where cheaper energy is available. Aluminium smelting capacity in

China in 2013 is estimated to be around 96,775 tonnes per day, while production is running at 66,500 tonnes per

day, which highlights the extent of overcapacity. This compares with capacity in the world ex-China of some 76,100

tonnes per day and where production is running at 69,300 tonnes per day. Chinas new government says it plans to

cut investment in areas where there is overcapacity, so it will be interesting to see if it manages to wrest control of

the industry away from local governments.

Non-Chinese production cuts of 760,000 tonnes per year have been announced this year but this will be insufficient

given that the market is already in a surplus and more capacity is being added. New capacity outside of China is

expected to increase some 600,000 tonnes per year next year, with EMAL ramping up output at its Al Taweelah

smelter in Abu Dhabi ahead of schedule, Hindalco stepping up output at its 360,000 tonnes per year Mahan

smelter and the Ras Az Zawr (Maadan) smelter in Saudi Arabia also ramping up output from 237,000 tonnes thisyear to 630,000 tonnes next year and 740,000 tonnes in 2015.

Although China is cutting output - smelters agreed earlier this year to suspend 1 million tonnes per year of capacity,

including 380,000 tonnes per year at Chalco, 150,000 tonnes per year at Yunan Aluminium and 120,000 tonnes

per year at the Xinheng Group - these are dwarfed by expansions. In 2014, an extra 3.86 million tonnes per year is

scheduled to come on stream so we wait to see if the governments attempts to curb new capac ity are effective.

In 2013, production is expected to rise 2.2 million tonnes, of which some 1.8 million tonnes is expected from China

and 0.4 million tonnes from outside China. In 2014, we expect production to rise 3.0 million tonnes, with around 2.1

million tonnes coming from China and 0.9 million tonnes from outside China. But these figures may well be reviseddownwards because we expect cuts to output.


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Page | 23

Primary Aluminium Production (in thousands of tonnes)

IAI reporting area ex-China China Global total Global daily average

Year 2009 24,022 12,964 36,986 101.3Year 2010 25,022 16,131 41,153 112.7Year 2011 26,203 17,786 43,989 120.5Year 2012 25,453 19,754 45,207 123.5

Jan-Dec 2011 26,203 17,786 43,989 120.5Jan-Dec 2012 25,633 22,154 47,787 130.9

Jan 2012 2,204 1,717 3,921 126.5Feb 2012 2,065 1,748 3,813 131.5Mar 2012 2,183 1,764 3,947 127.3Apr 2012 2,111 1,731 3,842 128.1May 2012 2,171 1,878 4,049 130.6June 2012 2,095 1,884 3,979 132.6

July 2012 2,153 1,870 4,023 129.8August 2012 2,149 1,949 4,098 132.2September 2012 2,072 1,872 3,944 131.5October 2012 2,149 1,917 4,066 131.2November 2012 2,100 1,862 3,962 132.1December 2012 2,181 1,962 4,143 133.6January 2013 2,176 1,960 4,136 133.4February 2013 1,981 1,929 3,910 139.6March 2013 2,187 1,934 4,121 132.9April 2013 2,117 1,907 4,024 134.1May 2013 2,177 1,966 4,143 133.6June 2013 2,108 2,043 4,151 138.4

July 2013 2,165 2.039 4,204 135.6August 2013 2,149 2,063 4,212 135.9Sourc e: IAI

Demand outlook

Demand for aluminium is particularly robust considering the state of the global economy but the metal is seeing

organic growth and is gaining market share from numerous other materials, including copper, steel and glass.

Being a light metal and a relatively cheap one, it helps manufacturers produce more efficient and environmentally

friendly products. So aluminium is winning market share from galvanised steel in the transport industry and copper

in the electricity cable industry; it is also making inroads into the bottling industry because aluminium bottles are

much lighter than glass bottles, which saves on shipping costs.

Demand is also strong. The aerospace industry is doing well, as are the auto industries in China and the US,

although vehicle sales in Europe remain depressed - data for September showed sales were at their lowest since

1990. In addition, capital flight, in anticipation of QE tapering, and tougher times in many emerging markets are

likely to weigh on auto sales in these regions.

There are also some concerns that auto sales in the US may start to suffer as rising bond yields force up the cost

of vehicle financing. Sales in September slowed to an annualised rate of 15.3 million units from 16.1 million units in

August but whether this is a blip in the data or the start of a period of weaker sales remains to be seen.

The construction sector in the US had become a stronger growth area for aluminium - earlier in the year it lookedas if the industry was picking up momentum - but recent data has shown that growth has slowed. Housing Stats in


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Page | 24

August rose 0.8 percent to a seasonally adjusted annual rate of 891,000 units and building permits declined 3.8

percent to 918,000. While this could be a dip in the data, the fact it coincided with a time when bond yields, which

affect mortgage rates, were on the rise may be a harbinger of how the economy could be affected once tapering

begins.

In China, fixed asset investment (FAI) in construction, railway networks and power distribution are helping to restart

the investment cycle. In the first eight months of the year, FAI climbed 20.3 percent; within that, construction

climbed 24.2 percent.

Although we expect aluminium demand to remain robust, we are concerned that on a global level, less liquidity in

the financial system and measures to tackle debt are likely to weigh on economic growth.

We have already seen capital flight in emerging markets in anticipation of QE tapering; when tapering actually

starts, the impact could intensify. So we have lowered our expectations for global demand growth in 2013 to 6.3

percent from 7.0 percent earlier - we feel these headwinds will limit growth to six percent in 2014.

Chinese trade

Primary aluminium net trade in China dropped 73 percent in the first eight months of the year, with imports slipped

to 150,000 tonnes from 400,000 tonnes in the same period in 2012. Exports remain relatively constant but are

insignificant given the size of the market. Imports of bauxite remain strong at 46.4 million tonnes in January-August

compared with 28.9 million tonnes in the same period in 2012, although alumina imports dropped 38 percent to 2.0

million tonnes from 3.2 million tonnes in 2012.

The run-up in bauxite is no doubt in anticipation of tighter supply next year when the Indonesian export ban comesinto effect. We would not be surprised if this trend continues; indeed, the market may get more concerned generally

about Chinas production capability next year if Indonesia implements its ban in full. Still, China has broadened its

bauxite supply base in recent months and has built alumina capacity near domestic bauxite supplies.

Chinese trade (thousand tonnes)

2010 2011 2012 Jan-Aug 2012 Jan-Aug 2013 Change

Exports

Primary aluminium 194 82 125 83 64 -23%Imports

Primary aluminium 230 225 516 400 150 -63%

Alumina 4,312 1,881 5,020 3,242 2,025 -38%Bauxite 30,070 45,234 39,820 28,930 46,381 +60%Source: Off ic ial custom s stat is t ics


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Page | 25

0%

2%

4%

6%

8%

10%

12%

14%

16%

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

LME Stocks as a % of AnnualConsumption

Source: FastMarkets; LME

0

1

2

3

4

5

6

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Milliontonnes

LME Aluminium Stocks

Source: FastMarkets; LME

Stocks

LME stocks changed direction in July -

having climbed to a high of 5.486 million

tonnes in mid-July, they have since fallen to

5.328 million tonnes. This change in trend,

however, is not thought to reflect a swing to

a supply deficit but market mechanics tied

into proposed changes to LME load-out

rates.

The LME announced its proposed changes

in early July and if the new rules are

implemented then that could shorten the exit

queues and in turn that would mean metal

might not stay in warehouses as long. Based

on that, warehouse companies have reduced

the incentives they were offering to attract

metal into warehouse so less metal has been

delivered in. Inflows into LME warehouses

averaged around 11,000 tonnes each day in

the first half of the year; this has dropped to

an average of around 5,200 tonnes per day

since the LME announcement.

If load-out rates increase, more metal could

hypothetically leave warehouses, in turn lowering physical premiums. But as things stand, most of the cancelled

warrants are owned by financial institutions looking to take metal out of LME warehouses to finance it in cheaper

non-LME warehouses. In turn, a faster drawdown of LME inventory could give the impression of a tightening

market but this would be misleading if the metal was merely going into other warehouses.

It is now very difficult to gauge how much metal is held outside exchange-registered warehouses given the

complicated movement in stocks but it is generally thought there are likely to be around 4-5 million tonnes of

unreported stocks. The combination of these and exchange stocks means there is around 10 million tonnes of

aluminium stock. This metal poses little threat to the market while it can be financed, as is now the case, but that

would change if any of the components that make financing viable change. A change in regulations that disqualifies

banks from owning commodities, a closing of the Fed free-money window, less liquidity, a pick-up in interest

rates/bond yields or higher warehouse rents due to regulatory changes could all alter the dynamics of financing

metal.

Balance

As things stand, the aluminium market is expected to remain in a supply surplus as new capacity comes on stream

at a faster pace than production is idled. We expect demand to remain healthy but the tapering of QE and later


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reduction in liquidity as the Feds treasuries mature, could produce headwinds for economic growth in the US and

in emerging markets in 2014.

So far this year, prices have held up well despite another year of supply surplus. In January-September, cash

aluminium prices averaged around $1,870 per tonne. For the fourth quarter, we are looking for prices to trade in the

$1,775-1,900 range and to average $1,830 so we will raise our forecast for the average of this year to $1,860.

Looking to 2014, we forecast an average price of $1,800 given another year of supply surplus and the presence of

large stockpiles that might become less tightly held, making the market look more vulnerable.

Global Supply/Demand Balance in Primary Aluminium (million tonnes)

2009 2010 2011 2012 2013(f) 2014 (f)

Production 37.5 42.3 44.7 47.8 50.8 53.8Consumption 35.4 41.3 42.8 47.4 50.4 53.4Balance +2.10 +1.00 +1.9 +0.4 +0.4 +0.4

Price $1,664 $2,172 $2,400 $2,000 $1,860 $1,800Sourc es: IAI, WBMS, FastMarkets forecasts

Conclusion

Aluminium demand remains robust but contagion from a possible winding-down of QE next year is likely to weigh

on global growth. The supply side of the equation is, however, a potentially more bearish factor - we feel the

developments on QE, LME load-out rates and tighter regulation will end up making it harder for producers and

traders to hold metal off market, which would raise supply and lower prices. Since prices are already well into the

marginal cost curve, lower prices are likely to trigger production cuts. Generally, we are looking for prices to trade in

a $1,750-2,000 range but there may well be downward spikes below $1,750 if the market gets nervous about extra

availability.


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CopperOctober 2013

Page | 27

Copper

Introduction

After copper peaked at $8,346 per tonne in February, it trended lower, bottoming out late at $6,602 in June before

rebounding to a high around $7,425 - prices have since been rangebound between there and $7,024. The market

feels well balanced for now - a scrap shortage has meant greater demand for copper cathodes but mine supply is

now set to continue to improve, so we forecast a growing surplus. Unless demand surprises on the upside, we feel

the surplus will weigh on prices throughout next year. The prospects for the tapering of quantitative easing (QE)

and the fall-out this is likely to produce are expected to dampen the economic data, which has of late been looking

brighter. Given that copper prices are still trading well above their marginal cost of production, it stands to reason

that a deterioration in the fundamentals should put downward pressure on prices.

Current situation

The rally after the 2008 sell-off ran until February 2011; prices have since broadly oscillated lower. There have

been extended periods when prices have moved sideways but the overall trend is still to the downside; given the

fundamental outlook, we would now look for the downtrend to extend below $6,600 in the year ahead. Global

growth is lame - the IMF has recently lowered its forecast for global growth this year to 2.9 percent from its July

forecast of 3.2 percent. It expects growth in 2014 to be 3.6 percent, which, although stronger, remains weak. Given


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CopperOctober 2013

Page | 28

how emerging markets have reacted to the prospect of tapering, we would not be surprised if most forecasts for

next year end up being revised lower.

Summary of outlook for 2014As always, much will depend on how China performs. While it has avoided a hard landing so far, the firmer stance

taken by the new government, especially on the shadow banking sector, is likely to prevent any rapid return to

strong growth. But after years of high compound growth, Chinas economy is now so large that even growth of 7.0-

7.5 percent is still significant for consumption levels.

Outside of China, the US seems to be the one large economy that is continuing to recover but growing opposition

to ever-increasing deficits and debt from the political right is likely to act as a brake that keeps growth subdued.

In Europe, there are signs of some recovery but high unemployment levels make us wonder how much of the

improvement merely reflects the shift from destocking to hand-to-mouth buying; we are not bullish for Europe.Emerging markets are also likely to suffer further as liquidity is withdrawn while QE is reined in. Subsequently,

copper demand growth throughout the remainder of 2013 and into 2014 is likely to be weak while supply is rising.

Supply outlook

Mine supply is starting to increase at a faster pace - we expect this to continue in the medium term while

investments made during the period of high copper prices are commissioned. This is part of the boom/bust

commodity cycle - high prices attract investment in new capacity; once these are brought online, it takes time for

demand to rise to the extent that it again absorbs the new capacity.

The fact that this new capacity is coming on stream during a period of relatively subdued demand growth now runs

the risk of adding downward pressure to prices. The effects could worsen if this coincides with greater availability of

metal from LME-listed warehouses and if there are fewer incentives to store metal off market in financing deals.

ICSG data for the first six months of the year puts world mine supply growth at 8.8 percent on the same period in

2012. Concentrate output increased at an even faster pace of 10.2 percent, while solvent extraction-electro-winning

(SX-EW) climbed 4.2 percent. Interestingly, rapid growth was recently more evident in SX-EW but this sector is

now slowing.

The overall rise was partially due to a recovery in production that was for various reasons idled last year - either

industrial action or production disruptions. New production, however, is rising as new capacity comes on stream.

Output has expanded or recovered at Antamina, Collahuasi, Los Bronces, Buenavista, Escondida and Frontier,

with further capacity coming on stream this year at Oyu Tolgoi, Caserones, Antapaccay, Mina Ministro Hales and

Toromocho, to name a few.

The latest forecasts from the ICSG meeting in early October are for mine and refined copper production to rise 6.5

percent and 3.9 percent respectively in 2013 and increase a further 4.5 percent and 5.5 percent in 2014. This

supports our view that mine supply is picking up at a faster pace than refined supply this year, so concentrate

stocks will increase. This will in turn boost treatment and refining charges (TC/RCs) so refined production growth

next year is likely to be even stronger. In addition, the ICSG has cut its expected growth rate for refined production

this year from 4.3 percent, which is no doubt tied into the supply disruptions at Freeport-McMoRans Grasberg mineand at Rio Tintos Bingham Canyon mine earlier in the year.


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CopperOctober 2013

Page | 29

Chinese refined output has been increasing significantly thanks in part to the ever increasing T/C and R/Cs.

September imports of scrap and concentrate showed marked increases and very recently reports confirm that

concentrates from Oyu Tolgoi are reaching smelters thanks to agreements with the Chinese customs officials.

On a regional basis, mine output has been growing in most regions this year, a trend that should continue in 2014

other than in Oceania. The strongest mine growth is expected in Africa, North America and Asia, with Europe

seeing only slight increases.

In 2014, refined production is forecast to grow at its fastest in Africa where refined production is expected to climb

14 percent to 1.475 million tonnes. For 2013, we expect global refined production to reach 20.9 million tonnes,

climbing to 22.2 million tonnes in 2014.

Historical global copper production and consumption (thousand tonnes)

2009 2010 2011 2012 Jan- Jun 12 Jan-Jun 13 Change

Mine production 15,943 16,053 16,076 16,697 7,963 8,666 +8.8%Refined production 18,248 18,981 19,596 20,129 9,857 10,403 +5.5%Refined capacityutilisation

77.8% 79.6% 80.4% 79.0% 78.9% 79.0%

Consumption 18,070 19,346 19,830 20,550 10,386 10,385 0%Refined balance +178 -365 -234 -421 -529 18Period stock change +275 -177 6 200 -150 358Refined stocks (endperiod)

1,376 1,199 1,205 1,406 1,050 1,764 +68%

Sourc e: ICSG

Demand outlook

In the first half of 2013, global apparent usage was unchanged from the same period in 2012, with Chinese

apparent demand falling as imports declined. Still, actual usage is likely to have continued to rise, with stocks of

copper held in bonded warehouses in China thought to have declined significantly. Earlier in the year, bonded

warehouse inventory reportedly climbed to around 900,000 tonnes before dropping back towards 350,000 tonnes

and Shanghai Exchange stocks have also fallen since the start of the year. Apparent credit tightening has been

prevalent in recent days as the Chinese central bank has restricted cash injections and consequent sentiment.

Consumption was flat outside of China but there were regional differences, with increases in the US and Russia

offsetting falls in Japan and Europe. The fall in Chinese refined copper imports (which ICSG data would interpret as

a fall in demand) has probably happened while consumers have drawn down stocks.

China accounts for around 40 percent of global copper consumption - it remains the single most influential demand

component. With manufacturing PMI data swinging from below to above the 50 level, therefore showing expansion,

and with good investment in the power generation and distribution industry as well as in the railway network,

underlying demand for copper wire and cable is expected to be strong, even though the industry faces competition

from aluminium cables in some applications. In addition, the march of urbanisation continues and the building of

infrastructure and social housing should keep demand for copper buoyant in China. Chinese copper financing is

still a major factor, particularly with regard to warrant premiums where Far Eastern locations have been

commanding high premiums for some time, and also shipments from European warehouses and also putting

pressure on premiums here, despite the slower physical demand.


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CopperOctober 2013

Page | 30

In Europe, there has been a pick-up in some data - the manufacturing PMI readings have moved above 50

although the data for September showed month-on-month weakness so there still seems little room for optimism.

In addition, with the euro relatively strong while the yen and Indian rupee have weakened, along with many other

emerging market economies, demand for EU exports may suffer, which in turn could hit regional copper demand.

Into 2014, high unemployment and high debt - both government and private - will keep the economy subdued and,

with it, demand for copper.

In the US, the auto industry has gained momentum this year and the housing market has picked up, both of which

are bullish signs for copper demand. However, the situation remain fragile as even the prospect of tapering lifted

bond yields, which in turn raised the cost of corporate borrowing/mortgage rates, these have become a headwind

for these sectors, especially housing.

With the focus on US deficit, debt and on reining in QE it looks as though the economic recovery may well struggle

across the rest of this year and into 2014, even though the underlying trend is still likely to be one of recovery.

We were turning more bullish for Japan - government stimulus efforts and the lower yen looked set to increase

demand for exports as well as boosting domestic demand. Tokyo's tone seems to have changed - the significant

increase in sales tax to 8.0 percent from 5.0 percent may well dampen domestic demand while strengthening the

yen.

As Japans demand for copper to produce goods for the export market is seen as a zero-sum game - in that if

demand for Japanese goods rises, demand for other countries exports is likely to suffer - the key for the copper

market as far as Japan is concerned is whether domestic demand rises.

In emerging markets, the capital flight and currency weakness that goes hand in hand with the tapering of QE is

likely to hit domestic consumer demand and strain government finances. This, in turn, is likely to reduce investment

in infrastructure.

On balance, demand for copper should grow around 1.1 percent this year, centred on emerging markets, especially

China, but with some improvement in North America too. We remain positive for Chinese growth overall but feel the

recovery may be relatively weak while the new leaders stamp their authority on local governments, the shadow

banking sector and on the practice of misallocating capital investment, which has in the past led to the building of

excess capacity. We now expect a period of relatively slow growth in China in the 7.0-8.0 percent band while

Beijing targets sustainable growth that will not bring inflation with it.

Chinese Trade

In the first eight months of the year, refined copper imports dropped 19 percent to 1,925,000 tonnes, from

2,387,000 tonnes in the same 2012 period. Higher domestic production, helped by a 33 percent increase in

concentrate imports and stock drawdowns, no doubt made up for the lower level of imports. Higher copper

concentrate imports have been driven by a shortage in scrap availability, which saw scrap imports fall 9.5 percent

during the same period.

With China liking to add value where possible, we are not surprised that the pick-up in global mine production has

seen the Chinese prefer to import concentrate rather than cathode - this is a trend we expect to see continue in

2014. What will be interesting will be whether the LME/Shanghai arbitrage window reopens if copper prices fall, in


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CopperOctober 2013

Page | 31

0.0%

2.0%

4.0%

6.0%

1

985

1

987

1

989

1

991

1

993

1

995

1

997

1

999

2

001

2

003

2

005

2

007

2

009

2

011

2

013

%

LME Stocks as a % ofAnnual Consumption

Source: FastMarkets;

which case much of the worlds copper surplus could end up in China, with concentrate and cathode inventories

risingin turn this could help cushion LME prices.

Source: Off ic ial custom s stat is t ics

StocksExchange-traded stocks were around 693,500 tonnes in

early October, up from 596,000 tonnes at the end of 2012,

an increase of 16 percent or 97,500 tonnes. Interestingly,

though, stocks are well down from this year's peaks. LME

stocks were last at 512,450 tonnes, down from a peak of

678,225 tonnes, Shanghai Exchange stocks were last at

151,124 tonnes, down from a peak of 247,591 tonnes,

and Comex stocks at 29,843 tonnes were down from

70,712 tonnes at the start of the year. In addition, bondedwarehouse stocks in Shanghai have fallen.

The drawdown in stocks is thought to be the result of a

combination of metal being drawn down to offset

production losses to make up for scrap shortages and as

some metal moved off warrant into financing deals.

One key issue will be how much metal continues to be

financed off market. Given the apparent supply deficit until

this year, off-warrant stocks are unlikely to be that great.

One of the reasons for the build-up in LME stocks earlier in the year - they climbed to a peak of 678,225 tonnes on

June 26 from 320,500 tonnes at the start of the year - was warehouse companies offering incentives of around

$100 per tonne to attract metal into warehouse.

With the rules governing LME load-out rates now under review, warehouses have been less inclined to offer

incentives so the outflow has continued while the inflow has slowed. In the first half of the year, before the LME

announced it would review its load-out rules, the daily average inflow was around 4,900 tonnes per day but it has

dropped to 1,796 tonnes per day since July.

Chinese copper trade ('000 tonnes)

2009 2010 2011 2012 Jan- Aug2012

JanAug2013

Change

Exports

Refined copper 72.9 38.7 154 274 207 221 +6.8%Imports

Refined copper 3,185 2,920 2,776 3,403 2,387 1,925 -19.3%Copper scrap 3,998 4,364 4,687 4,859 3,093 2,798 -9.5%Copper concentrates 1,717 1,813 1,789 2,192 1,300 1725 +32.7%


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CopperOctober 2013

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Cancelled warrants stood at 266,700 tonnes at the end of September, having peaked at 375,425 tonnes on June

26. The bulk of the cancelled warrants are held in Johor at 131,700 tonnes, Antwerp at 76,850 tonnes and New

Orleans at 45,925 tonnesthese locations hold 96 percent of cancelled warrants, which account for 51 percent of

total stock. Despite this level of cancelled warrants and their concentration, there is little sign of tightness in the

forward curve, with the cash-to-three months spread around $26 per tonne in early October, just slightly below the

average of $27 for the year to date.

Global supply/demand balance in refined copper (million tonnes)

2009 2010 2011 2012 2013(f) 2014 (f)

Production 18.25 18.98 19.60 20.11 20.90 22.20Consumption 18.07 19.35 19.83 20.51 20.73 21.60Balance +0.18 -0.37 -0.23 -0.40 0.17 0.60Price $5,155 $7,535 $8,810 +$7,946 +$7,250 $6,900Sourc es: ICSG, FastMarkets forecasts

Balance

After a supply deficit of 421,000 tonnes in 2012, according to ICSG data, the market has swung into a surplus,

which the ICSG forecasts around 387,000 tonnes this year, followed by an even bigger surplus in 2014 of 632,000

tonnes. Given that there have been some supply disruptions - this years surplus is likely to be lower than originally

forecast while growth has improved, as recovery in manufacturing PMIs suggests - it looks as though consumption

will also be slightly stronger than we originally thought. We have therefore revised our forecast surplus to 170,000

tonnes from 200,000 tonnes. Given this is just one percent of global consumption, the market remains fairly well

balanced but the outlook is likely to be biased to the downside because a bigger supply surplus is expected next

year - we forecast it at 600,000 tonnes.

Conclusion

Prices averaged $7,384 in the first nine months of the year; if copper trades between $6,700 and $7,420 in the final

quarter and mostly in the $7,075-7,420 range, we would expect an average price for the year of around $7,250.

Although the supply/demand surplus is relatively small, sentiment will focus on the likelihood of a larger surplus

next year, which in turn may keep prices towards the lower levels of our expected range and the upper reaches

only likely to be reached during short-covering rallies. In line with a larger surplus expected next year, we would

look for prices to average $6,800 in 2014.


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LeadOctober 2013

Page | 33

Lead

Introduction

Lead prices are generally holding up well - since hitting a low of $1,938 per tonne in April, prices have been

oscillating sideways to higher, setting a series of higher lows, although the August peak just fell shy of overcoming

the May peak. So it looks as though the market is well supported by scale-down buying, although buyers do not

feel the need to chase prices higher, unless they are covering shorts.

Given that exchange stocks are low and the market is showing a small supply deficit, it is surprising that lead prices

are not firmer. This may well reflect generally low investor interest in the metals while consumers are content to live

hand-to-mouth.

The fundamentals look set to remain tight and, given a robust demand profile, we feel prices will remain well

supported. But it may take a change in broad-based investment sentiment to the bullish before lead prices really

respond - lead could be one of the outperformers when that happens but until then we expect the sideways trend to

continue.


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LeadOctober 2013

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Current situation

Lead prices averaged $2,103 per tonne in the third quarter, up 2.4 percent from $2,054 in the second quarter, and

have averaged $2,153 in the year to date. The latest International Lead Zinc Study Group (ILZSG) data showed the

market was in a 41,000-tonne supply deficit in the first seven months of 2013, compared with a 31,000-tonne

surplus throughout the whole of last year.

So while the market remains roughly balanced in our view, the 132,552-tonne fall in combined exchange

warehouse stocks since this years highs suggests a larger deficit. This could be explained by a proportion of the

fall in LME stocks representing metal moving off-warrant into financing deals.


Our outlook for the rest of 2013 is for the market to remain roughly in balance and for prices to stay rangebound

with a slight upward bias, for seasonal reasons.

For 2014, at the macro level we expect good growth in the US and China for automotive batteries and steady

growth worldwide for industrial batteries. With QE tapering to come, we are concerned that capital outflows in

emerging markets will dampen demand for autos there and we expect auto sales in Europe to remain sluggish too.

On the supply side, we see the move towards a supply deficit next year and the low level of stocks as supporting

factors for lead prices.

Supply outlook

The lead market is unique in that more supply is derived from recycled lead than from mine supply. Of total refined

lead supply of 5.256 million tonnes in the first half of 2013, some 56 percent, came from secondary supply and 44

percent came for primary supply. Given the tightness in scrap supply and therefore the relative high cost of scrap,we assume that most of the scrap metal generated is being fed through to supply. Any new lead demand generally

must be met from an increase in mine output.

In recent years the bulk of the worlds mine production increase has come from China but the rate of growth is now

slowing. In the three years between 2009 and 2012, Chinas mine output increased to 2.84 million tonnes from 1.6

million tonnes - an increase of some 1.24 million tonnes. During this period, global lead mine output has increased

to 5.24 million tonnes from 3.83 million tonnes, an increase of 1.41 million tonnes. So China accounts for 88

percent of the increase.

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Sucden Financial Quarterly Metals Report October 2013

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