Underlying Commodity Research BASIC INDUSTRIES FUND … · BASIC INDUSTRIES Mining Institutional...

www.mfglobal.com

01

Equity Research | UK & EUROPE

TOBIAS WOERNER [email protected] +44 (0) 20 7144 4263

ANDREW GARDNER [email protected] 0061 2 8273 8659

MF Global Sector Note10 September 2010

Underlying Commodity Research

FUND FLOWS TAKE-AWAY BASIC INDUSTRIES

Mining

Institutional Use Only

» Commodity prices have good momentum. But both our commodity traders as well as our analysts believe that uncertainty surrounding seasonality and certain fundamentals could provide pitfalls. Eventually, both we analysts and the commodity traders see good upside once the seasonally more challenging September and October are out of the way. The question is whether we will see another adjustment in the meantime?

» What the commodity traders think. The commodity traders

like the price momentum and think that eventually the money will come flowing back into the sector. That said, the volumes remain low, while CTAs are the main driver of the latest upward move. Low volumes remain a concern, especially as the fundamentals are seen as no more than neutral so far;

» What the analysts think. We are much more cautious at least

in the short-term. Fundamentals, such as the ISM and Chinese money supply remain unconvincing. Seasonality is most accentuated in September and October. That said, if we do get through the next two months without any accidents or resistance levels are broken, then we too would become much more positive; and

» It will be interesting to see whether new highs can be broken?

Seasonality might soon prove to be in the sector’s favour, but normally September is a very challenging month. It is for this reason that we still have a more Neutral position on the sector with two BUYs (AngloAmerican, TP 3,300p and BHP Billiton, TP 2,300p) and two SELLs (Vedanta, TP U/R (from 2,200p) and Antofagasta, TP 800p).

Source: MF Global UK Limited

For the analyst certification and other important regulatory disclosures, please refer to the Regulatory Disclosures Section, located at the end of this report.

FUND FLOWS VS THE CRB INDEX

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AUM In Commodities %-age Change YonY

CRB %-age Change YonY

2


10 September 2010 MF GLOBAL SECTOR REPORT | FUND FLOWS TAKE-AWAY

Fund Flows vs. The Miners – Price Momentum Looks Good, BUT Fundamentals & Fund Flows Remain Unconvincing

CHART NO. 1 | CHINESE MONEY SUPPLY VS. THE SECTOR –FUNDAMENTALS REMAIN CHALLENGING

CHART NO. 2 | THE CRB INDEX VS THE MINERS

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Chinese Money Supply %-age Change YonY (LHS)

Mining Sector %-age Change YonY (RHS)

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CRB Index %-age Chge (LHS)

European Mining Sector %-age Chge (RHS)

Source: MF Global UK Limited, CFTC & BLB

TABLE NO. 1 | PICK YOUR COMMODITY EXPOSURE ACCORDING TO FUND FLOWS – BREAKING OUT OR FALLING BACK AGAIN?

Approx % Sales Ticker RecommendationTarget Price

Current Price

Alum

iniumC

opper/Moly

Nickel

Zinc

Iron Ore

Manganese

Ferrochrome

Coal

Petroleum

Uranium

Gold

Platinum

/PGM

s

Diam

ondsIndustrial M

inerals

Other

Spot traded

exposure

Anglo American AAL LN BUY £33.00 £25.37 0% 12% 3% 2% 23% 0% 0% 25% 0% 0% 0% 19% 6% 9% 0% 60%

Antofagasta ANTO LN SELL £8.00 £11.20 0% 92% 0% 0% 0% 0% 0% 0% 0% 0% 1% 0% 0% 0% 8% 92%

Aquarius Platinum AQP LN NEUTRAL £4.30 £3.13 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% 0% 0% 0% 100%

Boliden BOL SS N/R NA 95.50 kr 0% 30% 2% 60% 0% 0% 0% 0% 0% 0% 2% 0% 0% 0% 6% 94%

BHP Billiton BLT LN BUY £23.00 £19.26 6% 18% 5% 2% 20% 4% 2% 21% 18% 1% 0% 0% 2% 1% 0% 69%

Eramet ERA FP NEUTRAL €270 €214 0% 0% 25% 0% 0% 48% 0% 0% 0% 0% 0% 0% 0% 0% 27% 25%

Lonmin LMI LN NEUTRAL £17.00 £16.50 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% 0% 0% 0% 100%

Norsk Hydro NHY NO N/R NA kr 33.07 92% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 8% 92%

Rio Tinto RIO LN NEUTRAL £34.00 £35.40 35% 14% 0% 0% 28% 0% 0% 15% 0% 1% 1% 0% 1% 5% 0% 72%

Vale VALE US N/R NA $27.75 8% 5% 21% 0% 51% 1% 1% 2% 0% 0% 1% 1% 0% 1% 8% 63%

Vedanta VED LN SELL U/R £20.38 9% 55% 0% 22% 11% 0% 0% 0% 0% 0% 0% 0% 0% 0% 4% 92%

Xstrata XTA LN NEUTRAL £9.50 £11.39 0% 34% 8% 12% 0% 0% 5% 40% 0% 0% 0% 1% 0% 0% 1% 75%

Source: MF Global UK Limited estimates & Company data

Our commodity traders like the momentum, but uncertainty remains around sovereign debt, seasonality and low volumes. The analysts remain more cautious for now given challenging fundamentals, but would become more positive if we can get through this seasonally weaker period!

3



FUND FLOWS – Creeping Up But Lacking Conviction

What The Traders Say » The commodity traders like the price momentum, but remain concerned

about the low volumes and some of the fundamentals. Long positions have been rolled, while new positions are being added all the time. Volumes are quite a bit weaker than would normally be the case, while fundamentals are seen to be neutral. Our trade focused commodity traders hear mostly concerns about the US, not China. Concerns about sovereign debt in Europe contrast with some very positive commentary for physical demand for copper. The metal is seen as a leader with a deficit expected to be reported sooner rather than later. The view is that eventually more funds will flow into the commodity space, but that the next two months could be quite testing; and

» CTAs continue to remain the main drivers of this market. The macro and

hedge funds generally represent no more than 40% of activity and are little involved at the moment, at least at the LME. The main caution here seems to hang around the US$, the sluggish equity market and the fact that seasonality is not in favour of commodities for now. The key levels for copper are seen at around US$7,500/t and US$8,000/t in terms of support and resistance.

What The Analysts Say » Fundamentally, the analysts are much more concerned, albeit if the next

two months pass without any major upheavals or resistance levels are taken out then we too believe new highs could be possible. Chinese money supply, the ISM and sovereign debt remain our main concerns. In addition fund flows although recovered remain still quite a bit below the April highs at least in industrial metals and energy. Volumes do remain low and any bad news could accentuate commodity price moves;

» Seasonality too is a big question mark. Historically, September and October are very difficult months for commodities. With the ISM remaining overbought and the Chinese money supply not seeing its adjustment stop we are concerned that this year won’t be different; and

» Funds flow into gold remain supportive, albeit fund flows into platinum have lost significant momentum. We would expect gold to move to new highs, albeit a double top would be good news for higher risk assets such as equities.

4



Fund Flows – Positions Are Being Added Again

CHART NO. 3 | FUND FLOWS – AUM IN COMMODITIES SAMPLE (US$BN) FUND FLOWS INTO COMMODITIES NOW

BREAKING NEW HIGHS BUT momentum is still decelerating

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AUM In Commodities (US$bn)

%-age Change YonY

Source: MF Global UK Limited, ETF Securities & Other Providers

CHART NO. 4 | FUND FLOWS BY COMMODITY (US$BN) FUND FLOWS REMAIN SOLID FOR GOLD,

BUT MORE CHALLENGING IN INDUSTRIAL

METALS, ENERGY AND NOW EVEN

PLATINUM The latest move up in fund flows into copper come mainly on the back of gold.

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Energy

Diversified

Precious Metals

Industrial Metals

Agriculture & Livestock

Source: Source: MF Global UK Limited, ETF Securities & Other Providers

5



The €uro – The Shorts Are Back, But For How Long?

CHART NO. 5 | THE US$/€ EXCHANGE RATE DRIVES COMMODITY PRICES THE EURO HAS STARTED TO WEAKEN

AGAIN Lingering doubts about sovereign debt in Europe remain a key concern

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€uro Contracts Net Long Short - Money Managers

US$ €uro Exchange Rate

Source: MF Global UK Limited & Other Providers

CHART NO. 6 | FUND FLOWS INTO €URO CONTRACTS AND MOMENTUM THE EURO SEEMS TO BE RUNNING OUT OF

MOMENTUM The Euro is clearly no longer as oversold as only a few months ago. Will we see a double dip?

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€uro Contracts Net Long Short - Money Managers

€uro Contracts - Net Long Short Balance Change

Source: MF Global UK Limited & Other Providers

6



What About Seasonality? Some Risky Months Ahead

CHART NO. 7 | COPPER SEASONALITY STARTING TO KICK IN AGAIN HISTORICALLY SEPTEMBER AND OCTOBER

ARE CHALLENGING MONTHS History is never a guide for the future, but seasonality does matter in this sector

95

100

105

110

J F M A M J J A S O N D J

Seasonal Trend Adj

Source: MF Global UK Limited, Metals Desk

CHART NO. 8 | ALUMINIUM ALSO IMPACTED BY SEASONALITY WEAKNESS IN ALUMINIUM CAN LAST EVEN

INTO NOVEMBER Aluminium remains the fundamentally weaker metal

92

94

96

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100

102

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106

108

J F M A M J J A S O N D J

1980s 1990s 2000s Average

Source: MF Global UK Limited, Metals Desk

7



What About Ecomic Fundamentals?

CHART NO. 9 | THE ISM VS. THE MINING SECTOR THE MOMENTUM OF THE ISM REMAINS

EXTREMELY UNFAVOURABLE The Mining Sector remains too overbought, in our view!

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Mining Sector % Change YoY

ISM Manufacturing % Change YoY

Source: MF Global UK Limited & BLB

CHART NO. 10 | CHINESE MONEY SUPPLY VS. THE MINING SECTOR CHINESE MONEY SUPPLY HAS NOT

STOPPED CONTRACTING The Mining Sector is not reflecting this yet!

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Chinese Money Supply %-age Change YonY (LHS)

Mining Sector %-age Change YonY (RHS)

Source: MF Global UK Limited & BLB

8



What About Commodity Fundamentals?

CHART NO. 11 | THE COPPER PRICE VS. WAREHOUSE STOCKS COPPER IS EXPECTED TO MOVE INTO

DEFICIT THIS QUARTER That said, the warehouse stocks don’t look that convincing. The uptrend seen since the credit crunch is not broken

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LME Copper Price (LHS)

LME Copper Stocks (RHS - kt)


CHART NO. 12 | THE ALUMINIUM PRICE VS. WAREHOUSE STOCKS ALUMINIUM REMAINS A VERY DIFFICULT

MARKET Warehouse stocks remain significantly overextended!

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LME Aluminium Price (LHS)

LME Aluminium Stocks 000s (RHS)


9



The CRB Index – Absolute Fund Flows Now Also Rolling Over

CHART NO. 13 | AUM IN COMMODITIES (US$BN) VS THE CRB INDEX FUND FLOWS ARE MOVING UP IN

ABSOLUTE TERMS BUT THE TREND IN THE

CRB INDEX IS STILL DOWN The question is whether the CRB index finally breaks out of its slight downward trend?

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AUM In Commodities (US$bn)

CRB Index


CHART NO. 14 | FUND FLOWS INTO COMMODITIES VS THE CRB INDEX MOMENTUM MOMENTUM IN FUND FLOWS REMAINS NOT

VERY SUPPORTIVE Momentum for the CRB index does not look all that convincing either!

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AUM In Commodities %-age Change YonY

CRB %-age Change YonY


10



Base Metals – Will Prices Break Out?

CHART NO. 15 | AUM IN INDUSTRIAL METALS (US$BN) VS THE COPPER PRICE FUND FLOWS INTO INDUSTRIAL METALS

DON’T LOOK ALL THAT CONVINCING Although long positions have been rolled over and new positions have been added, the latest statistics don’t look all that convincing

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Copper Price

Industrial Metals Funds Flows (RHS)


CHART NO. 16 | AUM IN INDUSTRIAL METALS (US$BN) VS THE ALUMINIUM PRICE THE ALUMINIUM PRICE SEEMS TO HAVE

LOST MOMEMTUM The trend does not look good, in our view.

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Aluminium Price

Industrial Metals Fund Flows Sample (RHS)


11



Base Metals – Funds Flows Are NOT Back To The April Highs

CHART NO. 17 | FUND FLOWS INTO COPPER VS. THE COPPER PRICE (US$/T) FUND FLOWS INTO COPPER – THE TREND

STILL HAS NOT RECONNECTED WITH THE

PRE APRIL LEVEL We believe the copper price remains at risk.

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Copper Contracts Long - Money Managers

Copper Price (RHS)

Source: MF Global UK Limited, & CFTC

CHART NO. 18 | FUND FLOWS VS PRICE MOMENTUM FOR COPPER FUND FLOW MOMENTUM INTO COPPER

SEEMS TO BE STABILISING THOUGH But momentum of the copper price remains at risk, in our view.

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Copper Contracts Long - Money Managers %-age Change

Copper Price %-age Change (RHS)


12



Energy – The Trend In Fund Flows Appears Weak

CHART NO. 19 | FUND FLOWS INTO OIL VS. THE OIL PRICE (US$/B & US$BN) FUND FLOWS INTO OIL HAVE FALLEN BACK

MARKEDLY The price trend remains unconvincing

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Oil Price

Oil Funds Flows (RHS)


CHART NO. 20 | FUND FLOWS VS OIL PRICE (US$/B) THE FUND FLOW TREND INTO ENERGY IS

NOT CONVINCING The oil price seems out of step with fund flows

$60

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Ap

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Oil Contracts Long - Money Managers

Oil Price (RHS)


13



Precious Metals – Fund Flows Into Gold Remain On An Upward Trend

CHART NO. 21 | FUND FLOWS INTO GOLD VS. THE GOLD PRICE (US$/OZ) FUND FLOWS INTO GOLD – FUND FLOWS

HAVE REBOUNDED And more upside seems possible in both fund flows as well as the gold price.

$400

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g-1

0

Gold Contracts Long - Money Managers

Gold Price (RHS)


CHART NO. 22 | FUND FLOWS VS PRICE MOMENTUM FOR GOLD FUND FLOW MOMENTUM INTO GOLD

REMAINS REASONABLY SOLID Gold remains a safe haven asset.

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

0

50000

100000

150000

200000

250000

Jun

-06

Au

g-0

6

Oct-0

6

De

c-06

Fe

b-0

7

Ap

r-07

Jun

-07

Au

g-0

7

Oct-0

7

De

c-07

Fe

b-0

8

Ap

r-08

Jun

-08

Au

g-0

8

Oct-0

8

De

c-08

Fe

b-0

9

Ap

r-09

Jun

-09

Au

g-0

9

Oct-0

9

De

c-09

Fe

b-1

0

Ap

r-10

Jun

-10

Au

g-1

0

Gold Contracts Long - Money Managers

%-age Change (RHS)


14



Precious Metals – Platinum Slightly More @ Risk Now

CHART NO. 23 | FUND FLOWS INTO PLATINUM VS. THE PLATINUM PRICE (US$/OZ & US$BN) FUND FLOWS INTO PLATINUM HAVE COME

OFF The platinum price seems to be that bit more vulnerable now

0

2

4

6

8

10

12

14

16

0

500

1000

1500

2000

2500

Oct-0

6

De

c-06

Fe

b-0

7

Ap

r-07

Jun

-07

Au

g-0

7

Oct-0

7

De

c-07

Fe

b-0

8

Ap

r-08

Jun

-08

Au

g-0

8

Oct-0

8

De

c-08

Fe

b-0

9

Ap

r-09

Jun

-09

Au

g-0

9

Oct-0

9

De

c-09

Fe

b-1

0

Ap

r-10

Jun

-10

Au

g-1

0

Platinum Price

Precious Metals Funds Flows (RHS)


CHART NO. 24 | FUND FLOWS VS PRICE MOMENTUM FOR PLATINUM FUND FLOW MOMENTUM INTO PLATINUM

HAS COME OFF TOO The price could be at risk, in our view.

-100%

-50%

0%

50%

100%

150%

200%

250%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Oct-0

7

De

c-07

Fe

b-0

8

Ap

r-08

Jun

-08

Au

g-0

8

Oct-0

8

De

c-08

Fe

b-0

9

Ap

r-09

Jun

-09

Au

g-0

9

Oct-0

9

De

c-09

Fe

b-1

0

Ap

r-10

Jun

-10

Au

g-1

0

Platinum Price (%-age Change)

Precious Metals Funds Flows -%-age Change (RHS)


15



CHART NO. 25 | ETF PLATINUM HOLDINGS VS. THE PLATINUM PRICE (US$/OZ) ETF HOLDINGS IN PLATINUM HAVE FALLEN

BACK This matters as this was an incremental driver of demand.

0

500

1000

1500

2000

2500

0

100000

200000

300000

400000

500000

600000

700000

800000

Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10

ETF Platinum Holdings

Platinum Price


CHART NO. 26 | ETF HOLDINGS VS PRICE MOMENTUM FOR PLATINUM THE MOMENTUM IN EFT HOLDINGS FOR

PLATINUM REMAINS DOWN How long can the platinum price withstand this?

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

No

v-08

De

c-08

Jan

-09

Fe

b-0

9

Ma

r-09

Ap

r-09

Ma

y-09

Jun

-09

Jul-0

9

Au

g-0

9

Se

p-0

9

Oct-0

9

No

v-09

De

c-09

Jan

-10

Fe

b-1

0

Ma

r-10

Ap

r-10

Ma

y-10

Jun

-10

Jul-1

0

Au

g-1

0

ETF Platinum Holdings %-age Chge (LHS)

Platinum Price (RHS)


16


14 May 2010 MF GLOBAL SECTOR REPORT | FUND FLOWS TAKE-AWAY

MANAGEMENT Peter Forlenza [email protected] +44 (0) 20 7144 4044 James Rowsell [email protected] +44 (0) 20 7144 4240 Simon Maughan [email protected] +44 (0) 20 7144 4241 Mike Willis [email protected] +44 (0) 20 7144 5573 Michael Bowden [email protected] +44 (0) 20 7144 4857 IDEAS TEAM

AUTOS & INDUSTRIALS John Buckland [email protected] +44 (0) 20 7144 4243

CAPITAL GOODS & INDUSTRIALS Charlie Dove-Edwin [email protected] +44 (0) 20 7144 4242

BANKS & SPECIALTY FINANCE Simon Maughan [email protected] +44 (0) 20 7144 4241

Claire Kane [email protected] +44 (0) 20 7144 4317

Shailesh Raikundlia [email protected] +44 (0) 20 7144 4248

CONSTRUCTION & MINING Tobias Woerner [email protected] +44 (0) 20 7144 4253

Olivia Peters [email protected] +44 (0) 20 7144 4257

Jeremy Cave [email protected] +44 (0) 20 7144 4266

Andrew Gardner [email protected] 0061 2 8273 8659

INSURANCE Craig Bourke [email protected] +44 (0) 20 7144 5920 LEISURE & TOURISM Philippe Ronceau [email protected] +44 (0) 20 7144 4250

FOOD RETAIL & PRODUCERS Mike Dennis [email protected] +44 (0) 20 7144 4251

PHARMACEUTICALS Justin Smith [email protected] +44 (0) 20 7144 4256

STRATEGY Stewart Breed [email protected] +44 (0) 20 7144 4261

TELECOMS John Karidis [email protected] +44 (0) 20 7144 4262

David Hogg [email protected] +44 (0) 20 7144 5880

Noel Culhane [email protected] +44 (0) 20 7144 4868

Denise Molina [email protected] +44 (0) 20 7144 4263

DISTRIBUTION

LONDON, ENGLAND Oliver Bailey [email protected] +44 (0) 20 7144 5921

Gillian Berkery [email protected] +44 (0) 20 7144 5253

Luca Bomio [email protected] +44 (0) 20 7144 5583

James Boote [email protected] +44 (0) 20 7144 5585

David Butler [email protected] +44 (0) 20 7144 5569

Peter Edwards [email protected] +44 (0) 20 7144 5575

Benedikt Goetz [email protected] +44 (0) 20 7144 5586

Guy Hamshere [email protected] +44 (0) 20 7144 5237

Michael Hart [email protected] +44 (0) 20 7144 5238

David Izzard [email protected] +44 (0) 20 7144 5232

Alexis Levin [email protected] +44 (0) 20 7144 5247

Alexandra Longes [email protected] +44 (0) 20 7144 5589

Conor Smith [email protected] +44 (0) 20 7144 5241

Price Smith [email protected] +44 (0) 20 7144 5882

James Tyerman [email protected] +44 (0) 20 7144 5883 Mike Willis [email protected] +44 (0) 20 7144 5573

PARIS, FRANCE Emmanuel Allier [email protected] 00 331 55 30 5124

Nathalie Barbaut [email protected] 00 331 55 30 5164

Didier Jolibois [email protected] 00 331 55 30 5172

GENEVA, SWITZERLAND Mamoun Tazi [email protected] +44 (0) 20 7144 4260

Tristan de Blonay [email protected] +44 (0) 20 7144 4581

ZURICH, SWITZERLAND Thomas Kummer [email protected] +41 (0) 43 466 06 55 Thomas Messerschmid [email protected] +41 (0) 43 466 06 55 NEW YORK, USA Zubin Hubner [email protected] +1 212 935 4376

Alexander Shepard [email protected] +1 212 589 6306

EXECUTION SERVICES

AGENCY EXECUTION Daniel Bench [email protected] +44 (0) 20 7144 5579

Lloyd Plank [email protected] +44 (0) 20 7144 5584

Marcus Waddilove [email protected] +44 (0) 20 7144 5709

ELECTRONIC EXECUTION Neil Mackenzie [email protected] +44 (0) 20 7144 5794 Pedro Cameron [email protected] +44 (0) 20 7144 5799 Rupert Fitzhugh [email protected] +44 (0) 20 7144 5871 Linda Banchi [email protected] +44 (0) 20 7144 5263 JAPANESE EQUITIES Chikao Masuzawa [email protected] +44 (0) 20 7144 5235

17


14 May 2010 MF GLOBAL SECTOR REPORT | FUND FLOWS TAKE-AWAY

Regulatory Disclosures and Analyst Certification

MF Global UK Limited provides independent research of European equity markets, which is designed to help our institutional clients outperform their respective benchmarks. Our Analysts aim to cover the largest 300 companies in Europe. Our BUY and SELL recommendations are used to draw attention to stocks, which we believe are under-priced or over-priced by circa 15%. Stocks which we believe will no longer achieve this price differential or stocks which we have not rated, are by definition, NEUTRAL. The percentage distribution of our ratings as at 14th August 2010 was BUY 45%; SELL 21%; NEUTRAL 28% and Under Review 6%. Target Prices are established in the context of a flat market.

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