London, 13 March 2010

From a top-down, macro approach, Societe Generale are moderately bullish on commodities as a group for the remainder of 2010. However, they expect the prices of individual commodities to vary considerably.

"The recovery in end-user consumption of commodities should continue this year, driven by the expected gradual recovery in global economic growth. Our economists are predicting global economic growth of 4.1% this year, which is made up of a modest 2.2% for developed economies and an impressive 6.2% for emerging countries. Expansionary monetary and fiscal policies are working much better in emerging countries compared to developed countries because the former are not suffering from impaired balance sheets. This multi-speed nature of the global economic recovery is likely to be a feature not only for 2010 but for the next few years. Growth in emerging economies is heavily tilted towards infrastructure spending which requires a lot of commodities such as base metals, steel, iron ore and energy.

"Investor flows into commodities appears to have slowed during Q1 2010 after very strong inflows during the second half of 2009. The cause of this slowdown may have been concerns about the impact of tightening of monetary and fiscal policies in emerging markets, in particular in China. Some market participants believe that China has a massive property market bubble and substantial industrial overcapacity, and that tighter policies will result in a sharp drop in Chinese economic growth. We strongly disagree with this view.

"While China may have pockets of empty new housing/offices and excess industrial capacity, underlying demand driven by the migration of rural workers to the cities should soon eliminate this. It is also important to realise that the leverage of both the private and public sectors of the economy has remained moderate despite 2009's dramatic increase in bank lending. For example, according to our chief Asia economist, Glenn Maguire, the purchase of a first home in China requires a 30% down-payment, increasing to 40% for a second home. Such very tight lending standards have helped to prevent broad-based property market bubbles.

"The Chinese economy should grow by around 10% this year, according to our economists. Government-directed capital spending is expected to remain the key driver of economic growth in 2010 but less so than it was last year as the central government is taking measures to broaden economic growth. For example, spending on health and social security will be increased while bank lending to infrastructure projects will be reduced in order to achieve 20% growth in capital spending, down from 30% growth last year. The bottom-line on China is that the tightening in economic policies is fine-tuned to make sure that China achieves high sustainable growth, which should give uplift to commodity prices for years to come.

"The 2010 outlook for crude oil is, in our view, moderately bullish. We expect the WTI crude oil price to trade above $90/b during the second half of 2010 as a result of a gradual recovery in demand (almost entirely driven by emerging countries) combined with flat non-OPEC output and continued OPEC output restraint which should result in lower crude oil inventories. Looking further ahead we expect fundamentals and investor flows to push WTI prices above $100/b in 2011. The recent run-up in crude oil prices makes it somewhat unattractive to enter long positions at present. Our recommendation would be to wait for a price correction which could come as the market heads into Q2 seasonal low points for crude oil and product demand.

"While the 2010 outlook for crude oil is moderately bullish, this is not the case for product crack spreads. As was the case in 2009, the global refining sector is suffering from severe overcapacity. Therefore, margins should remain very low in 2010, and we recommend selling in spikes in cracks. Indeed, we are recommending selling the RBOB gasoline-WTI crack as we expect the ongoing surge to be short-lived.

"Gold and silver prices should, in our view, trend higher over the next few quarters. We expect investor buying of gold and silver to continue as inflation fears are likely to increase on strong economic growth in emerging economies and on concerns that developed countries may be tempted to monetise some of their large amount of sovereign debt.

"We doubt that rising consumption of base metals by infrastructure spending in emerging economies will translate into higher prices this year for the major base metals such as copper and aluminium. This is because copper and aluminium prices are, in our view, already discounting higher 2010 consumption, and China's huge stock-piling of base metals last year (to take advantage of low prices) means that Chinese consumption can partly be met be existing high domestic stock piles. The exception is nickel, which we remain bullish on as the stainless steel sector is recovering at pace and the sector is low on nickel inventories.

"The outlook for agriculture and livestock commodities is mixed. Within grains, corn should outperform on tightening supply against soybean's and wheat's rising inventories. Sugar prices have dropped sharply over recent days on expectations of a sharp rebound in supply next year assuming normal weather conditions. However, we believe that the sell-off is now overdone as near-term supply conditions remain tight."

Ends --

Societe Generale, Frédéric Lasserre

www.sgcib.com