ABNMM0111

ABN AMRO Metals Monthly
Investment Research by VM Group January 2011
Precious metals
Base metals
Steel
Price forecasts
18 Jan 11 1-month 2-month 3-month 12-month
Gold $/oz 1,370 1,325-1,400 1,420 1,455 1,245
Silver $/oz 28.79 26.50-30.00 31.00 31.00 27.00
Platinum $/oz 1,824 1,790-1,840 1,790 1,800 1,700
Palladium $/oz 805 790-850 800 815 735
Aluminium (3-month) $/tonne 2,462 2,350-2,500 2,485 2,500 2,500
Copper (3-month) $/tonne 9,715 8,900-9,300 9,100 9,500 8,650
Lead (3-month) $/tonne 2,660 2,350-2,625 2,450 2,340 2,400
Nickel (3-month) $/tonne 26,355 23,000-26,000 23,500 22,750 25,000
Tin (3-month) $/tonne 27,005 24,500-27,500 27,500 28,500 27,000
Zinc (3-month) $/tonne 2,457 2,350-2,500 2,450 2,450 2,500
Steel: (3-month) Med $/tonne 590 560-620 620 640 600
2010 av 2011 av 2012 av 2013 av 2014 av
Gold $/oz 1,225 1,457 1,165 921 900
Silver $/oz 20.13 29.63 23.00 17.18 17.00
Platinum $/oz 1,609 1,783 1,883 2,058 1,950
Palladium $/oz 525 798 750 746 600
Aluminium (3-month) $/tonne 2,176 2,331 2,496 2,667 2,900
Copper (3-month) $/tonne 7,537 9,150 8,879 8,896 7,950
Lead (3-month) $/tonne 2,190 2,329 2,388 2,171 2,200
Nickel (3-month) $/tonne 21,844 23,625 26,875 30,667 31,525
Tin (3-month) $/tonne 20,401 26,523 20,542 18,167 19,326
Zinc (3-month) $/tonne 2,187 2,348 2,735 3,671 3,200
Steel: (3-month) Med $/tonne 480 612 606 800 900
Source: VM Group italics denote revision from previous month
The Metals Monthly is produced as part of a joint venture
between ABN AMRO Bank N.V. and VM Group
Analysts:
• Carl Firman
E-mail: carl@vmgroup.co.uk
• Gary Mead
E-mail: garymeadgary@gmail.com
• Marina Loterijman
E-mail: marina@vmgroup.co.uk
• Charles Monbiot
E-mail: charles@virtualmetals.co.uk
Contents
Prices and stocks ....................................................................................... 2
Feature: Outlook for 2011 - stick or twist? .................................................. 3
Gold .......................................................................................................... 14
Silver ........................................................................................................ 16
Platinum and palladium ............................................................................ 18
Aluminium................................................................................................. 20
Copper...................................................................................................... 22
Nickel........................................................................................................ 24
Zinc .......................................................................................................... 26
Lead ......................................................................................................... 28
Tin .......................................................................................................... 30
Steel ......................................................................................................... 32
Fund activity ............................................................................................. 34
About VM Group ....................................................................................... 35
VM Group disclaimer and copyright.......................................................... 36
ABN AMRO disclaimer and copyright ....................................................... 37
Prices and stocks
Historical prices & base metal stocks
Past 12 months 12
Prices 18 Jan 1 week WoW 1 month MoM months YoY
2011 Average High Low ago (%) ago (%) ago (%) Av. 2010 Av. 2009
Gold $/oz 1,370 1,237 1,421 1,058 1,379 (0.7%) 1,363 0.5% 1,133 20.9% 1,225 1,206
Silver $/oz 28.79 20.72 30.70 15.14 29.6 (2.7%) 29.2 (1.2%) 18.5 55.6% 2,021 19.38
Platinum $/oz 1,824 1,620 1,824 1,475 1,793 1.7% 1,700 7.3% 1,621 12.5% 1,611 1,591
Palladium $/oz 805 544 819 395 803 0.2% 745 8.1% 456 76.5% 528 501
Aluminium $/tonne 2,462 2,209 2,503 1,858 2,496 (1.4%) 2,310 6.6% 2,273 8.3% 2,201 2,191
Copper $/tonne 9,715 7,661 9,716 6,125 9,618 1.0% 9,020 7.7% 7,475 30.0% 7,567 7,414
Lead $/tonne 2,660 2,179 2,677 1,581 2,639 0.8% 2,388 11.4% 2,445 8.8% 2,173 2,167
Nickel $/tonne 26,355 22,219 27,595 17,125 25,135 4.9% 24,400 8.0% 18,660 41.2% 21,914 21,453
Tin $/tonne 27,005 20,892 27,350 15,000 26,825 0.7% 26,100 3.5% 17,700 52.6% 20,479 19,750
Zinc $/tonne 2,457 2,182 2,585 1,618 2,445 0.5% 2,220 10.7% 2,477 (0.8%) 2,188 2,196
Steel (Med) $/tonne 590 493 620 405 593 (0.5%) 550 7.3% 448 31.7% 488 478
Past 12 months 12
LME Stocks 18 Jan 1 week WoW 1 month MoM months YoY
2011 Average High Low ago (%) ago (%) ago (%) Av. 2010 Av. 2009
Aluminium Tonnes 4,485,675 4,441,754 4,640,750 4,252,125 4,434,950 1.1% 4,287,600 4.6% 4,622,225 (3.0%) 4,452,376 4,517,104
Copper Tonnes 381,750 439,870 555,075 348,625 377,350 1.2% 361,400 5.6% 526,650 (27.5%) 446,165 459,718
Lead Tonnes 261,925 188,073 261,925 152,175 211,425 23.9% 207,600 26.2% 152,175 72.1% 184,932 170,231
Nickel Tonnes 137,238 136,445 166,476 115,668 136,662 0.4% 131,862 4.1% 161,292 (14.9%) 137,511 138,937
Tin Tonnes 17,290 18,459 27,905 12,150 17,170 0.7% 15,820 9.3% 27,425 (37.0%) 18,921 21,598
Zinc Tonnes 711,125 600,662 711,125 488,750 709,825 0.2% 699,450 1.7% 488,750 45.5% 590,675 547,321
London PM fix precious metal prices, over past month: re- LME 3-month base metal and steel prices, over past
based to 100 month: re-based to 100
120 115
Gold
115 Silver 110
Platinum
110 105
Palladium
105 100
100 95
Aluminum Copper
Lead Nickel
95 90
Steel Med Tin
Zinc
90 85
20 Dec 27 Dec 03 Jan 10 Jan 17 Jan 20 Dec 27 Dec 03 Jan 10 Jan 17 Jan
Source: VM Group
2
Feature: Outlook for 2011 – stick or twist?
Year on year % change in Chinese
base metals production in Jan-Nov Metals’ prices recovered more ground in 2010 in what turned out to be an
2010 extended rally from the multi-year price lows of 2009. The context for this price
performance was the migration of money into tangible assets due to the weak US
30%
dollar and near zero interest rates in most parts of the world, while growth in the
25%
emerging economies flourished. 2011 offers much of the same, but risks abound
20% and it is not necessarily a one-way bet as current commodity prices imply.
15%
10% The US economic recovery is expected to get into its stride late in 2011, aided by
5% the second round of quantitative easing announced by the Federal Reserve in
0% November 2010. To fight unemployment, a possible double-dip recession, and
deflation, we expect that the US Federal Reserve will keep interest rates very low
-5%
through to at least Q4 11, which will keep the US dollar weak for much of the
-10%
year. This, plus the injection of liquidity, should stimulate inflation and feed directly
into asset prices in much the same way as in 2010. Whether these measures will
jump-start the still lagging US housing sector is uncertain, but with the positive raft
of US economic data released in the closing month of 2010, suggesting that a
Source: NBS, VM Group
general recovery might be underway, there are hopes that this sector will be in
line for a lift in its performance levels too.
Metals prices in 2010

Max Min
End-09 H1 End 10 H1 (%) H2 (%) Yr (%) Ave Max date Min date Range
Aluminium - 3m 2,242 1,954 2,468 (13%) 26% 10% 2,201 2,482 19 Apr 1,858 08 Jun 624
Aluminium - 63m 2,590 2,292 2,627 (11%) 15% 1% 2,488 2,817 14 Apr 2,217 08 Jun 601
Copper - 3m 7,377 6,542 9,665 (11%) 48% 31% 7,567 9,665 31 Dec 6,125 09 Jun 3,540
Copper - 63m 7,258 5,852 7,532 (19%) 29% 4% 6,642 7,532 31 Dec 5,643 08 Jun 1,890
Lead - 3m 2,416 1,716 2,564 (29%) 49% 6% 2,173 2,620 07 Jan 1,581 09 Jun 1,040
Lead - 15m 2,455 1,753 2,515 (29%) 43% 2% 2,184 2,647 06 Jan 1,633 09 Jun 1,014
Nickel - 3m 18,555 19,375 24,950 4% 29% 34% 21,914 27,595 16 Apr 17,125 09 Feb 10,470
Nickel - 27m 18,625 18,450 23,850 (1%) 29% 28% 21,009 26,450 16 Apr 17,085 09 Feb 9,365
Tin - 3m 16,795 17,410 26,920 4% 55% 60% 20,479 27,350 14 Oct 15,000 09 Feb 12,350
Tin - 15m 16,875 17,535 26,475 4% 51% 57% 20,344 26,800 09 Nov 15,075 09 Feb 11,725
Zinc - 3m 2,596 1,763 2,442 (32%) 39% (6%) 2,188 2,660 07 Jan 1,618 08 Jun 1,042
Zinc - 27m 2,677 1,832 2,448 (32%) 34% (9%) 2,227 2,735 06 Jan 1,695 08 Jun 1,040
Gold 1,088 1,244 1,406 14% 13% 29% 1,225 1,421 09 Nov 1,058 08 Feb 363
Silver 1,699 1,874 3,063 10% 63% 80% 2,021 3,070 30 Dec 1,514 09 Feb 1,556
Palladium 393 446 797 13% 79% 103% 528 797 30 Dec 393 04 Jan 404
Platinum 1,461 1,532 1,755 5% 15% 20% 1,611 1,786 09 Nov 1,461 04 Jan 325
Steel 412 435 564 6% 30% 37% 489 620 29 Mar 405 16 Jun 215
Source: VM Group
Max Min
End-09 H1 End 10 H1 (%) H2 (%) Yr (%) Ave Max date Min date Range
S&P 500 1,115 1,031 1,258 (8%) 22% 13% 1,140 1,260 29 Dec 1,023 05 Jul 237
US 10yr Yd 4 3 3 (24%) 12% (14%) 3 4 05 Apr 2 08 Oct 2
EUR/USD 1 1 1 17% (9%) 7% 1 1 07 Jun 1 12 Jan 0
MSCI emer 989 918 1,151 (7%) 25% 16% 1,011 1,156 05 Nov 856 26 May 300
Oil, WTI 79 76 91 (5%) 21% 15% 79 91 28 Dec 65 26 May 27
Source: VM Group
*$/t for base metals and $/oz for precious metals, unless otherwise stated
3
Low interest rates in the US however and a continuation of the weak dollar in
2011 raise the possibility that metal prices will overshoot their fundamentals, and
thus run the risk of a sharp correction once the Fed starts to prepare the market
for rate hikes later this or early next year. Indeed, the cash that has been
pumped into the global economy via various government stimulus schemes over
the past two years, coupled with loose monetary policy around the world, has
been the chief architect of the price recovery in the metals market. The vast
amounts of cash generated by government bailouts and incentives has had no
better place to go than into high return, high risk assets, including base and
precious metals, where the short to longer term picture appears to be one of
increasing demand from the emerging markets.
Monthly % change in base/precious metal, oil and steel prices plus other indicators in 2010
20% 20% 20% 20%
Aluminium Copper Lead WTI crude
0% 0% 0% 0%
-20% -20% -20% -20%

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
20% 20% 20% 20%

Nickel Tin Zinc Steel (LME)
0% 0% 0% 0%
-20% -20% -20% -20%

20% 20% 20% 20%

Gold Silver S&P 500 Em. MSCI
0% 0% 0% 0%
-20% -20% -20% -20%

20% 20% 20% 20%

Palladium Platinum $/€ 10-yr yield
0% 0% 0% 0%
-20% -20% -20% -20%

Source: VM Group
4
In our view the commodity super-cycle re-asserted itself in 2010. Some of the base
% change in global domestic metals now seem to be regarded in some circles as the poor man’s hedge against
product at constant prices, 2008- risk, alongside the traditional safe havens of gold and the other precious metals –
2012 (forecast)
as opposed to fiat currency. Fundamentals have been largely ignored, except as a
8.0% means to allocate cash, with those base metals offering more convincing
7.0%
supply/demand dynamics taking the lion’s share of investment, while those with a
6.0%
less convincing supply/demand scenario may not feature quite so strongly. This
5.0%
4.0% ’fundamentals means testing’ should manifest itself further in 2011, with the metals
3.0% sporting the tightest supply-side dynamics appreciating faster than those in wide
2.0% surpluses, or with large stock overhangs – notwithstanding demand shocks or
1.0% unforeseen supply disruptions. Nevertheless, even poor fundamentals are unlikely
0.0% to oppose the macro and investment led momentum we expect to see in 2011.
-1.0%
-2.0%
-3.0% A potential drag on prices could be a strengthening of the US dollar against the
-4.0% euro in 2011, with episodes of sharp movements likely, if more economies in the
-5.0% eurozone get sucked into multibillion bailouts on sovereign debt distress. We have
identified that this could perhaps prove to be the primary macro concern in 2011.
Of these nations, Portugal, Belgium and Spain are currently in the frame, with both
World
Ireland and Greece having already fallen victim in 2010. The impact of eurozone
Major advanced debt issues on metals prices has so far only seen the upward trend stall before
economies (G7) later resuming, even though a consequence of this region’s instability would be to
Emerging and
developing economies dampen demand, besides the possibility of contagion to other markets.
Source: VM Group, IMF

Further, there is the question of the pace at which China is likely to grow. With
Beijing attempting to fight off economic overheating and rising inflation, thanks in
part to loose US monetary policy and quantitative easing, there are concerns that it
may act too aggressively and hence impact demand for raw materials by cooling
the economy too far, too fast. That said, the Chinese government has indicated
that it will continue to invest in state housing and urban development, and it is
unlikely to tolerate economic growth in 2011 falling below target (8%). The
measures used by Beijing to fight inflation and prevent economic overheating could
lead to enhanced price volatility in the metals sector, since China remains the
bedrock of the cycle. The yuan, for example, is expected to rise by 5% in 2011,
which will make imports of raw materials cheaper, while in turn dampening exports.
Currency conflicts are also expected to appear on the radar during 2011, and the
risk for trade disputes is thus higher. With both the US dollar and Chinese yuan
accused of being artificially weak, it stands to reason that governments elsewhere
will seek to raise competiveness in the export arena and weaken their respective
currencies, which could well prompt others to follow suit. The bottom line will be
that measures might have to be introduced to protect domestic industries and jobs
by raising duties on imports, or similar. This outlook presents a bleak scenario and
5
a bearish one too, since it will only serve to slow global growth if not managed
US dollar index in 2010
multilaterally.
90
88 A game of two halves

To use a cliché, 2010 was a year of two halves and marked the tenth year of the
86
commodity super-cycle. In H1 2010, signs of a recovery in the US had not fully
84
materialised, while the Greek debt default in Q1 10 and concerns of contagion
82 weighed on sentiment. Also impacting prices were moves by Beijing to rein in
excess liquidity in order to fight inflation by means of raising bank reserve quotas
80
and limiting lending. This stoked worries that demand would consequently
78 decline. That this did not happen is testimony to China’s resilience – its demand
76 for industrial metals grew by double digits, as implied by the year-on-year ramp
up in output.
74
Jan Apr Jul Oct Jan
But the overall rally in both base and precious metals prices in 2010 could be
Source: VM Group
viewed as disappointing, if we compare it to the rate of price appreciation the
year before. Having said that, metals prices in 2009 were in recovery mode after
sinking to multiyear lows, but in 2010 many prices recovered and even went on to
hit new record highs. Copper started 2009 at $2,935/t and exited 2010 at a
record $9,665/t – a more than three-fold gain. Likewise with palladium: having
collapsed during the height of the recession to finish 2008 at $183/oz, it finished
2010 at a ten-year high of $797/oz – a more than four-fold gain. Together these
two metals are by far the best performers of the base and precious metals over
the post-recession period to date.
Base and precious metal price volatility in 2010 (LHS) and gold and copper
correlation with US dollar in 2010 (RHS)
60 50%
Gold
25% Copper
40 0%
-25%
20 -50%
Base metal price volatility -75%
Precious metal price volatility
0 -100%
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
Source: VM Group
Palladium was the best performer of all base and precious metals in 2010, while
tin was the star performer in the base metals. Silver and copper also advanced
strongly, while the only decline over the year was seen in zinc. During H1 10 the
best performers were unsurprisingly the precious metals, as macro-economic
6
anxiety was fostered regarding the rate of recovery in the US, debt default in
Greece and potential contagion to the rest of the eurozone, as well as the effects
of a possible tightening of monetary policy by China.
In this risk-averse environment, and despite question marks over the US

recovery, the US dollar strengthened against most currencies, while gold played
out its traditional safe haven role. The gold:dollar correlation thus moved into
positive territory for the first sustained period since early 2009. Similarly, the
negative correlation between the dollar and copper weakened. Of the base
metals, only tin and nickel rose during this period. Tin because it was evident that
it was in market deficit (with worse to follow in the medium term), and nickel
because of strong demand from the stainless steel sector and supply disruption
leading to supply deficits in the opening months. The worst performers were zinc
and lead, with exchange stocks rising rapidly on growing supply and anaemic
demand.
All this changed in H2 2010, with prices across LME steel and base metals and
precious metals rising by an average 38%. Gone, at least temporarily, were
concerns of eurozone debt default, while markets were convinced that Beijing
would manage a soft landing in dealing with inflation and excess liquidity. The
lethargic US recovery meanwhile saw the US dollar weaken and the correlation
with gold move negative. So the star performer was palladium, rising 79%, but it
was closely followed by silver, up 63%. Gold rose just 13%, despite stealing all
the headlines. Of the base metals, three-month tin rose 55%, copper 48%, and
lead 49%. Even the laggard of the complex, aluminium, rose 26%, while zinc
recovered from a crushing H1 by rising 39%.
Winners and losers

Metal price performance in 2011 will be largely macro and investor led and
ultimately determined by ‘fundamentals means testing’. Those metals with tighter
supply/demand dynamics will advance appreciably higher year-on-year than
those in market surplus or with vast stock overhangs. On the macro side, the US
dollar/euro relationship will dominate, along with possible Chinese monetary
tightening, currency battles flaring-up, and potential geopolitical tensions.
Aluminium
Falling utilisation rates in China, the world’s largest aluminium producer, really
saved the day for the metal in 2010. Prices perked up following the year low in
early June, with the H2 10 price climbing 26%, to finish the year at $2,468/t. We
are not as positive about the price performance of aluminium in 2011 as many
consensus forecasts, owing to the large stock overhang and ample spare
production capacity. We therefore conservatively predict prices will average
7
$2,310/t in 2011, with risk to the upside due to macro influences and the
possibility of accelerating energy costs.
Much has been made of falling aluminium capacity utilisation rates in China due
to the enforced energy saving cutbacks in production from September 2010.
Concerns are that the Chinese government will continue to implement a policy
that will restrict aluminium production and thus prevent much of the ample
production capacity from coming online. This in turn is expected to tighten the
aluminium market both in China and internationally, since China is a prolific
exporter of aluminium in product form. Our view differs to consensus in as much
as we expect Chinese aluminium production to rise by at least 3% and that part
of the shortfall that is not deposited to the international market will be more than
offset by rapidly expanding production in the Middle East. There is also spare
aluminium production capacity in advanced economies; some of this was
suspended during the height of the recession and could be restarted should
demand pick up.
We anticipate however that rising power costs will be key to the price of
aluminium, possibly surprising to the upside. Although the current flooding in
Queensland, Australia, is likely to lead to higher thermal coal costs, which will
translate to higher power generation costs, it was in any case expected that
energy prices in advanced economies would rise during 2011. Rising energy
costs, and those too of alumina, feed directly into smelter margins and prices
may thus rise above our forecast average. Aluminium may also be caught up in
the momentum trade tracking copper and tin, while the introduction of exchange-
traded products could also offer support.
Copper
Copper looks likely to be the star performer of the base metals in 2011. There
are a number of reasons for this. First, sentiment is firmly rooted to the premise
that demand growth in China will be coupled with greater appetite in the US and
elsewhere. The macro environment is also positive, with investors now tempted
to favour high return, high-risk assets. Indeed, the appreciation of the copper
price is regarded by some as a near certainty, thus it is currently perceived as
being a part hedge against risk and fairly immune to the periodic reversals in
macro sentiment, despite the occasional wobble.
Dominating copper’s allure are its supply-side shortfalls, which are now well
established. Mine supply has not kept pace with demand for many years, nor has
it responded with alacrity to the meteoric price rise, implying that structural
difficulties exist. This is neatly summarised by mine utilisation rate data over the
past several years, provided by the International Copper Study Group. Extremely
8
low mine supply (concentrate availability) has kept smelter treatment charges low
for a prolonged period of time, while also eating into copper concentrate stocks.
The net effect in 2011 will be that refined copper supply growth will fall short of
demand growth by some distance, leaving a very large market deficit that we
estimate at >0.45 Mt in 2011. The introduction of copper-backed exchange
traded products in December 2010 will only exacerbate the deficit in our view.
While there appears little to stop the advance in the copper price, there are a
number of caveats. Although much of the easily substitutable end uses for
copper were already made in the last cyclical peak period between 2006-2008,
high prices (and indeed the prospects for even higher prices) will ultimately lead
to demand destruction wherever that is possible. Because of the inherent
difficulties in measuring substitution, it may not be clear in the next year just what
effect the high copper price will have on demand, but we expect it to be
significant. Scrap copper volumes will also soar on the high price, but to what
extent is also very hard to measure accurately. Even so, scrap will partly offset
sluggish refined growth in 2011 and we expect the copper price to average
~$9,150/t in 2011.
Nickel
Nickel might well prove to be a mixed bag in 2011, and although we generally
expect the price to rise slightly, its soft fundamentals imply that the price should
weaken. The only premise for a tight nickel market in 2011 is if new supply and
restarts fail to live up to expectations. Although the risks associated with supply
disruption in the queue of high pressure acid leach, nickel laterite mines that
have come online – or are scheduled to do so shortly – is high, there is a good
probability that these concerns are misplaced. Together with the introduction of
new supply from Brazil (Vale’s Onça Puma mine and Anglo American’s Barro
Alto mine) as well as the potential impact of higher Chinese nickel pig iron
production (notwithstanding the impact of the Australian flood on energy prices
and hence higher NPI production costs) on the higher nickel price, the market in
our view is heading for a slight surplus, with mine supply growing by an
estimated 12%.
Demand on the other hand should remain strong in H1 2011 but could trail off in
the later stages of the year, although overall it will grow less than in 2010. We
also have concerns over the impact of the growth in 200-series stainless steels in
China, which contain 50% less nickel than in 300-series. Our estimate therefore
for growth in refined nickel consumption in 2011 is a somewhat subdued 5%,
while refined supply should rise by as much as 9%. Our forecast average nickel
price in 2011 is $23,625/t.
9
Zinc
Zinc currently looks well supplied and has vast on and off market stockpiles,
which all in all should make it one of the laggards in 2011. Our price forecasts for
zinc are thus conservative, with an average of $2,350/t in 2011. On the demand
side, China will continue to dominate demand growth through automobile sales,
construction and durable goods sectors, offsetting weaker consumption in the
advanced economies. That said, US demand may surprise, as recovery gathers
pace. Supply growth will also taper off from 2010 levels, with both mine and
refined output growth expected to slow in 2011 and 2012. We therefore expect to
see the market surplus ease, eventually moving closer to balance by the end of
2012.
The introduction of zinc-backed exchange traded products in 2011 might just be

the tonic needed for prices to jump higher, especially should these products be
successful and mop-up some of the stock overhang. For this reason we see risk
to the upside on our PRICE forecast, especially considering the increasingly
positive macro backdrop.
Lead
Strong growth in emerging market automobile production and recovery in US car
sales should support prices in 2011. We originally forecast a large surplus in
2011, but with uncertainty surrounding the restart of the Magellan primary lead
mine in Western Australia (it was closed on environmental grounds in early
January 2011), the market might show only a slight surplus. Magellan was
expected to produce more than 80,000t of contained lead in 2011. The level of
demand growth in 2011 is also unclear. Should Beijing’s monetary tightening and
clampdown on liquidity prove too aggressive and impact car sales – coupled with
the end to the benefits provided by its car incentive scheme – then lead demand
growth may fall short of the forecast percentage (4.5%).
This uncertainty in the supply and demand of lead should keep prices fairly
tightly range-bound over the coming 12 months. We also remain unsure as to the
popularity of the soon to be launched lead-backed exchange traded products,
especially with visible stocks at the highest since the mid-90s, at >0.21 Mt (on
the LME), and climbing. We expect prices to be at their highest over Q1 2011
due to the cold northern hemisphere winter, especially in China where power
rationing may see smelter capacity cutbacks, or even closures. Thereafter we
expect the lead price to yield ground until the closing quarter of the year,
although it may be dragged up by the expected advance in the copper price, as
momentum trading kicks in. Our forecast average lead price in 2011 is $2,329/t.
10
Tin
We remain bullish on tin. Although there are indications that Indonesian supply is
responding to the high price, recent history tells us that further supply disruption
is likely. Chinese tin output is also an unknown element in the tin bull story, but
for now China appears to be showing little interest in increasing production, even
with the high price. Another early warning sign is the rise in LME tin stocks since
October 2010, which implies that either the price is impacting demand or that
supply has risen. Nevertheless, we expect demand for tin from the electronics
sector to grow at a steady pace in 2011 and for the market to ultimately show a
deficit of some 20,000t, with potentially more of the same in 2012. Outside of
potential existing mine expansions, there are only two projects that are
scheduled to come online in the next two years to ease the tightness in the
market (Syrmbet in Kazakhstan and Narsiin Khundlen in Mongolia), while there is
a question mark hanging over supply from the Democratic Republic of Congo
due to the introduction of conflict mineral legislation in the US from 1 April 2011.
Our forecast average tin price in 2011 is $26,523/t.
Gold
Just as gold has benefited from wider macro-economic problems in 2010, so too
will those wider issues determine gold’s trajectory in 2011. Overall, the US will
return to slow growth – around a 1.5% rise in GDP – and this will help ensure
that interest rates barely move, and if at all – will only do so towards the end of
the year. But markets overshoot in both directions, and it will take only a little to
encourage investors to start to feel more positive about the US economy.
Nevertheless, the near-zero interest rate environment will persist in the US and
in Europe for much of the year. This will benefit gold and equities, as investors
seek decent returns. The rise in the Chinese and Indian middle class will
continue to support demand, while political uncertainty in the Middle East and
North Korea and potential currency conflicts might lead to price spikes. There will
– unsurprisingly – also be periods where eurozone debt issues resurface,
momentarily increasing gold’s allure as a hedge against sovereign risk.
Offsetting these supportive factors for the gold price will primarily be the stronger
US dollar, as signs of US economic recovery become evident. The end to major
dehedging by gold miners in Q4 2010 has also removed a key support, while
government austerity measures that have been implemented in many developed
economies will see gold jewellery demand suppressed. All in all it will be a
bumpy ride for the yellow metal; continued investment demand will be the critical
price support factor, but as the global economy returns to growth, the perceived
necessity to buy gold as an anti-risk device will diminish, unless inflation gets out
of hand – always a possibility in the current environment, where governments are
11
nervous about raising interest rates in case they snuff out the fledgling recovery.
We forecast gold will average $1,457/t in 2011.
Silver
The rise in the silver price since August 2010 has been astonishing, but 2011 is
unlikely to see a repetition of this, yet a spike above $35/oz is possible. Although
the range from peak to trough could be quite wide, the average price is unlikely
to advance to the same degree as in the past 12 months. However, where gold
goes, silver will surely follow, so the trajectory will remain up. A key area of
support will come from industrial demand. China’s imports of silver during 2010
have been very strong and there is no reason for this to change in 2011.
Moreover, as the US economy gathers pace, industrial demand for silver will rise
strongly, while new end uses for silver will gain more traction and begin to eat
into the large market surplus by year-end. The key issue, as with gold, will be
how investors feel about the prospects for the US economy – investment
demand in silver remains crucial. Our forecast average silver price is $29.63/oz.
Platinum
The platinum price is due to rise in 2011, having increased by just 20% in 2010,
a stark contrast to the 103% climb in the palladium price, and 29% and 80% in
gold and silver, respectively. Platinum jewellery demand over the past year has
Metals prices during 2006-2010 (*$/t for base metals and $/oz for precious metals, unless otherwise stated)
End 5yr % 2.5yr
End-05 H107 End 10 chg % chg Ave Max Date of Max Min Date of Min Range
Aluminium - 3 2,285 2,736 2,468 20% (10%) 2,355 3,341 15 Jul 08 1,289 26 Feb 09 2,053
Aluminium - 63 1,897 2,179 2,627 15% 21% 2,368 3,588 09 Jul 08 1,760 02 Oct 06 1,828
Copper - 3 4,433 7,520 9,665 70% 29% 6,678 9,665 31 Dec 10 2,820 26 Dec 08 6,845
Copper - 63 2,846 4,297 7,532 51% 75% 5,254 7,532 31 Dec 10 2,760 01 Mar 06 4,772
Lead - 3 Month 1,059 2,645 2,564 150% (3%) 1,969 3,880 17 Oct 07 875 31 Dec 08 3,005
Lead - 15 Month 973 2,482 2,515 155% 1% 1,907 3,515 17 Oct 07 892 31 Dec 08 2,623
Nickel - 3 Month 13,480 35,810 24,950 166% (30%) 23,478 51,000 10 May 07 9,025 28 Oct 08 41,975
Nickel - 27 12,940 29,960 23,850 132% (20%) 20,506 34,950 10 May 07 9,960 01 Apr 09 24,990
Tin - 3 Month 6,600 13,900 26,920 111% 94% 15,126 27,350 18 Oct 10 6,580 05 Jan 06 20,770
Tin - 15 Month 6,500 13,370 26,475 106% 98% 14,843 26,800 11 Nov 10 6,480 05 Jan 06 20,320
Zinc - 3 Month 1,917 3,326 2,442 74% (27%) 2,452 4,515 28 Nov 06 1,069 16 Dec 08 3,446
Zinc - 27 Month 1,590 2,728 2,448 72% (10%) 2,219 3,368 02 Jan 07 1,200 26 Feb 09 2,168
Gold 513 651 1,406 27% 116% 874 1,421 11 Nov 10 513 04 Jan 06 908
Silver 883 1,254 3,063 42% 144% 1,496 3,070 30 Dec 10 883 04 Jan 06 2,187
Palladium 258 365 797 41% 118% 364 797 30 Dec 10 164 09 Dec 08 633
Platinum 964 1,273 1,755 32% 38% 1,367 2,273 06 Mar 08 763 29 Oct 08 1,510
Steel Med - - 564 na na 508 1,267 30 Jun 08 260 28 Oct 08 1,007
End 5yr % 2.5yr
End-05 H107 End 10 chg % chg Ave Max Date of Max Min Date of Min Range
S&P 500 1,248 1,503 1,258 20% (16%) 1,219 1,565 11 Oct 07 677 11 Mar 09 889
US 10yr Yd 4 5 3 14% (35%) 4 5 14 Jun 07 2 01 Jan 09 3
EUR/USD 1 1 1 (13%) 1% 1 1 04 Jan 06 1 24 Apr 08 0
MSCI 707 1,060 1,151 50% 9% 916 1,338 31 Oct 07 454 29 Oct 08 884
Oil, WTI 61 70 91 15% 30% 76 145 07 Jul 08 30 25 Dec 08 115
Source: VM Group
12
been dented by lack of consumer confidence in western markets, and the price
has reflected that, along with a slowdown in sales of diesel-engine vehicles –
diesel prices in the EU have marched ahead of gasoline, while the new car
market in the US remains in the doldrums. The big hope for platinum tended to
be that the diesel revolution was poised to take off in the US – but the recession
has put paid to that, at least for the time being. As for investment demand, that
grew considerably last year – platinum ETF holdings grew by 79% in 2010, to 1.2
Moz. Another healthy increase in 2011 will be necessary to propel prices towards
2008 levels; that, or a failure in South African supply – always a possibility given
the structural problems facing the country’s mines in terms of adequate power
supplies. We forecast platinum to average $1,783/oz in 2011.
Palladium
In 2010 the palladium price rose astronomically, largely thanks to a very strong
growth in sales of new vehicles in China and India, as well as in other parts of
the emerging world. There appears little reason for this growth to slow
appreciably in 2011 and thus the prospects for the palladium price in 2011 are
just as compelling. With autocatalyst demand therefore likely to grow strongly in
2011, a small market deficit will develop as supply fails to keep pace. This will be
compounded by dwindling sales from Russian state stockpiles. This continued
industrial demand growth and the uncertainty over Russian stockpile levels will
encourage further investment in palladium ETFs, to the benefit of the price. With
the absence of any new technological breakthrough in autocatalyst production to
threaten palladium, the tight market conditions, and the hunt for returns from
hard assets are likely to see the average price outperform platinum for the third
successive year. We forecast palladium to average $798/oz in 2011.
VM Group average prices for 2010 and average price forecasts for 2011 (base
metals in $/t and precious metals in $/oz)
Best palladium $798
$526
performer $2,963
silver $2,015
in 2011
tin $26,523
$20,439
copper $9,150
$7,556
gold $1,457
$1,224
platinum $1,783
$1,610
nickel $23,625
$21,877
zinc $2,348
$2,188
aluminium $2,331 2011
$2,179
Worse lead $2,329 2010
$2,193
performer
in 2011 - 5,000 10,000 15,000 20,000 25,000 30,000
Source: VM Group
13
Gold, London PM fix, $/oz Gold
“We have gold because we cannot trust governments” said President Herbert
1,420 Hoover in 1933. Almost 80 years later the precious metal is still viewed in the same
1,410 way. Investors are buying gold, as they cannot trust central banks to protect the
1,400 purchasing power of money. Quantitative easing programmes and record low
1,390 interest rates in the US are putting downward pressure on the dollar which lost 9%
1,380 of its value against the yen during 2010. There are also fears that the increase of
1,370 money supply may lead to a period of high inflation when consumer confidence is
1,360 restored and spending picks up. Despite the stimulus measures implemented by
1,350
the Federal Reserve, labour figures are failing to improve with unemployment at
1,340
9.4%. The December labour report showed that only 103,000 jobs were created
1,330
rather than the forecast 150,000. Federal Reserve chairman, Ben Bernanke,
20-Dec 30-Dec 09-Jan
warned that unemployment will remain high over the next five years despite an
Source: LBMA, VM Group anticipated recovery in economic growth.
Gold price in various currencies,
three months ago = 100
High gold prices are also being supported by the rolling debt crisis in the
eurozone. Portugal is thought to be on the verge of an international bailout with its
115
Dollar Rupee cost of borrowing for 10-year debt jumping above 7%, a level that Lisbon’s officials
Euro admit is unsustainable. Investor attention is also turning towards Belgium, which
110
has the third highest debt-to-GDP ratio in the eurozone. Its 10-year debt yields
105 have risen to a near record 4.2%.
The disintegrating confidence in fiat currencies is reflected by the rising

100
demand for gold from central banks. Russia became the largest buyer in 2010 as it
95 increased its holding by over 130 tonnes. Thailand and Bangladesh purchased 16
tonnes and 10 tonnes respectively, while Iran announced in November that it
90 converted approximately 15% of its foreign exchange reserves into gold. There is
18-Oct 18-Nov 18-Dec
wide speculation that China will be next, although this seems doubtful to us.
China’s gold holdings amount to only $37bn, just 1.5% of its $2.45 trillion foreign
Source: LBMA, VM Group
exchange reserves. Although prices are near record highs, the deteriorating
Shanghai Gold Exchange, lots/day
(average past 22 days) outlook for the dollar may be enough to force China’s hand – sending gold prices to
unprecedented levels.
60,000
The positive macro backdrop is reflected in rising investment demand through
50,000
futures and options trades and exchange traded funds (ETFs). Strictly speaking,
40,000 investment demand through these vehicles has declined recently, as confidence
returned in US economic recovery (following a raft of positive data in late
30,000
December), while profit taking has also weighed in. The total Comex net long
20,000 position fell to 25.2 Moz in the week ending 11 January 2011 (the latest data at
time of writing) from almost 30 Moz in early December 2010. The withdrawal of
10,000
funds and speculators is evident from the fall in the non-commercial position, which
0 has been led by-and-large by the liquidation of longs and rising shorts. ETFs have
Jan-10 Jul-10 Jan-11
also seen outflows, with consecutive declines in the four weeks to 14 January
Source: VM Group, SHFE 2011, to 66.2 Moz (from almost 67 Moz in early December 2010).
14
However, gold has been supported by buying on the lows, as private
st investors and long-term money has flowed into the void vacated by funds and
Gold forward curve (Comex), 1
position = 100, various dates speculators. This is demonstrated by the rise in coin and bar sales as gold drifted
below $1,400/oz at the start of 2011; we expect further inflows into the ETFs
114
1yr ago 1m ago during February.
112
Latest
110
108 Short-term outlook
106 The rising concerns over the European debt crisis will send gold prices to
104 new highs in H1 2011. According to a survey conducted by the London
102 Bullion Market Association, the expectation is that the gold price will
100 average $1,457/oz, 18% higher than 2010. Remarkably, our forecast for the
average gold price in 2011 (made prior to the LBMA published its own
98
1 13 25 37 49 average) also $1,457/oz. Gold did suffer a minor setback in the first week of
the New Year, but this price dip is seen by many as an ideal market entry
point for long term investors. Technically, gold appears well supported on
Gold ETF offtake, tonnes
the lows (for now), and we expect the price to trade sideways over a wide
range until the end of the Chinese New Year festivities. Thereafter, with
25 Chinese demand back on board, the gold price should begin to trend
20
upwards – notwithstanding a change in sentiment regarding eurozone debt
15
distress or US economic recovery. Short-term LBMA London pm fix:
10
$1,325/oz-$1,400/oz.
5
0
(5)
(10)
(15)
(20)
15-Oct 12-Nov 10-Dec 07-Jan
Gold supply & demand balance, tonnes
Source: VM Group
2009 2010 2011
Lease rates, 1m and 12m, % per Supply
annum Mine supply 2,465 2,495 2,523
0.20 Scrap recycling 1,408 1,339 1,501
Gold - 12m Hedging 74 65 42
0.15
Central Bank sales 383 225 50
0.10
Total supply 4,330 4,124 4,116
0.05 Demand
0.00 Jewellery fabrication 1,672 1,424 1,444
-0.05 Legal tender coins 234.3 296.1 305
-0.10 Electronics 375 356 370
-0.15 Other end uses 297 274.5 281
-0.20 Gold - 1m ETFs 576 313 270
Central Bank purchases 437 215 225
-0.25
Dehedging 321 205 31
-0.30 Total demand 3,912 3,084 2,926
-0.35 Residual* 418 1,040 1,190
20-Dec 30-Dec 09-Jan Source: VM Group
*The residual is difference between supply and demand and is available to investment (for a full
Source: VM Group definition see VM Group’s Yellow Book)
15
Silver, London fix, $/oz Silver
December was yet another good month for silver, as concerns over falling
31.0 currencies increased investment demand for safe haven assets. Prices rose by
30.5 6.6% in the month, ending the year on a 30-year high of $30.70/oz. As the price
30.0 of gold is becoming increasingly too high for many individual investors, silver
29.5 investment is becoming all the more attractive, especially against the backdrop of
29.0 rising industrial demand and the appealing longer term rise in new end uses.
28.5 The rise in investment demand is reflected in the surge of American Eagle
28.0 coin sales, which hit an intra-day record of 1.7 Moz on the first business day of
2011. ETF inflows have also risen sharply with global holdings growing by 2% in
27.5
December to a record high of 484 Moz. This advance was led by the US ETFs,
27.0
20-Dec 30-Dec 09-Jan which shot up by 10% to an all-time high of 16.4 Moz. US iShares, the largest
silver ETF, rose to 350 Moz, just 0.3% short of its record high. Silver was one of
the best-performing commodities in 2010, with prices rising by 72% compared to
Lease rates, 1m and 12m, % per gold’s 27%. As a result, the gold:silver price ratio has fallen steadily, hitting a four-
annum
year low of 46 on 30 December, seven points below the 40-year average.
0.3
Silver - 12m Silver is also benefiting from a strong recovery in industrial activity,
0.2 particularly in China, where industrial production from January to November 2010
0.1 grew 16% versus the same period in 2009. All this rapid growth resulted in a 25%
0.0 y-on-y increase in Chinese imports of silver in Q3 10.
(0.1)
(0.2) Short-term outlook

(0.3) Silver is likely to average above $30/oz in Q1 2011, supported by strong
(0.4)
Silver - 1m investment buying and a recovery in industrial uses. As precious metal
(0.5) prices continue on their upward trend, we expect silver to gain more
20-Dec 30-Dec 09-Jan
ground on gold before the end of Q1 2011. Short-term LBMA London fix:
$26.50/oz-$30.00/oz.
Silver ETF offtake, weekly, tonnes

600
500
400
300 Silver supply & demand balance, tonnes
2009 2010 2011
200
Supply
100 Mine supply 22,058 22,793 23,967
0 Recycling 12,752 11,978 11,372
Government 500 250 350
(100) Total supply 35,310 35,021 35,689
(200) Demand
08-Oct 19-Nov 31-Dec Jewellery and Silverware 7,068 6,971 7,218
Industrial 12,441 12,471 12,543
Investment & others 9,017 8,576 8,595
Source: VM Group, ETF providers
Total demand 28,517 27,805 27,805
Residual 6,785 7,003 7,333
Source: VM Group
16
Gold and silver data
Gold CFTC net long position & price Gold in current $/oz and 2009 $/oz Gold/oil ratio, past 3 years
1,500 1,000 2,000 30

900 1,800
1,400 800 1,600 25
1,300 700 1,400 20

600 1,200
2009$
1,200 500 1,000 15
400 800
1,100 300 600 10
Tonnes 200 400 5

1,000
Price, $/oz 100 200 Current $
900 0 0 0
Jan-10 May-10 Sep-10 85 90 95 00 05 10 Jan-08 Jan-09 Jan-10
Source: VM Group, CFTC Source: VM Group Source: VM Group
Gold/silver ratio, past 3 years Gold dehedging, tonnes/quarter Central bank gold data, November 2010
90 100
Country/institution Tonnes
85
50 IMF (19.52)
80
0 Others (0.28)
75
Total sales (19.80)
70 (50) Russia 8.96
65
(100) Others 0.06
60
Total purchases 9.02
55 (150) Net change -10.78
50 IMF (19.52)
(200)
45
40 (250)
Jan-08 Jan-09 Jan-10 01 03 05 07 09
Source: VM Group Source: VM Group Source: IMF, International Financial Statistics &
national country websites. Not all country changes
shown
Silver CFTC net long position & $/oz Silver in current $/oz and 2009 $/oz Silver/copper ratio, past 3 years
34 9,000 25 160
8,000 140
29 20
7,000 120
24 6,000
15 100
5,000
19 80
4,000 2009$
10 60
14 3,000
2,000 40
9 5
$/oz Tonnes 1,000 20
Current $
4 0 0 0
Jan-10 May-10 Sep-10 85 90 95 00 05 10 Jan-08 Jan-09 Jan-10
Source: VM Group, CFTC Source: VM Group Source: VM Group
17
Platinum price, PM fix, $/oz Platinum and palladium
Palladium was certainly the star performer in 2010. Prices more than doubled
1,850 as the gradual recovery of the automotive sector plus soaring demand in
1,800 emerging markets, and a rise in speculative investment boosted demand. The
creation of new ETFs in the US has allowed investment demand to soar amid
1,750
concerns of a weakening dollar and the rolling debt crisis in Europe. Total
1,700 palladium ETF holdings rose more than two-fold in 2010, ending the year on 2.19
Moz, just 3% short of its all-time high.
1,650
Palladium demand from the automotive industry is revving back up after a
1,600 sharp drop in consumer purchases following the global recession. Sales of new
cars in Russia reached 1.9m in 2010, up 30% versus the previous year. US car
1,550
10 Dec 24 Dec 07 Jan sales rose by more than 11% to just under 11.6m units in 2010, while sales in
India shot up by a record 31%. High palladium prices have perhaps been
Source: LPPM, VM Group
primarily supported by the growth in China’s auto industry, which is dominated by
Palladium price, PM fix, $/oz
palladium-rich gasoline fuelled cars. Sales rose to 12.24m units in the period
January to November, up 33% y-on-y. As a result, monthly palladium imports into
840
China in 2010 averaged 85,360oz, up 27% on 2009.
820
Concerns over dwindling stockpiles in Russia are putting further pressure on
800 palladium prices. Norilsk Nickel, a major Russian producer, claims that 2010
780 would be the last year when any significant amount of metal would be sold on the
760 open market. If Russian stockpiles have indeed been exhausted, a supply deficit
740 could materialise in 2011.
720 In contrast, platinum rose by only 25% in 2010, strongly outperformed by the
700 other precious metals. Growth has been stifled by the metal’s exposure to the
680 flagging European automotive market, where it is used in volume in the
10-Dec 24-Dec 07-Jan production of diesel autocatalysts. Regional car sales took a plunge in November,
dipping 6.5% over the past year to 1.1m units. New registrations have declined
Source: LPPM, VM Group
for eight straight months following the end of the various scrappage schemes in
Platinum/palladium price ratio
March. However, the rise in demand for safe haven assets in 2010 prevented
platinum prices from falling. Despite being an expensive investment in
5.5
comparison to its rivals, global ETF holdings shot up 80% in 2010 while the
5.0
Nymex net long position rose 30%.
4.5
4.0 Short-term outlook

3.5 We expect physical demand for platinum and palladium to be strong in
3.0 January in Asia, as jewellers restock after Christmas and prepare for the
2.5 Chinese New Year. Prices will continue to rise, boosted by an optimistic
auto sector and a weak dollar. China’s preference for using gasoline-based
2.0
Jan-08 Jan-10 cars will ensure that palladium will recover further ground on its platinum
rival. Short-term LPPM London pm fix: platinum, $1,790/oz-$1,840/oz;
Source: VM Group
palladium, $790/oz-$850/oz.
18
PGMs data
US & China car* monthly sales, million Top four European car markets sales, Platinum turnover on the SGE, rolling
units monthly, million units 3m average, annualised, oz
2.0 0.50 France Germany 1.4

UK Italy
1.8 0.45
1.2
1.6 0.40
1.4 0.35 1.0
1.2 0.30 0.8
1.0 0.25
0.8 0.20 0.6
0.6 0.15 0.4
0.4 0.10
US China 0.2
0.2 0.05
0.0 0.00 0.0
Dec-07 Dec-08 Dec-09 Dec-10 Dec-07 Dec-08 Dec-09 Dec-10 Jan-09 Jul-09 Jan-10 Jul-10
Source: VM Group, national data. * China includes Source: VM Group, national data Source: VM Group, SGE
commercial vehicles.
Palladium ETFs weekly offtake, oz Platinum ETFs weekly offtake, oz South Africa PGM output, 2005=100
200,000 70,000
ETFS US 140
ETFS US 60,000 ZKB
150,000 120
ZKB 50,000 ETFS UK
ETFS UK
40,000 100
100,000
30,000 80
20,000 60
50,000
10,000
40
0 0
20
(10,000)
0
(50,000) (20,000)
Nov-07 Nov-08 Nov-09 Nov-10
15-Oct 12-Nov 10-Dec 07-Jan 15-Oct 12-Nov 10-Dec 07-Jan
Source: VM Group, company data Source: VM Group, company data Source: VM Group, SSA
Platinum supply & demand balance, 000 oz Palladium supply & demand balance, 000 oz
2009e 2010 2011 2009 2010 2011
Supply Supply
Mine supply 6,020 6,160 6,245 Mine supply 6,390 6,480 6,465
Scrap recycling 1,450 1,518 1,690 Scrap recycling 1,356 1,558 1,595
Total supply 7,470 7,678 7,935 Total supply 7,746 8,038 8,060
Demand Demand
Autocatalysts 2,700 3,100 3,485 Autocatalysts 4,000 4,600 4,965
Jewellery 2,500 2,150 2,175 Jewellery 1,075 1,110 1,075
Other industrial 1,571 1,505 1,600 Other industrial 2,093 2,111 1,995
Total demand 6,771 6,755 7,260 Total demand 7,168 7,821 8,035
Residual 699 922 875 Residual 578 217 25
Stock movements Stock movements
ETF inflows 380 538 500 ETF inflows 502 1,026 650
Russian stock sales 1,000 850 600
Unknown/implied investment 319 385 375 Unknown/implied investment 1,076 41 (25)
19
Aluminium price, LME, $/tonne Aluminium
Modest price gains are the most likely outcome in the aluminium market in
2,650 2011. On the positive side, recent declines in production capacity utilisation rates
2,600 in China, due to government enforced power rationing measures, have offset
2,550 restarts and new supply coming on elsewhere. On the negative side, there is a
2,500 huge stock overhang in both visible and off market inventories and ample spare
2,450 capacity in and outside China should demand growth surprise. The Middle East in
2,400 particular is bringing on cheap capacity rapidly and is fast becoming a significant
2,350 factor in global supply. Global demand growth may also disappoint following
2,300 2010. We expect demand outside China to remain sluggish on 2010 levels, while
2,250 3m 27m Chinese demand could be impacted by government measures to fight inflation.
2,200 China is the key market that will determine the strength of the aluminium
20-Dec 03-Jan 17-Jan price this year. Should Beijing continue to pursue energy efficiency programmes
through either enforced production cutbacks or by raising electricity prices, then
Source: LME, VM Group
the stock overhang (at least domestically) could begin to fall rapidly. The National
Aluminium stocks, LME, Mt
Development and Reform Commission has after all stated that it no longer sees
China as a major aluminium exporter. However, if Beijing throws in the towel,
4.70
then it will be business as usual for aluminium producers, who have shown little
4.60 discipline in slowing output to meet demand over the past 18 months. For now,
Chinese aluminium production rates are down from the record levels of June
4.50
2010, which is price supportive, but exports of aluminium products are still high,
4.40 implying that the Chinese market remains well supplied.
4.30
Short-term outlook
4.20 China is very much in the driver’s seat as far as aluminium is concerned.
4.10 Should Beijing relax its energy saving policy then aluminium production
Jan-10 May-10 Sep-10 Jan-11 rates may rise and the large stock overhang will be maintained. Otherwise
Source: LME, VM Group

market conditions could tighten gradually. Demand may also suffer as a
result of China’s handling of inflation, and we expect aluminium
Aluminium forward curve, LME,
various dates, spot price = 100 consumption growth to remain subdued in 2011 from year ago levels.
Rising alumina costs and energy prices will however underpin prices, while
115
113 the introduction of metal-backed ETPs will lend support. In the short term
17/01/2011
111 the price will follow macro trends, while market fundamentals will come
1m ago
109 1yr ago into play later in Q1 2011. Short-term LME three-month aluminium price:
107 $2,350/t-$2,500/t.
105
103 Chinese aluminium and alumina prices, yuan/t
101 18 January 2011 Current YoY % chg Last mth YoY % chg
99 SHFE spot price 16,545 -3% 16,215 -1%
SHFE three-month price 16,810 -3% 16,555 -2%
97
SHFE six-month price 16,960 -4% 16,955 -2%
95 SHFE stocks, tonnes 434,020 46% 444,699 -33%
Spot 3m 15m 27m 63m Chinese aluminium ingots (99.7%min) 15,285 3% 14,675 2%
Chalco alumina prices 2,650 0% 2,650 0%
Source: LME, VM Group Chinese alumina (Australian import) 2,625 -5% 2,575 6%
20
Aluminium data
Aluminium output by region, monthly, SHFE/LME price differential, $/t Japanese domestic shipments of
Mt extruded products, 000t
1.60 China 200 85

Rest of world 80
1.40 100
Europe
1.20 75
Americas 0
70
1.00
(100) 65
0.80
(200) 60
0.60
55
0.40 (300)
50
0.20 (400) 45
0.00 (500) 40
05 07 09 Jan-10 Jun-10 Nov-10 Jan 08 Jan 09 Jan 10
Source: IAI, VM Group Source: SHFE, LME, VM Group Source: Japan Aluminium Association
Unwrought aluminium producer stocks, Chinese imports/exports of unwrought US output, alumina and aluminium,
Mt aluminium and aluminium products, 100=2002
000t
2.0 500 600 105
Exports
400 500 100
1.8 Imports
300 400 95
Net
200 300 90
1.6 200
100 85
100
0 80
1.4 0
(100) (100) 75
1.2 (200) (200) 70
(300) (300) 65
1.0 (400) (400) 60
05 07 09 06 07 08 09 10 2006 2007 2008 2009 2009 2010
Source: IAI, VM Group Source: China Customs Source: Federal Reserve, VM Group
Aluminium supply & demand balance, 000t

2009 2010 2011 2012
Supply
China 13,483 16,252 16,700 17,700
North America 4,762 4,777 5,040 5,250
Europe & CIS 8,774 8,792 8,954 9,100
Rest of world 10,438 11,094 11,705 12,240
Total world output 37,457 40,916 42,399 44,290
Year-on-year % chg (5%) 9.2% 3.6% 4.5%
Demand
Total world consumption 35,813 40,020 41,941 44,143
Year-on-year % chg (6%) 11.8% 4.8% 5.3%
Implied market balance 1,644 895 458 147
Total stocks 8,195 9,890 10,064 9,926
Average 3-m LME price ($/t) 1,703 2,179 2,331 2,496
Source: IAI, WBMS, VM Group
21
Copper price, LME, $/tonne Copper
The copper price in 2011 will be defined by the size of the market deficit,
10,000 which we estimate will be at least 0.45 Mt. For this reason and due to increasingly
9,800 favourable macro conditions, we anticipate the price will average more than
9,600
$9,100/t, with price spikes above $10,000/t and $11,000/t being an outside
9,400
9,200 possibility.
9,000 There are numerous supportive factors for this advance and only a few
8,800
caveats. One of these would be if Chinese copper consumption disappoints due
8,600
8,400 to government inflation-fighting measures that might manifest themselves during
8,200 3m 27m 2H 2011. The exact supply response from the hard-to-measure copper scrap
8,000 market is also uncertain, but it is likely to be considerable and at higher prices.
7,800
Other worries to what is otherwise a very bullish market are debt defaults in the
20-Dec 03-Jan 17-Jan
eurozone, other financial mishaps that may impact confidence elsewhere in the
Source: VM Group world, and perhaps a strengthening US dollar as the US economic recovery
Copper stocks, LME, Mt gathers pace.
On the plus side, besides the deficit, the copper-backed exchange traded
0.6
products will lock up some of the metal and hence tighten an already materially
short marketplace. To date only the ETF Securities copper ETP is available to
0.5 investors and holdings have only risen modestly since the fund’s launch on 10
0.4 December 2010, to 1,945t, as at 17 January 2011. But with two more products in
the US likely to launch soon the impact, even if modest, is still supportive.
0.3

In the immediate term, copper appears overbought, both technically and
0.1
fundamentally, and may be due a pullback. Copper stocks held on the LME
0.0 and SHFE have flowed in since mid-December 2010, while large stocks are
Jan-10 May-10 Sep-10 Jan-11 retained in Chinese bonded warehouses and these could begin to leak into
Source: VM Group the market under current market conditions. With the Chinese market
currently well supplied and the arbitrage between the LME and SHFE
Copper forward curve, LME, various
dates, spot = 100 copper price at a negative ~$500/t, the conditions for outflows are higher
now than at any time in the past several months, in our view. With Chinese
110 buying activity likely to stay subdued until the end of the Chinese New Year
105 festivities in early February, we expect prices to weaken. Short-term LME
copper price: $8,900-$9,300/t.
100
Chinese copper prices, yuan/t (unless stated otherwise)
95
18 January 2010 Current YoY %chg Last mth YoY %chg
90
SHFE spot price 70,800 17% 66,800 21%
85 17/01/2011
71,550 18% 67,360 22%
SHFE three-month price
1m ago
80 SHFE six-month price 71,720 18% 67,540 22%
1yr ago
SHFE stocks, tonnes 132,647 34% 127,836 22%
75
Chinese copper cathode (99.95%) 57,650 14% 53,950 -6%
Spot 3m 15m 27m 63m
Current Last mth 6m ago
Copper TC (cif) China ($/t) 17.5 7.5 10.5
Source: VM Group
22
Copper data
World mine capacity utilisation, % Global copper concentrate output, Apparent copper usage, monthly, 000t
monthly, 000t
95.00 1,450 800.00 EU-15

1,400
700.00 United States
90.00 1,350
1,300 China
600.00
85.00 1,250
1,200 500.00
1,150 400.00
80.00 1,100
1,050 300.00
75.00 1,000
950 200.00
70.00 900 100.00
850
65.00 800 -
2007 2008 2009 2010 07 08 09 10 07 08 09 10
Source: ICSG, VM Group Source: ICSG, VM Group Source: ICSG, VM Group
Monthly refined copper production China implied copper demand & copper US copper imports in million dollars
(primary and secondary), 000t output, monthly, 000t
Rest of World US 1,200 1,000
2,000
Russian Fed Japan 900
1,800
India China 1,000 800
1,600
700
1,400 800 600
1,200
500
1,000 600
400
800 300
600 400
200
400 Implied demand
200 100
200 Production Output 0
0 0 Jan 08 Jan 09 Jan 10 Jan 11
2007 2008 2009 2010 Jan 08 Jan 09 Jan 10 Jan 11
Source: ICSG, WBMS, VM Group Source: China customs, NBS, VM Group Source: US Census Bureau, VM Group
Copper supply & demand balance, 000t

2009 2010 2011 2012
Supply
Total mine production 16,023 16,359 16,842 17,767
Year-on-year %change 3.7% 2.1% 3.0% 5.5%
North America 1,634 1,721 1,805 1,855
Latin America 3,564 4,499 4,612 4,655
Asia (ex China) 3,952 3,520 4,065 4,120
China 4,005 4,725 5,068 5,223
Europe 3,522 3,659 3,680 3,702
Total refined production 18,362 18,913 19,613 20,700
Year-on-year %change 0.7% 3.0% 3.7% 5.5%
Demand
Total refined consumption 17,721 19,157 20,076 20,759
Year-on-year %change (1.7%) 8.1% 4.8% 3.4%
Implied balance 641 (244) (463) (59)
Total stocks 1,263 950 489 400
Average 3-m LME price ($/t) 5,186 7,331 9,113 8,880
Source: ICSG, WBMS, VM Group
23
Nickel price, LME, $/tonne Nickel
Chinese nickel pig iron (NPI) production has become a significant factor in
2,800 determining the nickel market balance; the high nickel price has encouraged
more Chinese capacity to come on-line, with an estimated 130,000t produced in
2,700
2010. With some 0.4 Mt/year of new and existing NPI capacity currently idle, its
2,600
start-up will closely follow the nickel price. That said, flooding in parts of Australia
2,500 has inadvertently raised costs for NPI producers and hence might increase the
2,400 production costs by as much as 50%. The cost of coking coal used in the
production of NPI has risen above $300/t and is likely to climb higher, which could
2,300
3m possibly force much existing Chinese NPI capacity to close and raise the nickel
2,200
27m price v. profitability threshold of the entire NPI market northwards.
2,100
However, there will be a great deal less additional nickel consumed in 2011
than in 2010 – demand growth is unlikely to match year-ago levels. Much of the
Source: VM Group restocking by stainless steel producers has been done, while the expected
Nickel stocks, LME, Mt slowdown in the Chinese economy and lethargic EU demand in 2011 will more
than offset any growth in the US market. Refined nickel supply meanwhile is
expected to rise by almost 10% in 2011, to 1.58 Mt, and the slight 2010 deficit will
0.20
move to a surplus of 31,000t in 2011. The primary factor for the potential rise in
supply is the introduction of new, high pressure acid leach (hpal) output from a
0.15 slew of projects that have recently started up or are scheduled to do so soon, as
well as new sulphide supply (Onça Puma and Barro Alto) and the full resumption
0.10 of supply from Canada. Of these, the only question mark hangs over whether the
hpal projects will stay on track.
0.05
Short-term outlook
0.00 The flooding in Australia should provide a floor of $23,000/t to the nickel
Jan-10 May-10 Sep-10 Jan-11 price over H1 2011, since much Chinese NPI production is priced out at
Source: VM Group levels far below, on higher coking coal costs. We expect the nickel price to
Nickel forward curve, LME, various perform strongly in H1 2011 while tracking copper and the complex higher
dates, spot = 100 but this could trail off during H2 on weaker demand from China. However,
with the market expected to be in surplus, we expect the nickel price to lag
102
advances in copper and tin. Short term LME three-month nickel price:
100
98 $23,000/t-$26,000/t.
96
94
92 Chinese nickel and stainless steel prices, yuan/t
90 18 January 2010 Current YoY %chg Last mth YoY %chg
88 17/01/2011
1m ago Nickel cathode (Jinchuan, 99.9% min) 165,000 27% 153,000 -13%
86
1yr ago Nickel cathode (Norilsk 99.9% min) 164,000 28% 154,500 -14%
84
Nickel cathode (Vale Inco, 99.9% min) 174,500 14% 170,000 -9%
82
Spot 3m 15m 27m Stainless steel
Hot rolled sheet (304) 20,350 23% 20,250 -14%
Source: VM Group Cold rolled coil (304) 22,450 14.8% 20,750 0%
24
Nickel data
Chinese imports of nickel ore, 000t Chinese refined nickel output and Nickel mine production, year-on-year %
imports, 000t change
3,000 70 300.0%
Thousands
Canada
Imports 250.0% Kazakhstan
2,500 60
Production 200.0% Russian Fed
50 Australia
2,000
150.0%
40
1,500 100.0%
30
50.0%
1,000
20 0.0%
500 10 -50.0%
0 0 -100.0%
2008 2010 Jan 09 Jan 10 Jan 11 Jan-08 Jan-09 Jan-10
Source: China Customs Source: China Customs, NBS Source: INSG, VM Group
World primary output and refined Chinese stainless CR Sheet (304 2b, US stainless steel prices for flat rolled
consumption, 000t 1mm), yuan/t coil, $/kg
Output
150 Consumption 30,000 9
301(7%)
Net 8
100 25,000 304 (8%)
7 316
50 20,000 6
5
0 15,000
4
-50 10,000 3
2
-100 5,000
1
-150 0 0
2007 2008 2009 2010 Jul 08 Jul 09 Jul 10 Jan-08 Jan-09 Jan-10 Jan-11
Source: INSG, VM Group Source: Asian Metals, VM Group Source: Metal Prices
Nickel supply & demand balance, 000t

2009 2010 2011 2012
Supply
% chg y-o-y (6.9%) 5.0% 11.8% 10.8%
Canada 116 80 175 184
China 240 325 375 405
Japan 142 167 161 169
Russian Fed. 244 258 260 270
Australia 112 114 124 145
% chg y-o-y (1.6%) 6.3% 8.9% 6.0%
Demand
% chg y-o-y (3.0%) 14.0% 4.7% 7.8%
Implied balance 75 (19) 41 15
Total stocks 257 245 275 290
Average 3-month LME price ($/t) 14,706 21,384 23,625 26,875
Source: INSG, WBMS, VM Group
25
Zinc price, LME, $/tonne Zinc
The inexorable rise in inventories on both the LME and SHFE over the past
2,600 two years highlights a market in chronic oversupply. This is why the zinc price fell
in 2010 (as opposed to the other base metals) despite putting on a brave rally in
2,500
H2 2010. The outlook for the metal over the next 12 months does not appear to
2,400 be much better. That zinc has remained fairly unresponsive to the underlying
2,300 market surplus, preferring to loosely follow the base metals complex but never
threatening marginal production, has been the root of the problem. Zinc
2,200
producers tempted by the high price naturally restarted capacity that was idled
2,100 3m 27m
during the height of the recession and brought on new supply. Since then, the
market has remained firmly in surplus as supply growth has more than kept pace
2,000
20-Dec 03-Jan 17-Jan with the recovery in demand. The same dynamics will shape 2011 and we
estimate a market in surplus by 0.4 Mt.
Source: VM Group
On the demand side, zinc consumption in 2011 will weaken from the strong
Zinc stocks, LME, Mt growth seen last year. China will continue to dominate through growth in the
galvanised steel sector, which leapt 66% in the first ten months of 2010, to 23 Mt.
0.8 Demand will be driven by automobile, construction and infrastructure
development, but will be constrained by fiscal tightening and could slow during
0.7
H2. Likewise demand growth in the US and EU will slow due to the end of the
0.6
various car scrappage schemes (hitting car sales) and other stimulus
0.5
programmes – although the US may surprise depending on the scale of economic
0.4
recovery there.
0.3
0.1 We see zinc demand steadily climbing in 2011 but it will be the scale of
0.0 supply growth that will determine whether the market will be in large or
Jan-10 May-10 Sep-10 Jan-11 massive surplus. Either way it is hardly price supportive. Much of the
Source: VM Group metal’s price action will be macro driven, but with gentler rallies and
Zinc forward curve, LME, various corrections, as it will tend to lag other base metals. Unfortunately the
dates, spot = 100 corrections will not be sharp enough or sustained to make inroads into
marginal production and alleviate the surplus. In the short term the zinc
17/01/2011
109 price will more or less track the copper price, as funds and investors weigh
1m ago
107 1yr ago into commodities. Short-term LME three-month zinc price: $2,350/t-$2,500/t.
105
Chinese zinc prices, yuan/t, unless otherwise stated
103
101
SHFE spot price 18,760 27% 18,060 -4%
99
SHFE three-month price 19,120 28% 18,445 -3%
97 SHFE six-month price 19,590 29% 18,905 -3%
95 Chinese zinc ingot (99.995% min) 15,950 -9% 15,150 -9%
Spot 3m 15m 27m 63m Chinese zinc conc (55% min) S China 11,000 -6% 9,650 -9%
Chinese zinc conc. (55% min) N China 10,850 -4% 9,350 -11%
Source: VM Group
Zinc conc TC (50% min, cif) China ($/t) 75 -63% 75 -59%
26
Zinc data
Zinc mine production, Mt World zinc demand, Jan 2009-Oct 2009, China: imports and exports of
y-o-y % change unwrought zinc, 000t
1.2 Australia Peru 25% 150
Asia (ex China) China Imports
North America EU
20%
1.0 Exports
15% 100
Net
0.8 10%
5% 50
0.6
0%
0
0.4 -5%
-10%
0.2 -50
-15%
0.0 -20% -100
Jan 08 Jan 09 Jan 10 Jan-09 Jan-10 2006 2007 2008 2009 2010
Source: ILZSG, WBMS, VM Group Source: ILZSG, CHR Metals, VM Group Source: China Customs
SHFE/LME price differential (inc VAT) Zinc concentrate TC, cif China, $/t US construction spending, y-o-y %
change
250 250 0
200 0
200 0
150
100 0
150
0
50
0
0 100
0
-50 0
50
-100 0
-150 0 0
Jan 10 Jul 10 Jan 11 2009 2010 2010 2007 2008 2009 2010 2011
Source: SHFE, LME, VM Group Source: Asian Metal, VM Group Source: USCB
Zinc supply & demand balance, 000t

2009 2010 2011 2012
Supply
% chg y-o-y (2.6%) 7.6% 5.0% 2.6%
China 4,334 5,176 5,702 6,077
North America 1,120 1,300 1,493 1,573
South America 450 489 577 577
Europe 2,001 2,208 2,403 2,413
Australia 500 525 520 526
% chg y-o-y (2.0%) 9.6% 3.8% 3.8%
Demand
% chg y-o-y (5.1%) 12.4% 6.5% 5.4%
Implied balance 765 538 238 50
Total stocks 1,123 1,404 1,658 1,671
3-month LME price ($/t) 1,669 2,132 2,348 2,735
Source: CHR Metals, ILZSG, WBMS, VM Group
27
Lead price, LME, $/tonne Lead
The LME lead price has been in backwardation since mid-October 2010,
2,800 suggesting near term tightness in the market, while the three-month price hit a
multi-year high of $2,690t in early January. We suspect the price has been
2,700
supported by the anticipation that the market would tighten with destocking in the
2,600
Northern Hemisphere winter and positive sentiment on the imminent introduction
2,500 of lead backed exchange traded products (ETP). This has however not filtered
2,400 through to LME exchange stocks, only prices.
2,300 LME lead stocks have risen relentlessly, ending December 2010 at 207,750t,
3m up from 203,875t at the end of November. Inventories have climbed further in
2,200
27m
early January, standing at a fifteen-year high of more than 260,000t (as at 18
2,100
January). Since January 2010 stocks have risen 26% over the year continuing the
trend for lead inventories that have been steadily rising since the recession hit in
Source: VM Group 2008. In terms of weeks of consumption of refined lead (using 2009 consumption
Lead stocks, LME, Mt figures), we estimate that visible stocks could stand at almost 21 days of
consumption with LME stocks accounting for just over 11 days. Stocks rose by
47,800t during 17-18 January this year, with inflows into Far Eastern locations
0.30
accounting for the lion’s share. This increases the share of LME stocks in the Far
0.25 East to 31% (from 18% on the 14 January) while European warehouses hold 37%
and US warehouses 32%.
0.20
On a positive note (at least for prices), two lead acid battery plants in China
0.15 and a lead mine in Australia have been closed on environmental grounds. The
0.10 latest case of lead poisoning in China has affected hundreds of people in Auhui
province, which, combined with previous events, might accelerate government
0.05
efforts to implement measures in tackling polluting industries with closures likely.
0.00 In Australia, the Magellan primary lead mine in Western Australia has been
Jan-10 May-10 Sep-10 Jan-11 closed. Previously closed in early 2008, the mine only reopened in early 2010.
Source: VM Group Magellan was expected to produce about 85,000t of lead in 2011.
Lead forward curve, LME, various

dates, spot = 100 Short-term outlook
102 LME lead stocks are growing rapidly, especially in the Far East, implying
101 slack demand and ample inventories ahead of the Chinese New Year
100 period. With car scrappage schemes ending we expect lead demand to dip
99 further, however we remain positive on US car sales following recent data.
98 We do not believe the current lead price is justified given the stock
97 availability and predict prices to rise only modestly in 2011. Short-term
96 LME three-month zinc price: $2,350/t-$2,625/t.
17/01/2011
95 1m ago
94 1yr ago Chinese lead prices, yuan/t, unless otherwise stated
93
Spot 3m 15m 27m 63m Lead ingot (>99.99%) 16,300 4% 14,800 7%
Lead concentrate (60% min) 13,950 7% 12,350 10%
Source: VM Group 25 -67% 25 200%
Lead concentrate TC (cif) China ($/t)
28
Lead data
World refined lead output, 000t Refined lead consumption, 100=Aug Chinese lead trade, past two years, 000
2005 tonnes
900 300 Germany China
40
Rest of World US EU China 35
800 US Japan Exports
250 South Korea 30
700 Imports
200 25
600
20
500
150 15
400 10
300 100 5
200 0
50
100 -5
0 0 -10
Jan Jul Jan Jul Jan Jul Jan-08 Jan-09 Jan-10 2009 2010 2011
Source: ILZSG, WBMS, VM Group Source: ILZSG, WBMS, VM Group Source: China Customs
Chinese refined lead output, 000 tonnes Passenger cars sold or produced, 000 Lead TC, cif China, $/t
units
500 1,600 400

Japanese
450 1,400 Chinese 350
400 1,200 US 300
350
1,000 250
300
250 800 200
200 600 150
150
400 100
100
50 200 50
0 0 0
Jan 09 Jan 10 Jan 11 2006 2008 2010 Jan 08 Jan 09 Jan 10 Jan 11
Source: China Customs Source: JAMA, NBS, BEA Source: VM Group
Lead supply & demand balance, 000t

2009 2010 2011 2012
Supply
% chg y-o-y (3.0%) 10.2% 5.0% 4.2%
China 3,605 4,180 4,523 4,894
US 1,276 1,270 1,273 1300
Europe 1,702 1,688 1,729 1752
% chg y-o-y 3.0% 6.6% 4.9% 3.3%
Demand
% chg y-o-y 1.2% 8.5% 4.5% 4.6%
Implied balance 222 69 114 (5)
Total stocks 521 590 705 690
3-month LME price ($/t) 1,721 2,124 2,316 2,388
Source: WBMS, ILZSG, VM Group
29
Tin price, $/tonne Tin
The recovery in tin consumption in 2010 came across the board and
27,500 outstripped supply, which struggled to keep pace for a number of reasons. 2011
offers more of the same, but with demand growth falling short of last year’s level,
27,000
and supply growth continuing to underachieve.
26,500 Indonesian tin exports fell 9.2% month-on-month in December 2010, to
26,000 7,722/t, and full year exports by 7% year-on-year, to 92,487t. The decline in
exports (and production) has been blamed on poor weather conditions but is also
25,500
owed to the clampdown on illegal tin ore mining over the last several years, the
25,000 3m 27m closure of smelters because of financial difficulties thrown up by new mining
duties, and reduced availability of readily accessible tin ore. Despite the
24,500
20-Dec 03-Jan 17-Jan Indonesian government claiming that tin output will hit 90,000t in 2011, we expect
the various production difficulties outlined above to persist.
Source: VM Group
Elsewhere, there are concerns over supply from the Democratic Republic of
Tin stocks, LME, 000 tonnes Congo in 2011. Conflict mineral legislation to be introduced in the US from 1 April
2011 will reject untraceable minerals from central Africa unless it is certified as
30 conflict free. The campaign to promote the certification of conflict free tin supply
from this region has been led by the ITRI [formerly International Tin Research
25
Institute), but with time and resources running out to identify all sources it may
20 lead to a period where supply is impacted. In addition, we expect to see little extra
supply emerge from new projects or expansions this year, with just Silver
15
Standard Resources’ Pirquitas mine in Argentina offering much upside.
10 Chinese tin production remains the dark horse but high tin prices have yet to
5 prompt a supply response. This may be due in part to power rationing
programmes in late 2010, so increased production in 2011 should not be
0
discounted; especially should the tin price move much higher.
Jan-10 May-10 Sep-10 Jan-11
Source: VM Group Short-term outlook

Tin forward curve, LME, various China remains the great uncertainty in the tin market. Sustained high tin
dates, spot = 100 prices could encourage tin miners to raise production and impact the
101 market balance. Due to the nature of the comparatively small tin market this
would in turn translate to a sharp and sustained correction to lower levels.
100 However any supply response from China or elsewhere will not be
signalled for months and in the interim we expect the tin price to remain
99
strong on firm fundamentals. Short-term LME three-month tin price:
$24,500/t-$27,500/t.
98
17/01/2011
1m ago Chinese tin prices, yuan/t, unless otherwise stated
97
1yr ago 13 December 2010 Current YoY %chg Last mth YoY %chg
96
Chinese tin ingot (99.9%) 160,000 38% 162,000 38%
Spot 3m 15m
Chinese tin concentrate (60% min) 140,500 33% 140,500 31%
Source: VM Group
30
Tin data
Tin mine production, year-on-year % World refined tin production and China tin output and imports, tonnes
change consumption, 000t
1.4 40.00 20,000
Indonesia Production Imports
1.2 China 18,000
Consumption Output
1.0 Peru 35.00 16,000
0.8 Boliva 14,000
0.6 30.00 12,000
0.4 10,000
0.2 25.00 8,000
0.0 6,000
-0.2 20.00 4,000
-0.4 2,000
-0.6 15.00 0
Jan 09 Jul 09 Jan 10 Jul 10 Jan-08 Jan-09 Jan-10 Jan 10 Jul 10 Jan 11
Source: WBM, VM Group Source: WBMS, VM Group Source: China Customs, NBS
China tin concentrate and ingot prices, Japan electronics production, billion yen China computer production, million
000 yuan/t units
160 1,600 30
150 1,500
1,400 25
140
1,300 20
130 1,200
120 1,100 15
110 1,000
900 10
100 Tin Ingot, 99.9%min
Free Market 800 5
90 Tin Conc, 60%min Ex 700
works
80 600 0
Dec 09 Jun 10 Dec 10 Jan 09 Jan 10 Jan 11 2009 2010 2011
Source: Asian Metal Source: JEITA Source: NBS
Tin supply & demand balance, 000t

2009 2010 2011 2012
Supply
Total mine production 306 314 345 350
% chg y-o-y (2.7%) 2.6% 9.9% 1.4%
China 136 140 142 148
Indonesia 62 58 63 75
South America 58 61 60 68
Rest of world 40 39 39 41
Total refined production 331 332 342 363
% chg y-o-y (1.0%) 0.4% 3.0% 6.1%
Demand
Total refined consumption 311 349 363 370
% chg y-o-y (9.0%) 12.3% 4.0% 2.0%
Implied balance 20 (17) (21) (7)
Total stocks 52 44 37 31
3-month LME price ($/t) 13,337 20,152 26,523 20,540
Source: WBMS, VM Group
31
Steel price, LME, Med, $/tonne Steel
The most significant factors that will determine steel prices in 2011 will be
750 increasing raw material and energy costs. The seaborne iron ore market will be
supported by the continued withdrawal of Indian material, which should
700
compensate for the rise in Australian and Brazilian iron ore shipments. In the
650 short term we expect iron ore prices to rise due to the disruption of shipments
600 caused by bad weather, which in turn will lead to steel mills raising prices to offset
these additional costs. Moreover, coking coal costs are likely to soar due to the
550 flooding in eastern Australia that has all but halted supply, while energy prices
500 3m 27m
should also climb since thermal coal supplies have also been affected in addition
to rising global demand.
450
20-Dec 03-Jan 17-Jan We expect demand growth in China will slip from year ago levels, while that
in the US and other advanced economies will slow following the recovery in 2010.
Source: VM Group
Supply outside of China should rise cautiously against demand, as was the case
Steel stocks, LME, Med, 000 tonnes in 2010, but China represents an unknown. Should steel mills revert to type and
over-produce then stocks will build and exports will likely rise. This will put
90 pressure on international steel mills and could lead to potential trade conflicts.
80 However the stance adopted by Beijing in late 2010 we expect will continue in
70 2011 forcing the steel sector to trim output.
60 The recovery in steel demand and the rise in raw material costs have not
50 been lost on the LME steel billet contract. At a high of $609/t in January 2011 it is
40 at its highest in 27 months. This is partially based on rising costs and the early
30 Northern Hemisphere winter but is also the results of rising steel scrap prices and
20
robust demand.
10
World crude steel production hit 1.28bn tonnes in the first eleven months of
0
Jan-10 May-10 Sep-10 Jan-11 2010, according to the World Steel Association, a 16% increase on the same
period in 2009. The EU 27 produced 160 Mt, up 26% on the year, the US 74 Mt,
Source: VM Group up 41% and China 577 Mt, up 10%.
Steel forward curve, LME, Med,
various dates, spot = 100
Short-term outlook
140 LME steel has by no means been the laggard. In 2010 the contract
135 17/01/2011 advanced 37%, to close the year at $564/t. Although we do not expect it to
130 1m ago
appreciate as much in 2011 on weaker demand growth, prices should
125 1yr ago
strengthen in H1 before trading sideways or slipping during H2. Short term
120
LME steel price: $560/t-$620/t.
115
110
Chinese steel prices, yuan/t, unless otherwise stated
105
100
95 SHFE spot rebar 4,926 24% 4763 26%
SHFE 3m rebar 4,906 18% 4,731 17%
90
SHFE 6m rebar 4,914 9% 4,768 7%
Spot 3m 15m
SHFE 12m rebar 5,057 6% 4,832 1%
Source: VM Group 16mm Med plate (Q235b) China ($/t) 4,310 18% 3,790 6%
Iron ore (Indian 61%, cnf China), ($/dt) 138 55% 119 42%
32
Steel data
Crude steel production, yoy %chg China export/imports, steel products, SHFE steel rebar price curve, 100=spot
Mt
1.2 4 120
1.0
2
0.8 115
0.6 0
110
0.4 -2
0.2 105
0.0 -4
-0.2 100
-6 Imports
-0.4 6-mths ago
-8 Exports 95 last month
-0.6 current
Net
-0.8 -10 90
2008 2009 2010 2006 2008 2010 1 3 7 9 11
Source: WSA, VM Group Source: China Customs Source: SHFE, VM Group
Japan steel products trade, Mt Germany, new orders of first processing US construction, consumer durable and
of steel, constant prices, euros, equipment steel output, 100=2002 ($)
2005=100
5.00 180 140

Imports
160
4.00 Exports 120
140
Net 100
3.00 120
100 80
2.00
80 60
1.00 60
40
40 Construction
- 20 Durable
20
Equipment
-1.00 0 0
2008 2009 2005 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Source: Japan Customs Source: German Federal Statistical Office Source: Federal Reserve
Crude steel production, Mt H2 09 H1 10 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Sept Oct Nov

China 300.4 323.2 139.3 153.7 146.7 157.9 165.3 151.32 47.9 50.3 50.2
Year-on-year %change 27.2% 21.5% 0.9% 20.8% 34.7% 24.6% 18.7% (1.55%) (5.5%) (2.8%) 6%
US 33.9 40.9 12.5 16.4 17.6 19.6 21.3 20.0 6.6 6.5 6.5
Year-on-year %change (16.03%) 67.2% (51.05%) (34.61%) 14.2% 63.5% 70.8% 22.4% 15.0% 9.2% 13.0%
Russia 32.0 32.7 13.9 15.5 16.5 15.7 17.0 16.8 5.6 5.7 5.5
Year-on-year %change 6.0% 22.0% (27.34%) (16.85%) 42.9% 22.3% 21.8% 8.7% 3.3% 2.1% 2.7%
Germany 18.8 22.7 6.6 8.8 10.0 10.9 11.8 10.2 3.3 3.8 3.8
India 27.9 32.4 13.9 14.2 15.1 16.1 16.3 17.0 5.6 5.8 5.6
Year-on-year %change 0.0% 19.2% 7.7% 2.1% 8.5% 18.7% 17.7% 19.9% 20.0% 16.6% 15.9%
South Korea 26.1 28.3 12.3 12.7 13.4 13.2 15.1 13.8 4.7 5.2 5.2
Japan 50.8 54.6 19.1 24.2 26.6 26.5 28.1 27.4 9.2 9.5 9.0
Rest of world 16.2 16.4 6.8 8.1 8.1 8.1 8.3 7.2 2.4 2.9 2.9
Year-on-year %change 8.7% 20.1% (39.58%) (13.75%) 47.1% 18.2% 22.1% (10.84%) (13.04%) 10.7% 6.8%
Source: World Steel Association
33
Hedge fund returns in metals, % Fund activity
monthly
Hedge funds trimmed bullish bets on gold to their lowest since mid-2009.
20 According to CFTC figures hedge fund managers and other large speculators
15 now hold just 144,236 lots of Comex gold.
10
Long Island hedge fund manager Vince McCrudden has been arrested on
5
allegations that he made threats against 47 regulatory offices from the Securities
0
Exchange Commission and the CFTC. In October McCrudden received an
-5
enforcement action from the CFTC and has since claimed $1bn. from the SEC,
-10
Reuters-CRB precious CFTC and other regulatory bodies in a harassment charge. McCrudden
-15
metals previously worked at ICAP.
-20 Funds with >50% in metals
-25 Despite being host to the majority of European-based hedge funds, London is
Feb-09 Oct-09 Jun-10 home to just 14 of the world’s top 100 funds. According to a recent survey by
Bloomberg markets, only 3 of the funds named in the top 20 top performers
Source: VM Group, Barclay Database
based on profitability call the city home. Of the world’s 20 biggest funds 4 are
Hedge funds AUM, $bn headquartered here including BlueCrest Capital Management, Man Group and
Soros Fund Management.
1,300
1,200
1,100
November: no sign of a strong finish
Hedge funds in our database were lingering around the break-even mark by the end
1,000
of November, not boding well for a strong finish to a year, which has seen a patchy
900
performance from most. Hedge funds returned just 0.05% in the penultimate month
800
of 2010, barely in the red - they will need to show strong December returns to finish
700
2010 on a positive note overall. Assets under management slipped from $1.26 trillion
600 to $1.25 trillion. Commodity funds dipped into negative territory, down 0.94% for the
Mar-09 Nov-09 Jul-10
month. Those with over 50% of their assets devoted to commodity strategies
actually did better than the broader sample, returning 0.12% on average. Those
Source: VM Group, Barclay Database weighted to specific sectors did not do as well; funds in metals fell by 1.14% while
Hedge fund returns by commodity those in softs dropped by 2.04%. Energy funds fell by 1.41%, slightly less than the
weighting, % monthly Reuters CRB Energy Index that fell by 3.37% in the same month.
5
4
3
2
1
0
(1)
All Funds
(2)
(3) All with some commodity
investment
(4) Funds with >50% AUM in
(5) commodities
Jan-09 Jul-09 Jan-10 Jul-10
Source: VM Group, BarclayHedge
34
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ABN AMRO Metals Monthly

Investment Research by VM Group January 2011

Metals prices in 2010

-20% -20% -20% -20%

20% 20% 20% 20%

-20% -20% -20% -20%

20% 20% 20% 20%

-20% -20% -20% -20%

20% 20% 20% 20%

-20% -20% -20% -20%

Source: VM Group, IMF

88 A game of two halves

In this risk-averse environment, and despite question marks over the US

Winners and losers

The introduction of zinc-backed exchange traded products in 2011 might just be

The disintegrating confidence in fiat currencies is reflected by the rising

(0.2) Short-term outlook

Silver ETF offtake, weekly, tonnes

1,500 1,000 2,000 30

1,300 700 1,400 20

Tonnes 200 400 5

Source: VM Group, CFTC Source: VM Group Source: VM Group

Source: VM Group, CFTC Source: VM Group Source: VM Group

4.0 Short-term outlook

2.0 0.50 France Germany 1.4

Source: LME, VM Group

1.60 China 200 85

Aluminium supply & demand balance, 000t

0.2 Short-term outlook

95.00 1,450 800.00 EU-15

Source: ICSG, VM Group Source: ICSG, VM Group Source: ICSG, VM Group

Copper supply & demand balance, 000t

Nickel supply & demand balance, 000t

Zinc supply & demand balance, 000t

Lead forward curve, LME, various

500 1,600 400

Source: China Customs Source: JAMA, NBS, BEA Source: VM Group

Lead supply & demand balance, 000t

Source: VM Group Short-term outlook

Source: Asian Metal Source: JEITA Source: NBS

Tin supply & demand balance, 000t

Source: WSA, VM Group Source: China Customs Source: SHFE, VM Group

5.00 180 140

Crude steel production, Mt H2 09 H1 10 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Sept Oct Nov

Source: VM Group, BarclayHedge

ABN AMRO is not providing you with investment advice or a personal

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