Commodities Performance in 2011 Special Report By Money CapitalHeight

Commodities Performance in 2011

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Contents

Introduction

Precious Metals

Gold

Silver

Energy

Crude oil

Natural Gas

LME Metals

Copper

Aluminum

Lead

Zinc

Nickel

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Introduction

Year 2011 has been the most volatile year for the Commodities and Financial markets across

the world as this year was started by hope of a economic recovery and ends with fears of

slipping into Economic recession. In last few decades political environment has never affected

commodities or financial market as 2011 did. European debt crisis and its contagion to EU and

slowdown in global economy and China’s manufacturing PMI slumping down created concerns

for the global investors as they spent 2011 in fears rather than relief.

Commodities was one of the sector that performed with a lot of volatility as Gold, the safe

haven” was giving returns of 35% in 1st half of 2011 suddenly underperformed US treasuries

which gave a return of 16.7% in 2011 as Gold posted its first quarterly loss since 2008. Silver

which made an all time high of $49.76 and was giving returns to investors which was never

imagined, 63.52%, dropped like a knife and underperformed and gave a negative return of -

10.1%. And as we enter in 2012 the precious metals have been into more negative territory as

there 20 DMA dipped below 200 DMA in last week of 2011.

Industrial metals were one of the best performing commodities in 2010 and as 2011 started it

was copper that was supposed to lead the rally but as soon as Tsunami hit the Japan, European

debt crisis bubbled and its contagion to other economies coupled with fears of economic

recession. Industrial, ferrous and non-ferrous metals were the worst performers in 2011 with

Tin and Nickel leading the downtrend with 28.72% and 25% respectively.

Oil space did well in 2011 as there was better demand but supply side risks, geo-political

tensions from Iran, Libya and Sudan coupled with a drop in Dollar led investors to liquidate their

portfolio from precious metals and pump into energies space. Crude oil gave investors a return

of 8.2% while Brent crude edged up 14%. In this report we have summarized the commodities

market and their performance in 2011.

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Gold |31/12/2010 - $1420.3 31/12/2011-$1562.76| Return - 10.2%

Gold started the year as a safe haven as European debt crisis (PIGS) bubbled up and

its contagion to other EU economies and Japan having economic reconstruction lift the

gold t make a fresh all time high of $1920.64, up 35.70%. Gold was seen as a safe

haven as equity markets were underperforming in the time of crisis. The volatility of gold

was higher in 2011 and it technically retraced top Fibonacci extension of its rally from

$250 to $1032 in Mar 2008. Physical gold ETF holdings printed new highs in 2011 to

currently exceed 2300 tonnes. Overall, ETF holdings continued to increase relatively

steadily since their introduction in the early 2000s.

In H2FY11, Gold dropped heavily due to heavy liquidation by hedge funds as they

scrambled for cash to meet client’s requirements and European banks trimmed their

Gold holdings to raise capital, also, US 10 year Treasuries performed better in last

quarter due to which Gold lost its shine as safe haven and trimmed 25% to end 2011

giving a return of 10.20%.

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Silver |31/12/2010-$30.83 31/12/2011-$27.64| Return (-) 9.8%

Silver was the most watched commodities that gave returns of whopping 63.52%,

outperforming every tradable thing in H1FY11 and eclipsed gold in most part of the

year. Silver emerged as the substitute to Gold as it was cheaper for investors to buy it,

also, as leading industrial metals whose demand was seen increasing across the world.

Gold silver ratio which fell to all time low of 32 levels in May 2011 climbed up to 56.13 in

the end. Silver technically slipped down as it formed a Head and Shoulder pattern on

the daily chart and as it broke the neckline at $ 37 saw a fall to $26 levels.

Physical silver ETF holdings have stagnated this year to stand currently just below

17500 tonnes, about 1000 tonnes below their high earlier this year. Speculative

positions in COMEX silver which were at their all time high are approaching 2008 lows,

and are also relatively modest compared to most of the past decade. US mint silver coin

sales fell to a year low in November, in line with developments in the US gold coin

market. Silver posted a loss of 10.2% in 2011 compared to its positive return in 2010.

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Crude oil |31/12/2010-$91.39 31/12/2011-$98.96| Return (-) 8.2%

Crude oil was on one of the best performing commodity in 2011 as it went through a lot

of Geo-political uncertainties, steady demand and supply side risks coupled with a drop

in dollar. Oil prices ended 2011 on a positive note, up 8.2 percent, as a fresh wave of

supply concerns capped a year of unrest and disruptions in North Africa and the

Middle East that overwhelmed concerns about the economic health of large

consuming nations. The supply problems helped lift the price of global benchmark

Brent crude by 13.3 percent on the year to average nearly $111 a barrel for 2011,

eclipsing the previous annual record of nearly $100 struck in 2008 and marking the

third year of annual gains. Crude oil demand according to OPEC, which was

87.81 MB/D in 2011, is expected to edge up to 89.01 in 2012. Crude oil

inventories which were above the level of 330 MB (million barrels) in 2010

declined to 330 MB in 2011 while average (2006-2010) was decreased 320 MB. If the

macroeconomic picture were to turn bullish faster than expected these factors could

quickly drive oil prices above $120/b again.

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Natural Gas |31/12/2010-$91.39 31/12/2011-$98.96| Return (-) 8.2%

Natural gas was the 2nd worst performer tumbling (-) 32.1% this year (Cotton was the

first shredding (-) 36.6%) as it touched to lowest levels since December 2001 at $2.968.

Prolific shale gas wells boosted domestic production and helped sink prices, with U.S.

marketed gas production climbing nearly 7 percent this year to an estimated record high

of about 66 billion cubic feet per day, easily besting the previous all-time high of 62.05

bcfd from 1973. Prices tumbled to their lowest level for any December in the past 10

years, and with no signs of production slowing and no extreme cold weather forecast,

natural gas could fall even further before finding a floor. Mild weather during November

and December has weighed heavily on prices, as winter demand usually runs about 45

percent over summer levels. A host of bearish industry data this year gave the final

push to a market that has been on the defensive since peaking for the year in early

June at just below $5 per mmBtu. EIA total domestic gas inventories fell by 81 bcf to

3.548 trillion cubic feet but at a record high for this time of year. The weekly draw

sharply widened the inventory surplus relative to last year to more than 9 percent and

blew out the surplus to the five-year average to nearly 14 percent.

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Copper |31/12/2010-$9725 31/12/2011-$7530| Return (-) 22.57%

Copper was the best performing commodity in 2010 and was expected the same in

2011 as it ended last year in an upward move and was meant to outperform other

commodities. Copper started the year on a positive note and made a fresh all time high

of 10170 until it was bruised to end the year as worst performing commodity in

2011.Industrial metals were major loser this year with Copper dropping 22.57%

along with other base metals while Tin which doubled in 2010 fell by 28.72%.

COMEX copper trimmed $100 to end the year at $343.35. Over the first eight months of

this year, the copper market deficit totaled 161 kt (vs. production of 12926 kt)

according to the ICSG. Metals were affected by fears over the festering euro zone

crisis and the dollar's resultant strength against the euro. Worries about the possibility

of an economic slowdown in top metals buyer China, and destocking of a

wide variety of metals by that country, also depressed the market.

Chinese manufacturing purchase manager’s index also slipped from the level of 55-56

to 49 in the year end signals subdued demand from world’s largest consumer of metal.

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Aluminum |31/12/2010-$2463 31/12/2011-$1990| Return (-) 19.20%

In metals space, Aluminum was second worst performer in 2011 after copper shredding

19.20% as it was worst hit due to inventories at LME for the whole year were at

higher levels while prices shredded $473 in the international market hit by its

subdued demand in the major consuming economies which were slowed down.

LME Aluminum inventories from second half of 2010 to end of 2011 were

at higher levels. Aluminum inventories were consolidating at comfortable high

level of 450,000 for the past one and a half year near its peak of 470,000

levels. In 2011, aluminum market remained in surplus despite production

cutbacks caused by high cost Chinese marginal producers. Aluminum was

worst hit on report of Chinese economy suffering a downturn

and its major demand which came from European zone was deteriorating for most

part of 2011. Though LME inventories may be at high but SHFE inventories are

witnessing a downtrend and Given the prevalence of expensive, low quality domestic

aluminum smelting, high cost domestic bauxite reserves and power shortages in China,

aluminum imports are likely to increase in coming years.

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Lead |31/12/2010-$2568 31/12/2011-$2009| Return (-) 21.76%

Lead followed copper and ended the year 2011 with a de-growth of (-) 21.76% as the

demand of Lead in the metal industry across globe was subdued for the year with one

of the two major economies like China and European economies signaling negative

demand outlook. The single major factor behind this is the unfolding of the euro zone

crisis, which had some direct and indirect impacts on metals. Another key factor

was the economic slowdown in China. There was a risk of hard landing, and perhaps

the market discounted that. China's factory sector shrank in December as demand

at home and abroad slackened, a purchasing managers' survey during 2011

which fell from level of 55-56 to 49 in December. China accounts for 40 percent of the

world's refined copper consumption. De-stocking in China this year of a wide

variety of metals has surprised market players and analysts, who had forecast

much higher prices for materials such as lead. LME inventories soared to

nearly 400,000 tonnes in 2011 compared to 200,000 levels in 2010.

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Zinc |31/12/2010-$2430 31/12/2011-$1825| Return (-) 24.89%

Zinc was hit hard in 2011 as it was expected to make wave “C” on the monthly chart

after its fall in 2008 from $4633 to $1031 in 2008. Zinc was in a continuous downtrend

tracking metal industry and its slumping demand. Over the first three quarters of 2011

the zinc market surplus was 275 kt (vs. production 9720 kt) according to the ILZSG,

confirming that supply continues to significantly exceed demand. However, with

production costs for most producers in the region just below $2000/t; prices were well

supported provided the growth outlook holds ground. There was a negative divergence

in prices and inventories which came off. As, LME Zinc inventories were in continuous

uptrend for the past four years from the level of 700,000 to 900,000 in 2011 despite Zinc

prices were edging up in 2010 from $1783 to $2586 in 2010. Zinc inventories which

were at lowest levels in 2008 of around 700,000 tonnes saw a continuous rise and

peaked to all time high of 900,000 levels. In 2012, a six month inventory downtrend

following four years of rising inventories, likely a sign of restocking rather than strong

consumption. Over the same period SHFE inventories have also decreased.

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Nickel |31/12/2010-$24835 31/12/2011-$18534| Return (-) 6.1%

Nickel was much less beaten down as compared to other metals such as Copper and

Aluminum and shredded 6.1%. Nickel prices were in a downward trend in 2011 making

lower top and lower bottoms while technically on weekly chart it completed its corrective

wave “C” of its uptrend from $8520 in late 2008 to $29335 in Feb 2011 based on the

weave pattern count. Nickel was beaten down due to negative environment in the global

metal market and economic slowdown in China and European debt crisis. Nickel was

less beaten due to continuous fall in LME nickel inventories as compared to 2010.

Nickel inventories were peaking at 160,000 in 2010 while they slipped to 120,000 in first

half of 2011 and then slipped below 100,000 at the last quarter of 2011 and settled at

90,000 levels in December 2011. With both nickel and iron prices relatively low and

power costs high, Chinese nickel pig iron (NPI) producers are struggling. Due to support

from marginal production costs, lower inventories and decreasing prices so far this year,

we see little further downside risk in the nickel market, absent a serious global

economic setback. Though in 2012, Nickel is likely to continue an uptrend given its

downward trend in inventories which fell by 600,000 tonnes and likely a restocking from

China could also support prices.

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