Citigroup Bulks - Structural Change

Commodity Outlook
 Benchmark Pricing Is Dead — The shift in the iron ore and metallurgical coal markets from annual benchmark pricing to quarterly (and ultimately index) pricing
is a structural change – one that we have some concerns about.

 Iron Ore — Prices will likely double in CY2010 Q2, and are expected to rise further in Q3. Increasing domestic Chinese production, increasing scrap consumption
and margin compression in the steel industry should pressure prices in subsequent periods. Oversupply looms from 2012.

 Metallurgical Coal — Prices have also moved from annual to a quarterly basis.
Settlements of CY2010 Q2 prices at USD200/t are as we forecast, but we now believe prices will increase to USD300/t by Q4. However, challenges to the continuation of such high prices should come from increasing domestic Chinese production and slower Indian imports.

 Base Metals – Few Changes — We have made only cosmetic changes to our base metal price forecasts, except for nickel which has been increased more significantly.

 Fund Flows Slowed — Fund flows into commodity markets have slowed following the dramatic rebound post GFC. However, we expect renewed interest if the OECD demand recovery is confirmed.

 OECD Demand Turning — Recovering demand in the OECD economies, and a restocking amplifier are a cornerstone of our expectations of higher base metal prices in 2010H2. Latest data in Japan and the USA shows the beginnings of recovery.