COMMODITIES WEEKLY

COMMODITIES RESEARCH 20 August 2010 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 27 COMMODITIES WEEKLY Price moves remain diverse across the commodities complex. Market concerns on recent softer macro-economic data have pressured crude oil prices, while agricultural commodities – grains and cotton in particular – have been relatively immune after witnessing recent supply-side production downgrades on adverse weather conditions. We dissect commodity investment trends in this month’s Commodity Investor with commodity investments passing an important milestone in July with AUM surpassing $300bn for the first time, as commodity inflows bounced back and prices strengthened. Cross commodities 7 Commodity investments passed an important milestone in July with AUM surpassing $300bn for the first time as commodity inflows bounced back. Energy 9 Recent strength in Mexican oil production set to fade over the next 18 months, in our view, yet we expect milder decline rates than in the recent past; last week’s announcement by Japan to pursue a bilateral offset approach is an indication of the tensions inherent in the offset portion of the carbon market; the Alberta royalty review has helped to revive drilling activity in Canada; the second coming: the Western Climate Initiative; the sudden change in outlook embedded in the FOMC statement has reinvigorated the short oil macro play. Metals 15 We believe the market is overoptimistic for HPAL nickel production in 2011; the counter-seasonal decline in base metals inventories is reflective of robust demand, even during this seasonally slower period. Agriculture 19 Grains prices strength is underpinned on supply-side uncertainties meeting positive demand conditions. Forecasts and data releases 21 Sudakshina Unnikrishnan+44 (0) 20 7773 3797 sudakshina.unnikrishnan@barcap.com Kerri Maddock +44 (0) 20 3134 2300 kerri.maddock@barcap.com www.barcap.com Barclays Capital | Commodity Weekly 20 August 2010 2 Commodity review Price moves remain diverse across the commodities complex. Market concerns on recent softer macro-economic data have pressured crude oil prices, while agricultural commodities – grains and cotton in particular – have been relatively immune after witnessing recent supply-side production downgrades on adverse weather conditions. Commodity investments passed an important milestone in July with AUM surpassing $300bn for the first time as commodity inflows bounced back, up $5bn compared with June’s $2.3bn, and prices strengthened. Growth in index swaps was the main driver, more than offsetting a large outflow of funds from ETPs, especially from physically backed gold products. Over the past ten years, commodity AUMs have risen by $290bn, with investment inflows having amounted to $245bn at an annual average rate of about $24bn. Will those inflows continue? In our focus piece in this month’s Commodity Investor, we examine two issues at the top of commodity investors’ list of concerns. First, we examine the long-term demand growth outlook for commodities, and whether emerging market demand will be sufficient to offset slower growth ahead in industrialised markets. Second, we examine the recent close correlation of commodities with other risky assets, which has prompted debate about the value of commodities as a distinct asset class. With markets focusing on slowdown fears in the US and China, we are reducing some risk by closing long base metals positions and have instituted an outright short in US natural gas. However, we remain long crude oil, gold, corn and cotton. Indeed, grains markets and cotton have posted some impressive price gains over recent weeks. Our agricultural piece this week looks at the future trajectory of the grain market after recent moves. In our view, with the supply side having disappointed, demand conditions are now being watched more closely as a