Commodities Overview: Consolidating With China's Help

Commodities Overview
Global
Madrid, 23 November 2011
Market Analysis
Consolidating with Chinas help

The financial risk premium remains a determining factor for markets
The impact that premium has had on demand for commodities will remain.
Commodities
Global Interest Rates, FX and Commodities
Commodities Pedro Moreno pedro.m_alonso@grupobbva.com +34 91 537 88 89
For the moment supply remains stable and there has only been a change of trend in aluminium
China is again more active on the market on the back of the general falls in prices.
Flows no longer negatively affecting commodities

Investment over the last month has remained at levels similar to the preceding month.
We still anticipate consolidation

An improvement in the financial premium would favour this.
Table 1
Forecasts and commodities futures curve

18/11/2011 Oil Aluminium 3M Copper 3M Nickel 3M Zinc 3M Corn Wheat Soybean Reference price Units 107.56 USD/bar 2,110 USD/ton 7,525 USD/ton 17,655 USD/ton 1,965 USD/ton 6.38 USD/bsl 5.98 USD/bsl 11.68 USD/bsl Futures curve 3M 107.08 2,110 7,525 17,655 1,965 6.24 6.33 11.88 12M 104.11 2,178 7,548 17,675 2,025 5.68 7.12 11.98 Forecasts 3M 94 2,100 7,450 19,000 2,000 6.15 6.05 11.49 12M 98 2,300 7,250 20,300 2,000 5.95 5.76 10.89 Changes to mediumterm forecasts
Source: Bloomberg and BBVA Research
REFER TO IMPORTANT DISCLOSURES ON THE LAST PAGE OF THIS REPORT Banco Bilbao Vizcaya Argentaria, S.A. is a legal person incorporated under Spanish law. BBVA is not a member of the FINRA and is not subject to the rules of disclosure affecting such members. The persons who have prepared and or contributed to the preparation of this Report are not registered members of the FINRA. No part of this report may be copied, conveyed or distributed into the United States of America or furnished to any person or entity in the United States. The failure to comply with these restrictions may breach the laws of the US.
Commodities in brief
The market remains worried by the situation in Europe, and there have been some fresh flurries of selling. European authorities are failing to calm the markets, although in the last month the movements have been less marked. In general we have seen consolidation in most commodities, and only aluminium has hit a fresh low for the year. New cuts to forecast growth in Europe may affect demand for commodities, which on the whole has weakened in 2H11. The lack of financial stability in the Eurozone and the need for fiscal adjustment appears to be having an effect on growth in the region. In the US we have seen a slight improvement in macroeconomic indicators, although it is too soon for the markets concerns to be dispelled. China has again increased its imports of raw materials as a result of the falls in prices, although in most cases this does not reflect an increase in domestic demand; this has happened in copper, nickel and some soft commodities, and appears to be supporting prices. However, oil imports seem to be stagnant, increasing just 4.5% vs. the first 10 months of 2010 in 2011 YTD. Investors positions in commodities have been maintained this month, marking a change from the dangerous trend we had been seeing since the start of the summer (see Chart 2). The risk premium remains high, and this is limiting interest in this asset class. In most cases prices have reached key levels, where they are starting to form bottoms, from which we could see moderate rises. We do not expect sharp increases in prices, since globally there are still many uncertainties and this is being priced in by the market. While global issues continue to have an impact the contrast between the performance of different commodities should increase.
Chart 1
Chart 2
Imports China: annual increase

200% 150% 100% 50% 0% -50% Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 -100%
ETF investment in commodities

40 35 30 25 20 15 10 5 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 0 USD bn
Soybean
Copper
Oil
Global
Agriculture
Energy
Source: Bloomberg, China Customs y BBVA Research
Source: Bloomberg y BBVA Research
No part of this report can be reproduced, taken or transmitted to the United States of America or to American persons or entities. The non-compliance with these restrictions could constitute an infraction of the legislation of the United States of America. Page 2 REFER TO IMPORTANT DISCLOSURES ON THE LAST PAGE OF THIS REPORT
Energy: Oil
Caught between Iran and sovereign debt
Geopolitical risk returns. The financial risk premium continues to play a major role, increasing market volatility.
Brent once again hit 116 dollars, its high from the end of the summer, due to worries about Irans nuclear weapons plans. The problems related to European sovereign debt are still affecting the market, although they are affecting oil less than in previous months. The physical market also shows countervailing factors, with forecasts of less demand for next year and somewhat stagnant Chinese demand, and OECD inventories that continue to decline. Apart from the question concerning Iran (discussed in more detail in note Oil: geopolitical risk remerge), two other factors could have a negative impact on supply: a) a situation in the Middle East that remains delicate, with US troops scheduled to withdraw from Iraq (greater risk of terrorist attacks) and violent conflict in Syria and b) a new round of attacks on oil installations in Nigeria. These factors would limit the impact on the market of the faster than expected recovery in Libyas production. At the time of the preparation of this report it was already producing half a million barrels/day, a production level that the market did not expect until the end of the year. The stagnation in Chinese import data is even more surprising, given that its domestic production should have also stagnated in the first half of the year. However, dynamic growth rates are still expected in this economy, for which reason it will continue increasing its consumption, although perhaps at a lower rate than expected, which could surprise the market. Furthermore, the revision of the outlook for the Eurozone as a whole has made it so demand is no longer putting so much pressure on oil prices. This situation of improved supply and a downward revision to demand has eased the tension in the balance expected for the next three quarters, which should help maintain OECD inventories, following the correction of recent months. The pressure in the physical oil market should ease somewhat, which should have an impact on oil prices. Non-commercial positions have returned to their highest levels since the beginning of the summer. Rising tension with Iran has attracted investors, although given the high current prices, upside should be limited and corrections could even be more accentuated, should they occur. The financial risk premium will also remain present in markets, which should limit oils upside. Geopolitical risks could affect oil prices in the short term, although less tension in the physical market leaves margin for corrections (so long as an armed conflict does not erupt).
Chart 3
Chinese imports
25 millions of tonnes 20 15 10 5 0 Brent 1M Cumulative Return (%): 1W -5.78 1M -6.21 3M -0.98 6M -4.30 1Y 29.36 Close 18/11/2011 USD 107.56/bar
Source: Bloomberg, China Customs and BBVA Research
Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Crude oil Refined products
Oil: Forecast
Chart 4 Chart 5
Oil price (Brent)

160 140 120 100 80 60 40 20 USD/bar
Distribution of frequencies of the 12M forecast
Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12
Adjustment to valuation for financial and risk premiums Fundamental factors Price Forecast
104
124
117
Source: Datastream, Bloomberg and BBVA Research estimates
USD/bar Short term (next 2 months) 1 year

Source: BBVA Research estimates
Forecast equilibrium 85 90
Most probable range 100-110 90-100
Risk levels 100 80
131
98
65
85
78
111
91
71
Oil: Fundamental Variables

Brent vs Spread 3M - Spot
10 8 6 4 2 0 -2 -4 -6 -8 -10 $/Bbl $/Bbl 165 145 125 105 85 65 45 25 35 30 25 20 15 10 5 0 -5 -10
Brent: Cumulative Return

%
Mar-09
Aug-09
Sep-06
May-08
Oct-08
Dec-07
Feb-07
Nov-10
Jun-10
Jan-10
Jul-07
Sep-11
Apr-11
Spread
Spot
1 wk
2 wk
1M
3M
6M
1Y
Crude Oil Inventories

390 370 350 330 310 290 270 250 mn Barrels
US Refinning Capacity vs Capacity Utilization (%)

100 95 90 85 80 75 70 65 % '000 barrels/day 18000 17500 17000 16500 16000 15500
Jul-05 Oct-05 Feb-06 MaySep-06 Dec-06 Mar-07 Jul-07 Oct-07 Feb-08 MaySep-08 Dec-08 Apr-09 Jul-09 Oct-09 Feb-10 May-10 Sep-10 Dec-10 Apr-11 Jul-11 Nov-11
Jun-02 Feb-03
Nov-03
Dec-05
Aug-99
Sep-06
Jul-04 Apr-05
Apr-00 Jan-01
Sep-01
Jul-09
May-07 Feb-08
Oct-08
Mar-10
5 year range
Current
5 year average
% Utilized
Refining Capacity
Oil: Financial variables

Crude Oil: Futures Curve
115 110 105 100 95 90 85 1 2 3 4 5 6 18/11/2011 7 8 Months 9 10 11 12 13 14 15 16 17 18 21/10/2011 23/09/2011 USD/Barrel
Crude Oil: Implied Volatility

80 70 60 50 40 30 20 10 0 1M 2M 3M 5 year median 6M 9M 1Y 18/11/2011 2Y 3Y 21/10/2011 80 70 60 50 40 30 20 10 0
Crude Oil: Net Non-Commercial Positions vs. Price (WTI)

165 145 125 105 85 65 45 25 Oct-07 USD/barrel '000 contracts 300 250 200 150 100 50 0 -50 -100 Oct-11
Sharpe Ratio* Oil vs Average**

6 4 2 0 -2 -4 -6 -8 Mar-06 Mar-09 Dec-06 Aug-09 Jul-06 May-05 Oct-05 Jan-05 Feb-08 Nov-08 Jun-08 Sep-07 May-10 Apr-07 Oct-10 Jan-10 Feb-11 Jul-11
Oct-09
Jan-09
Apr-09
Jul-09
Apr-08
Oct-08
Jan-08
Jul-08
Net
Price
Apr-10
Oct-10
Jan-10
Apr-11
Jul-10
Jan-11
Jul-11
*Annualized weekly return (rolling 52 week) //** Since 2000 Source: Bloomberg and BBVA Research
Dec-10
Aug-11
Metals: Aluminium
Supply starting to tighten
Production cuts are starting to become noticeable in China and other countries. The reduction in exchange inventories seen since May has been interrupted.
Aluminium has again hit 12-month lows, coming dangerously close to USD2,000. These extremely low prices have prompted production cuts in China and other countries, since it is estimated that around a quarter of the industry is producing at a loss. However, for the time being, the financial risk premium and doubts over demand are having more of an impact. Production cuts are starting to have a noticeable impact on the market. Rio Tinto announced that it was closing the Lynemouth plant in England (180,000 tonnes/year) due to the current low prices levels and the prospect of increases in costs linked to the new phase of assignment of carbon credits. This closure forms part of the companys divestment plan, which includes another 12 plants. Meanwhile, China appears to have reduced production in October by 6.8%, for the first time in the last 9 months. Another sign that current prices will continue to drive down aluminium production, is the postponement of the reopening of the Sunndal plant in Norway until the market recovers. Demand seems to be weakening somewhat at present, but in the long term it should continue to show dynamic growth. In certain uses such as transport and packaging it may act as a substitute for copper or tin, and aluminium prices are also proving more stable, a characteristic which is appreciated by consumers (as well as the lowest relative price in similar uses for several years). The falls in exchange inventories came to a halt in recent months, although the main reason for this was that the lions share is tied up in financial agreements. According to the WBMS, the balance to September was more than 900,000 tonnes, although at the end of this year we could see this excess decline as a result of the expected reduction in supply. The curve still favours a continuation of these financial agreements, as the contango has been maintained, even with some steepening over the last month. Implied volatility has approached annual highs due to the fresh lows reached by aluminium. The rise in open contracts seen on the market since the summer has been surprising. A larger number of open contracts should make the market more efficient. Production cuts should start to have an impact on the market, reducing the excess supply and preventing aluminium prices from falling below USD2,000.
Chart 6
Producer and exchange inventories

thousands of tonnes 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
Jan-07 Apr-07 Jul-07 Oct-07 Jan-11 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Apr-11 Jul-11
LME 3M Cumulative Return (%): 1W -2.41 1M -5.17
Close 18/11/2011 3M -10.40
2110 USD/mT
6M -15.60
1Y -12.23
Inventory levels: Monthly change (%): 3.26 Metric tons: 4,700,063
Producers
LME and Shanghai
Source: IAI, Bloomberg and BBVA Research
Aluminium: Forecast
Chart 7 Chart 8
Aluminium price
3500 3000 2500 2000 1500 1000 500 0 Jan-06 Jan-09 Jan-02 Jan-07 Jan-08 Jan-10 Jan-03 Jan-04 Jan-05 Jan-12 Jan-11 USD/tonne
1790
1870
1950
2120
2280
2360
2030
2200
2440
2520
Adjustment to valuation for financial and risk premiums Fundamental factors Forecast Value
USD/mT Short term (next 2 months) 1 year

Forecast equilibrium 2,000 2,200
Most probable range 2,000-2,300 2,100-2,300
Risk levels 2,100 2,000
2600
USD/t
Aluminium: Fundamental Variables

Alumininium vs Spread 3M - Spot
80 60 40 20 0 -20 -40 USD/ton 3500 3000 2500 2000 1500 1000 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11
Aluminium: Cumulative Return

% 0 -5 -10 -15 -20 1 Wk 2 Wk 1M 3M 6M 1Y
Spread
Spot
Aluminium: LME, COMEX, SHFE Inventories

k ton 6000 5000 4000 3000 2000 1000 0 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11
Aluminium: Physical Premium

USD/ton 200 160 120 80 40 0 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Europe US
5 year range
Current
5 year average
Aluminium: Financial Variables

Aluminium: LME Futures Curve
USD/ton 3000 2800 2600 2400 2200 2000 1 6 11 16 21 18/11/2011 26 31 36 41 30/09/2011 46 51 M 56 t 61 13/05/2011
Aluminium: Implied Volatility

50 40 30 20 10 0 1M 2M 3M 6M 9M 1Y 2Y 3Y 4Y 20/10/2011 5 year median
50 40 30 20 10 0
21/11/2011
Aluminium: Open Interest

'000 of contracts 1000 900 800 700 600 500 400 300 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
Sharpe Ratio* Aluminium vs Average**

6 4 2 0 -2 -4 -6 -8 Mar-06 Aug-06 Nov-09 Jun-09 Jun-05 Oct-05 Jan-09 Jan-05 Mar-08 Aug-08 Nov-07 Jan-07 Jun-07 Apr-10 Aug-10 Nov-11 Jun-11 Jan-11
* Annualized weekly return (rolling 52 weeks) //** Since 2000 Source: Bloomberg and BBVA Research
Metals: Copper
Volatility and correlation but different fundamentals
Despite the correlation that copper has shown with other metals, its drivers are very different. Chinese imports have supported the market.
This month has seen high volatility in copper. Prices recently hit a new high after the summer at more than USD8,000, on the back of supply problems caused by strikes in various regions (Grasberg, Cerro Verde) and an increase in Chinese imports. However, funding problems in Europe have again driven copper prices below USD7,500. Problems with labour negotiations affecting supply continue to dominate the headlines in terms of copper supply. Although there has not been much progress, these problems are expected to be resolved by the end of the year. Another factor which may push prices up is the increase in royalties demanded by Zambia from mining companies, doubling them to 6%. In this respect coppers situation differs from other metals, because this restriction on supply means that there is still interest in extending projects such as Golden Grove in Australia, whose owners hope to extend the operating life of the plant by two years to 2019, with expected production of 30,000 tonnes/year. Chinese imports reached their highest level since April 2010, on the verge of 300,000 tonnes of refined copper. The most likely scenario is that this increase in buying is not a reflection of improved demand, but does point to sustained demand in the future. Outside China, demand from both the US and Europe is proving quite weak, as shown by the physical premiums, which have retreated since the summer. This relative tightening of the supply-demand balance appears to be reflected in exchange inventories, which are seeing significant reductions (in the last four weeks, more than 12%), taking them to YTD lows. Although to September the WBMS recorded a production surplus of 236,800 tonnes, in the last few months the market appears to have adjusted even further. In fact, the forecast balance for the year from the ICSG (International Copper Study Group) is of a deficit of 250,000 tonnes, which should help to support the market. Financial factors support for copper prices has waned in recent weeks, although they should not be a reason for further declines. The profile of the curve has remained stable in the last month, with a slight contango at the short end of the curve (12 months), and short non-commercial positions match long positions, with neutral sentiment on the market. Although implied volatility is still at historically high levels, it has corrected over the last month, giving the market something of a rest. This situation should allow copper prices to consolidate at current levels. Chinese purchases on the market every time prices fall are acting as a clear support, keeping copper above USD7,000. It is crucial that this performance continues and that industrial activity in China remains dynamic.
Chart 9
China: imports of refined products and LME-SHFE spread

tonnes 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 25% 20% 15% 10% 5% 0%
Close 18/11/2011 3M -14.73
7,525 USD/mT
6M -17.04
1Y -12.65
Inventory levels: Monthly change %: -12.39 Metric tons: 559,098
Source: China Customs, Bloomberg and BBVA Research
Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
Import Discount LME-SHFE
Copper: Forecast
Chart 10 Chart 11
Copper price
USD 12000 10000 8000 6000 4000 2000 0 Jan-07 Jan-09 Jan-02 Jan-03 Jan-04 Jan-05 Jan-08 Jan-06 Jan-10 Jan-12 Jan-11
9000
6700
9580
4390
4970
5540
6120
7300
7850
8420
10150
Adjustment to valuation for financial and risk premiums Value Fundamental factors Forecast
USD/t

Copper: Fundamental Variables

Copper: Spot Spread 3m - Spot
USD/ton 100 50 0 -50 -100 -150 -200 May-09 Feb-09 May-08 Aug-09 Nov-09 May-11 Feb-08 Aug-08 Nov-08 Aug-07 Nov-07 May-10 Aug-10 Nov-10 Feb-10 Aug-11 Nov-11 Feb-11 USD/ton 10500 8500 6500 4500 2500
Copper: Cumulative Return

45 35 25 15 5 -5 -15 -25 1 Wk 2 Wk 1M 3M 6M 1Y
Spread
Spot
Copper: LME, COMEX, SHFE Inventories

k ton 1200 1000 800 600 400 200 0 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
Copper: Physical Premium

USD/ton 180 160 140 120 100 80 60 40 20 0 Apr-03 Apr-06 Apr-09 Apr-05 Apr-02 Apr-04 Apr-08 Apr-07 Apr-10 Apr-11
5 year range
Current
5 year average
Copper: Financial Variables

Copper: LME Futures Curve
USD/ ton 7600 7500 7400 7300 7200 7100 7000 Spot 6 12 18 24 30 36 42 48 18/11/2011
Copper: Implied Volatility

60 50 40 30 20 10 Months 54 60 0 1M 2M 21/11/2011 3M 6M 9M 1Y 2Y 3Y 4Y 24/10/2011 5 year median % % 60 50 40 30 20 10 0
21/10/2011
23/09/2011
Copper: Open Interest

'000 of Contrasts 300 250 200 150 Nov-06 Mar-09 Nov-09 Jul-09 Mar-08 Mar-07 Nov-08 Jul-08 Nov-07 Nov-10 Mar-10 Nov-11 Mar-11 Jul-07 Jul-10 Jul-11
Sharpe Ratio* Copper vs Average**

10 8 6 4 2 0 -2 -4 -6 -8 Jan-06 Jul-06 Jan-09 Jul-09 Jan-05 Jul-05 Jan-08 Jul-08 Jan-07 Jul-07 Jan-10 Jul-10 Jan-11 Jul-11
*Annualized weekly return (rolling 52 weeks) //** Since 2000 Source: Bloomberg and BBVA Research
Metals: Nickel
Chinese buying returns
Chinese imports have picked up recently. Production starts to drop on pig iron projects and certain laterite projects.
The nickel price is trying to establish a floor around the USD 18,000 level; but it remains under pressure from a market weighed down by Europes financing problems and relatively weak demand. Against this backdrop, Chinese buying has provided the market with some breathing space. Despite lower prices, the supply-related headlines are dominated by previously-delayed new projects that are now coming on stream. Talvivaraa in Finland has raised its production forecasts for next year from 16,000 tonnes to a range of 25,000-30,000 tonnes. In Australia, Western Areas has reported a new project that is due to start up two months ahead of schedule and also that it may increase its production at Spotted Quoll, where it plans to replace an open mine with a new mine as of the first quarter of 2012 (it expects to increase production 50% to 15,000 tonnes/year). Even though these new openings are going ahead, prices remain under pressure and we are starting to see projects elsewhere being cancelled: Albidon has suspended its operations at the Munali project in Zambia (56,000 tonnes/year) due to lower prices. And, unless we see the nickel price recovering, this type of story will become increasingly commonplace. Chinese imports, on the other hand, registered their fourth highest monthly level ever in October, providing support to the market. However, and although it is an impressive figure, we need to bear in mind that these purchases are not being used for real consumption but rather for building up the countrys stocks. For this reason, it will be important to track closely Chinas investment in infrastructure and housing, which needs to remain buoyant in order to ensure firm demand for stainless steel (forecast to grow by 7% next year). This should offset the stagnation that we are seeing in the European stainless steel industry, where traditional players such as Italy are reducing their production by 10%. London inventories have dropped another 10% on the month, although this decrease is directly related to Chinas imports. The market balance as indicated by the WBMS data through to September implies a slight production surplus of close on 8,000 tonnes, although there will probably have been a small shortfall over the last month. In the face of the slower activity detected in recent months, supply is likely to have adjusted, meaning that the surplus is unlikely to increase between now and the end of the year. There has been little change in nickels financial factors. The curve remains flat despite the continued decrease in LME inventories. And even with the attacks on the USD 18,000 level, implied volatility has eased back slightly from the highs at the beginning of October, demonstrating the strength of the support. Nickel is holding on at USD 18,000, level at which many new projects are not profitable. This, together with Chinese buying (which is likely to remain steady), ought to provide some support.
Chart 12
Chinese imports of refined products

tonnes 60000 50000 40000 30000 20000 10000
Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
Close 11/11/2011 3M -15.54
18,075 USD/mT
6M -25.92
1Y -26.09
Inventory levels: Monthly change (%): -10.70 Metric tons: 84,180
Source: China Customs, Bloomberg and BBVA Research

Nickel: Forecast
Chart 13 Chart 14
Nickel price
USD/tonne 60000 50000 40000 30000 20000 10000 0
Jan-02
Jan-04
Jan-06
Jan-07
Jan-08
Jan-09
Jan-03
Jan-05
Jan-10
Jan-12
Jan-11
19120
21000
22650
23650
19620
20130
21640
22140
23150
20630
Adjustment to valuation for financial and risk premiums Fundamental factors Forecast Price

24160
17610
18110
18610
USD/t
Nickel: Fundamental Variables

Nickel vs Spread 3m - Spot
500 400 300 200 100 0 -100 USD/ton 40000 35000 30000 25000 20000 15000 10000 5000 0
Nickel: Cumulative Return

% 0 -5 -10 -15 -20 -25 -30 1 Wk 2 Wk 1M 3M 6M 1Y
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Spread Spot
Nickel: LME Inventories

180000 150000 120000 90000 60000 30000 0 May-06 ton
Nickel: Physical Premium

3000 2500 2000 1500 1000 500 Dec-10 Feb-10 May-11 Jul-10 Jun-08 Jan-08 Nov-08 0 Feb-00 Jul-00 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 US
USD/ton
Oct-06
5 year range
Aug-07
Mar-07
Current
Sep-09
Apr-09
5 year average
Oct-11
Nickel: Financial Variables

Nickel: LME Futures Curve
USD/ton 22000 21000 20000 19000 18000 17000 16000 1 6 18/11/2011 11 16 14/10/2011 21 19/08/2011 Months 26
80 % 70 60 50 Nickel: Implied Volatility 40 8030 % 7020 6010 50 0 40 1M 2M 3M 30 5 year median 20 10 0 1M 2M 3M

5 year median
6M
9M
21/11/2011
6M
9M
80 70 60 50 1Y 2Y 40 30 20/10/2011 20 10 0 1Y 2Y % 20/10/2011
80 70 60 50 40 30 20 10 0
21/11/2011
Nickel: Open Interest

No. Contracts 120000 110000 100000 90000 80000 70000 60000 50000 40000 30000 Dec-10 Feb-10 May-11 Jul-10 Dec-05 Jun-08 Jan-08 May-06 Nov-08 Oct-06 Apr-09 Aug-07 Mar-07 Sep-09 Oct-11
Sharpe Ratio* Nickel vs Media**

6 4 2 0 -2 -4 -6 May-10 May-11 Jan-11 Jan-10 May-08 May-05 Jan-08 Sep-08 Jan-05 Sep-05 May-06 May-09 Jan-06 May-07 Jan-09 Sep-06 Sep-09 Jan-07 Sep-07 Sep-10 Sep-11
*Annualized weekly return (rolling 52 weeks) //** Since 2000 Source: Bloomberg and BBVA Research
Metals: Zinc
Resistance at USD 1,900
Continued cost pressures but no production cutbacks. Still plenty of supply.
Having seen one of the biggest falls over the summer, zinc is now establishing a floor around the USD 1,900 level, making it the best performing metal over the last few weeks. The fact that we have not yet seen any announcements of production cutbacks is surprising, given that there is more than enough supply in the market and prices are now under pressure. Nonetheless, supply levels surprisingly remain the same, with costs that can hardly have changed at all (Brent still close to USD 110). And the swift agreement between Peruvian workers and Volvan has ensured that there have been no production setbacks for other reasons. It is our belief that at current levels some production is being carried out at a cost higher than the market price, which suggests that unless we see a rebound in the latter then we are bound to see production cuts. The physical availability of zinc continues to be distorted by the financial agreements affecting a large proportion of total inventories. Physical premiums reflect much higher levels than those consistent with current demand, growth in which has slowed overall. OECD countries are hardly making any contribution to demand growth, while Chinas contribution has also diminished. WBMS data shows surplus production through to September of 575,000 tonnes, a figure that contrasts with the drop in exchange inventories that began in mid summer. The latter is likely to have adjusted slightly over the last month, but not by enough. The situation looks set to continue next year, although not to such an exaggerated degree according to the ILZSG, which is forecasting surplus production in 2012 of 135,000 tonnes, a figure that would probably continue to weigh on the market. Financial factors are unlikely to provide much support either. There has been little change in the futures curve, which continues to show a gentle contango. Implied volatility has pulled back from the highs seen at the beginning of November, but we are still not far off the highs for the year. There is a continued threat of production cuts due to low prices, and this should ensure that zinc consolidates at current levels, despite slower demand.
Chart 15
Zinc: production, demand and balance

thousands tonnes 1200 1150 1100 1050 1000 950 900 850 800 750 700 thousands tonnes surplus 150 100 50 0 -50 -100 deficit -150
LME 3M Cumulative Return (%): 1W 2.34 1M 1.76
Close 18/11/2011 3M -10.40
1,965 USD/mT
6M -8.65
1Y -17.92
Inventory levels: Monthly change (%): -6.61 Metric tons: 1,114,526
Source: WBMS, Bloomberg and BBVA Research
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Balance Production Demand
Zinc: Forecast
Chart 16 Chart 17
Zinc price
3500 3000 2500 2000 1500 1000 500 USD/tonne
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
2000
2600
2080
2490
Adjustment to valuation for financial and risk premiums Fundamental factors Forecast Price

2700
2290
2390
1460
1260
1360
1670
1870
2180
1570
1770
Zinc: Fundamental Variables

Zinc: 3m Spot Spread - Spot
60 40 20 0 -20 -40 -60 -80 -100 Aug-06 USD/ton USD/ton 5000 4500 4000 3500 3000 2500 2000 1500 1000
Zinc: Cumulative Return

% 0 -5 -10 -15 -20 -25 -30 1 Wk 2 Wk 1M 3M 6M 1Y
Dec-09
Feb-09
Jul-09
Mar-11
Nov-07
Sep-08
Apr-08
Spread
Spot
May-10
Jun-07
Jan-07
Oct-10
Aug-11
Zinc: LME Inventories

1400 1200 1000 800 600 400 200 0 Aug-06 k ton
Zinc: Physical Premium

$/ ton 350 300 250 200 150 100 50 0 Dec-09 Feb-09 Jul-09 Mar-11
Nov-07
Sep-08
Apr-08
Jun-07
May-10
Jan-07
Oct-10
Aug-11
5 year range
Current
5 year average
Zinc: Financial Variables

Zinc: LME Futures Curves
2500 2300 2100 1900 1700 1500 1 5 9 18/11/2011 13 17 14/10/2011 21 Months 25 19/08/2011 USD/ton
Zinc: Implied volatility

80 70 60 50 40 30 20 10 0 % % 80 70 60 50 40 30 20 10 0
Zinc: Open Interest

No. Contracts 310000 280000 250000 220000 190000 160000 130000 100000 May-06 May-09 Nov-06 Nov-05 Nov-09 May-08 Nov-08 May-07 Nov-07 May-10 Nov-10 May-11 Nov-11
Sharpe ratio * Zinc vs. Average**

12 10 8 6 4 2 0 -2 -4 -6 Jan-06 Jul-06 Jan-09 Jul-09 Jan-05 Jul-05 Jan-08 Jul-08 Jan-07 Jul-07 Jan-10 Jul-10 Jan-11 Jul-11
*Annualised weekly rental (rolling 52 weeks) //** Since 2000 Source: Bloomberg and BBVA Research
Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11
1M 2M 5 year median 3M 6M 21/11/2011 9M 1Y 20/10/2011
Soft Commodities
Corn: Fundamental Variables
Corn vs Spread 3M - Spot
60 40 20 0 -20 -40 -60 -80 -100 cent $/bushell 900 800 700 600 500 400 300 200 100 0
Corn: Cumulative Return

10 8 6 4 2 0 -2 -4 -6 -8 -10 %
Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Spread (left) Spot
1 Wk
2 Wk
1M
3M
6M
1Y
Corn: Inventories
12000 10000 8000 6000 4000 2000 0 March 2008 June 2009 September December 2010 2011 mill Bushell
Corn: 1M Contract vs. Spread Long-Short Non-Commercial Positions

cent $/bushell 800 600 400 200 0 Mar-09 Dec-09 Sep-09 Jun-09 Mar-08 Dec-08 Sep-08 Dec-07 Jun-08 Jun-10 Sep-07 Mar-10 Dec-10 Sep-10 '000 Contracts 600 500 400 300 200 100 0 Jun-11 Mar-11 Sep-11
Long-short
1M (left)
Corn: Financial Variables

Corn: CBT Futures Curve
850 750 650 550 450 350 Sep-11 Feb-12 18/11/2011 Jul-12 Dec-12 16/09/2011 May-13 Oct-13 10/06/2011 cent $/ bushel
Corn: Implied Volatility

70 60 50 40 30 20 10 0 SEP 11 DEC 11 5 year median
70 60 50 40 30 20 10 0
MAR 12 18/11/2011
MAY 12 13/10/2011
Corn: Historical volatility of first contract

90 80 70 60 50 40 30 20 10 May-09 Sep-09 Jan-09 May-07 May-08 Sep-08 Jan-08 Sep-07 May-10 Jan-07 Sep-10 May-11 Jan-10 Sep-11 Jan-11
Sharpe Ratio Corn* vs Average**

6 4 2 0 -2 -4 -6 -8 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
*Annualized weekly return (rolling 52 weeks) // ** Since 2000 Source: Bloomberg and BBVA Research
10D
30D
90D
Wheat: Fundamental Variables

Wheat vs. 3m Spread - Spot
150 100 50 0 -50 -100 -150 -200 Aug-07 USDcent/bushel USDcent/bushell 1400 1200 1000 800 600 400 200 0
Wheat: Cumulative Return

0 %
-20
May-09
Feb-09
May-08
Aug-09
Nov-09
May-11
Feb-11
Feb-08
Aug-08
Nov-08
Nov-07
May-10
Aug-10
Nov-10
Feb-10
Aug-11
-40 1W 2W 1M 3M 6M 1Y
Spread
Spot
Wheat: US Stocks
3000 2500 2000 1500 1000 500 0 March 2008 2009 June 2010 September 2011 December mill Bushel
Wheat: 1M Contract vs. Spread Non-Commercial Long-Short positions

1300 1100 900 700 500 300 Sep-09 May-09 Jan-09 May-08 Sep-08 Jan-08 Sep-07 May-10 Sep-10 May-11 Jan-10 Sep-11
% 80 70 60 50 40 30 20 10 0 SEP 11 5 year median DEC 11 18/11/2011 MAR 12 18/10/2011
USDcent/bushell
thd contracts
50 30 10 -10 -30 -50 -70
Long-short
1M (left)
Wheat: Financial Variables

Wheat: CBT Futures Curve
850 800 750 700 650 600 550 500 Sep-11 18/11/2011 Jan-12 14/10/2011 May-12 19/08/2011 cent $/bushel
Wheat: Implied Volatility

80 70 60 50 40 30 20 10 0 %
Wheat: Historic Volatility of the First Contract

100 90 80 70 60 50 40 30 20 10 Jan-07 %
Sharpe Ratio *Wheat vs. Average**

5 4 3 2 1 0 -1 -2 -3 -4 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
*Annualised weekly return (rolling 52 weeks) / ** Since 2000 Source: Bloomberg and BBVA Research
May-09
Sep-09
Jan-09
May-08
May-07
Sep-08
Jan-08
Sep-07
10D
30D
90D
May-10
Sep-10
May-11
Jan-10
Sep-11
Jan-11
Jan-11
Soybean: Fundamental Variables

Soybean vs. 3M Spread - Spot
100 50 0 -50 -100 -150 -200 Feb-09 May-09 Aug-09 Nov-09 Feb-11 May-11 Feb-08 May-08 Aug-08 Nov-08 Aug-07 Nov-07 Feb-10 May-10 Aug-10 Nov-10 Aug-11 cent$/bushel cent$/bushel 1800 1600 1400 1200 1000 800 600 400 200 0
Soybean: Cumulative Return

% 2 0 -2 -4 -6 -8 -10 -12 -14 -16 -18 1W 2W 1M 3M 6M 1Y
Spread (left)
Spot
Soybean: Inventories
2.5 2 1.5 1 0.5 0 March 2008 June 2009 September 2010 2011 December Mil Mill Bushel
Soybean: 1M contract vs. Spread Non-Commercial Long Positions

2000 1500 1000 500 0 May-09 Sep-09 Jan-09 May-08 Sep-08 Jan-08 May-10 Sep-07 Sep-10 May-11 Jan-10 Sep-11 Jan-11 cent $/bushel thous. contracts 250 200 150 100 50 0 -50
Long-short
1M (left)
Soybean: Financial Variables

Soybean: CBT Futures Curve
1500 1450 1400 1350 1300 1250 1200 1150 1100 cent $/ bushel
Soybean: Implied Volatility

70 60 50 40 30 20 Months 10 0 AUG 11 SEP 11 5 year average
70 60 50 40 30 20 10
Aug-11
Dec-11 18/11/2011
Apr-12 Aug-12 Dec-12 16/09/2011 10/06/2011
NOV 11 18/11/2011
0 JAN 12 13/10/2011
Soybean: Historic Volatility of the First Contract

190 170 150 130 110 90 70 50 30 10 May-09 Sep-09 Jan-09 May-08 Sep-08 Jan-08 May-07 Sep-07 May-10 Jan-07 Sep-10 May-11 Jan-10 Sep-11 Jan-11
Sharpe Ratio "Soybean* vs. Average**"

6 5 4 3 2 1 0 -1 -2 -3 -4 Jan-06 Jul-06 Jan-05 Jul-05 Jan-08 Jan-07 Jul-07
Jan-09
Jul-09
Jul-08
10D
30D
90D
*annualised weekly return (rolling 52 week) // ** From 2000 Source: Bloomberg and BBVA Research
Jan-10
Jul-10
Jan-11
Jul-11
Market & Client Strategy

Director
Antonio Pulido
ant.pulido@grupobbva.com +34 91 374 31 81
Global Interest Rates, FX and Commodities

Director
Luis Enrique Rodrguez, CFA

luisen.rodriguez@grupobbva.com +34 91 537 35 87
Global FX
Chief Strategist
Global Interest Rates

Chief Strategist
Asia Chief Strategist
Dustin T. Reid
Dustin.Reid@bbvany.com +1 (212) 7281707 FX Europe Roberto Cobo roberto.cobo@grupobbva.com +34 91 537 39 59 FX Latam FX Mexico/Brazil Claudia Ceja claudia.ceja@bbva.bancomer.com +5255 5621 9715 FX & Interest Rates Colombia Ignacio Mir Ignacio.miro@bbvacolombia.com.co +571 347 1600 ext.2834 FX & Interest Rates Chile Hernan Merino hmerino@bbva.cl +562 663 8242 FX & Interest Rates Peru Fernando Palma fpalma@grupobbva.com.pe +511 414 3025
Pablo Zaragoza
pzaragoza@grupobbva.com +34 91 374 38 64 Interest Rates Europe and USA Jos Miguel Rodrguez josemiguel.rodriguez@grupobbva.com +34 91 374 68 97 Interest Rates Mexico/Brazil Chief Strategist
Richard Li
richard.li@bbva.com.hk +852 2582 3220
Long-term Trends
Andrea Cerasa andrea.cerasa@grupobbva.com +34 91 374 33 01
Ociel Hernndez
o.hernandez@bbva.bancomer.com +5255 5621 9616
Commodities
Pedro Moreno pedro.m_alonso@grupobbva.com +34 91 537 88 89
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Commodities Overview: Consolidating With China's Help

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Commodities Overview: Consolidating With China's Help

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Commodities Overview

Consolidating with Chinas help

Flows no longer negatively affecting commodities

We still anticipate consolidation

Forecasts and commodities futures curve

Source: Bloomberg and BBVA Research

Imports China: annual increase

ETF investment in commodities

Source: Bloomberg, China Customs y BBVA Research

Source: Bloomberg y BBVA Research

Source: Bloomberg, China Customs and BBVA Research

Oil price (Brent)

Distribution of frequencies of the 12M forecast

Source: Datastream, Bloomberg and BBVA Research estimates

Source: Datastream, Bloomberg and BBVA Research estimates

USD/bar Short term (next 2 months) 1 year

Most probable range 100-110 90-100

Risk levels 100 80

Oil: Fundamental Variables

Brent: Cumulative Return

Source: Bloomberg and BBVA Research

Source: Bloomberg and BBVA Research

Crude Oil Inventories

US Refinning Capacity vs Capacity Utilization (%)

Source: Bloomberg and BBVA Research

Oil: Financial variables

Crude Oil: Implied Volatility

Source: Bloomberg and BBVA Research

Source: Bloomberg and BBVA Research

Crude Oil: Net Non-Commercial Positions vs. Price (WTI)

Sharpe Ratio* Oil vs Average**

Source: Bloomberg and BBVA Research

Producer and exchange inventories

LME 3M Cumulative Return (%): 1W -2.41 1M -5.17

Close 18/11/2011 3M -10.40

Inventory levels: Monthly change (%): 3.26 Metric tons: 4,700,063

LME and Shanghai

Source: IAI, Bloomberg and BBVA Research

Distribution of frequencies of the 12M forecast

Source: Datastream, Bloomberg and BBVA Research estimates

USD/mT Short term (next 2 months) 1 year

Forecast equilibrium 2,000 2,200

Most probable range 2,000-2,300 2,100-2,300

Risk levels 2,100 2,000

Aluminium: Fundamental Variables

Aluminium: Cumulative Return

Source: Bloomberg and BBVA Research

Source: Bloomberg and BBVA Research

Aluminium: LME, COMEX, SHFE Inventories

Aluminium: Physical Premium

Aluminium: Financial Variables

Aluminium: Implied Volatility

Source: Bloomberg and BBVA Research

Aluminium: Open Interest

Sharpe Ratio* Aluminium vs Average**

Source: Bloomberg and BBVA Research

China: imports of refined products and LME-SHFE spread

LME 3M Cumulative Return (%): 1W -1.49 1M -0.47

Close 18/11/2011 3M -14.73

Inventory levels: Monthly change %: -12.39 Metric tons: 559,098

Source: China Customs, Bloomberg and BBVA Research

Distribution of frequencies of the 12M forecast