commodities 161110 sutias

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Commodities

Introduction and overview

Alexander Raygorodetskiy

Salman Shariff



2

COMMODITIES TYPES

16 November 2010SUTIAS

Energy

Crude OilOil Products

RefiningCoal-to-Liquids & Gas-to-LiquidsOil SandsOil TransportationUS Natural GasLiquefied Natural GasUS Power

Thermal CoalUraniumEthanol

CO EmissionsRenewable Energy

Precious Metals

Gold

Silver

Platinum

Palladium

Rhodium

Other Platinum Group Metals:

Ruthenium, Iridium & Osmium

Industrial Metals & Bulk

Commodities

Aluminium

Copper LeadNickelTinZincIron OreFerro-Chrome

Metallurgical CoalSteel

Minor Metals

CobaltGalliumLithiumMagnesiumManganese

MolybdenumRheniumTantalumThorium

TitaniumTungstenVanadium

Agriculture

CocoaCoffee (Arabica)

Coffee (Robusta)CornCottonPalm OilRapeseedRiceRubber

SoybeansSugar Wheat

Orange JuiceFeeder CattleLean HogsFrozen Pork Bellies



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COMMODITIES MARKET OVERVIEW


Source: Bloomberg

Figure 1: Commodity Scorecard since 2002 Figure 2: Top 20 commodity futures by turnover

Source: NYMEX, ICE, DCE, LME, NYBOT, TCE, SHFE, CBOT, ZCE



4

ENERGY


Global energy consumption has nearly doubled since the 1973 oilcrisis. In terms of the energy mix, oil provides approximately 36% of

total primary energy consumption, that is primary fuels that are

commercially-traded. Despite the implications for global warming and

the environment, coal represents 29% of total energy use followed by

natural gas, which meets 26% of energy demand. Hydro-power and

nuclear energy account for approximately 6% each.

Energy markets, and specifically crude oil, are the deepest and

most liquid of all the five broad commodity sectors. The Nymex WTI

crude oil futures contract is the most actively traded commodity future

anywhere in the world, with annual turnover in 2007 of just over 120million lots. The NYMEX WTI futures contract is therefore twice as

liquid as its nearest rival, the ICE Brent futures contracts. In the past

two years, turnover on both contracts has more than doubled.



5

ENERGY


Source: NYMEX, ICE, TOCOM, SHFE, CJCE (Turnover in million lots)

Figure 3: Energy futures turnover Figure 4: Global energy use by region in 2007

Source: BP Statistical Review



6

CRUDE OIL


Saudi Arabia is the world¶s largest producer as well as exporter of crudeoil. Although the US is the world¶s third-largest oil producing nation, it is also

the world¶s largest importer of oil, representing 25% of cross-border trade in

oil. In terms of annual production, OPEC's market share has declined from

about 50% in 1973 to 32% in 1987 and has averaged approximately 43%

over the 2005 to 2008 period. This share is expected to rise going forward

since the 12 OPEC member countries hold 75% of the world¶s proved crudeoil reserves. The largest oil reserves exist in Saudi Arabia, Iran and

Iraq, Figure 5.

The United States remains the largest consumer of oil, accounting for

24% of world consumption in 2007. In 2005, China overtook Japan to

become the world¶s second largest oil consumer. Since 1995

India hasmoved from being the 13th largest oil consuming nation to the world¶s 4th.

Brazil has also moved up the league table of oil consuming nations from 12th

to 9th place over the same period. In terms of oil demand growth, China is

expected to post the largest incremental increase in oil demand during the

current decade.



7

CRUDE OIL


Source: Central Intelligence Agency

Figure 5: Crude oil reserves by country

18.97%

12.67%

9.95%

8.31%7.52%

7.18%

7.07%

5.71%

3.20

%

2.69%

2.17%

1.84% 1.47%

1.38%0.93%

8.94%Saudi Arabia

Canada

Iran

Iraq

Kuwait

Venezuela

United Arab Emirates

Russia

Libya

Nigeria

Kazakhstan

Qatar

China

United States

Brazil

Others



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CRUDE OIL


Figure 6: Different crude oil grades compared

Source: EIA



9

BALTIC DRY INDEX


The Baltic Dry Index (BDI) is a number issued daily by theLondon-based Baltic Exchange. Not restricted to Baltic Sea

countries, the index tracks worldwide international shipping prices of

various dry bulk cargoes.

The index provides "an assessment of the price of moving the

major raw materials by sea. Taking in 26 shipping routes measured

on a time charter and voyage basis, the index covers

Handymax, Panamax, and Capesize dry bulk carriers carrying a

range of commodities including coal, iron ore and grain.

Most directly, the index measures the demand for shippingcapacity versus the supply of dry bulk carriers. The demand for

shipping varies with the amount of cargo that is being traded or

moved in various markets (supply and demand).



10

BALTIC DRY INDEX


Source: Bloomberg

Figure 7: 3Y Baltic Dry Index



11

NATURAL GAS


The US and the countries of the former Soviet Union are the largestproducers of natural gas. The Russian natural gas industry is dominated by

Gazprom, which controls 95% of production. In the

US, Texas, Louisiana, Alaska, New Mexico and Oklahoma hold more than

half of the country¶s reserves. Other major producers include

Canada, Iran, Norway, Algeria, Saudi Arabia, and the United Kingdom. World

natural gas reserves are estimated at 6,261 trillion cubic feet (tcf). TheMiddle East holds 41% of world reserves, while an additional 40% is located

in the former Soviet Union, with only 9% held in the OECD countries.

Burning natural gas is relatively clean, producing 30% less carbon dioxide

than petroleum and 45% less than coal. The major use for gas is in

homes, businesses and factories for heating, cooking and cooling. Naturalgas is increasingly used as a source of energy for electricity generation via

gas turbines and steam turbines. Compressed natural gas is used as a

vehicle fuel for public transport buses. In addition, natural gas is used as a

base ingredient in the manufacture of

ammonia, antifreeze, fabrics, glass, steel, plastics and paint.



12

NATURAL GAS


Source: BP Statistical Review

Figure 8: The world¶s top 10 natural gas producers, consumers, exporters and importers



14

THERMAL COAL


Source: AME

Figure 9: Major exporters and importers of thermal coal



15

URANIUM


In 2007, Canada was the world¶s largest producer of uranium, amountingto 9.5Kt, although Kazakhstan is set to surpass Canada as the top global

producer in the coming years. Australia has the world¶s largest reasonably

assured reserves of uranium, amounting to 1,142,000 tonnes, representing

30% of the world¶s total. However, there are tight restrictions on new uranium

mining in Australia that will likely remain in place for the next several years

which will restrict access to most Australian material, though we think thesepolicies will eventually be overturned. Other major producing countries are

South Africa, Namibia, Russia and Niger.

Today, nearly 100% of all uranium produced goes to nuclear reactors for

electricity generation, with a very small amount used in research, medical

applications and as fuel for nuclear-powered ships and submarines. In itsfinal physical form, uranium dioxide (UO2) is a ceramic powder, pressed into

small cylindrical pellets. These pellets are loaded into zirconium alloy or

stainless steel fuel rods which are assembled into bundles to form an array of

reactor fuel assemblies.



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URANIUM


Source: UxC

Figure 10: Uranium production by country Figure 11: The leading uranium mining companies

Source: Raw Materials Group



17

RENEWABLE ENERGY


Renewable energy is produced from resources which are naturally replenished, such asrain, wind, sunlight, oceanic streams, geothermal heat and biomass. In order to get rid of the

intermittency inherent in renewable, storage capacities and integration to the electricity¶s

transportation network are essential, not even taking into account the potential of smart grids in the

future.

Hydropower is the most commonly of all renewable energy sources for electricity generation.

Hydropower generates electricity by harnessing or directing moving water. Typically, water flowing

through a penstock or a pipe, turns and pushes against the blades in a turbine to spin a generator

to produce electricity. Hydropower has been used for thousands of years to turn stones for grindinggrains and consequently it is one of the oldest harnessed sources of energy. However, it did not

become widely used until the 20th Century when the technology to transmit electricity over long

distances was developed.

Wind power uses wind turbines to generate electricity. The power output of a turbine increases

dramatically as wind speed increases. Areas where winds are more constant and stronger, such as

high altitude sites and offshore regions, are better albeit more expensive locations for wind farms.

Wind energy has also been used by people since ancient times as a source of power to grind

grains and other materials. The earliest windmills were built in Persia in the 7th century. Solar power describes the conversion of solar energy into other forms of energy, such as heat

and electricity. Solar energy can be converted into electricity using photovoltaic (PV) devices or

solar power plants. Photovoltaic generates electricity directly from sunlight. Solar power plants can

also generate electricity indirectly using thermal collectors to focus the sun¶s rays to heat fluid at a

high temperature. The heated fluid then produces steam that is used to operate a turbine and

generate electricity. British astronomer John Herschel used a solar thermal collector box to cook

food during an expedition to Africa in the 1830s.



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RENEWABLE ENERGY


Geothermal energy is the energy derived from the hot interior of the earth. It is a renewableenergy because heat is continuously produced inside the earth by the slow decay of radioactive

particles. Water heated by the geothermal energy rises naturally to the surface via fissures in the

earth¶s crust at hot springs and geysers. Heated underground steam or water are tapped and

brought to the surface to operate steam turbines and generate electricity, a practise common in

Iceland.

Biomass energy is generated from non-fossilized materials derived from plants. The main

sources of biomass energy are wood and wood waste, followed by energy from municipal solidwaste (MSW) and alcohol fuels. Biomass in the form of organic waste can be converted through

gasification to produce a biogas (normally methane). The biogas is then burnt to produce energy.

When using biomass as a renewable source of energy it is absolutely necessary to consider the

durability of the source via land management practises.

China is the world¶s largest producer of energy using renewable resources. In 2007, about 820

megawatts of solar PV were produced in China, second only to Japan. Canada, the largest

producer of hydropower in the world, produces about 3.1 billion kilowatt hours of hydropower per year, followed by the United States. China is the world leader in total renewable energy

consumption, followed by the United States and Canada. However, the United States consumes the

most non-hydro renewable energy, consuming twice as much non-hydro renewable energy as

Germany and more than three times as much as Japan.



19

PRECIOUS METALS


Gold held by central banks amounted to just over 29,800 tonnes as of the end of June 2008. The lion¶s share of these holdings is held by the United

States, Germany, France and Italy. These countries gold holdings are equivalent to

around two-thirds of total reserves, compared to a world average of just over 10%. In

contrast, gold to total reserve ratios are significantly lower in Asia and the Middle East

and in some circumstances below 3% of total reserves. The performance of the gold

price has been closely linked to the course of the US dollar and the level of real

interest rates in the United States.

Since 1905, South Africa had been the world¶s largest producer of gold.

However, last year China surpassed South African production by 16 tonnes. During

this decade South African production has suffered from declining ore grades, maturing

mines, power disruptions and labour unrest. Today China, South Africa, Australia and

the US account for approximately 40% of the world¶s annual gold mine production.

Global central banks remain a powerful community in terms of the world gold

market. Their combined holdings amounted to 29,813 tonnes as of June 2008. The

largest holder of reserves is the United States with 8,134 tonnes, equivalent to 78.2%

of total reserves. The average gold to total reserve ratio across all central banks is

10.8%. However, in Europe ratios are significantly higher with Greece holding the

highest gold to total reserve ratio at 89.9%.



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PRECIOUS METALS


Source: CPM Group

Figure 12: Precious metals production in 2007 Figure 13: Central bank gold reserves

Source: IMF, World Gold Council (data end June 2008)



21

PRECIOUS METALS


Source:: CPM Group * Middle East includes Pakistan ** Asia excludes Japan and Thailand *** Africa excludes South Africa

World production data excludes secondary supply. World consumption excludes investment demand

Figure 14: The world¶s top 10 gold producers and consumers in 2007 by country and region



22

PRECIOUS METALS


Figure 15: The world¶s top 10 gold producers and consumers in 2007 by country and region

Source: * Middle East includes Pakistan ** Asia excludes Japan and Thailand *** Africa excludes South Africa

World production data excludes secondary supply. World consumption excludes investment demand



23

INDUSTRIAL METALS


Industrial metals are non-ferrous metals, meaning they do not contain anappreciable amount of iron. The industrial metals complex is comprised of

aluminium, copper, lead, nickel, tin and zinc. These six metals are traded on several

exchanges around the world. However, the benchmark contracts are listed on the

London Metal Exchange (LME). The LME was founded for in 1877 and much of the

business is still conducted through open outcry trading in the µRing.¶ Volume on the

LME is dominated by the aluminium, copper and zinc contracts, which combined

represent around 85% of all turnover on the exchange. The LME is a highly liquid market and in 2007 turnover reached a new record of 93

million lots, equivalent to USD9,500 billion. During this decade the LME have been

increasing the number of listed futures contracts for example polypropylene, low

density polyethylene and steel billets. Aluminium is the most actively traded metal on

global exchanges. The annual production of aluminium, which reached 38.1 million

tonnes in 2007, exceeds the output of all other industrial and precious metals

combined, with the exception of steel. One of the most important trends during this decade has been China¶s voracious

appetite for industrial raw materials, which has accelerated since the country joined the

World Trade Organisation in 2001. This has led the country¶s share of world

consumption of not only industrial metals, but all major raw materials to increase

substantially.



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INDUSTRIAL METALS


Source: Brook Hunt, World Bureau of Metal Statistics

Figure 16: Industrial metals primary productionFigure 17: China¶s raw materials consumption

as a percent of global consumption

Source: Brook Hunt, UNCTAD, Tex Report, AME



25

AGRICULTURE


The United States and China are the world¶s superpowers when it comesto agricultural production. Their combined output of

corn, wheat, rice, soybeans and sugar is approximately double that of their

nearest rivals, India and the EU-27 countries. However, what distinguishes

these two countries apart is that while the US is a major exporter of

agricultural commodities, China has become increasingly dependent on

agricultural imports. For example, in 2007-08, the US accounted for 30%, 41% and 63% of world exports for corn, soybeans and wheat

respectively while China has became the world¶s largest importer of

cotton, palm oil, rubber and soybeans.

Of all the agricultural commodities, corn and wheat dominate in terms of

world production. However, global wheat production has declined over the

past two years in response to significant droughts in major wheat producing

countries, such as Australia. In contrast, global corn production has risen by

15% over the past two years following an increase in US corn plantings. This

has occurred to supply the US ethanol industry, which now consumes

approximately 25% of the annual US cornharvest compared to less than 5%

at the beginning of the decade.



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AGRICULTURE


Source: USDA

Figure 18: The world¶s top agricultural producersFigure 19: Total world production of a selection of

agricultural commodities

Source: USDA, World Cocoa Organization

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