 Risk — Current turbulent economic times have greatly heightened uncertainly in

commodity markets necessitating a different approach. In this report we revise

our commodity price forecasts and present trough cycle prices as lines in the

sand.

commodity markets necessitating a different approach. In this report we revise

our commodity price forecasts and present trough cycle prices as lines in the

sand.

 Forecasts Reduced ~20% — Forecasts for 2009 have been reduced by ~20% as a

result of slower demand growth. We remain most positive on the coal markets and

copper. Negative on nickel and zinc. Trough cycle prices are between 0% and

70% below our forecasts.

result of slower demand growth. We remain most positive on the coal markets and

copper. Negative on nickel and zinc. Trough cycle prices are between 0% and

70% below our forecasts.

 Trough Prices — If commodity markets are in persisting over supply, prices will be

determined by costs and margins. Current marginal costs do not provide an

accurate guide to trough prices, and our analysis takes account of falling costs

and margin compression. We do not believe prices will fall below trough cycle

estimates for a sustained period (months).

determined by costs and margins. Current marginal costs do not provide an

accurate guide to trough prices, and our analysis takes account of falling costs

and margin compression. We do not believe prices will fall below trough cycle

estimates for a sustained period (months).

 Market Pricing Dynamics — In cyclical troughs the degree of margin compression

is generally consistent across the cycles; but varies between commodities because

of differences in the shape of the cost curve, amount of swing supply and barriers

to exit.

is generally consistent across the cycles; but varies between commodities because

of differences in the shape of the cost curve, amount of swing supply and barriers

to exit.

 Speculators Scamper — Speculators and investors are exiting commodity markets.

It is notable that both long and short positions are being liquidated and we

interpret this as de-risking rather than a negative view on commodities. Holdings

in the commodity indexes have been reduced because of counter party risk. LME

stocks of aluminium increased sharply as physical positions were sold.

It is notable that both long and short positions are being liquidated and we

interpret this as de-risking rather than a negative view on commodities. Holdings

in the commodity indexes have been reduced because of counter party risk. LME

stocks of aluminium increased sharply as physical positions were sold.

 Super Cycle Will Survive — It is important not to lose sight of the long term

picture. We regard these conditions as a correction (albeit a severe correction) in

a secular bull market. The drivers of the super cycle – urbanisation and

industrialization in China and supply restrictions – are intact. Indeed the next upcycle

could be more powerful than its predecessor.

picture. We regard these conditions as a correction (albeit a severe correction) in

a secular bull market. The drivers of the super cycle – urbanisation and

industrialization in China and supply restrictions – are intact. Indeed the next upcycle

could be more powerful than its predecessor.