FMM0609

Merchant Banking INVESTMENT RESEARCH
Fortis Bank metals monthly

June 2009
Gold, silver, platinum,

palladium, aluminium,
VM Group
copper, nickel, lead & zinc,
Tel. +44 20 7569 5930
tin, plastics, steel. info@vmgroup.co.uk
Fortis Bank/VM Group June 2009 | Fortis Bank metals monthly | 1
Contents
Metals and plastics – Strategic view 3
Analysis 7
Focus 11
Hedge funds activity 17
Gold 18
Silver 19
Platinum 20
Palladium 21
Aluminium 22
Copper 23
Nickel 24
Lead and zinc 25
Tin 26
Steel 27
Plastics 28
Prices 29
Disclaimer and copyright 30
About VM Group 31
Fortis Bank metals monthly is an exclusive precious and base metals research
joint venture between Fortis Bank SA/NV and Virtual Metals Research and
Consulting.
Metals and plastics – Strategic view

Analyst: Carl Firman Introduction
VM Group Are the green shoots of spring turning into the full blossoms of summer? Or is a
Tel: +44 20 7569 5930 late frost about to descend? As might be expected at this point in the economic
Email: carl@vmgroup.co.uk
cycle, there is plenty of evidence – and argument – on both sides. In the more
Analyst: Matthew Turner positive camp, the Organisation for Economic Co-operation and Development
VM Group (OECD) said in early June that its overall measure of advanced member
Tel: +44 20 7569 5934 countries – ranging from the EU to the US, Mexico and Japan – now points to
Email: matthew@vmgroup.co.uk
“recovery” instead of the “strong slowdown.” And, according to one anonymous
Analyst: Gary Mead representative of the G8, the IMF is considering revising its 2010 growth
VM Group forecast up sharply from 1.9% (in April) to 2.4%, in part due to the collective
Tel: +44 20 7569 5930
global stimulus measures. In the less positive camp can be found … the OECD
Email: gary@vmgroup.co.uk
and the IMF. The former warned this month that it was “still too early to assess
whether [this] is a temporary or a more durable turning point.” And Dominique
Strauss-Kahn struck a chilling note by saying: “The large part of the worst is not
yet behind us.” We should expect more of this push-me, pull-you commentary in
the coming weeks as fresh data continues pointing in two contradictory
directions. The bottom-line is that, just as the technical start of the recession
came well before its impact started to be felt in industrial output and consumer
spending, so too will the recession’s technical end be some way in advance of a
real – and, equally important, a perceived to be real – end of the recession.
Having said that, base metals have enjoyed a remarkable recovery so far this
year, based on expectations (if not conclusively lasting evidence) of China’s
growth prospects. It’s certainly the case that, ignoring May’s lower export
figures, China’s fixed asset investment, home sales and car sales have all soared,
and Chinese imports of raw materials have continued to set new records. This is
of course very positive – but insufficient to bring about a rapid end to the global
recession.
Gold
Gold’s latest rally failed to beat its 2009 high, and with the dollar recovering the
price has fallen back sharply. There is little internal news to get in the way of
further dollar-based losses, and the IMF gold sale is approaching finalisation.
Silver
Silver shot higher and collapsed back, as is in its nature; nevertheless it remains
higher relative to gold than it has been for most of this year. Stronger industrial
demand is giving silver an independent source of price gains from the yellow
metal, but deep uncertainties remain as to how solidly-based that demand source
currently is.
Platinum
Strong Chinese jewellery sales and government-enhanced European car sales are
both helping push platinum prices higher. But the latter cannot continue forever,
and masks a slip in the diesel-engine share of the EU car market.
Palladium
Chinese and US car sales have charted utterly contradictory courses, with a
surprisingly buoyant Chinese market offsetting much of the US decline. With a
US incentive programme in the works there might be better prospects ahead, but
investors appear to have already priced this in.
Aluminium
Aluminium is structurally the weakest of all the base metals, so a price rally of
almost 9% in June has to be based on hope rather than reality. Apart from
speculatively eager anticipation of future demand there is little reason for
aluminium to trade above $1,200/t. The greatest risk is therefore to the
4 | Fortis Bank metals monthly | June 2009 Fortis Bank/VM Group
downside, but such is the renewal of risk appetite that further price strength
cannot be ruled out.
Copper
Copper is approaching the point where there is danger of oversupply. The
persistently high price has given miners and smelters the perfect justification to
restart idled production and go ahead with mine expansions and the
commissioning of new projects. The rally essentially boils down to the notion
that Chinese fiscal stimulus-fuelled growth will more than absorb the contraction
in copper demand from the developed world. If that proves not to be the case
then we could see a sharp price correction in 2H 2009. However, right now the
momentum is with bullishly-inclined speculators.
Nickel
A consensus is building among the world’s biggest stainless steel producers that
the collapse in demand has stabilised. That is the only positive in nickel, a
market that despite the savage production cuts of late 2008 and early 2009, is
approaching oversupply. The speculatively-driven high nickel price risks
encouraging a resumption of output at precisely the wrong moment.
Lead and zinc

Both lead and zinc ought to be more alluring to speculative investors than is
currently the case, as the supply-side response has been particularly effective in
keeping stocks to historical norms for both metals. The higher Chinese cars sales
will directly help demand for both, while the Chinese fiscal stimulus should
offer zinc considerable support, due to its use in galvanised steel.
Tin
Tin may be subject to the same speculative support as the rest of the base metals
complex, but unlike some of the others, it’s more justifiable. Caught between
continued low demand and tight supply, tin has the potential to rally much
higher once the recession is well and truly behind us. Tightly controlled supplies
from Indonesia are running headlong into the arms of China’s electronic
soldering industry.
Steel
Chinese steel producers want at least a 40% discount to the benchmark contract
price, but iron ore producers only want to give a smaller 33% discount. With
many Japanese, South Korean and Taiwanese steel makers succumbing to the
iron ore miners’ charms, the Chinese are fighting an uphill battle. Their case
hasn’t been helped by the high rates of Chinese production in 2009 (although
monthly crude steel output in April fell 3.9% year-on-year).
Plastics
The higher oil price has given the plastics a boost with even the illiquid LME
contracts up by as much as 14%. However, should the oil price remain high then
we expect there will be a negative effect on the price as some idled capacity
comes back online.
Forecasts
Price forecasts
17th June 1-month 2-month 3-month 12-month
Gold $ /oz 930.5 880-950 860 (r) 875 (r) 1100 (r)
Silver $ /oz 14.02 12-15 12 (r) 12 (r) 16.50 (r)
Platinum $ /oz 1,201 1,200-1,275 1,100 (r) 1,050 (r) 1,250 (r)
Palladium $ /oz 239.0 220-260 200 (r) 200 (r) 250 (r)
Aluminium (3-month) $ /tonne 1,591 1,400-1,725 1,450-1,550 (r) 1,450 (r) 1,500 (r)
Copper (3-month) $ /tonne 4,925 4.700-5,650 4,750 (r) 4,500 (r) 5,250 (r)
Lead (3-month) $ /tonne 1,630 1,400-1,900 1,500 (r) 1,500 (r) 1,500 (r)
Nickel (3-month) $ /tonne 14,800 12,250-16,400 12,000 (r) 12,000 (r) 12,750 (r)
Tin (3-month) $ /tonne 14,950 13,500-16,500 14,750 (r) 13,250 (r) 14,000
Zinc (3-month) $ /tonne 1,548 1,400-1,840 1,450 (r) 1,400 (r) 1,500
Plastic: LL (Global) $ /tonne 880 850-975 940 (r) 940 (r) 1000 (r)
Plastic: PP (Global) $ /tonne 910 860-980 950 (r) 950 (r) 1100 (r)
Steel: (3-month) Med $ /tonne 375 400-470 450 (r) 500 (r) 850 (r)
Steel: (3-month) Far East $ /tonne 370 400-470 450 (r) 500 (r) 800 (r)
Average/2010 Average/2011 Average/2012 Average/2013 Average/2014
Gold $ /oz 1,027 (r) 923 800 800 (r) 800

Silver $ /oz 14.06 (r) 11.1 10 10 10
Platinum $ /oz 1,217 (r) 1,404 1,500 1,400 1,200
Palladium $ /oz 253 301 350 350 350
Aluminium (3-month) $ /tonne 1,556 (r) 1,875 2,500 2,650 2,700
Copper (3-month) $ /tonne 4,121 (r) 4,367 5,700 6,000 7,500
Lead (3-month) $ /tonne 1,321 (r) 1,567 1,400 1,400 1,400
Nickel (3-month) $ /tonne 12,729 (r) 14,925 14,000 15,000 16,000
Tin (3-month) $ /tonne 14,333 15,708 15,000 12,000 10,000
Zinc (3-month) $ /tonne 1,558 (r) 1,792 1,700 2,000 >2,000
Plastic: LL (Global) $ /tonne 775 800 (r) 850 850 900
Plastic: PP (Global) $ /tonne 775 800 (r) 850 850 900
Steel: (3-month) Med $ /tonne 500 630 750 900 1,000 (r)
Steel: (3-month) Far East $ /tonne 470 610 730 900 1,000 (r)
Source: VM Group [r] = revised from previous month

Market Update
Prices and stock levels 17th June
Prices Most Average High Low Price WoW Price MoM Price YoY Average Average
recent over past 1 week (%) 1 month (%) 12 months (%) 2008 2007
price 12 M ago ago ago
Gold $/oz 930.5 872.9 989.0 712.5 947.5 (2) 929.5 0 887.5 5 872.6 696.5
Silver $/oz 14.02 13.00 19.30 8.88 15.1 (7) 13.9 1 17.0 (18) 15.15 13.4
Platinum $/oz 1,201 1,181 2,103 763 1,253.0 (4) 1,109.0 8 2,103.0 (43) 1,599 1,304.7
Palladium $/oz 239.0 246.8 475.0 164.0 257.0 (7) 224.5 6 467.0 (49) 357.4 354.7
Aluminium $/tonne 1,591 1,965 3,341 1,289 1,674.0 (5) 1,515.0 5 3,074.0 (48) 2,659 2,662.0
Copper $/tonne 4,925 5,041 8,812 2,820 5,290.0 (7) 4,351.0 13 8,126.0 (39) 7,030 7,095.9
Lead $/tonne 1,630 1,465 2,230 875 1,809.5 (10) 1,435.0 14 1,906.0 (14) 2,136 2,557.9
Nickel $/tonne 14,800 13,697 23,800 9,025 15,650.0 (5) 12,350.0 20 23,800.0 (38) 21,689 36,217.1
Tin $/tonne 14,950 14,697 23,750 9,755 15,655.0 (5) 13,550.0 10 22,505.0 (34) 18,766 14,532.3
Zinc $/tonne 1,548 1,438 2,035 1,069 1,661.5 (7) 1,486.0 4 1,920.5 (19) 1,924 3,243.2
Steel (3-month)
Med $/tonne 375 506 1,267 260 360.0 4 336.0 12 1,200.0 747
Far East $/tonne 370 485 1,172 255 360.0 3 360.0 3 1,090.0 695
PP $/tonne 880 1,033 1,930 620 880.0 0 835.0 5 1,680.0 (48) 1,407 1,220.2
LL $/tonne 910 1,058 1,750 685 910.0 0 840.0 8 1,630.0 (44) 1,404 1,254.9
LME Stocks Most Average High Low Stocks WoW Stocks MoM Stocks YoY Average Average
recent over past 1 week (%) 1 month (%) 12 months (%) 2008 2007
stocks 12 M ago ago ago
Aluminium Tonnes 4,359,100 2,345,130 4,359,100 1,077,975 4,269,850 2 3,937,050 11 1,078,325 304 1,231,093 842,573
Copper Tonnes 283,175 312,077 548,400 122,075 290,275 (2) 353,550 (20) 124,225 128 176,337 158,899
Lead Tonnes 84,200 66,250 101,900 40,950 82,125 3 73,925 14 97,225 (13) 62,174 37,218
Nickel Tonnes 108,186 75,241 114,474 43,188 108,948 (1) 110,190 (2) 46,776 131 51,857 18,110
Tin Tonnes 16,250 8,077 16,250 3,010 16,035 1 13,610 19 7,010 132 7,314 11,891
Zinc Tonnes 336,450 246,214 362,275 149,650 329,975 2 320,675 5 152,175 121 150,777 81,377
Source: VM Group
Analysis
Analyst: Carl Firman Testing China’s mettle
VM Group Just like any bride jilted at the altar, China’s state-owned aluminium producer
Tel: +44 20 7569 5930 Chinalco has no doubt run through the whole gamut of emotions – first
wounded, then angry, and now probably plotting who its next suitor will be. The
Analyst: Gary Mead decision by Rio Tinto to walk away from a deal that looked clever in February
VM Group but less so in June shows that its management – under pressure from
Tel: +44 20 7569 5930 shareholders – recalled at the last minute the old adage, “marry in haste, repent
Email: Gary@vmgroup.co.uk
at leisure.” The collapse of Rio’s enthusiasm for Chinalco was not just an
unparalleled slap in Chinalco’s face, in a country where maintaining face still
counts; it also symbolises a turning point in the current global recession. Bluntly,
Rio no longer feels it needs rescuing by a cash-rich but relatively unknown
entity. It can instead get its necessary financing by turning once more to the old
familiar faces, who turn out not to be busted flushes (as was feared back in
February) after all.
Were it a case merely of Chinalco’s bruised sentiment, this whole episode might
be relatively quickly smoothed over. But in walking away from the Chinese
aluminium giant, Rio Tinto is proposing to embrace BHP Billiton, in the form of
an iron ore production joint venture (JV) between its and BHP Billiton’s assets
in Western Australia. For Beijing, this adds insult to injury. The fact that Rio has
merely decided that it makes better commercial sense to join forces with BHP
than Chinalco is unlikely to make the Chinese feel warm and cuddly towards
potential overseas targets in the future.
For the past nine months China has been looked upon as the bank of last resort
by debt-laden companies, but the Rio move signals that Western confidence and
credit have recovered from the brink of collapse. When Rio sprang the idea of a
tie-up with Chinalco earlier this year as a mechanism for solving its huge
looming debt problems – almost $38bn, much of that resulting from its gobbling
up of Alcan in 2007 – the only potential investors with the appetite for
expansion and the money to pay for it were Chinese.
Under the terms of the deal with Chinalco, Rio Tinto agreed to sell stakes in its
copper, aluminium and prized iron ore assets to Chinalco for $12.3bn, as well as
permit it to buy up to $7.2bn of convertible bonds and thereby raise its stake in
Rio Tinto Group to 18%. Rio’s flirtation with the Chinese brought upon it plenty
of cross words from angry existing institutional shareholders – its chairman Paul
Skinner had to stand down – but back in February Rio lacked sufficient long-
term confidence to stomach the kind of mammoth rights issue that was the only
alternative.
But just four months later base metals prices are up by as much as 50%, credit
lines have improved considerably, and sentiment has turned bullish, providing
Rio the room to get its rights issue, as well as shoring itself up by agreeing an
iron ore JV with BHP Billiton. The irony is that Chinalco has lost out partly
because its political masters in Beijing have been the main supporters of this rise
in metals prices, through government support for its domestic metals’ sector, and
via its huge fiscal stimulus package.
So where does this leave China?

China may give the impression it speaks with one voice, but this is far from the
case. In order to secure long-term resource assets on the cheap, metals prices
would have had to remain at rock bottom – which required discipline from
government bodies and considerable self-sacrifice from individual companies
for the greater good of China Industry plc. But China’s failure to control the
huge inflows of metal into the country have provided the markets with very
useful price support at the very moment when demand elsewhere was at its
weakest. This in turn has boosted renewed confidence and restored risk appetite,
especially with signs that the ravaged US economy may be stabilising.
This inability to staunch the actions in its own domestic industry may appease
international concerns that Chinese foreign direct investment (FDI) is geared
towards just one goal, and that is to secure long-term strategic resources to the
detriment of the markets. Surely, goes this reasoning, if Beijing cannot rein in its
industry on its own turf, then it is unlikely to have any more success with its
foreign investments?
Certainly China has a relatively poor rate of success when it comes to large-
scale foreign acquisitive moves. Numerous big international investments have
been scuppered at the last minute, such as China National Offshore Oil
Corporation’s bid to purchase California-based Unocal in 2005, and Minmetals
attempt to gain a foothold in the Canadian nickel markets via Noranda.
China’s reaction after these failures was to back away, as if in fear that further
credibility might be lost, should different new bids also prove to be
unsuccessful. But China is clearly learning to adapt and take the rough with the
smooth, a kind of ‘some you win, some you lose’ attitude. Chinalco may have
lost out with Rio, but China Minmetals has won over Australia’s Oz Minerals by
sweetening its offer by another 16%, to $1.4bn. And in a clear policy statement
the Chinese Commerce Ministry says that the country’s ‘go abroad’ policy is
still alive, although it would be pursued “in a more mature and efficient way.”
The surge in shares of the smaller Australian iron ore miners, Fortescue Metals
Group and Murchison Metals, certainly suggests investors are betting that the
Chinese will re-engage and redirect their attention to smaller and less politically
sensitive entities in the near future. With a stockpile of $1.95 trillion in foreign
currency reserves, invested mainly in US bonds, China has a huge wallet from
which to cherry-pick its targets.
But for China to really succeed in winning over the sceptical, it might do well to
loosen its own policies with regard to foreign direct investment (FDI) within its
own territory. China has attracted about $1.25bn a week in FDI since it joined
the World Trade Organisation in 2001; its outbound FDI almost doubled last
year to $52.2bn, from $26.5bn in 2007, while its FDI in Australia leapt to $13bn
in Q1 2009. However, certain Chinese sectors remain out-of-bounds for foreign
investment; these will need to open up if China expects similar treatment from
other jurisdictions.
Yet it’s unlikely that China will tear down its protective fences very hurriedly.
For one thing it has seen that much of its natural resources’ ambitions can be
pinned down not by moving into the boardrooms of Western corporations but
via state-to-state agreements. It has extended $45bn in loans to develop oil and
gas fields in Brazil, Russia, Venezuela, Angola and Kazakhstan, while also
signing long-term gas supply deals in Queensland, Australia and, recently, deals
with the Democratic Republic of the Congo and Peru for unfettered access to
natural resources. More of this is likely in the future – as the opportunity for
China to snatch up leading Western companies on the cheap has probably
disappeared.
Implications for the iron ore market

The Rio Tinto/BHP Billiton tie-in will encompass all the current and future
output from both companies’ iron ore assets in Western Australia, excluding
Rio’s HIsmelt operation. Due to the lesser production capacity of BHP Billiton’s
Western Australian operations, BHP Billiton will pay Rio Tinto a consideration
of $5.8bn for a 50:50 equity share in the JV.
Although Rio Tinto will have to pay Chinalco a breakaway fee of $195m, it
claims the synergies between it and BHP Billiton’s iron operations in the Pilbara
region of Western Australia will realise net present value cost savings of more
than $10bn. The JV would produce more than 250 Mt of iron ore in 2009, from a
combined capacity of approximately 340 Mt, but is unlikely to be signed until
2010. Rio Tinto produced more than 142 Mt of iron ore (attributable) from its
Western Australian iron ore assets in calendar year 2008 and BHP Billiton
produced more than 108 Mt. In Q1 2009, Rio Tinto produced 29.8 Mt of iron ore
and BHP Billiton produced 26.6 Mt.
By 2010, the JV will have about the same production capacity as Brazil’s Vale,
but further ahead it could account for up to 700 Mt/y of iron ore, if present and
planned production from both Rio Tinto and BHP Billiton prior to the JV is
included. Vale, meanwhile, could easily manage to expand to at least 425 Mt/y
within the next few years. Importantly, Rio and BHP will be responsible for the
marketing and sales of their own equity share of iron ore production.
What are the implications for iron ore pricing as a consequence of the Rio/BHP
link? Not much in the short-term. Longer-term however is a very different
matter. Steel producers have already been extremely vociferous in protesting
that the combination will give Rio/BHP enormous and unjustifiable clout in
setting future iron ore prices. The China Iron and Steel Association (CISA) said
the deal had “a strong monopolistic tint,” and that it opposes such an
“establishment,” while the Japan Iron and Steel Federation has labelled the JV as
“anti-competitive.” Europe’s steel industry body, Eurofer, has called for the
EU’s antitrust authorities to investigate the JV, saying the “merger of iron ore
assets of this type in a world market already dominated by just three suppliers
would not be in the interests of the steel industry.”
But although an EU anti-monopoly inquiry is likely, the details of the JV are

clever and should get through antitrust scrutiny, in our view. The JV is for the
equal sharing of production, not for the marketing and sales of the iron ore once
at port. Therefore, both Rio and BHP Billiton will still both approach iron ore
contract negotiations and spot iron ore sales separately, maintaining the status
quo between the big three and the steel sector. One caveat, and essentially the
crux of the problem for the steel sector, is that once the JV gets the expected
green light, an outright bid from BHP Billiton for the whole of Rio Tinto
becomes much more likely in the future. Preventing the iron ore JV going ahead
would likely drive the final nail in BHP Billiton’s ambition to buy its rival.
Here and now

The Rio rights issue and planned tie-in with BHP Billiton has considerably
strengthened the iron ore producers’ hand with regard to the current iron ore
contract negotiations with Chinese steelmakers, who have been seeking a 40%
cut in iron ore contract prices for the 2009-2010 marketing year. Rio is now
likely to hold out until the Chinese agree the 33% cut in iron ore fine prices, to
$97/dry metric tonne, for the contract year 2009/10, or follow BHP Billiton’s
lead and threaten to sell on the spot market. The Chinese will be wary of relying
on the spot market, even though spot prices are well below Rio’s agreed contract
terms with Japanese, Taiwanese and South Korean steelmakers. Spot prices are
volatile and could rise well above the contract price, which is almost a certainty
should China continue to throw out such positive economic growth data, while
continuing to stock up on commodities.
The only card China holds is that it can point to more than 75 Mt of iron ore at
its ports, enough to cover six weeks of imports and five weeks of domestic mine
production. These large stock volumes have played a major part in China’s
tough stance in the current annual iron ore contract negotiations. But the gambit
may have worked against China, because this high level of monthly imports has
supported an increase in spot iron ore prices, and this has strengthened the iron
ore producers’ negotiating stance. The danger for China is that, if it elects not to
sign up to an annual contract, then it will eventually exhaust its iron ore stocks
and be forced to import iron ore from the spot market. This would likely create
an iron ore price bubble and could be very damaging to China’s steel sector. One
way to offset this would be to hedge the price using iron ore swap contracts, but
this would require a radical change in policy and attitude from the Chinese steel
industry, which has hitherto vigorously opposed such contracts.
Implied Chinese iron ore demand (imports + production), 1999-April 2009 (Mt)
140
120
100
80
60
40
20
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Reuters Ecowin
There has been much talk of this episode marking the end of the 40-year old iron
ore benchmark system, but we consider it to be more the beginning of the end
than the end itself. We expect the Chinese will eventually give in and settle close
to the 33% iron ore fines price sought by the iron ore producers for this contract
year. For the next contract year starting 1st April 2010 a change is almost a
certainty. There have been numerous suggestions, the main ones being a change
to a quarterly contract system or index-linked iron ore spot sales. It’s too early to
tell which system will be preferred, or whether iron ore producers and steel
makers will elect to settle for a mixture of pricing systems. Either way, such has
been the growth in the Chinese steel sector that it is obvious to all that bitter and
protracted wrangling once a year is not an efficient way to run such a vast
business.
Focus
Analyst: Carl Firman Silver: investment and industrial demand
VM Group Silver’s unusual position, part financial instrument and part industrial metal,
Tel: +44 20 7569 5930 has both supported and capped its price throughout the present global
recession. It has gained 30% since the start of 2009, passing $15/oz in early
Analyst: Gary Mead June, with a rally of 15% since the start of May alone. Unlike gold, which is tied
VM Group more closely to shifts in economic sentiment rather than the hard fundamentals
Tel: +44 20 7569 5930 of supply and demand, silver has not only benefited from the huge increase in
Email: gary@vmgroup.co.uk
investment demand but also on optimism that industrial demand will soon pick
Analyst: Matthew Turner up. Silver is therefore seemingly placed in a win-win situation.
VM Group
Tel: +44 20 7569 5934
The silver price has significantly outperformed that of gold so far in 2009,
Email: matthew@vmgroup.co.uk
despite the fact that physical demand – photography and jewellery – has
declined consistently over the past two years. Partly this strong price surge is to
be explained by the tremendous success of the silver-backed exchange traded
fund and the enthusiasm of investors in silver futures. Partly it’s due to the fact
that the savage production cuts in lead and zinc mining mean that silver as a by-
product is being produced in significantly lower volumes.
But one of the greatest underlying reasons behind this price strength is the
growing view that silver faces a strong demand recovery from the electronics
and brazing alloy sectors and, more importantly, new end uses that may possibly
soak up the existing surplus within the next several years. If the green shoots of
recovery prove to be just a mirage, we expect silver investment demand to pick
up alongside that of gold as a hedge against risk. But if the global recession has
truly bottomed and is poised to recover, then silver will benefit from heightened
physical demand in new industrial applications.
Investment demand
In October 2008 the silver price collapsed to a low of $8.88/oz, as the financial
crisis saw investors flee for the safety of the US dollar and industrial demand
collapsed. It was a hard landing but that low is now apparently consigned to
history; silver has traded at over $10/oz since mid-December 2008. At that
October 2008 low point, Comex net long positions accounted for just 95.7 Moz
(in the week to 21st October), from 339.6 Moz in mid-July 2008 and 382.4 Moz
in mid-February 2008. That net long position on Comex has now recovered to
stand at 249.4 Moz as at 9th June 2009.
Silver investment demand (Moz) and silver price, $/oz
700 25
600
20
Investment demand (Moz)
500
Silver price ($/oz)
15
400
300
10
200
5
100
0 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total net longs, Moz Silver ETF holdings, Moz Silver price, $/oz
Source: VM Group
ETF demand has remained more robust than has been seen on Comex, in spite of
the financial crisis and global recession. As at 12th June, total silver ETF
holdings had grown to 344.7 Moz, with the US BGI share at 276.7 Moz, the UK
ETF at 19.9 Moz and the Swiss ZKB ETF at 48.1 Moz. At the start of 2009,
total silver ETF holdings were 265.5 Moz, while back in late October 2008 total
holdings stood at just 6 Moz lower. This suggests that come what may, silver
ETF demand has become a key support to the silver price – and we expect that
to remain the case.
However, even though total investment demand (including ETFs and Comex
futures and options) has now reached a record of more than 573 Moz, the silver
price is still significantly down from its multi-year high of $19.88/oz in March
2008. This reflects the lower level of real industrial demand, while the recovery
in Comex positions and perhaps to a lesser extent the rise in ETF holdings is
partly based on anticipation that physical demand will soon recover.
Industrial demand
In Q4 2008 a generalised flight from risk saw gold outperform all other
commodities – a flight that has steadily reversed so far this year. From July to
December 2008 the monthly gold/silver ratio (the amount of silver ounces in US
dollar terms required to buy 1 oz of gold) moved from the lower 50s to around
80 – a level last seen back in 2003. In other words, 1 oz of gold was worth only
slightly more than 50 oz of silver at the end of July 2008, and about 80 oz of
silver by the end of December. The downward swing was a direct consequence
of collapsed industrial and jewellery offtake for silver and the surge into gold,
which evidently retains much of its historical importance as a safe haven when
all else falls apart.
End month gold/silver ratio from 2003
85
80 End December 2008
75
70
65
End October 2008
60
End February 2009
55
50
45 End March 2008
End July 2008
40
2003 2004 2005 2006 2007 2008 2009
Source: VM Group
The out-performance of gold over this period is even clearer when compared
with copper. At the end of August 2008, 3,558 ounces of copper (priced
according to Comex spot prices) would have been necessary to buy 1 oz of gold,
but by the end of February 2009 this had almost trebled to 9,122 oz – a 22-year
high. At the end of September 2008, 57 oz of copper was equivalent in US dollar
terms to 1 oz of silver, while by the end of February 2009, this had more than
doubled to 130.
End month gold/Comex copper ratio from 2003
10,000
9,000 End February 2009
8,000
7,000
6,000
End October 2006 End August
5,000 End July 2007
4,000
3,000 End April 2009

2,000
2003 2004 2005 2006 2007 2008 2009
Source: VM Group
So far in 2009 the rally in base metals’ prices and those of most other
commodities has been largely supported by Chinese apparent demand and a
weak US dollar, together with some evidence of stabilisation in the US
economy. This is brought into sharp focus by the performance of silver over
gold, and that of copper over silver. From their highs in December 2008 and
February 2009, the silver/gold ratio has declined to the low 60s, while that of
gold/copper has declined to the low 6,000s. Our current concern is that the rally
in industrial metals may have moved too far, too fast, anticipating a global
economic recovery rather than that recovery being already firmly in place. If
that’s the case, then we may see a steadying of these ratios and possibly a
reversal, with gold out-performing silver in 2H 2009 and early 2010, as
economic gloom lingers and the worries over government long-term
indebtedness deepen. Yet even then the silver price ought to continue to remain
strong, as it will benefit from its investment safety potential.
End month silver/Comex copper ratio from 2003
150
130 End February 2009
110
End September 2008
90
70
50 End July 2006 End April 2009

End July 2007 End May 2009
30
2003 2004 2005 2006 2007 2008 2009
Source: VM Group
End month gold/silver and gold/copper from 1976
12,000 120
Ratios back at
10,000 100
2003/2004 levels
Gold/copper ratio
Gold/silver ratio
8,000 80
6,000 60
4,000 40
2,000 20
0 0
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Gold/copper Gold/silver
Source: VM Group
Shiny industrial future for silver

Putting the current volatility of the precious metals’ markets to one side, we
remain positive on silver’s long-term industrial demand profile, as emerging
end-uses replace the relentless decline in demand from the photographic sector.
Many of these new end-uses will see little in the way of recycling, with silver
permanently lost to the marketplace. Putting together photographic demand (net
of recycling), we expect that by 2015 these new end-uses will exceed overall
global demand levels seen back in 2005; this is not taking into account the
growth in demand from catalysts, electronics and brazing alloys, nor does it
factor in future growth in investment demand.
Moreover, the supply-side for silver is looking more price supportive than for
many years. We have seen dramatic cutbacks of zinc and lead mine production
that have, for the first time since the mid-1990s, reduced the amount of primary
silver entering the market. We estimate about 60 Moz/year of silver by-product
from this source has been lost. Although this still will not see the silver market
anywhere near balanced – having been in a surplus ranging between 30 Moz-200
Moz for the past 15 years, that surplus will take much more than the current
round of mind output cuts to be eradicated – but supply is coming down and sets
the stage for a rather tighter than typical market out to 2015. By when we
anticipate much of these new end-use applications will be consuming ever-
increasing volumes of metal.
Sectors such as wound care dressing, food packaging and hygiene, solar panels,
wood preservatives and radio frequency identification tags (RFIDs) have
become reliant on silver’s innate biocidal and electrical properties. We estimate
that wound care, which also includes catheters, pacemakers etc, will consume
about 45 Moz/year by 2015, after growing at 10%-12% each year from 2008.
Our reasoning is partially based on the harsh reality that populations in North
America and Europe are aging, and in the case of the US (and some others) also
becoming weightier. This brings with it a whole plethora of health issues,
including skin problems and the need for hospitals and medical centres to ward
off infection. In the US alone, sales of silver-based wound care products
between 2002-2005 grew on average at 32% per year. Supporting this strong
growth is the fact that silver-based wound care products are finding increasing
application in overcoming the bacterial resistance as seen in MRSA (Methicillin-
resistant staphylococcus) in hospitals the world over. Silver-based products are
effective against MRSA and can be applied instead of antibiotics.
Food packaging is another area that relies on silver’s unique germ-killing

properties, with demand projected to increase from almost 4 Moz in 2009 to an
estimated 27 Moz by 2015. The global food industry, valued at $2,000bn per
year (retail), is being forced by more restrictive legislation to raise its standards
of storage and hygiene and substantial investments are being made in research
and development in this field. The most advanced products to date are advanced
anti-microbials used in packaging, using silver for its active ingredient. Silver
ions are slowly released from the anti-microbial compound to the surface of the
treated material, inhibiting the growth of a broad array of bacteria, moulds and
fungi. The first products gained US Food and Drug Administration approval in
2003, containing 5% silver, but these products can now be found in bulk food
storage containers, paperboard cartons, plastic or paper food wraps and milk
containers.
A further strong future new industrial end-use for silver is in solar power
applications. Prior to the worst days of the systemic financial meltdown last
September, the world solar industry was growing at a compound annual growth
rate of at least 10%. Like most sectors, this growth has slowed considerably
during the recession, but in the US the new federal administration is firmly
committed to renewable energy as a way of cutting its dependency on imported
crude oil. This will certainly give the solar industry a shot in the arm. Not that it
needed one. By 2030 it’s likely that solar power will account for close to 10% of
total global power generation. The most common form of solar generation is
through crystalline silicon panels that use silver as the conducting medium
between the semi conductors. We estimate silver usage from this particular area
will account for about 80 Moz/year by 2015, with very little in the way of
possible substitution.
Domestic household demand for silver will also begin to make much greater –
although scarcely noticed by consumers – inroads. Chromated copper arsenates
have been banned (for environmental reasons) in the treatment of commercial
and residential timber in the US, where most houses are timber-framed. Silver-
based materials are being licensed in their place. While there are still some
environmental worries about colloidal silver getting into the water table, these
are substantially less of an environmental issue compared with copper arsenates.
Various silver-based products are currently awaiting approval; once they get it,
this could be a 100 Moz/year market in the future. However, the approval
process could take time and we have allowed for offtake of just 3.5 Moz by
2015.
Last but not least is one of the fastest growing new demand sources for industrial
silver, in the form of radio frequency identification tags (RFIDs), which will be
crucial for the movement, safety and control of goods, as well as people, in years
ahead. We estimate end-use demand for RFIDs will increase from 3 Moz in
2009 to 45 Moz/year by 2015, as RFIDs rapidly replace traditional bar codes on
all types of goods and documents. RFIDs can transmit data rather than having to
be physically scanned; they do not need line of sight to transmit data; and they
can withstand very harsh environmental conditions. They are capable of tracking
huge amounts of goods right through the supply chain. In other words they are a
potent weapon against stock theft and counterfeiting. They can also track people.
China recently spent $6bn on a rollout of RFID cards in a number of
applications, including ID cards and a programme to issue 3bn railway tickets
every year. Moreover, many of the developed world’s new passports are
required to carry an embedded RFID in the cover for automated scanning. Each
tag at the moment consumes a minute 10mg of silver; but billions will be
required, with little in the way of recycling possible.
Silver demand forecast out to 2015, Moz
600
500
400
300
200
100
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Wound care Radio Frequency Identification Tags Mirrors/Reflective Glass

Water Purification Solar Panels Plasma Screens
Food Hygiene Fibre/Textiles Photographic demand (net of recycling), Moz
Jewellery
Source: VM Group
Overall, our estimate is that these new end use sectors will consume more than
250 Moz/y of silver by 2015, which will more than wipe out the current supply
surplus of 163 Moz. Falling photographic use and recycling will partly offset
this; but mine supply will also need to ramp up or we may be facing a situation
where the market enters a supply shortfall – not tomorrow, or even the next year,
but later next decade.
Hedge funds activity

News
Hedge funds by type (% returns)
• June 17th: UK lawmakers expressed their concern over EU proposals for
12 region wide financial regulation. According to the bipartisan House of Lords
10 European Union Committee there is no immediate need for EU legislative
8 action to tighten the regulatory noose on the financial services industry- such
6 moves could be detrimental to the long term health of the economy. The
4
committee stated that “financial services are a key strategic industry for the
2
UK [and] many other EU member states do not share this perspective".
0
-2
Financial Services Secretary Paul Myners has opposed European Commission
-4 plans to create a single organisation to regulate Europe’s financial system
-6 favouring market regulation by respective national governments.
-8 • June 3rd: Connecticut, home to hundreds of hedge funds, has tired of waiting
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 for federal action and is set to enforce its own regulations on the industry.
Proposals include mandatory audits, licensing and disclosure of fee structures.
All hedge funds
While still some way off from becoming state law, the moves in the
All with some commodity investment
Connecticut Senate suggest that a delay in action at the federal level could
Funds with >50% AUM in commodities
result in a confusing state-by-state regulatory scheme.
Source: VM Group from Barclay Hedge Fund • June 1st: The UK Financial Services Authority (FSA) extended its ban on
Database short selling of selected banking and insurance stocks beyond the 30th June
deadline.
Monthly returns of hedge funds (%)
Analysis
20 15 • Green shoots appear in April
15
10
10 After a disappointing first quarter, hedge funds have caught some of the
5 infectious enthusiasm of equity and commodity markets, posting an overall
5
0 0 positive return of 2.19% during April, the best monthly performance we’ve seen
-5
from funds in our database since October 2007. Metals’ funds were the only
-5
segment in negative territory, down by 0.17%. Energy funds were up 3.7%,
-10
-10 faring better than the softs funds, although they returned a respectable 3.23%.
-15
-15
Commodity funds overall were up by 2.29%, while funds with over 50% of their
-20
assets devoted to commodities were up by 1.54%.
-25 -20
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Outlook
Reuters-CRB precious metals
The improved performance in April is encouraging and will provide some
Funds with >50% in metals respite for managers, but it would be premature to base much on a single
month’s returns. Funds are still being liquidated; two high profile
Source: VM Group from Barclay Hedge Fund managers chose to close up shop on some of their operations this month.
Database
James Pollota announced the closure of his $800m Global Raptor Fund
following losses incurred in 2008, and George Noble, also a seasoned
manager, notified clients that he plans to refund their money in the $550m
pool he has spread across two funds. Geneva’s oldest private bank,
Lombard-Odier, announced it will close two funds of hedge funds that it
operates. These exits illustrate that seasoned industry participants may be
feeling a bit sceptical about the immediate prospects for recovery, choosing
instead to liquidate and bide their time until re-entry with a new fund. The
last 18 months have been especially damaging for an industry that prided
itself on an ability to keep at least one step ahead of markets. New inflows
will come along but investors’ terms will be more demanding. Pension funds
are expected to spearhead the return of investors to hedge funds over 2009,
but they are already proving to be fussy clients. The British pension fund
manager Hermes has called for greater transparency and a more equitable
performance fee structure for the industry. Others are arguing for fees only
kicking in once minimum performance targets are reached, and that funds
that require lock-up periods should not be able to charge fees at all. April
was a promising start but it will take a more consistently good run to repair
the industry reputation.
Gold
News
Gold price ($/oz)
• June 16th: The US Congress is close to passing legislation that, among other
990 things, grants permission for the IMF’s planned sale of 403.3t of gold. The
980 bill has been controversial for many reasons, not least because it was attached
970
to a war-funding bill. The US, with 15% of the votes at the IMF, has an
960
950 effective veto on policies such as the sale of gold.
940 • June 12th: A survey by UBS of 80 institutional money managers, with
930 combined assets of $5.5 trillion, asked: “What will be the most important
920
910
reserve currency in the world in 25 years?” Top of the pile was the US dollar,
900 with 40%, followed by “an Asian currency” with 18%, and the euro, with
890 14%. Gold got 13%, followed by SDRs, on 11%, and ‘others’, on 4%.
880
870
1-May 11-May 21-May 31-May 10-Jun
Analysis
• Dollar gyrations mask wait-and-see market
Source: London Bullion Market Association
After reaching $981.75/oz on the London PM fix of 1st June, its highest fix since
Comex: Non-commercial net position (tonnes) 24th February, gold looked set for another assault on the $1,000/oz level, last
breached in March 2008. It was not to be however, with a stronger dollar and
1,000
reduced fear of economic collapse sidelining the yellow metal. The price fell
800
first to around $950/oz and then back towards $930/oz on 13th June, where it
held. This volatility essentially followed moves in the US dollar – as with many
600 commodities right now, gold is being bounced about by external markets, which
in turn are suffering a bout of indigestion, a surfeit of conflicting
400 macroeconomic data. The dollar/gold correlation has been very strong of late
and while the move is not 1:1 (from peak to trough, the move in gold was 11%,
200 in the dollar v. the euro, 7.5%), such a relatively strong correlation is a sure sign
that there is little else driving the gold market – the forces behind a push for
0 higher prices are being offset by those favouring lower prices. In such a scenario
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 the exchange rate fluctuations account for most of the price moves – a situation
we expect to persist for some time to come. It will therefore take a truly strong
Source: VM Group
swing towards a much weaker dollar to see the price get to and sustain itself at
Dollar/euro and gold correlation
$1,000/oz. The next major event in the gold market is likely to be details of the
renewal of the Central Bank Gold Agreement (CBGA) and, related, the IMF’s
1.45 990 proposed sale of 403.3t of its bullion reserves. Congress is shortly to give its,
1.43 970 and therefore the US’s approval, and the IMF Executive Board authorisation is
1.41 likely to follow soon after. But with only a little over three months to go in the
950
1.39 current CBGA, it is likely the IMF will be the lynchpin of a new agreement.
930
1.37
1.35
910 Outlook
890
When little else is going on, gold inversely follows the dollar quite closely,
1.33
but more pronouncedly, i.e. for a given dollar move gold moves more in the
1.31 870
opposite direction. This surely is because it is seen by many investors,
especially those who are dollar-based, as a dollar hedge. With further dollar
Dollar/euro Gold (in $) gains likely we see gold falling back to levels seen in April. Then all eyes will
be on physical demand. Short-term London fix: $880/oz-$950/oz.
Source: VM Group
Market data (May unless stated)
Prices $/oz €/oz Rand/kg ETF Tonnes Monthly Lease 1m 3m 6m 12m Option volatility
investment holdings change rates (end month, %)
Average 930 680 248,854 US (2) 1,187.7 14.9 Average (0.12) 0.16 0.64 0.91 1-month 22.35
High 982 693 258,677 UK (2) 220.2 3.4 High 0.00 0.26 0.74 0.99 3-month 26.70
Low 885 660 234,750 Aus 13.5 0.1 Low (0.23) 0.06 0.55 0.83 6-month 30.10
S. Africa 29.3 1.0 12-month 31.75
Swiss 173.2 (11.2) 24-month 31.80
India (5) 5.0 0.1
Turkish 1.5 0.2
German 28.7 (1.2)
Source: Prices: London Bullion Market Association, Others: VM Group Note: Indian ETF holdings calculated from rupee amounts and thus are approximations only
Silver
News
Silver price ($/oz)
• May 31st: Peru produced 313.3t of silver in April 2009, 7.4% higher than the
16.5 same month of 2008.
16.0
15.5 Analysis
15.0 • Silver storms higher
14.5
14.0 Silver bulls were handsomely rewarded in early June, when the metal fixed at
13.5 $15.97/oz on the 3rd, its highest level since August 2008 and an astonishing 31%
13.0 higher than at the start of May. Over the same time period the gold price
12.5 managed to rise just 5.2%, platinum 11.6%, palladium 12.7%. Only lead, tin and
12.0
nickel (21%, 20% and 27%) of the base metals beat it; copper, also clearly
11.5
performing strongly, rose just 9%. A weaker dollar clearly helped, but the US
1-May 11-May 21-May 31-May 10-Jun currency was down just 7% against the euro and on its currency index, so silver
was higher in all the major currencies. Silver then fell back to $14.02/oz by 17th
Source: London Bullion Market Association June, but that was still 15.4% higher than at the start of May.
That silver’s performance can be compared to the hottest of base metals, rather
Nymex: Non-commercial net position (tonnes)
than gold, or even the PGMs, suggests that it is industrial demand, or at least the
14,000 expectation of an increase in industrial demand, rather than “safe-haven”
12,000
demand that is driving prices. This does not mean investors have been absent
however – the BGI ETF added 260t on 1st June, its 7th largest daily increase on
10,000 record (and the largest this year) – and the COMEX net long hit 7,758t in the
8,000 week ending 9th June, the highest level since August.
6,000
But what goes up sharply can come down just as sharply. Silver is a relatively
4,000 small market and is often subject to exaggerated moves in either direction. This
2,000 means new highs cannot be ruled out, especially if gold rallies again. But it also
means that there could be a sharp correction lower, especially if investors decide
0
Jun-07 Dec-07 Jul-08 Feb-09
to take some profits – most ETF holdings were bought at prices considerably
lower than the current price.
Source: CFTC
Outlook
By 15th June silver had slipped to $14.31/oz, down over 10% from its peak,
Silver/gold ratio, 2009
as a stronger dollar took its toll. What happens next will depend on a
82 combination of the dollar, which we expect to rally – thus meaning lower
80 silver prices – and perceptions of the economic recovery.
78
76
These are very volatile scenarios, changing with every new release of
74
72
economic data, but our short-term bias is towards a more protracted and
70 difficult, uncertain exit from the recession, one that will not become
68 conclusively apparent until 2010. Investment demand will remain strong
66 but industrial demand – in the mid-term will not visibly strengthen.
64 Longer-term, the prospects for silver are however looking better than for
62
several years, thanks to the cutbacks in silver produced as a by-product and
60
the emergence of new end-uses. Short-term London fix: $12/oz-$15/oz.
Jan Feb Mar Apr May Jun
Source: VM Group
Prices $/oz e/oz £/oz Lease 1m 3m 6m 12m Imports Exports ETF offtake (tonnes) Option volatility
rates Holdings Change (end month, %)
Average 14.06 10.26 9.06 Average 0.24 0.72 1.20 1.42 USA (Mar) 89,931 83,427 US 8348 (65) 1-month 36.25
High 15.86 11.20 9.65 High 0.37 0.96 1.42 1.71 Japan (Mar) 113,412 347,104 UK* 624 68 3-month 37.25
Low 12.15 9.07 8.09 Low 0.07 0.40 0.92 1.22 China (Mar) 315,423 312,053 Swiss 1,464 24 6-month 38.25
12-month 39.25
24-month 39.50
Source Price: London Bullion Market Association, Others: VM Group * Includes 'basket' ETF
Platinum
News
Platinum price ($/oz)
• June 10th: At Anglo Platinum, the world’s largest platinum producer, the
1300 National Union of Mineworkers (NUM) in South Africa rejected a 6% pay
rise and are looking for a 15% increase. Workers at Impala Platinum are
1250 pushing for a 20% pay rise.
• May 21st: The Cohen Mint in the US is to launch the first ever rhodium
1200 bullion coin. The metal has fallen in value by 90% over the past year, and is
primarily used in autocatalysts.
1150
Analysis
1100 • Car sales bad but probably stabilising
1050 Platinum surged higher at the end of May, rising from $1,175/oz to a peak (on
1-May 11-May 21-May 31-May 10-Jun its London fix) of $1,275/oz on 10th June, the highest since September 2008. As
with many commodities, renewed (if uncertainly based) economic optimism has
Source: London Platinum & Palladium Market
helped to firm prices; however, at just 6%, platinum’s increase lagged that of
base metals – the LMEX index gained 13% over the same period.
Nymex: Non-commercial net position (ounces)
A worrying trend for platinum is the declining share in European markets of
800,000
diesel-engine vehicles – which still predominantly use platinum rather than
700,000 palladium catalysts. During January-April the share was 47.2%, down from
600,000 52.9% in 2008, and 53.6% in 2007. The main reason for this has been a slump in
500,000 Germany, which is also the market where car sales (thanks to incentives) are
400,000
currently performing best. So far this year just 31.5% of new cars sold in
Germany have diesel engines, compared with 44.1% last year, a level not seen
300,000
since 2000. But the decline is more widespread than just Germany; diesel’s
200,000
share has also fallen in 12 of the 15 EU countries covered in data from ACEA
100,000 (the European Automobile Manufacturers’ Association).
0
Jun-07 Dec-07 Jul-08 Feb-09 So far, however, investors seem unconcerned by this shrinkage of the main
industrial offtake for platinum. Holdings of the UK platinum ETF reached
Source: CFTC
338,689 oz by 11th June, up 49,661 oz on the end of May. On Nymex the non-
commercial net long position was 630,550 oz by the week ending 9th June, up
SGE turnover, rolling 12m total, Moz 88,150 oz on the week and the highest since January 2008, when the South
African power crisis first broke. The sense of optimism might be because
0.95 Chinese platinum jewellery demand is very strong – the latest forecast being 1.5
0.90 Moz in 2009, which even if it is a gross rather than net (of recycling) figure is
0.85 impressive. Turnover on the Shanghai Gold Exchange (SGE) on a rolling 12m
0.80 basis is the highest it has been, at just under 900,00 oz.
0.75
0.70 Outlook
0.65 The current platinum price is very strong when viewed historically, despite
0.60 a sluggish economic backdrop. Chinese jewellery demand clearly is a factor,
0.55 and relatively strong European car sales, propped up by government
0.50 incentives have been. Maybe ‘organic’ demand for new cars will have
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 picked up by the time this somewhat artificial stimulus; if not, industrial
demand will be hit. Short-term LME fix: $1,200/oz-$1,275/oz.
Source: VM Group
Note: SGE = Shanghai Gold Exchange
Prices $/oz Lease rates 1m 3m 6m 12m Trade (kg) Imports Exports ETF offtake (oz) Option volatility
*ETF ZKB (end month, %)
Securities
Average 1,133 Average 0.0 0.7 1.2 1.5 USA (Mar) 201 221 Apr-09 335,245 170,332 1-month 32.00
High 1,214 High 1.3 2.0 2.6 3.0 Japan (Mar) 6,698 1,471 May-09 289,734 170,248 3-month 34.00
Low 1,076 Low (0.3) 0.4 1.0 1.0 Switzerland (Mar) 9,058 8,103 6-month 36.00
China (Mar) 3,566 37 12-month 38.50
24-month 39.50
Source Price: London Platinum and Palladium Market, Others: VM Group *ETF Securities includes platinum held in 'basket' ETF
Palladium
News
Palladium price ($/oz)
• June 9th: North American Palladium’s Lac des Iles mine will reopen when the
260 palladium price is above $300/oz, according to the company. The mine has
been shut since October 2008, due to poor palladium prices.
250
• May 26th: Norilsk, the world’s foremost palladium producer, has revised
240 upwards its 2009 production expectations to between 2.685 Moz and 2.71
Moz of palladium, from between 2.610 Moz and 2.625 Moz.
230
220
Analysis
• Nymex speculators surge back
210
Trading above $250/oz by 9th June, palladium has been enjoying its best run
200
since September 2008, when the price was on its way down from its early 2008
peaks. Despite these gains palladium has not outperformed platinum, with the
Source: London Platinum & Palladium Market ratio of the two metals relatively stable at just less than 5, suggesting a
generalised belief in improving demand prospects.
Nymex: Non-commercial net position (ounces)
As has been the case in recent months, Chinese and US car sales present
1,400,000 contrasting fortunes. This is key to palladium as both markets are gasoline-
engine dominated, which, given palladium’s cost advantage over platinum, tend
1,200,000
to use palladium-rich catalysts. Sales of passenger vehicles in China in May
1,000,000 were 829,100 units, up 264,500 units year-on-year. In the US they were 823,167
800,000 units, down 360,250 units year-on-year. So while China is not quite offsetting
the US decline, it is helping and, in the last few months as the US figures have
600,000
stabilised, the two countries’ combined sales have risen.
400,000
200,000 One reason why US passenger vehicle sales have been so badly hit is that, unlike
many other countries, there have been no government incentives for buying a
0
new car. This is likely to change if, as expected, a Congressional incentive
Jun-07 Dec-07 Jul-08 Feb-09
scheme is passed. This proposes to give car owners a $3,500 voucher if their
Source: CFTC new vehicle had more than 4 mpg (miles per gallon) better fuel consumption
than their trade-in vehicle, or $4,500 if the improvement was 10 mpg or more.
The old car must do less than 18mpg and have been owned for one year. For
US and China car sales, units
pickup trucks the deal is slightly different. The scheme would run between 1st
2,500,000 July 2009 and 1st November 2009 and currently has $1bn set aside (equivalent
to more than 200,000 vehicles) but does not place limits on total expenditure.
2,000,000
1,500,000
Outlook
Palladium investors seem to know no fear, despite having been disappointed
1,000,000 many times before. By the week ending 2nd June the Nymex non-
500,000
commercial long position, the most commonly used measure of speculative
trends, had once again risen over 1 Moz, its highest since May 2008. ETF
0 demand also continues to rise. Will investors again find themselves losing
Jan-07 Jan-08 Jan-09 out? There are clearly positive signs, but we think a lot of them are already
price-in – so a period of price stasis ought to be in order. Short-term
US China
London fix: $220/oz-$260/oz.
Prices $/oz Lease 1m 3m 6m 12m Trade (kg) Imports Exports ETF offtake (oz) Option volatility
rates *ETF ZKB (end month, %)
Securities
Average 227.9 Average (0.17) 0.49 1.02 1.28 USA (Mar) 488 386 Apr-09 275,106 556,906 1-month 40.75
High 238.5 High 1.32 2.07 2.66 2.91 Japan (Mar) 465 1,859 May-09 291,900 556,642 3-month 43.00
Low 213.0 Low (0.43) 0.25 0.80 1.08 Switzerland (Mar) 4,891 2,608 6-month 44.75
China (Mar) 1,531 0 12-month 46.75
24-month 47.25
Source: London Platinum and Palladium Market, Others: VM Group *ETF Securities includes platinum held in 'basket' ETF
Aluminium
News
LME aluminium price ($/tonne)
• June 12th: China’s production of aluminium rose 14% in May, to 999,300t, on
2,000 smelters’ restarting of idled and new capacity. For the January-May period,
total output was 13% lower than the same period of 2008, at 1.6 Mt.
1,800
• May 26th: Western world unwrought aluminium stocks fell to 1.421 Mt in
1,600 April, compared with 1.537 Mt in March, according to the International
Aluminium Institute (IAI). Unwrought stocks stood at 1.580 Mt in April
1,400
2008. Total aluminium smelter stocks, excluding finished end products, fell to
1,200 2.587 Mt in April, versus 2.738 Mt in March and 2.862 Mt in April 2008.
1-May 11-May 21-May 31-May 10-Jun Daily average primary aluminium output fell to 64,000t in April from 65,200t
Cash 3-month in March.
15-month 27-month
Analysis
• Aluminium continues to defy gravity
LME aluminium stocks (tonnes) Aluminium prices are up despite there being very little fundamental support.
With world demand likely to fall by as much as 5 Mt in 2009, it is no wonder
4,800,000 that LME stocks are at record levels. However, aluminium bulls have built up a
4,300,000 strong momentum and they have taken heart from the fact that Chinese cars and
3,800,000 house and fixed asset investment soared in May.
3,300,000
2,800,000 The price has also been a beneficiary of the weaker dollar, along with the entire
2,300,000 base metals complex, but this alone cannot explain that prices are now back to
1,800,000 levels last seen during the start of the commodity boom in late 2005. After
1,300,000 steadying in early June 2009, LME stocks have risen by 2.7% to reach a record
800,000 4.36 Mt as at 17th June – but with rising cancelled warrants these stocks could
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 begin to level off over the next month. But there is a long way to go for stocks
fall, given the remaining poor outlook for demand growth over the rest of this
Source: Reuters Ecowin year. That the LME three-month price has gained 9% in June alone – and even
tease $1,700/t at one point – should hinder any rapid return to equilibrium, since
Aluminium and oil price in 2008 ($/t and $/b) the high price has encouraged idled capacity to come back online, which
threatens in turn to prolong the supply overhang. In previous reports we have
4,000 160 calculated that about 6.1 Mt of world aluminium production had been cut in
3,500 140 2009. But the price recovery has enabled at least 1.6 Mt of Chinese output to be
3,000 120 brought back online, and some Western producers are also beginning to restart
2,500 100 capacity. We expect global aluminium demand to contract by at least 12% in
2,000 80 2009, to 33.1 Mt, while our supply estimate is for a fall of 9.4% to 36.2 Mt.
1,500 60 However, if more idled supply is restarted then the aluminium market will
1,000 40 become even more structurally weak.
500 20
0 0 Outlook
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 The supply-demand outlook for aluminium is the poorest of all the base
Aluminium Oil Price metals, yet it has rallied strongly to a seven-month high. This is
unsustainable and sooner or later the bears will have their day. Short-term
Source: Reuters Ecowin LME three-month price: $1,400/t-$1,725/t.
Prices Cash 3-month 15-month 27-month LME stocks Tonnes Prod (kt) March April LME Open Interest
($/t) (contracts), latest
Average 1,457 1,494 1,637 1,752 Apr-09 3,792,300 Europe 691 643 Aluminium 777,872
High 1,550 1,587 1,737 1,853 May-09 4,237,225 Americas 633 603
Low 1,363 1,400 1,537 1,653 Asia 372 359
China 883 892
Other 325 316
Total 2,904 2,813
Source: London Metal Exchange, except Production: International Aluminium Association

Copper
News
LME copper price ($/tonne)
• June 18th: China’s imports of refined copper rose 11.5% month-on-month and
5,400 139% year-on-year, to a record 354,567t in May.
5,200
5,000 Analysis
4,800 • China the driving force
4,600
4,400 Chinese imports of refined copper reached another record in May, rising 11.5%
4,200 v. April and 139% year-on-year. What with the weaker US dollar and signs of a
4,000 bottoming of the global recession, how much higher will the copper price go? As
1-May 11-May 21-May 31-May 10-Jun of 17th June, the LME’s three-month contract was around $4,925/t (from a high
Cash 3-month of almost $5,400/t just several days earlier), almost double its low in December
15-month 27-month 2008. The inflated price has enabled uninterrupted smelter and mine supply;
marginal producers who might otherwise have been forced to close or reduce
Source: Reuters Ecowin production have struggled through. So the market has become awash with metal,
albeit metal which has (so far) been soaked up by China.
LME copper stocks (tonnes)
Chinese implied demand for copper products has rocketed in the four months to
600,000 May, to 3.17 Mt, up 22% compared with the same period in 2008. Much of the
550,000
imports of refined and scrap copper have gone to satisfy this demand, especially
500,000
450,000
since Chinese exports of copper products have been down year-on-year in each
400,000 month since September 2008. This is bullish for the copper price, since the
350,000 imports of refined copper, copper scrap and refined production combined have
300,000
only been 19% more, or approximately 0.75 Mt, over this period. In the
250,000
200,000 comparable period in 2008, this was more than 1.1 Mt, with implied Chinese
150,000 demand for copper products at 2.59 Mt. Yet this is still a substantial volume of
100,000 metal, so how far can this be sustained? With Western copper demand likely to
50,000
contract by double digits in 2009, and the hit to China’s own consumption also
0
Jun-08 Oct-08 Feb-09 Jun-09
likely to see smaller year-on-year growth, these record Chinese imports of
copper are difficult to justify. It would be great to say that this proves that the
Source: Reuters Ecowin market has turned, but record levels of Chinese imports during such a severe
recession confound logic – that is unless you try and factor in the unknowns of
China’s infrastructure-focused $585bn stimulus package. Estimating this
China unwrought copper imports (000t)
additional copper offtake is extremely challenging, but it would have to more
450 than treble China’s total copper consumption growth rate in 2009 (from 5% in
400 2008) to offset demand weakness in the US, Japan and the EU-15 alone. We
350 estimate that Chinese consumption is certainly up from 2008, but not enough to
300
soak up all the metal, and this suggests hoarding of metal by consumers,
250
investors, provincial governments and the SRB, all looking to buy now and
200
avoid anticipated much higher prices in the future. But China’s production of
copper products implies that a strong economic recovery has been evident since
150
February, which coincides well with the price rally.
100
50
Outlook
0
Will copper challenge $6,000/t this summer? Maybe, if the past three
Jan-07 Jan-08 Jan-09
months are anything to go by. But we should be under no illusion that this
Souce: VM Group from Reuters Ecowin signifies the end of the recession. Short-term LME three-month price:
$4,700/t-$5,650/t.
Prices ($/t) Cash 3-month 15-month 27-month LME stocks Tonnes LME Open Interest
(contracts), latest
Average 4,584 4,595 4,600 4,598 Apr-09 398,700 Copper 239,597

High 4,947 4,955 4,955 4,950 May-09 311,975
Low 4,309 4,322 4,330 4,325
Source: London Metal Exchange

Nickel
News
LME nickel price ($/tonne)
• June 12th: Zambia plans to re-open the Munali nickel mine within the next
17,000 month, after the operation was suspended in March due to low nickel prices.
16,000 • June 3rd: Spain’s Acerinox raised cold roll and hot roll flat steel prices for its
15,000
North American Stainless unit by 5% and 6%.
• May 25th: South Korea’s POSCO lowered prices of its stainless steel by up to
14,000
19%, its third price cut since August 2008, reflecting weak market conditions.
13,000
Hot-rolled stainless steel fell 19% to $2,026/t and cold-rolled stainless steel
12,000 by 18% to $2,241/t.
11,000 • May 20th: China’s primary nickel output will grow by 11% to 230,000t in
1-May 11-May21-May31-May10-Jun 2009, while stainless steel output will fall 6% to 6.9 Mt, according to state-
owned research group Antaike.
Cash 3-month
15-month 27-month
Analysis
Source: Reuters Ecowin • Nickel prices buck stainless plight
Much like aluminium, nickel demonstrates the gulf between the current metals
LME nickel stocks (tonnes)
price rally and conditions of depressed demand. At the start of the year LME
120,000 nickel stocks and prices were 78,822t and $10,925/t, respectively; they are now
110,000
at 108,186t and $14,800/t as at 17th June. So what has changed? The start of
2009 looked unbearably bleak on all fronts, with negative data hitting the
100,000
headlines each day. There was no talk of recovery but just how worse things
90,000
might get. Chinese imports of refined metals had not hit the headlines, nor its
80,000 secretive restocking programme led by the State Reserves Bureau. Nickel’s key
70,000 end-use in stainless steel was suffering from a complete collapse in demand,
60,000 with plant closures or output cuts seemingly a daily occurrence. By June,
50,000
however, Chinese refined nickel imports had soared to record highs, pessimism
had moved to hope that the worse of the global recession is behind us, and
40,000
Chinese restocking of nickel, even though it denies it, is still a supportive factor.
Yet none of the change in the past six months points towards any sustained
Source: Reuters Ecowin recovery in nickel demand, simply the stocking up of metal or finished products,
and the anticipation of better times ahead.
Nickel forward curve, various dates

Stainless steel production figures released by the International Stainless Steel
(spot = 100)
Forum show that Q1 2009 output was the lowest since 2000, at 4.832 Mt, and
103 down from Q4 2008 output of 4.856 Mt and Q1 2008 output of 7.376 Mt. The
102 stainless producers, who have now called the bottom of the market, offer the
101 only hope in a decimated market. However, a pick-up in stainless steel demand
100 will not happen overnight, and the high nickel price could exacerbate the market
99 surplus as miners and refiners turn production on, while the high price feeds into
98 stainless charges and sparks an inventory build.
97
96 Outlook
95 All’s good while speculation drives the nickel price higher, but the damage
Spot 3m 15m 27m wrought on this oversupplied market will have longer-term consequences.
Should prices stay high over the northern hemisphere summer then watch
Latest 1m ago Year ago
out for a pick-up in nickel pig iron production. Short-term LME three-
Source: VM Group from Reuters Ecowin month price: $12,250/t-$16,400/t.
Prices ($/t) Cash 3-month 15-month 27-month LME stocks Tonnes LME Open Interest
(contracts), latest
Average 12,658 12,712 12,924 12,973 Apr-09 114,204 Nickel 83,836

High 14,275 14,250 14,430 14,455 May-09 109,314
Low 11,605 11,625 11,890 11,985

Lead and zinc

News
LME lead price ($/tonne)
• June 18th: The global lead market was in surplus by 40,000t in the first four
1,900 months of 2009, according to the International Lead and Zinc Study Group
1,800
(ILZSG). The global zinc market was in surplus by 203,000t.
• June 11th: Shareholders of OZ Minerals approved the $1.4bn sale of assets to
1,700
China’s state-owned Minmetals, after it improved its offer.
1,600 • June 3rd: Doe Run Peru halted operations at its La Oroya smelter due to
1,500 financial and environmental setbacks that have prevented it from buying
concentrates.
1,400
1,300 Analysis
1-May 11-May21-May31-May 10-Jun
• Speculation and supply prop up prices
Cash 3-month 15-month
Lead and zinc prices have followed the general trend in metals prices over the
Source: Reuters Ecowin past few months, with lead up by more than 75% since the start of 2009, to
$1,630/t as at 17th June, and zinc up 34% to $1,548/t. LME stocks for both
metals have stabilised, with zinc stocks at 336,450t as at 17th June, and lead
LME zinc price ($/tonne)
stocks at 84,200t, up almost 12,000t since 1st May. Prices have been supported
1,850 by the huge Chinese refined imports in the four months to April and the
1,800 heightened levels of speculation in the entire complex, betting that demand will
1,750
1,700
soon fully recover. Lead’s price strength can also be traced to the recession-
1,650 resistant replacement battery sector, which accounts for about 40% of lead
1,600 offtake and soaring Chinese cars sales, which have been bolstered by favourable
1,550
tax incentives. In addition, we estimate about 360,000t of lead production has
1,500
1,450 been lost from the supply chain, due to the severe cuts by zinc miners – lead is
1,400 produced primarily as a by-product from zinc mines. This has tightened the
1-May 11-May21-May31-May 10-Jun market considerably, leaving LME lead stocks at no more than four days’ worth
of consumption. Adding to this is the fact that China remains a net importer of
Cash 3-month
lead.
15-month 27-month
Source: Reuters Ecowin Meanwhile, the increase in the zinc price highlights how the market has
overextended itself. In our view, a zinc price closer to $1,300/t is fairer value, as
global demand for galvanised steel – which accounts for about two-thirds of zinc
LME stocks (Jan. 1st 2004 = 100)
offtake – remains low, despite much stronger Chinese car sales. But positive
100 signals in Chinese consumption and, indeed, green shoots of recovery in the
90 West, should ensure that it does not revisit December lows of $1,069/t; it may
80 even test new multi-month highs as investors pile in. Supporting both the price
70
60
of zinc and lead have been the troubles at US-based Doe Run’s La Oroya lead-
50 zinc-copper smelter in Peru, which produced more than 114,000t of refined lead
40 and 43,440t of refined zinc in 2008. It restarted in May, albeit at reduced
30
20
capacity, but has again closed on environmental and financial grounds. No date
10 has been set for its restart.
0
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Outlook
We continue to argue that prices are ahead of themselves, but there seems
Lead Zinc
little to stop the bullish trend betting that a full recovery is just around the
Source: VM Group from LME corner. Short-term LME three-month price: lead: $1,400/t-$1,900/t, zinc:
$1,400/t-$1,840/t.
Prices ($/t) Cash Cash 3-month 3-month LME stocks LME Open Interest (contracts), latest
Lead Zinc Lead Zinc Lead Zinc
Average 1,444 1,485 1,450 1,510 Apr-09 72,325 328,950 Lead 75,234
High 1,640 1,589 1,640 1,614 May-09 78,975 323,600 Zinc 224,787
Low 1,335 1,425 1,350 1,444

Tin
News
LME tin price ($/tonne)
• June 12th: Indonesia’s refined tin exports were 9,873t in May, up 38% year-
17,000 on-year. Refined tin exports between January-May stood at 41,914t, up 2.3%.
16,000
• June 4th: The consortium of seven Indonesian independent tin smelters will
operate at less than half capacity from June through Q3 2009, due to rising
15,000
ore prices.
14,000 • May 28th: Q1 2009 sales volumes for Novosibirsk Integrated Tin Works,
13,000 Russia’s sole producer of the metal, declined by 72% year-on-year, to 122.3t.
In 2008 the group produced 1,405t of tin, down from 2,480t in 2007, due in
12,000
part to a shortage of tin concentrate.
11,000 • May 26th: Indonesia approved an export permit for a new tin smelter in East
1-May 11-May21-May31-May10-Jun
Java, bringing the number of smelters allowed to export the metal to 28.
Cash 3-month 15-month
Analysis
Source: Reuters Ecowin • Supply is top dog
With LME stocks at just two weeks of consumption, the near-term spread
LME tin stocks (tonnes)
slipping back in contango after months in backwardation to the tune of $330/t
20 over May and early June – and one participant holding in excess of 50% of
Thousands
warrants – has clearly been supporting the price. So far tin has gained more than
48% in 2009, and around 3% in June, to reach $14,950/t on 17th June (it reached
15
$15,775/t on 12th June). Some of the rally has been based on speculation that the
global economic downturn has bottomed, while the latest spurt has also been
10 supported by the weakening US dollar. Whether the tin price can be sustained at
this level, bearing in mind that not much has changed fundamentally in the past
5 few months, is questionable. While speculation remains rife in the metals
markets, then prices will stay ahead of actual fundamentals, in anticipation of
increased levels of future demand.
0
The difference with tin is that it has a small source of supply and a thin market,
Source: Reuters Ecowin rendering it that much more susceptible to speculation; tin may hold its ground
even if the prices of other base metals fade. With Chinese production recovering
in April by 8.5% year-on-year to 12,472t and imports up 284% year-on-year to a
Tin, LME, contracts volume traded
record 4,817t, this may suggest that Chinese demand has recovered from lows in
(Daily, 1-month moving average)
January and February. However, as with the rest of the base metals, whether the
15,000 increase in Chinese production and imports is due to real demand or restocking
14,000 is unclear.
13,000
12,000
11,000 Outlook
10,000 Indonesia, in our view, continues to be the main prop to the high price, with
9,000
8,000 tin production and exports down more than 5% year-on-year in the first
7,000 four months of 2009, to 32,041t. We doubt demand has recovered anywhere
6,000 near pre-Q4 2008 levels, so Chinese output and imports suggest some
5,000
4,000 consumer restocking in anticipation of a full recovery in demand ahead. In
3,000 the meantime, speculation will continue to drag tin up with the rest of the
2,000
base metals.
Jun-06 May-07 Apr-08 Mar-09
Source: Reuters Ecowin Short-term LME 3-month price: $13,500/t-$16,500/t.
Prices ($/t) Cash 3- 15- LME Tonnes LME Open Interest

month month stocks (contracts), latest
Average 13,803 13,571 12,697 Apr-09 12,560 Tin 27,619

High 14,800 14,550 13,550 May-09 14,480
Low 12,750 12,475 11,850
Source: London Metal Exchange except Option volatility: Virtual Metals

Steel
News
Composite steel prices ($/tonne)
• June 11th: BHP Billiton cut iron ore fine prices to Nippon Steel in line with
1,400 Rio Tinto’s discount of 33% to Japanese, Taiwanese and South Korean
1,300 producers. The previous day Brazilian miner Vale reduced contract iron ore
1,200
1,100
fines prices to Japanese and Korean steelmakers by 28.2% and by 45% for
1,000 lump ore.
900 • June 5th: Rio Tinto and BHP Billiton signed a non-binding agreement to
800 establish a production joint venture covering the entirety of both companies’
700
600 Western Australian iron ore assets.
500
400 Analysis
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
• Pressure mounts on Chinese steelmakers
Asia N.America Europe
China’s tough stance on the iron ore annual contract price for the year starting 1st
Source: MEPs, Reuters Ecowin April 2009 seems doomed to fail. While both Rio Tinto and BHP Billiton have
settled the contract iron ore fine price at a 33% discount with steelmakers
outside of China, and Vale at a 28.2% discount, China is holding out for at least
Steel products, world prices ($/tonne)
a 40% reduction. It has until 30th June to finalise its position or rely on the
1,400 vagaries of the iron ore spot market for supply. Month-on-month increases by
China in its in iron ore imports have not helped its cause, with iron ore spot
1,200
prices above $75/dmt, and rising. Its imports slipped by 6% month-on-month in
1,000 May to 53.46 Mt, but are still up 37.4% year-on-year, while in the five months
800 to May imports were up almost 25.8% to 242 Mt, of which at least 75 Mt is
stockpiled at Chinese ports. The China Iron and Steel Association (CISA),
600
which is leading the negotiations for the Chinese steel sector, has threatened to
400 duck out of talks and reduce steel output rather than pay at $97/dmt for fines and
Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 $112/dmt, as settled between Rio Tinto and BHP Billiton with Japanese steel
producers. Shan Shanghua, general secretary of the CISA, said: “China is ready
Cold rolled coil Hot rolled plate
for a breakdown of the talks. In case of a short supply of iron ore, Chinese steel
Hot rolled coil
producers would rather cut output.” We think this is an empty threat. Not only is
Source: MEPs, Reuters Ecowin the Chinese steel industry extremely competitive, and would be loath to make
Note: "World" is average of Asia, N. America, and cuts and allow rivals to gain market share, but China will require large volumes
Europe of steel to support its $585bn stimulus-led infrastructure programme. Moreover,
Rio Tinto’s rights issue and the planned joint venture between its and BHP
LME steel prices ($/tonne)
Billiton’s Western Australian iron ore operations means that all iron ore
producers can now afford to play a waiting game.
480
460 Outlook
440
Global apparent steel use is expected to decline by more than 14% in 2009
420
400
to 1.019bn tonnes, with Chinese demand expected to fall 5%, US demand to
380
fall by 36.6% and EU demand to fall by 28.8%; the iron ore contract price
360 settlement could put pressure on steel producers to increase prices or
340 reduce output. So long as the world remains optimistic about an economic
320 recovery, this may not be a problem; but if demand recovery is slower than
300 expected then there could be trouble ahead.
Steel, 3-month, MED

Short-term LME 3-month price: Med $400/t-$470/t, Far East $400/t-$470/t.
Steel, 15-month, MED
Steel, 3-month, Far East
Steel, 3-month, Far East Market data (May unless stated)
Source: Reuters Ecowin Prices ($/t) Asia N. America Europe World LME Open Interest
Composite Composite Composite Composite (contracts), latest
Med Far East
Mar-09 537 660 548 582.00 Steel 606 29

Apr-09 541 624 534 566.00
May-09 550 592 545 562.00
Source: MEPs, Reuters Ecowin

Plastics
News
Plastics prices, nearest contract, LME
• June 3rd: Saudi Aramco said that the Dow Chemical and ConocoPhillips’ joint
($/tonne)
ventures in Saudi Arabia face delays. The $20bn petrochemical plant that
920 Saudi Aramco planned to build with Dow Chemical would start up in about
900 two years time will now be delayed until 2015, while ConocoPhillips’ plan to
880
start up its Saudi Yanbu refinery joint venture will start a year later than
860
planned, in 2014.
• June 1st: India’s Oil and Natural Gas Corporation decided to abandon plans to
840
build a new 15 Mt/y refinery adjacent to its subsidiary Mangalore Refinery
820
and Petrochemicals, due to lower demand.
800
• May 28th: ExxonMobil Chemical Technology signed an agreement with Saudi
780 International Petrochemical to license ExxonMobil’s tubular high pressure
low density polyethylene process technology for Sipchem’s new ethylene
LLDPE PP
vinyl acetate plant.
Source: Reuters Ecowin Analysis

• Excess supply
Plastics prices, various contracts, LME
The oil price has passed $70/barrel on a number of positive indicators, the latest
($/tonne)
being US government data showing a slowdown in crude imports. Whether the
1,100 price at this level is sustainable is questionable, but for polymer fabricators the
high price will increase input costs, which will inevitably be passed down to the
1,000
end user despite poor demand. However, Asian propylene prices have increased
900 $15/t in the week to 10th June, to around $800/t, but the rise has been more
800 subdued than the increase in the price of crude.
700
This either suggests that prices are set to rise further or that naphtha production
600 from excess capacity in the Middle East is finding its way into the Asian market
500 and creating an oversupply. Should the latter argument be correct then Asian
Dec-08 Jan-09 Mar-09 Apr-09 Jun-09 naphtha suppliers may be forced to reduce production.
PP (First position)
Low-density polyethylene prices have also climbed; rising $20/t in the week to
PP (Second position)
10th June to $1185/t in Asia, as sellers have upped offers in line with increased
LLDPE (First position)
ethylene prices. Offers for July shipment are even higher at $1,220/t for film
LLDPE (Second position)
grade and up to $1,250/t for other grades from Asian suppliers. The general rise
Source: Reuters Ecowin in oil prices is also reflected in the LME plastic contracts, with the linear low-
density polyethylene futures price rising 13.7% since May to reach $910/t as at
12th June, while the polypropylene contract has increased by 9.3%, to $880/t
Plastics volume traded on LME, lots
over the same period.
350
300
Outlook
As long as the oil price is rising, plastics should find support, but excess
250
Middle Eastern production capacity could cap any gains. However, a steady
200
recovery seems underway with the LME plastics prices rising for the third
150 consecutive month, still short of the all time highs of more than $1,800/t in
100 July 2008. Short-term, LME Global LL: $850/t-$975/t, Global PP $860/t-
50 $980/t.
0
May-05 May-06 May-07 May-08 May-09
PP
LDPE
3 per. Mov. Avg. (PP) Average prices Volumes (April) Open Interest
3 per. Mov. Avg. (LDPE) (contracts), latest
Contract Global Global All All All LL All PP
Source: VM Group LLDPE PP LLDPE PP contracts contracts
First position 854.84 844.11 Daily average 1.00 9.00 0 61

Prices
Gold ($/oz) Silver (cents/oz) Platinum ($/oz)
1,025 2,000 2,300

1,000 1,900
2,100
975 1,800
950 1,700 1,900
925
1,600
900 1,700
1,500
875
1,400 1,500
850
1,300
825 1,300
1,200
800
775 1,100 1,100
750 1,000
900
725 900
700 800 700
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Source: London Bullion Market Association Source: London Bullion Market Association Source: London Platinum & Palladium Market
Palladium ($/oz) Aluminium ($/tonne) Copper ($/tonne)
500 3,800 10,000

475 3,600
9,000
450 3,400
425 3,200 8,000
400 3,000
2,800 7,000
375
2,600
350 6,000
2,400
325
2,200 5,000
300 2,000
275 1,800 4,000
250 1,600 3,000
225 1,400
200 1,200 2,000
175 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
150
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Cash 3-month Cash 3-month
15-month 27-month 15-month 27-month
Source: London Platinum & Palladium Market Source: London Metal Exchange Source: London Metal Exchange
Nickel ($/tonne) Lead & zinc ($/tonne) Tin ($/tonne)
25,000 2,400 26,000

23,000 24,000
21,000 2,000 22,000
19,000 20,000
17,000 18,000
1,600
15,000
16,000
13,000
1,200 14,000
11,000
12,000
9,000
800 10,000
7,000
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 8,000
Cash 3-month Zinc cash Zinc 27-Month
15-month 27-month Lead Cash Lead 15-Month Cash 3-month 15-month
Source: London Metal Exchange Source: London Metal Exchange Source: London Metal Exchange
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Virtual Metals and its employees have no obligation to inform the reader when
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Merchant Banking INVESTMENT RESEARCH

Fortis Bank metals monthly

Gold, silver, platinum,

Hedge funds activity 17

Lead and zinc 25

Disclaimer and copyright 30

Metals and plastics – Strategic view

Lead and zinc

17th June 1-month 2-month 3-month 12-month

Average/2010 Average/2011 Average/2012 Average/2013 Average/2014

Gold $ /oz 1,027 (r) 923 800 800 (r) 800

Source: VM Group [r] = revised from previous month

So where does this leave China?

Implications for the iron ore market

But although an EU anti-monopoly inquiry is likely, the details of the JV are

Here and now

Source: Reuters Ecowin

Silver investment demand (Moz) and silver price, $/oz

End month gold/silver ratio from 2003

End month gold/Comex copper ratio from 2003

9,000 End February 2009

3,000 End April 2009

End month silver/Comex copper ratio from 2003

130 End February 2009

50 End July 2006 End April 2009

End month gold/silver and gold/copper from 1976

Shiny industrial future for silver

Food packaging is another area that relies on silver’s unique germ-killing

Silver demand forecast out to 2015, Moz

Wound care Radio Frequency Identification Tags Mirrors/Reflective Glass

Hedge funds activity

Market data (May unless stated)

Market data (May unless stated)

Market data (May unless stated)

Market data (May unless stated)

Market data (May unless stated)

Source: London Metal Exchange, except Production: International Aluminium Association

Market data (May unless stated)

Average 4,584 4,595 4,600 4,598 Apr-09 398,700 Copper 239,597

Source: London Metal Exchange

Nickel forward curve, various dates

Market data (May unless stated)

Average 12,658 12,712 12,924 12,973 Apr-09 114,204 Nickel 83,836

Source: London Metal Exchange

Lead and zinc

Market data (May unless stated)

Source: London Metal Exchange

Source: Reuters Ecowin Short-term LME 3-month price: $13,500/t-$16,500/t.

Market data (May unless stated)

Prices ($/t) Cash 3- 15- LME Tonnes LME Open Interest

Average 13,803 13,571 12,697 Apr-09 12,560 Tin 27,619

Source: London Metal Exchange except Option volatility: Virtual Metals

Steel, 3-month, MED

Mar-09 537 660 548 582.00 Steel 606 29

Source: MEPs, Reuters Ecowin

Source: Reuters Ecowin Analysis

First position 854.84 844.11 Daily average 1.00 9.00 0 61

Source: Reuters Ecowin

Gold ($/oz) Silver (cents/oz) Platinum ($/oz)

1,025 2,000 2,300

Palladium ($/oz) Aluminium ($/tonne) Copper ($/tonne)

500 3,800 10,000

Nickel ($/tonne) Lead & zinc ($/tonne) Tin ($/tonne)