>COMMODITY OUTLOOK (CITI)

All That Glitters……

■ …is Copper & Coal — Our preferred commodity exposures to the economic recovery are copper and coal. The fundamental outlook is strongest for copper, coking coal, thermal coal. We are increasingly positive on copper and thermal coal. We are still positive on coking coal and gold and remain negative on iron ore. Potential surprise is greatest in nickel and aluminum.

■ Risk Turns Positive — Economic indicators are improving, demand is turning, supply constraints will affect some commodities and investors are back.

■ Short Term Pullback — China’s import growth will slow (inventory building has dragged forward demand). The nascent recovery in demand elsewhere might falter and production restarts are a worry. But investment flows will limit the retreat.

■ China the Locomotive — China buying has been the driver behind the recovery. But, although demand is recovering, inventory building will not be sustained. The super cycle lives, despite these short term concerns.

■ Developed World Demand Turning Slowly — In the developed world the fall in demand is slowing. We expect a restocking amplifier in 2010.

■ Investment Demand is Back — Investment demand is back with a bang. In fact it hardly went away. It could support prices through short term fundamental weakness and drive prices to new highs early next decade.

■ Supply will be the Differentiator — The outlook for individual commodities will be differentiated by excess inventory stockpiles and supply constraints. Constraints will be greatest in copper and coal, least in aluminium and iron ore.

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