Beyond Market - Issue 78

7/29/2019 Beyond Market - Issue 78

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3/48Its simplified...Beyond Market27th Feb 13

DB Corner Page 5

Act Now For A Better Tomorrow

Th e co mmoditi es market in Ind ia will be nefit if certain Bi l ls

passed in the Parliament sooner than expected Page 8

Still Betting On Bullions?

Once the markets start pricing in rate hikes in the US, gold

are likely to enter into a major consolidation Page 13

As Confidence Returns To The Markets And Investors Re

To Equities, Gold Will Become More Attractive As A Stor

Wealth.

Mr Marcus Grubb, Managing Director, Investment at World

Council speaks about the factors influencing gold prices amother important issues pertaining to the yellow metal Pa

On A Stable Path

Th e outl oo k fo r cru de oil re mai ns fro m ne utra l to bu ll ish fo

first half of 2013, supported by improving oil demand and

recovery in the global economy Page 21

When Too Muc h Is Too Bad

Continuous increase in domestic production of shale oil an

in the US has resulted in oversupplied market conditions, l

ing the prices of this commodity Page 26

This Year, And Going For ward, The Foc us Shif ts Ba ck To

Health Of The Global Economy, As far As The Commodity

Markets Are Concerned.

Mrs Vandana Hari, Asia Editorial Director at Platts, speaks a

energies and their impact on the global economies Page

Riding On Sentiments

More than fundamentals, sentiments and expectations of s

ity are seen driving the prices of copper and nickel Page

Weather Uncertainties: A Deciding Factor

Decline in process of soybean in the first quarter should be

as a good opportunity to initiate long positions as dry wea

concerns during the 2013-14 planting season in the US ma

prices of this crop higher Page 42

olume 1 Issue: 78, 27th Feb 13

Editor-in-Chief & Publisher:Rakesh Bhandari

Editor: Tushita Nigam

Senior Sub-Editor: Kiran V Uchil

Art Director: Sachin Kamble

Junior Designer: Sagar Padwal

Marketing & Operations:

Divya Bhurat, Shreelatha Gollavathini

We, at Beyond Market welcome your views,

comments and feedback. Do help us to grow

better as per your liking. This is our attempt to

reach you better while crossing horizons...

Web: www.nirmalbang.com

[email protected]

Tel No: 022 - 3926 804 7

HEAD OFFICE

Nirmal Bang Financial Services Pvt Ltd

Sonawala Building, 25 Bank Street,

Fort, Mumbai - 400001

Tel. 022-3926 7500/7501

CORPORATE OFFICE

B-2, 301/302, Marathon Innova,Off Ganpatrao Kadam Marg,

Lower Parel (W), Mumbai - 400 013

Tel: 022 - 3926 8000/8001

Research Team: Kunal Shah, Somya Dixit,

Sunit Mehta, Ankita Parekh, Ravi Dsouza,

Vikash Bairoliya, Sameer Kazi, Mohammed Azeem,

Devidas Rajadhikary, Harshal Mehta,

Sakina Mandsaurwala, Ishwar Kelwadkar


4/48


5/48

(LTP: `213.30) and pharma stocks

like Lupin Ltd (LTP: `609.90) and

Sun Pharmaceuticals Industries Ltd

(LTP: `820.65) can be considered for

the purpose of investments. Also,

Ajanta Pharma Ltd (LTP: `597) looks

good around the`550 level.

All eyes will now be on P

Chidambaram who will be presentingUnion Budget 2013-14 in the

backdrop of a weak economy and

decelerating investment climate,

which have shaken the confidence of

corporates in India. Therefore, the

biggest task before the Finance

Minster would be to keep fiscal

deficit under check, while giving

stimulus to revive economic growth

of the countrY.

Its simplified...Beyond Market27th Feb 13

DisclaimerIt is safe to assume that my clients and I may have an investment interest in the stocks/sectorsdiscussed. Investors are required to take an independent decision before investing. Investment inequity is subject to market risk. Our research should not be considered as an advertisement oradvice, professional or otherwise. The investor is requested to take into consideration all the riskfactors including their financial condition, suitability to risk return profile and the like and takeprofessional advice before investing.

he previous fortnight saw

key developments around

the world as well as in

India. In the US, Federal

Reserve officials seemed divided over

monetary stimulus measures adopted

by the country.

At its policy meeting in the last week

of January, Federal Reserve officialsdebated over risks of high inflation

against the need for continued support

to revive a weak economy through

liquidity measures.

Similarly, growth issues in the Euro

zone continued to be a cause of worry.

And the Chinese government too has

been trying to deflate the rising real

estate bubble in the country by

cooling the property market.

In India, quarterly earnings results of

TIndia Inc were not too encouraging.

In fact, they were rather mixed. Also,

the Wholesale Price Index (WPI) fell

to 6.62% in January from a year ago,

beating market expectations and

fuelled hopes of a rate cut by the

Reserve Bank of India in its next

policy meet.

Market participants are advised toavoid fresh buying or overnight

positions due to the upcoming Union

Budget. If the Nifty breaches the

5,800 mark, then any buying in the

markets should be totally avoided.

However, the pharma and media

sectors look good from an investment

perspective. Media stocks like TV18

Broadcast Ltd (LTP: `25.20), Sun TV

Network Ltd (LTP: `427.10), Zee

Entertainment Enterprises Ltd (LTP:`218.55) and Den Networks Ltd

Market participantsare advised to avoid

fresh buying or overnigpositions due to the

upcoming Union Budg

Sensex: 19,331.69Nifty: 5,854.75

(As on 25th Feb 13)



A LIQUIDITY RUSH

Kunal Shah

Head - Commodities Research,

Nirmal Bang

During the year 2012 neither the world nor the financial markets ended. A famous astrologer had forecasted that the world may comeend in 2012. And economists too, among many things, had said that the Euro zone may break up, China may face a hard landing and thmay again slip back into recession. But neither of these things happened.

Central bankers came to the rescue just in time and managed to save the financial markets from something which could have been worse

the crisis of 2008. While a crisis comes in disguise, the biggest difference between the crisis of 2007-08 and the debt crisis in the Euro zo

2012 was that everyone knew about the debt crisis in the Euro zone but very few were aware of the sub-prime housing crisis in 2007 o

bankruptcy of Lehman brothers in advance in 2008. Interestingly, more than actions, words were enough for the markets to heal. Coordi

actions by top central bankers helped postpone the crisis again. Massive infusion of liquidity by top central bankers, have led to a rally in

assets and liquidation in safe haven instruments.

The global economy is trying to recover from the rough patch and is showing signals of a halt in contraction, except in the Euro zone. Th

economy has done exceedingly well in the last two quarters, the Chinese slowdown has moderated and we are witnessing a cyclical rec

in the Chinese and Japanese economy, which are likely to register moderate growth in the first half of the year due to aggressive stimulusmarkets, as always, have run ahead of the actual fundamentals and we are yet to see the real economy, showing signals of strong growth

Commodities have remained in the lime light since the last four - five years thanks to the prevailing easy monetary policies, invest

demand and stimulus packages by central bankers. But the impact of these policies and packages are moderating. The actual demand i

not picking up at the same pace as it did in the year 2009 and correspondingly the supply side of many commodities has been getting str

and stronger. For sustained recovery in commodity prices, the demand side should get stronger, going forward. Many commodities are tr

way above their cost of production, encouraging producers to boost production. Inflows in top commodity index funds have remained r

and we believe this is one of the most important factors for prices to sustain at unreasonable high levels. More than actual demand, fina

demand has remained robust, giving support to prices.

In 2009, the turnaround story of China, after a huge stimulus by their central bank, led to a massive rally in commodity prices and the

was on investment-led growth, which eventually led to a housing bubble in China, where we have seen a rapid rise in prices followedsharp fall. In spite of a sharp contraction in economic activity in 2012, China has not come up with any aggressive rate cuts or stim

packages. This makes us believe that China is focusing on transforming its economy from an investment-led economy to a consumptio

economy, which will take time. Imports of various commodities from China still remain very low, except crude oil where we have seen

meaningful revival lately.

With the recent correction in commodity prices, it is becoming very clear that more than fundamentals, liquidity is driving prices. Rece

talks by Federal Reserve officials that the central bank might have to slow or stop buying bonds led to a massive sell off in bullions, ene

and metals. It clearly indicates that the run up in commodity prices is liquidity driven and talks of withdrawing excess liquidity led to a ma

correction. I am still waiting for the time, when commodities prices will be determined by their fundamentals not just by liquiditY.

I am still waiting for

the time, when commodities

prices will be determined

by their fundamentals

not just by liquidity.


7/48

www.nirmalbang.com

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing.Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is not oering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commod

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8/48

Act NowFor

A Better Tomorrow

The commodities market in India will benefit

if certain Bills are passed in the Parliament

sooner than expected




he commodities market in India has been

growing gradually since its inception in the

year 2003. Post 2007-08 volumes in

commodities were seen rising exponentially.

This period also witnessed a huge investment demand and

a rally in commodities due to recession, aggressive

monetary easing by the Federal Reserve and the Chinese

Central Bank in 2009.

Apart from base metals, bullions and agri commodities too

saw a rally. Besides, oil too tested $150/barrel in 2008. All

these things led to an increase in awareness of

commodities among retail investors and traders. In fact,

commodities have done better in terms of volumes when

volumes in equity markets were dropping.

However, volumes in the Indian commodities markets

have stagnated after continuously posting growth since the

last five years. During April 12 and January 13, the total

volumes of MCX and NCDEX have not shown anyincremental growth. Commodities market participants

have been waiting for several reforms and amendments of

important acts, which can take this market to new heights.

The Indian commodities markets are facing a number of

hurdles in the path towards exponential growth in volumes

from here.

Cumulative volumes of Multi Commodities Exchange and

National Commodity Exchange Ltd are seen stagnating.

institutions in the futures market, diversifying the product

basket and strengthening the regulator. Despite opposition

from some parties in the Parliament, the government has

repeatedly taken this bill to the Cabinet, indicating the urge

to grow the commodities market, which is still grossly

underdeveloped in India.

However, the issue of FDI in retail took much of the timeat the winter session of the Parliament. Food and

Consumer Affairs Minister KV Thomas believes that the

Forward Contracts (Regulation) Amendment (FCRA) Bill

will be passed in the coming session of the Parliament. For

innovative products (Options, Index trading), wider

participation and portfolio management services, markets

need the FCRA Bill to be passed as soon as possible.

Levy Of Commodity Transaction Tax (CTT)

The Ministry of Finance is seeking to extend the tax

burden so levied on equity derivatives to commodityderivatives under the ambit of the Commodity Transaction

Tax (CTT). The proposal is being considered for Budget

2013-14.

In Budget 2008-09, P Chidambaram proposed to levy CTT.

However, the tax was never notified due to firm opposition

from the ministry of food and consumer affairs and

commodity exchanges. The proposal was to impose

0.017% tax on commodity derivatives trade, on the lines of

the securities transaction tax (STT).

Unlike the equities market, which can be termed as adeveloped market, the commodities market is still a

developing market and imposing CTT at this juncture will

do little good than impede the market activity in the long

run. There is an urge to develop this market and increasing

transaction cost may not prove to be a good move for the

market, which is generating job opportunities for masses

and giving traders, hedgers as well as investors new and

better opportunities.

Impact Of CTT On Hedging

As hedgers remain one of the vital participants in thecommodity markets, an overall increase in cost will

discourage such an activity.

The most important cost for hedgers apart from brokerage

transaction charges, loss of interest on margin and security

deposits is the difference between the bid and the ask price

of a commodity on its trading platform. The spread

difference of the bid and the ask price is inversely

proportional to the trading volumes in commodity

Source: MCX, NCDEX and NB Research

Exchange Turnover (MCX & NCDEX)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

A pr'10-Jan'11 Apr '11-Jan'12 A pr'12-Jan'13

inc

rores

Waiting For Amendment In Forward ContractRegulation Amendment (FCRA)

Market participants were expecting the government to

clear the much-delayed Forward Contracts (Regulation)

Amendment (FCRA) Bill, 2010 in the winter session of the

Parliament in 2012, after it was approved in the Cabinet.

However, it has not been passed yet.

The bill is aimed at widening the participation of financial

T



Source: Bloomberg, NB Research


derivative contracts. Smaller the trade volume, higher is

the difference in the bid-ask price, and vice-versa. The cost

of commodity trades increases with the fall in trade

turnover, and vice-versa.

Domestic physical traders seek to recover the increasing

cost or the risk of their hedging activity either by reducing

prices they pay to their suppliers or by raising prices atwhich they sell to their consumers. As a result, the margins

related to processing in a commodity trade and industry

will indeed increase, which will be detrimental to both

producers as well as consumers of not only commodities,

but also their products.

Impact Of CTT On Speculation

Speculation, which is similar to hedging, is a zero sum

game. A gain for one is indeed a loss to somebody else at

an aggregate level.

Most speculators, who generate trading volumes in a

commodity derivatives market, are day traders or jobbers.

They generate a lot of volume in the market by constant

buying and selling of commodities on an intra-day basis,

which means they close their positions at the end of the

day. Thus, as discussed earlier, more the trading activity,

less is the spread cost. Hence, they help market participants

in reducing the cost involved between the bid and the ask

price of the underlying.

To ensure that the overall cost in the commodity market is

as low as possible, it is essential to have maximumparticipation of intra-day traders. However, if CTT is

imposed, we may see a low intraday activity as it adds on

to the cost, thus challenging the purpose of the commodity

derivatives market.

Manipulation may hold ground in commodity markets if

there is low participation from hedgers and trading

volumes are also low.

If CTT is imposed, then Multi Commodity Exchange,

National Commodities and Derivatives Exchange,

National Multi Commodity Exchange would be affected.The introduction of a transaction tax would shoot up the

transaction cost and lead to higher volatility and lower

trading activity. Since CTT will discourage

physical-market functionaries from hedging, the purpose

of the functioning of the commodity derivatives market is

also lost. In the larger interest of the economy, the

government should desist from levying CTT.

The role of the commodity futures market becomes even

more compelling with India moving towards greater trade

liberalization, particularly in the context of agriculture and

getting further exposed to the volatilities of international

trade and finance.

Rupee Volatility Has Made Trading Difficult On The

Domestic Bourses

In India, rupee has always remained a major concern for

trading in dollar-denominated asset classes. Trading in

commodities has become even more difficult due to high

volatility in the rupee. Evidently, volatility in the rupee

surged post the sub-prime crisis in the US. Compared with

an annual range of 10% during 2003 to 2007, the rupee lost

roughly 18% in 2011 and 3% in 2012.

40

42

44

46

48

50

52

54

56

58

60

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Rupees

USDINR Spot

Stable

Highly Volale

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.0016.00

18.00

2007 2008 2009 2010 2011 2012

Percentage

Rupee Volatility

Indias burgeoning current account deficit (CAD) against

the backdrop of rising imports, coupled with weakerexports, made rupees fortune increasingly dependent on

the capital account. As a consequence, the rupee became a

symbol of risk proxy, following the vagaries of global

risk-on and risk-off environment.

Looking ahead, if global uncertainties diminish and the

prospects of growth revival in the emerging markets take

centre stage, then capital flows to the developing world

may not remain as volatile as we have seen in the last few



years. This development may reduce rupee volatility in the

coming times and may make life slightly easier for

commodities traders.


Source: Bloomberg

Source: Bloomberg


Commodities such as oil, gold, silver and base metals are

the first ones to take a hit from the USDINR movement.The positive correlation between commodity prices of

international and domestic markets has deteriorated,

tracking the volatility of the rupee.

We can take the example of gold price movement in MCX

and COMEX in two different time zones. Earlier, in 2010

the price reaction of international and Indian gold was

positively correlated. This can be justified by looking at

the percentage gain of COMEX and MCX gold in the year

2010 on a year-on-year (y-o-y) basis, which was around

29% and 24%, respectively. It shows parallel movement in

prices in both the markets.

However, in the second half of 2011, significant rupee

depreciation narrowed the gap between COMEX and

MCX gold prices, as international gold prices were under

pressure on the back of a stronger dollar. Hence, we saw a

32% annual return in MCX gold against a mild 10% annual

gain in COMEX gold.

Further, this correlation was disturbed recently in the year

0

500

1000

1500

2000

0

10000

20000

30000

40000

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Rupees

MCX & COMEX GOLD (2010-11)

MCX Gold COMEX Gold

Dollar

Due to a stronger dollar the price of gold in

COMEX came down and the gap between

COMEX and MCX gold narrowed .

40.00

42.00

44.00

46.00

48.00

50.00

52.00

54.00

56.00

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Rupees

USDINR (Spot)

47.00

49.00

51.00

53.00

55.00

57.00

59.00

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Rupees

USDINR (Spot)

1400

1450

1500

1550

1600

1650

1700

1750

1800

1850

24000

25000

26000

27000

28000

29000

30000

31000

32000

33000

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Rupees

MCX & COMEX GOLD (2012-13)MCX Gold COMEX Gold

Dollar

Due to Rupee Volality

2012 due to sustained dollar-rupee volatility. The

continuous depreciation in the rupee resulted in a rise in

MCX gold and it gained approximately 8% in 2012-13. On

the other hand, the stronger dollar caused a decline in the

COMEX gold price; it showed a negative annual return of

6.4% in 2012-13.

There are several issues, which are important for the

commodities market. They are:

1) In March 12, FMC had banned futures trading in guar

seed and guar gum, which are exported for use in oil and

gas industry, to curb price volatility and speculation. Guar

seed and gum were of highest interest among commodities

market participants and banning the contract had negative

repercussions on agri commodity traders and hedgers and

adverse impact on volumes was very visible.

Post that the Commissioner of Food Safety sealed six

warehouses over complaints of adulteration in pepper

stocks. Since then trading interest has dropped in one of

the most vibrant contracts of pepper. Therefore, traders are

still waiting for guar seed contract to be re-launched,

which can help revive volumes on agri bourses and resolve

the quality issue, ensuring that smooth deliveries can bring

hedgers, exporters and the trading community back to the

pepper contract.


12/48

Micro analysis. Mega gains.Trading at Nirmal Bang is based on extensive research and in-depth analysis, where we

focus on the smallest of details and turn them into an advantage for you.

Over the years, the analytical approach coupled with decades of experience has

helped us maximize returns for our investors and thereby inspire condence in them.

EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^| IPOs^| INSURANCE^| DP* www.nirmalbang.com

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010

Disclaimer: Insurance is a subject matter of solicitation. Mutu al Fund investments are subject to market risk. Please read the scheme related document carefully before invest ing. Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is n ot oering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.

SMS BANG to 54646 | Contact at: 022-3926 9404 | e-mail: [email protected]


2) Some of the listed commodity contracts are illiquid.

Exchanges should put more efforts to make illiquid

commodities more liquid as it will bring more interest from

trading community of that particular commodity. Creating

awareness camps in the mandis, training programmes and

generating more interest among physical market

participants can bring more volumes in such contracts.

3) In agriculture commodities such as spices, pulses and

cereals, more commodities can be introduced on the

exchange platform, which will give more choice to traders

and market participants. Even in case of international

commodities, more commodities can be listed on the

domestic bourses.

4) Warehousing facilities is one the major hurdles to the

growth of the commodity markets in India. For commodity

futures to work efficiently, the seller must deposit the

commodity traded in a warehouse and the buyer should

take physical delivery of the commodity in a warehouse ata location of his choice.

5) However, at present, only a few warehouses can handle

such kind of delivery requests and that too for specific

commodities. Because of lack of adequate warehousing

facilities that can ensure the quality standards of the

commodities traded, traders and farmers still prefer local

rural markets for trading the commodities. This factor is

one of the major hurdles in the emergence of a nation-wide

commodity market in India.

Spot Markets In India

The National Spot Exchange Ltd (NSEL) has been a silver

lining in terms of giving new products to the commodities

market participants. NSEL is a market place where

farmers, traders, corporates, processors and importers can

sell and buy at the best possible and competitive rates,

where it provides guarantee in respect of all trades.

It also provides services like quality certification, storage

of goods and other customized value added services. After

the success of the commodities futures market in India, the

introduction and successful operation of the electronic spot

exchange has brought investors to the commodities market

as innovative e-series has done well in the last

one-and-a-half years.

NSEL has created national level institutionalized,

electronic, transparent spot exchange to enable farmers to

sell their produce directly to end users, processors andexporters without any intermediary. Apart from agriculture

commodities, it is spreading its presence in bullions,

metals and even bulk commodities. With the amendment in

the Goods and Services Act, the size and role of the spot

exchange in our country is likely to get bigger and bigger.

Policymakers should encourage commodities market and

passing of the FCRA Bill and Goods and Services Act, and

not levying Commodities Transaction Tax is the need of

the hour to scale the commodities market to the next leveL.


13/48



recious metals gave decent returns to investors in 2012 in countries where currencies have weakened against

the US dollar. And India is no exception to this since the rupee has been under pressure since some time. In

2012, bond yields of troubled countries from the Euro zone shot up dramatically, credit spreads widened

sharply and consensus that the Euro zone may break up grew, leading to a massive spike in prices of gold.

Interestingly, except the second quarter of 2012, investment demand, especially from exchange traded funds (ETFs)

remained healthy. Owing to fear that the Euro zone may break up, massive monetary debasement by western central

bankers - especially by Federal Reserve and European Central Bank, supply concerns in South Africa, continuous buyingby central banks and improvement in demand in India during the second half of 2012, gold holdings in Gold ETFs have

been rising constantly.

In spite of all bullish triggers gold prices registered nominal gains.

The most interesting thing is that since the inception of the crisis in 2008 till 2012, investors have preferred to remain

invested in bullions due to crisis of confidence. Even when central bankers were flooding the markets with liquidity,

industrialists as well as investors preferred to remain invested in safe haven instruments such as gold and US bonds.

Investing in gold has not led to economic growth of any country in the last five years.

Central banks aim to stimulate economies. However, this will not be achieved if investors keeps buying gold and do notinvest in industrial activities, new projects as well as acts that lead to economic growth. Despite quantitative easing

program or QE3 in the US and bullish sentiments in the markets, gold prices did not shoot up. In fact, it witnessed a

gradual decline with every stronger-than-expected economic report from the US and other developed economies.

P

2,739

-108

2,632

1,723

4,355

2,017

466

2,483

1,205

382

77

4,147

207

4,355

2010

2,610

-234

2,376

1,735

4,145

1,814

410

2,223

780

623

-34

3,626

519

4,145

2,827

10

2,836

1,669

4,505

1,972

453

2,425

1,519

185

457

4,586

-81

4,505

2011

2,841

-15

2841

1,686

4,512

1,860

440

2,300

1,226

270

470

4,266

109

4,375

2012E2009Supply (in kt)

Mine Production

Net Producer Hedging

Total Mine Supply

Recycled Gold

Total Supply

Demand (In Kt)

J ewellery Fabrication

Technology

Sub-total Above Fabrication

Total Bar & Coin Demand

ETFs & Similar

Official Sector Purchases

Gold Demand

OTC I nvestment & Stock Flows

Total Demand

Gold Demand And Supply

Source: Thomson Reuters GFMS, WGC, NB Research

152

55.6

207.6

Q1'12

187.6

103

290.6

-18.98

-46.02

-28.56

% Change (yoy)Q1'11India

J ewellery (In Tonnes)

Total Bar Coin And Investments

Total

Overall Gold Demand In India In The First Quarter

Source: WGC, NB Research

Loss of Indian gold demand in the first quarter impacted the overall demand for gold.



^Z/^^K,DEZ^Z,

'&z:

Data for 2009-10 and for 2010-11 are revised

51413.3

61412.1

78149.1

111517.4

149166

185735.2

251439.2

303696.3

288372.9

369769.12

489417.4

4170.4

3844.9

6516.9

10537.7

10830.5

14461.9

16723.6

20725.6

28640.1

33875.8

56616.53

8.1

6.3

8.3

9.4

7.3

7.8

6.7

14.65

9.9

9.2

11.56*

Percentage Share(%)Total ImportYear Gold Import

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Indian Gold Imports - US Dollars (US $ million)

Source: RBI, NB Research

Source: RBI, NB Research

4.1704

3.8449

6.5169

10.5377

10.8305

14.4619

16.7236

20.7256

28.6401

33.8758

56

477.8

507.2

599.5

661.3

765.6

872.8

1138.5

1150.2

1293.5

1603.2

1796.2

0.87

0.75

1.08

1.59

1.41

1.65

1.46

1.8

2.21

2.11

3.48

% share of GDPGold Import

US$ billion

Year GDP ($ bn)

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12*

Indias Gold Imports Percentage Share In GDP

Balance Of Payment Of I ndia With And Without Gold

Why the Indian government is continuously

discouraging gold imports?

Share of Indias gold import in the total import bill has

been increasing at an alarming rate.

The demand for gold plummeted in the first quarter of

2012 due to a host of reasons. These include nationwide

strike by jewellers against excise duty on unbranded

jewellery, double import duty and government rhetoric to

cut gold imports. This also makes us believe that any

measure by the Reserve Bank of India to curb gold imports

can lead to a sharp drop in imports of gold, which can lead

to a correction in prices of gold.

However, the demand for gold rose in the third quarter on

a year-on-year growth rate of 7% and 12% in jewellery and

investment, respectively, in spite of record high prices.

Due to low inventory of jewellers and recovery in

monsoon, Indian gold demand picked up sharply during

the third quarter of 2012. Going forward, moving into

2013, we expect overall fabrication demand in the first half

of 2013 to remain weak. We expect a 5% drop in global

fabrication demand.

In 2012, investment demand of bars and coins remained

subdued. But that of ETFs remained robust. The demand

for gold ETFs shot up to 136 tonnes in the third quarter of

2012. Investment demand is a major driver of gold prices

and has remained subdued.

Going forward, in the first half of 2013 investment demand

of gold is likely to remain strong. After a drop in demand

of physical bars, we expect it to pick up in the first half of

2013 and ETF demand is also likely to remain strong

globally. Investment demand may cool down during the

second half of the year 2013.

Central bankers continued to purchase gold in the third

quarter of 2012. Brazil, Paraguay, South Korea, Russia,

Mexico as well as Venezuela added more gold to their

reserves as diversification. We expect official sector

buying to remain strong, going forward. This trend is

likely to continue in the year 2013. However, the pace may

be quite moderate.

In 2013, due to the evidence of green shoots of recovery,

we expect investment demand to remain subdued. India

has again hiked gold import duty from 4% to 6% inJanuary 13, which may lead to some drop in imports. We

expect gold imports by India to remain under pressure and

remain below 900 tonnes during the year. Monsoon will

play a pivotal role as far as rural demand is concerned.

In January13, Finance Minister P Chidambaram said:

Demand for gold must be moderated. We may be left with

no choice but to make it more expensive to import gold.

The matter is under government consideration.

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12*

-100000

-80000

-60000

-40000

-20000

0

20000

40000

US$million

Current Account Includin Gold Imports

Current Account ExcludinGold Import

Share of gold in the total import bill has been increasing



from 8.1% to 11.5%. Indias love for gold is costing the

government huge sums of money, which is reflecting in the

widening current account deficit. Golds share in Indias

total import bill stands at an alarming 11.5%.

It is estimated that gold imports are 3.48% of our GDP,

which is quite high. On the other hand, China has become

the top producer of gold and imports of the yellow metalhave hardly put any pressure on its balance of payment.

The RBI panel headed by KUB Rao, an adviser to RBIs

department of economic and policy research had put

forward gold-backed financial products to discourage

investments in physical gold. The new products, according

to the panel, could be in the form of gold-linked accounts,

gold accumulation plans, modified gold deposits and gold

pension products. These gold-backed financial products

will be very important and, therefore, watched by all, from

gold miners to investors.

The demand for gold from India is likely to take a hit in the

first quarter of 2013 because of import duty hikes and other

initiatives by the government to discourage gold imports,

which will determine the fate of gold imports in the

coming times. We expect investment demand to remain

subdued. However the demand for jewellery will remain

robust and any expectation of appreciation of the rupee is

likely to put downward pressure on domestic prices of the

yellow metal.

Will The Negative Interest Rate Regime Continue?

As long as real rates remain negative, we feel a crash in

gold looks difficult. But if the US economy gets stronger

based on economic reports, it will be a dampener for gold

prices. Further, if unemployment rate drops below 7.5% or

inflation moves above 2.5%, then expectation of reversal

of interest rates can be expected, which still sounds

far-fetched.

We see strong floor for gold at $1,580/ounce for the next

two quarters of 2013 due to expectation that negative real

rates regime will continue.

Source: Bloomberg, NB Research *(U.S. Interest rates- U.S. Core CPI)


Gold Price V/s U.S.Real Rate*

SPDR Gold Trust Holdings

Historically, we have seen that whenever negative real rate

regime persists, gold prices remain strong. Between 1970

and 1980, gold prices shot up as during this period,

negative real rates persisted in the US economy and after

that real rates gradually started turning positive, which led

to a massive sell off in the prices of gold from 1981 to

2000. And post 2006, the negative real rates regime started,

which along with other factors, led to a major spike in the

price of gold.

The above chart is interesting to say the least as it reveals a

lot about investment demand or financial demand. Gold

ETF holdings have shown good growth. We have not seen

any exponential rise in gold holdings in 2012 like we saw

in 2008, 2009 and 2010 in spite of the sharp rise in prices

during the second half of last year.

The ongoing quantitative easing programs by developed

central bankers will continue to drive investors towards

gold ETFs. The demand for gold ETFs may remain robust

during the second quarter of 2013 as deadline for debt

ceiling in the US is on May 18, which may lead to the

revival of safe haven demand and demand for gold ETF

holdings may surge at that time. But we are of the view that

even in 2013 we may not see exponential rise in gold ETF

holdings as once stability is restored in the financial

market, there will be redemption in gold ETFs too.

OUTLOOK ON GOLD

We expect gold prices to have a strong floor at

$1,580/ounce during the first half of 2013 and during the

first half of the year we may see a gradual recovery in

prices. Weakness in dollar, uncertainties in the Euro zone

and debt ceiling talks will remain the prime reason for the

potential upside in prices of gold. During the second half of

the year, gold prices are likely to remain under pressure

once developed economies become stable. When markets

-3

-2

-1

0

1

2

3

4

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Jan-0

5

Jun-0

5

Nov-0

5

Apr-06

Sep-0

6

Feb-0

7

Jul-07

Dec-07

May-0

8

Oct-0

8

Mar-09

Aug-0

9

Jan-1

0

Jun-1

0

Nov-1

0

Apr-11

Sep-1

1

Feb-1

2

Jul-12

USD/Ozs

Go ld Pr ice Re al Rate (RHS)

Percentage

0

200

400

600

800

1000

1200

1400

1600

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

Jan-12

May-12

Sep-12

Jan-13

MetricTonnes



will start pricing in rate hikes in the United States, during

the same time gold prices can enter into a major

consolidation phase and gradual distribution shall take

place. We dont remain very optimistic on the outlook of

the yellow metal.

SILVER

Source: Thomson Reuters GFMS, NB Research


22.27

6

0.49

29

2

13

6.81

2

24.32

5

-1

4.11

4.78

21.26

6

0.95

28

3

15

6.72

2

27.22

1

-0.26

0.97

3.15

23.37

7

1.37

32

2

16

6.8

3

27.68

4

2

5.74

4.12

23.69

8

0.36

32.03

2

15

6.4

4

27.17

5

0

5.19

-0.75

24.3

8.5

0.3

33.1

1.85

15.4

6.5

3.5

27.25

5.85

0

5.85

1.76

2010 2011 2012e2009000 Tonnes 2008

Mine Production

Old Scrap

Official Sales

Total Supply

Photography

Industrial

J ewellery +Silverware

Coins And Medals

Total Demand

Physical Balance

Net Producer Hedging

Net Balance

ETFs

Demand And Supply Of Silver

iShares Silver Trust Holdings

The demand from this industry jumped from 30 tonnes in

2002 to an estimated 1,860 tonnes in 2011. As per data by

Thomson Reuters GFMS, silver consumption in solar

panels, which was 1,860 million ounce in 2011, dropped to

1,244 tonnes in the year 2012. According to research firm

HIS, there were less than 150 global solar module and cell

companies in 2012 as compared to over 750 in 2010.

Going forward, we may see a cyclical upswing in the solar

industry during the second half of 2013, which will lead to

a recovery in industrial demand. The industrial demand for

silver in 2013 is likely to grow by 4-5% mainly due to

strong demand of consumer products like electrical

appliances, especially from the emerging markets.

Production of silver is rising at a rapid pace due to high

prices of the precious metal. It is believed that the marginal

cost of production of silver for major miners of this metal

is between $5 and $7. And if silver trades above

$30/ounce, then miners will be encouraged to produce

more of it.

Mining is a lucrative business and silver mining too is one

of the many profitable ventures. We expect new supply of

silver to inch up during 2013. But we wont be surprised ifsilver production moves up by 2-3% in 2013.

Demand for silver took a beating after prices of this metal

fell sharply in 2011 and 2012. After hitting a high of

$37.46 in February 12, silver prices made a low of $26.11

in June 12. Investors burnt their fingers during the fall in

silver prices. Quantitative easing by the US kept hopes

alive for silver bulls as before the onset of QE3, silver

prices rallied sharply and made a high of $35.36/oz. Indian

imports of silver for the year 2012 are estimated to be

down by 20-25%.

Demand for silver from jewellery and industrial sectors

was weak in the year 2012. One of the major demand

drivers for silver has been the solar industry. A huge

demand for this precious metal was expected from the

solar industry but due to trade fight and slapping of

anti-dumping duty as well as other restrictions by the

European Union and the United States, the Chinese solar

industry faced severe downturn, resulting into a major glut

of solar panels in the country.

0

50000000

100000000

150000000

200000000

250000000

300000000

350000000

400000000

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

Jan-12

May-12

Sep-12

Jan-13

Ounces

Silver coins and ETFs were the top demand drivers for this

precious metal. Silver ETF holdings shot up in 2012,

Silver ETF holdings have surged approximately by 5% ascompared to 2011. We expect the demand for silver ETF

holdings to remain relatively strong in the year 2013.

We are of the view that silver ETF demand will remain

strong as monetary easing by the developed worlds central

banks from developing nations may lead to good

investment demand for silver. Until a strong economic

recovery, there is little probability of heavy redemption in

silver ETFs.

OUTLOOK ON SILVER

The silver market is in surplus and new supply is negative

from fundamentals point of view but more than

fundamentals, looking at the macro economic scenario for

the first half of 2013, we find that silver has set a strong

floor at $28.50/oz . We may see moderate bullish trend in

silver prices during the first two quarters of 2013 in spite of

bearish fundamentals. The most important key to this

upside is robust silver ETF holdings demand and recovery

in the Chinese solar PV industrY.


18/48

M arcus Grubb joined the World Gold Councilin June08. His key role is to be the goldstrategist for the World Gold Council,responsible for the organizations view of all aspects of the

gold market and to articulate it to investors, from privatewealth to institutional and sovereign investors worldwide.

He also acts as the global spokesperson, speaking at high

profile forums and events worldwide. He is responsible for

managing partner relationships in investment, such as ETF

Securities and Bull ionVault. Marcus has worked in

investment banking and capital markets for 20 years with

experience in management, sales, trading, research and

product origination. He was the Global Head of Equities at

Rabobank and a Board member, where he built and

managed global equities and equity derivatives business.

Marcus was the founder Chief Executive of Swapstream,

the largest inter-bank exchange for interest rate swaps, sold

to the Chicago Mercantile Exchange in 2006. In the

mid-1990s, he was a top-rated Senior Investment Strategist

running a part of research at the Union Bank of Switzerland

and Salomon Brothers and began his career in Eurobond

and swap origination at JP Morgan in the 1980s. Marcus

graduated in 1983 from Oxford University with top first

class honours in Modern History & Economics.

As confidence returns to

the markets and

nvestors return to equities,

gold will become more attractiveas a store of wealth.

Marcus Grubb

Managing Director,Investment at World Gold Council




THE WORLD GOLD COUNCIL

The World Gold Council is the market development organization for the gold industry. Working within the

investment, jewellery and technology sectors, as well as engaging in government affairs, its purpose is to

provide industry leadership, whilst stimulating and sustaining demand for gold.

The Council develops gold-backed solutions, services and markets, based on true market insight. As a

result, it creates structural shifts in demand for gold across key market sectors.

It provides insights into the international gold markets, helping people to better understand the wealth

preservation qualities of gold and its role in meeting the social and environmental needs of society.

Based in the UK, with operations in India, the Far East, Europe and the US, the World Gold Council is an

association whose 23 members comprise of the worlds leading gold mining companies, representing

approximately 60% of global corporate gold production.

In an email interview with the

Beyond Market magazine, Mr

Marcus Grubb speaks about factors

influencing gold prices, among

other important issues pertaining to

the yellow metal.

Excerpts from the interview are asunder:

Q. I n spite of massive stimulus

package by the US and J apan

why are gold pr ices not moving

up? Is this because gold pr ices

are becoming immune to the

monetary stimulus?

There are many factors that

influence gold prices and its

movements are not merelyreactionary in relation to the

introduction of monetary stimulus

by central banks.

Q. The US avoided the fiscal cliff

at the start of the year. But

raising the ceiling on public debt

and borrowing has to be reached

by the end of February.

Moreover, an agreement on

long-term budget savings has not

been sorted out and if noconsensus is reached at, then

spending cuts will automatically

come in. What will be the impact

of this on gold prices?

We anticipate that the ongoing

economic uncertainty in the US

will continue to drive strong

demand for gold in 2013.

Q. During the year 2012, when

the European debt crisis was at

its peak, why were gold prices

trending down at that time?

The Euro zone crisis peaked in

2011, in 2012 the announcement of

Outright Monetary Transactions by

the European Central Bank and the

statement by Mario Draghi that

the ECB will do anything it takes

had the effect of reducing tail risksand peripheral bond yields in the

Euro zone.

Q. What is the outlook for

Chinese & Indian gold jewellery

and investment demand for the

year 2013? How much do you

expect the demand growth to be

in 2013 from India and China?

Economic improvement in Q4

bodes well for the Chineseeconomy and potentially for gold

demand in China in 2013. The

long-term growth trend is strong

although there has been a plateau

in demand in 2012. Therefore,

indications are for a modest rise in

demand in 2013. As a result, the

World Gold Council expects a

slight increase in demand in 2013

with the figure falling in the 780 880 tonne range. Demand in 2012

was 776.1 tonnes.

Concerns over continued political

focus on the gold market as well as

concerns over the Indian economy

give rise to a somewhat cautious

outlook. The first quarter of 2013

could be weak given stock building

in the fourth quarter. However,

appetite for gold remains strong

and there are significantly moreauspicious days in 2013 than 2012.

Therefore, we expect demand to

remain on its long-term growth

trend. We expect gold demand in

India to be in the 865-965 tonnes

range for 2013, representing a 5%

growth rate on average. Demand in

2012 was 864.2 tonnes

Q. Buying of gold by central

banks remained robust duringthe year 2012. Going forward, do

you expect the same trend to



continue ?

At 534.6 tonnes, central bank

buying in 2012 reached its highest

level since 1964 and we expect to

see ongoing strong demand from

the official sector throughout 2013.

Q. The Indian government has

raised gold duty from 4% to 6%.

How will the raised duty impact

gold imports, going forward?

The overall demand for gold in

India in 2012 was strong, despite

measures aimed at reducing gold

demand, such as increase in gold

duty from 4% to 6%. The appetite

for gold remains strong in India

and there are significantly more

auspicious days in 2013 than 2012.

Therefore, we expect demand to

remain on its long term-growth

trend in 2013.

Q. The Indian government is

working on various schemes to

discourage gold imports. Roll out

of such schemes is yet to take

place. Once rolled out, what

impact will the schemes have on

gold imports of I ndia and how

significant will it be for the

global gold market?

The centuries-old cultural affinity

that Indians have with gold means

that they will continue to invest in

gold to meet their emotional,

cultural and financial needs,

regardless of government

intervention.

Gold is a protector of assets, animportant attribute during these

times of economic uncertainty

when wealth preservation is

paramount. It also has a key role to

play in hedging against currency

risk and inflation, both prevalent

economic issues facing India

today. We believe, therefore, that

the fundamental reasons for buying

gold remain as strong as ever.

Q. What is the importance of

having gold in a portfolio in the

context of the ongoing currency

war, where major economies are

deliberately devaluating their

currencies to boost their

respective economies?

Gold has a clear role to play as a

strategic asset within an

investment portfolio in relation to

currency risk on account of its

unique foreign exchange-hedging

characteristics.

Golds main attractions in relation

to hedging forex risk are the fact

that it is negatively correlated tothe US dollar and most developed

currencies as well as being a

cheaper hedging option than the

alternatives.

In addition, gold offers significant

additional benefits in optimizing

risk-adjusted returns during

periods of extreme market stress

and heightened currency tail-risk.

Over eight periods of crisisconditions, use of gold in currency

hedging strategies in an emerging

market portfolio offered

cumulative outperformance of

2.4% above an unhedged portfolio

and over 1% above a

currency-hedged portfolio.

Q. Economic scenario of the US,

China and many other countries

is getting better. Can this lead to

a major correction in gold pricesduring the year 2013? I f not, do

you see gold entering into a

major consolidation phase after

nearly 12 years of bull run?

The investment case for gold is

strongest when considered as a

diversifying asset held within a

portfolio containing risk assets. As

confidence returns to the markets

and investors return to equities,

gold will become more attractive

as a store of wealth.

As investors seek to profit from a

potential turning point in the

economic cycle, it should be bornein mind that we are in a credit

cycle as well, supported by

unlimited QE and competitive

currency policies, which are also

positive for gold in its role as a

hedge, which investors will not be

looking to sell.

At the same time, it should be

remembered that as the economic

situation in countries improves,

consumer jewellery purchases arelikely to rise as was witnessed in

H2 in India and China where

demand rose in Q4 as the economic

challenges of the first half of the

year began to ease.

Q. What is the role and

importance of Exchange Traded

Funds (ETFs) in gold markets?

Do you expect global Gold ETF

demand to remain robust during

the year 2013?

Gold ETFs provide investors with

a viable route to gain exposure to

gold other than the purchase of

gold mining shares or physical

holdings.

In 2012, full year net inflows into

ETFs were up 51% on the previous

year to 279.0t as investors turned

to gold in the face of ongoing

economic uncertainty andexpectations of further monetary

stimulus in the US Fed.

With both the US and Japan

committed to ongoing quantitative

easing in 2013, and with the

expected launch of a gold ETF in

China, we expect investor inflows

into ETFs to continuE.


21/48

The outlook for crude oil remains from neutral to bullish

for the first half of 2013, supported by improving oil

demand and slight recovery in the global economy

rude oil remained positive and rose almost

10% in the first half of 2012 following

positive cues from the global financial

markets. The oil market was also well

supported as exports from Iran contracted sharply due to

tighter sanctions on the nation by the US and Europe to

control the nuclear activity going on in the country.

However, in the early second half of 2012, oil prices

C

On A Stable Path

contracted by approximately 20% following higher

production numbers from the Organization of the

Petroleum Exporting Countries or OPEC (mainly from

Libya and Saudi) and non-OPEC nations (such as US,

Canada and Russia). Higher output from all major

producing nations and continuous lower demand of oil

from both emerging and non-emerging nations further kept

oil prices under pressure.




Sources: Reuters, NB Research

88.23

86.97

Q1

86.88

86

Q2

88.88

87.07

Q3

89.24

88.19

Q4

88.31

87.06

2011

88.51

88.93

Q1

88.64

88.99

Q2

89.68

88.35

Q3

89.41

89.48

Q4

89.06

89.09

2012

89.95

90.06

2013E(mbpd)

Total World Demand

Total World Supply

World

Oil demand is expected to improve slightly in 2013 following lower growth in 2012 on account of muted economicrecovery. Demand is expected to grow by 1 mpbd or 0.9% approximately on a year-on-year (y-o-y) basis in 2013

compared to a fall of 0.4% last year. Demand is expected to grow mainly from the emerging markets (non-OECD nations)

We expect demand from developing countries to overtake demand in developed economies. OECD nations are not

expected to show any major improvement in oil demand due to structurally weak growth in their nations. Emerging

markets are still expected to perform better and oil demand to remain strong, with the use of loose policy to offset

weakness in major export markets.

However, on the supply side, the market is expected to remain well-balanced throughout 2013, keeping the

supply-demand dynamics stable. Global supply is expected to increase by 1 mbpd approximately with the help of

increased production from the Organization of the Petroleum Exporting Countries (OPEC) and Non-OPEC members. Last

year, OPEC produced around 31.34 mbpd, which is higher by 1.34 mbpd than the production quota of 30 mbpd that wasagreed in the latest meeting. Crude oil supply from non-OPEC countries is expected to increase by 2.5% in 2013. The US

and Canada would be the major drivers as output grows with extraordinary production from shale oil in the US and

increasing production from oil sands in Canada.

DEMAND: OECD NATIONS

Oil demand in Organization for Economic Cooperation and Development (OECD) nations is expected to remain weak in

2013. Major oil consumers such as the US and Europe are constantly showing a fall in demand figures. US, the top

consumer of crude oil, has witnessed a fall of 2.09% in 2012 as compared to the previous year and a further fall of 0.5%

is expected in 2013. The weak demand figure in the US is justified by a slow growth in the economy.

European oil demand declined by 2.6% on a y-o-y basis and in 2013 the demand is expected to fall by 2.09% due to the

ongoing debt crisis in the country. The total OECD demand is expected to remain weak in 2013 followed by weak demand

from major oil-consuming nations and may fall by 0.5% as compared to a fall of 1% in 2012 on a y-o-y basis.

DEMAND: NON-OECD NATIONS

In the year 2013, the demand from non-OECD nations is expected to remain strong and overtake OECD nations demand.

Non-OECDs share of energy demand has grown from 36% in 1973 to 55% in 2010 as per International Energy Agency

(IEA). Further, it is expected to climb to 64% of the global energy demand by 2035.

Source: EIA, Reuters, NB Research

US Q-o-Q Demand Growth Europe Q-o-Q Demand Growth

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

Q2 '1 1 Q3 '1 1 Q4 '1 1 Q1 '1 2 Q2 '1 2 Q3 '1 2 Q4'1 2

Percen

tage

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12Percentage





China Q-o-Q Demand Growth Other Asia Q-o-Q Demand Growth

^ZEZE

h^E'>

3.6

2.99

3.61

1.55

9.76

21.52

3.36

2.98

3.31

1.57

10.02

21.23

3.66

2.93

3.1

1.59

10.06

21.35

3.77

2.94

3.35

1.59

10.67

22.31

3.6

2.96

3.34

1.58

10.13

21.6

3.89

2.94

3.36

1.54

10.82

22.55

3.82

2.94

3.23

1.55

10.86

22.41

3.85

2.95

2.97

1.56

10.76

22.1

4.04

2.93

2.94

1.53

11.21

22.66

3.9

2.94

3.13

1.55

10.91

22.43

4.14

2.89

3.1

1.53

11.44

23.1

Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 2013E(mbpd)

Canada

Mexico

North Sea

Other OECD

US

Total OECD

OECD Nations

China remains the second largest importer of oil followed by Japan, India and Russia. China has started showing signs of

recovery since August 12. The demand from China has slowly picked up from the fourth quarter of 2011. Higher demand

is very well supported by improving refining activity in the country. Recently, China imported 5.57 mbpd of oil, up 8%

on a y-o-y basis, supported by the new refining capacity added in the last quarter of 2012. With continuously improving

refining capacity we expect the same trend to continue in 2013 as well. Overall, Asian demand is also expected to remain

strong throughout the year.

SUPPLY

-8

-6

-4

-2

0

2

4

6

8


-5

-4

-3

-2

-1

0

1

2

3

4

5


We expect supply side to remain strong in 2013 with rising exploration of shale oil and tar sands mainly in the US and

Canada, respectively.

Oil production in the US has been rising steadily since the start of 2009. The jump in domestic production is mainly due

to oil extraction from shale rocks by enhanced fracturing and horizontal drilling methods. US oil production, including

NGLs and residual fuel, rose by 7.6% to 10.91 mbpd in 2012 and is expected to climb 5% more to 11.44 mbpd in 2013.

Canadian oil-sands deposit holds the worlds third largest reserves of crude oil after Saudi Arabia and Venezuela. Last

year, the oil production stood at around 3.9 mbpd, the second highest among non-OPEC countries, which is 10.74% higher

compared to a production of 3.52 mbpd in 2011, making it the worlds fifth largest oil producer. It is expected to rise

further by 6.2% in 2013 to 4.14 mbpd.

North Sea oil production fell 22.38% in the month of September 12 as compared to December 11. We have seen a fallof 8.22% in output of the nation on a year-on-year basis. However, some upward revision is seen in the month of

December 12 production numbers, which was around 2.69 mbpd. Exploration drilling has witnessed more than 50%

downside in the last few years, the lowest level since 1960. The main factors contributing to this decline are prolonged

field shutdowns and the ongoing credit crunch in the country.

Russian oil production has shown a constant increase over the past years. Oil output stood at 10.39 mbpd in 2012, which

was 1.27% higher compared to the production of 10.26 mbpd in 2011. The constant increase in production numbers is

supported by exploration of new areas in the country. Further, the production is expected to touch 11 mbpd by the end of

the year 2013.




Source: Reuters, NB Research

Saudi Arabia Libya

Non-OECD supply is also expected to remain well-balanced with no major loss in supply figures. The total production is

expected to rise by 0.5% and reach the level of 6.97 mbpd by the end of 2013.

OPEC Vs NON-OPEC PRODUCTION

In 2012, OPEC pumped around 31.53 mbpd of oil compared to 29.90 mbpd in 2011. We have seen a 7.88% rise in

production numbers on a yearly basis. The rise in production numbers was supported by recovery in oil production in

Libya, reaching its pre-crisis level. Also, there has been a continuous increase in output by Saudi Arabia till November

12, OPECs largest oil producer.

On 12th Dec 12, OPEC members decided to maintain its output ceiling at 30 mbpd for the current year, which will be

about 1 mbpd lower than the actual production.

The decrease in OPEC oil supply would be offset by increase in the production of non-OPEC countries by 1-1.3 mbpd in

2013. The increase in numbers is primarily because of increased crude oil production from tight oil in the United States

and Canadian oil sands.

According to IEA, the US is expected to contribute nearly 0.89 mbpd in non-OPEC output in 2013, for a total of 54.20

mbpd. This would be the highest growth in production since the year 2010.


4.42

13.34

12.56

35.13

65.44

4.31

13.35

12.68

34.44

64.77

4.21

13.24

13.05

35.22

65.72

4.2

13.29

12.7

35.7

65.88

4.29

13.3

12.75

35.12

65.46

4.32

13.4

12.12

36.55

66.38

4.3

13.34

12.2

36.74

66.59

4.33

13.27

12.54

36.71

66.85

4.41

13.33

12.35

36.73

66.82

4.34

13.33

12.3

36.68

66.66

4.43

13.33

12.8

36.4

66.97

Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 2013E(mbpd)

China

FSU

Other Non-OECD

Total OPEC Supply

Total Non-OECD

Non-OECD Nations

8

8.5

9

9.5

10

10.5

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

On an average, crude oil production in Saudi was around 9.8-10 mbpd in 2012 and continues to be the top producer of this

commodity in OPEC. However, its production numbers slid 4.9% to 9.025 million barrels in December12 alone asincreased output from the US and Canada, coupled with recovering shipments from Iraq, increased concerns of an over

supplied market.

The sudden cut of 4,65,000 barrels was the highest monthly drop in production numbers since November 08. We expect

other OPEC members to reduce their output, due to expectations of increased output from non-OPEC nations in 2013.

Libyan oil production currently stands at around 1.43 mbpd close to its pre-war levels. The civil war ended in October 11.

Since then the Libyan oil production is ramping up constantly, with production jumping almost 1.2 mbpd compared to

March 11.




Irans exports have fallen more than 55% since January 12

following tough sanctions by the US. Historically, oil

exports comprised 80% of Irans forex earnings and

provided about two-third of its budget revenue. Last year,

oil exports were around 2.4 mbpd to about 20 countries,

making it the third largest oil exporter in the world.

However, sanctions from the US and pressure on othernations by Europe to cut down their imports from Iran

resulted in a sharp contraction in export numbers. Exports

declined to 1 mbpd, the lowest level since 1998. Looking

at falling export numbers, the countrys oil output also

dropped to 2.65 mbpd in the month of December12

Oil imports from major consuming nations are likely to be

stable in 2013. We expect demand from emerging markets

to remain strong and economic conditions to improve in

the first two quarters of 2013. However, developed

markets such as the US and Europe are not expected to

show any major improvement in import numbers.

European imports are expected to remain subdued due to

the nations on-going debt crisis, which would further

dampen the demand for oil in the coming quarters of 2013.

However, US, the top consumer of oil, has reduced itsreliance on imports in recent years as domestic production

is rising from shale formations and further demand is

expected to fall as domestic oil production is believed to

compared to the output of 3.58 mbpd in the same period in 2011. The decrease in exports is costing Iran $5 billion a day,

forcing the nation to reframe its budget and cut down its expenses on account of lower revenue. It is believed that Iran will

export around 1.5 mbpd average oil in the first quarter of 2013.

Recently, Iran agreed to resume nuclear talks after a break of eight months. Nuclear negotiation between Iran and other

nations is going to take place in Kazakhstan at the end of February13, which may have a negative impact on oil prices.

Earlier, Iran and six other powers, in June, had failed to reach an agreement over ending the nuclear programme.



IMPORTS: CRUDE OIL

IRAN OIL PRODUCTION AND EXPORTS

2.50

2.70

2.90

3.10

3.30

3.50

3.70

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

Jan-1

2

Feb

-12

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-1

2

Dec-1

2

mbpd

Exports Producon (RHS)

mbpd

0.00

4.00

8.00

12.00

2005

2006

2007

2008

2009

2010

2011

2012

mbpd

China US Germany South Korea Japan

remain robust. China, the second major consuming nation, is showing signs of recovery in demand after lowering demand

to 4 mpbd in October 10. Recently, China imported 5.57 mbpd of crude in December 12 which is 8% higher from a year

earlier. Higher import numbers were supported by new refining capacity coming up in the last quarter of 2012.

Oil imports by China eased in the second and third quarter of 2012 as overall growth and manufacturing activity in the

economy slowed. However, imports picked up in the last quarter as demand recovered and more refining units went into

operation. Chinas imports are expected to pick up further in 2013 by almost 7.3% as countrys refinery runs is also

expected to increase by 4% due to the addition of new refining capacity in 2013. In Japan, imports of oil are also expected

to remain strong in the first two quarters of 2013, following seasonal demand and overall recovery in the economy. Japanimported 3.71 mbpd of oil in the month of December 12, which was well above the average of 2011.

OUTLOOK

Combined efforts from all the major central bankers such as US, China, J apan and ECB have resulted in stable economic

conditions. Demand from Non-OECD nations is expected to pick-up further in the first half of 2013 especially from China

followed by Japan and India. We expect oil prices to remain stable in the coming quarter. Our view remains from neutral

to bullish for the first half of 2013, supported by improving oil demand and slight recovery in the global economy. We

expect oil prices to remain in the range of $93 - $97/barrel in the near terM.


26/48



atural gas prices have remained under pressure and corrected almost 23% in the first quarter of 2012. Lower

demand, unfavourable weather conditions across the US and heavy surplus available in the market depressed

gas prices further. The heating demand fell sharply as temperatures remained above normal in major

consuming nations in the US.NInventories rose by 12.3% compared to the five year

average and stood at 3.29 tcf near an all-time high in the

month of December 12. The main reason behind theheavy surplus of natural gas is the boom in the production

of shale oil and gas in the US.

The introduction of new techniques such as horizontal

drilling and hydraulic fracturing have caused a rapid rise in

production numbers of shale oil and gas in the US.

Natural gas prices touched the bottom of $1.90/mmbtu on

20th Apr 12 due to rapid shale gas production in the

country and currently stand at around $3.30/mmbtu.

Source: EIA, Bloomberg, NB Research

26.17

14.77

20.03

16.74

63.79

11.04

6.53

17.11

Q1

7.59

5.89

17.59

19.71

65.96

8.95

4.79

10.42

Q2

3.74

4.42

17.14

27.6

66.3

8.96

5.14

-9.67

Q3

14.61

9.73

18.92

18.81

68.74

8.94

4.91

-0.51

Q4

13.03

8.7

18.42

20.72

66.2

9.47

5.34

-0.87

2011

20.69

12.12

19.72

21.69

68.85

8.97

4.55

10.72

Q1

6.3

5.43

17.82

26.61

68.9

8.36

4.17

-7.16

Q2

3.65

4.39

17.85

31.55

69.07

8.84

4.57

-6.33

Q3

16.74

10.49

19.13

20.72

70.04

8.83

4.24

4.11

Q4

11.85

8.11

18.63

25.14

69.22

8.75

4.38

0.33

2012

13.26

8.93

18.75

22.53

69.59

11.04

4.5

-0.1

2013E(bcf/d)

Demand

Residential

Commercial

Industrial

Electrical

Supply

Total Marketed Production

Gross Imports

Net Imports

Net Inventory Withdrawals

Demand and Supply Scenario - US

Source: Bloomberg

Henry Hub Natural Gas Price

As per Energy Intelligence Administration (EIA), the global demand for natural gas rose 4.5% in the year 2012, driven by

higher consumption by the United States of America, the top consumer of the commodity and strong demand growth in

Asia. The overall demand for natural gas in the US (residential, commercial, industrial and electrical demand) rose by

almost 5% in the year 2012.

However, the US consumption growth is expected to slow down in the year 2013 as well as 2014. Demand is expected to

show a negative growth of around 0.4% in the year 2013 on a year-on-year (y-o-y) basis.

The global natural gas output is rising continuously on the back of robust growth in production in the Middle East, the US

and Russia. It rose by 3.9% in 2012 and is expected to further grow with an annual rate of around 3.3%. Out of all nations,the US remains the top contributor in the overall production of gas. The total marketed production of natural gas stood at

69.33 tcf, which is 4.5% higher compared to a year ago.

It is expected that the ongoing exploration of shale gas and tight gas in the nation will further push production numbers

higher and reach the level of 69.59 tcf in 2013, 0.5% higher compared to the year 2012.

Higher domestic production of natural gas helped the US to reduce its reliance on imports which is justified by the

continuous downside in the import numbers since the year 2010. Imports fell by almost 18% in 2012 as compared to the

year 2011.

2

2.5

3

3.5

4

4.5

5

5.5

6

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

$/mmbtu




Source: EIA, NB Research

US PRODUCTION

Total Natural Gas Production Dry Gas Production

Natural Gas Coal

The production of US natural gas and dry gas has been rising constantly since the year 2000. Gas produced from shale

formations contributed to the current heavy surplus of natural gas in the US. Between the year 2000 and 2006, gas

produced in the US from shale formations grew by an average of 17% per year. Further, production rose by 48% per year

from 2006 to 2010. It is expected that shale and tight gas would account for 70% of the overall production of natural gasin the US by the year 2035.

Continuous increase in domestic production of natural gas will force the nation to cut gas imports further. EIA expects US

imports of gas to shrink to 1% by 2035, which roughly stands at around 12% at present.

COAL AND NATURAL GAS DEMAND FOR POWER GENERATION

55.00

57.00

59.00

61.00

63.0065.00

67.00

69.00

71.00

73.00

75.00

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

2013(E)

Bcf

1550

1650

1750

1850

1950

2050

2150

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

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Bcf

0

20000

40000

60000

80000

100000

120000

140000

Jan

Feb

Mar

Apr

May

Jun

July

Aug

Sep

Oct

Nov

Dec

000megawaho

urs

Max 2011 2012

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

Jan

Feb

Mar

Apr

May

Jun

July

Aug

Sep

Oct

Nov

Dec

000megawah

ours

Max 2011 2012

The above charts show the demand shift trend from coal to natural gas in 2012. Demand for natural gas and coal for

generation of electric power keeps shifting depending on the seasonal pattern. Natural gas prices were trading at a 10-year

low in April 12 when it was delivered to power plants.

Due to warmer weather conditions, the demand for natural gas remained low in the first half of 2012. The prices fell to the

level of $1.9/mmbtu, which was the lowest level since 2003 as the total heating demand reduced. Lower gas prices

encouraged users to prefer gas over coal, which is considered as the second largest source for generation of electricity.

According to EIA, despite seasonally low loads, natural gas-fired generation grew markedly and accounted for 30% of

overall net generation by March 12.

Coal generation decreased to the lows of five year average from April 11 to April 12, while natural gas generation

increased and reached a high of a five-year average. In April 12, coals share of total generation was 34% compared to

natural gas at 30%.

Source: EIA, NB Research



29/48

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Source: EIA, NB Research Source: EIA, NB Research

Inventories Rigs

Natural gas inventories are at 12.3% above the five-year average and it currently stands at around 3 trillion cubic feet. The

heavy build-up of stocks is mainly due to the continuous rapid production and unfavourable weather conditions in the

United States since the start of 2012. Warmer than normal temperature in major consuming regions in the US have

lowered the demand for gas. Other than temperature, rising domestic production of shale gas has resulted in this elevated

level of stocks.

The decrease in the gas rig count is a clear indication of heavy surplus available in the market. However, on the other hand

the count of horizontal and vertical rig count is increasing constantly as the domestic production of shale oil and gas is at

its peak.

Looking at the high inventory build-up in the market we expect shale oil and gas production to slowdown in 2013. We

expect a draw down in the inventories of gas by the end of the first quarter of 2013 on account of lower domestic

production and a mild recovery in demand. However, in the latter half of the year 2013 we may see a build-up in stocks

on account of low seasonal demand.

OUTLOOK

Unfavourable weather conditions, followed by lower heating demand in the nation is expected to continue in the secondquarter of 2013. Continuous increase in domestic production of shale oil and gas in the US has resulted in oversupplied

market conditions and we expect a build-up in stocks of natural gas in the latter half of 2013. Considering the factors

discussed here, we expect natural gas prices to remain depressed and to trade in a tight range o

Beyond Market - Issue 78

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