Global Commodities Markets: Trends and Challenges

neal.shear@gmail.com

REORDERING OF GLOBAL COMMODITIES MARKETS Implementation of Dodd Implementation of Dodd Frank/Volcker Rule/EMIR Basel III capital rules punitive to commodities Basel III capital rules punitive to commodities Loss of important bank counterparties Loss of important bank counterparties impacts liquidity in futures and physical markets futures and physical markets Huge turnover in senior staff from Banks to Trade Houses Huge turnover in senior staff from Banks to Trade Houses Reduction in risk capital for client risk management facilitation Reduction in risk capital for client risk management facilitation Bank credibility challenged by scandals in Fx, Libor and Gold Bank credibility challenged by scandals in Fx, Libor and Gold Fixing Fixing Transition from OTC Transition from OTC markets to f markets to futures Regulators reign in HFT in futures markets Regulators reign in HFT in futures markets Private Private E Equity and Sovereign Wealth Funds increase interest in quity and Sovereign Wealth Funds increase interest in the sector the sector Trade Houses increasingly push integrated model Trade Houses increasingly push integrated model Frank/Volcker Rule/EMIR impacts liquidity in utures and cleared and cleared product product

BANKS EXIT OR REDUCE THEIR EXPOSURE TO COMMODITIES Banks exit businesses because they are unprofitable Banks exit businesses because they are unprofitable Regulatory bias against commodities (especially physical) Regulatory bias against commodities (especially physical) Key risks that banks face in the sector include: Key risks that banks face in the sector include: Regulatory risk Fines Headline risk Cost of capital Cost of capital is higher than in traditional lines is higher than in traditional lines of Market risk Credit risk Operational risk Regulators exert a preference for the future/cleared model Regulators exert a preference for the future/cleared model which competes with important OTC business for banks which competes with important OTC business for banks of business business

BANK GLOBAL/SECTOR COMMODITIES REVENUE POOL 16 14.3 14 12 10.3 10 8.4 3.4 7.7 8 2.2 6.1 6 2.5 1.8 2.4 4 0.9 2.2 0.8 1.9 2 0.5 1.3 1 1.5 1.1 0.6 0 0 0 0 0 0 0 0 0 0 0 2009 2010 2011 2012 2013 Power & Gas Investor Products Others Metals Oil NA *Data provided by Coalition

GLOBAL/REGIONAL COMMODITIES REVENUE POOL 16 14.3 14 12 10.3 7.7 10 8.4 3.1 7.7 8 6.1 3.6 2.2 6 1.6 5.3 4 5.6 4.1 3.9 3.2 2 1.9 1.4 1.2 1 0.9 0 2009 2010 2011 2012 2013 Americas EMEA APAC *Data provided by Coalition

NEW TRENDS IN BANK STRATEGIES Partial Exits Partial Exits - - Morgan Stanley, Bank of America, JP Morgan, Goldman Morgan Stanley, Bank of America, JP Morgan, Goldman Sachs, Credit Suisse Sachs, Credit Suisse Exits Exits - - Barclays & Deutsche Bank Barclays & Deutsche Bank Growth Growth - - BNP Paribas, CITI, Macquarie, BTG, HSBC BNP Paribas, CITI, Macquarie, BTG, HSBC Regional Growth Regional Growth - - Standard Bank, Standard Charter, Wells Fargo, Standard Bank, Standard Charter, Wells Fargo, CIBC, RBC, Scotia Bank, Sberbank, ABN AMRO, CBA CIBC, RBC, Scotia Bank, Sberbank, ABN AMRO, CBA

TRADING HOUSES FILL THE VOID Energy Energy Glencore Trafigura Gunvor Mercuria Vitol Cargill Noble Agriculture Agriculture Archer Daniels Midland Bunge Cargill Louis Dreyfus Glencore Mercuria Noble Wilmar Olam Metals Metals Glencore Trafigura Noble

TRADING HOUSES FILL THE VOID Advantages Advantages Disadvantages Disadvantages Fast Fast decision making decision making Opaque Structure Opaque Structure Willingness to use balance Willingness to use balance sheet sheet Higher cost of capital Higher cost of capital Private ownership (most) Private ownership (most) Limited regulatory oversight Limited regulatory oversight Opaque structure Opaque structure Succession planning issues Succession planning issues Risk Risk t taking capabilities aking capabilities Anticipatory Anticipatory n new ew r regulation egulation Light touch regulation Light touch regulation Exposure to global Exposure to global e economic conomic d downturns ownturns Continue to invest in developing markets Continue to invest in developing markets Limited provider of risk management Limited provider of risk management Investing in the integrated model Investing in the integrated model services services No compensation restrictions No compensation restrictions

MARKET IMPACTS OF THE NEW TREND Global dominance of trades houses adversely impacts the relationship of price Global dominance of trades houses adversely impacts the relationship of price makers to price takers makers to price takers Reduction of liquidity in forward markets and physical markets Reduction of liquidity in forward markets and physical markets Increased cost of risk management to consumers and producers Increased cost of risk management to consumers and producers Increased cost of balance sheet usage Increased cost of balance sheet usage Light regulatory regimes may allow trade houses a wide path to exercise market power Light regulatory regimes may allow trade houses a wide path to exercise market power Ownership/control of strategic infrastructure causes increased prices volatility Ownership/control of strategic infrastructure causes increased prices volatility Lack of market transparency in data Lack of market transparency in data Pressure to use standardized exchange products increases basis risk for hedgers Pressure to use standardized exchange products increases basis risk for hedgers Regulators create new TBTF institutions in the clearing houses Regulators create new TBTF institutions in the clearing houses Banks reduced presence in physical market makes certain project finance deals Banks reduced presence in physical market makes certain project finance deals undoable, has a direct impact on storage costs, security of supply (SPR) and increases undoable, has a direct impact on storage costs, security of supply (SPR) and increases end user costs end user costs

TRADE HOUSES TAKE CENTER STAGE Oligopolistic pricing in physical market Oligopolistic pricing in physical market Control over important infrastructure chokepoints Control over important infrastructure chokepoints Hearsay reporting of prices to important industry pricing publication Hearsay reporting of prices to important industry pricing publication Domination of physical commodity production and supply in developing markets Domination of physical commodity production and supply in developing markets Controlling large market share in certain commodities Controlling large market share in certain commodities Trade Houses enter the Hedge Fund space Trade Houses enter the Hedge Fund space

CHINA PARTICIPATES IN OPENING MARKETS Chinese financial institutions become active in global commodity markets Chinese financial institutions become active in global commodity markets ICBC/Standard Bank, China Merchants Securities, GF Securities, BOCI ICBC/Standard Bank, China Merchants Securities, GF Securities, BOCI Chinese exchanges focus on global markets Chinese exchanges focus on global markets HKS HKS LME, SHFE LME, SHFE INA INA China SOE s buys stakes in global trading companies China SOE s buys stakes in global trading companies COFCO Noble (agriculture), COFCO Nidera (Agriculture) COFCO Noble (agriculture), COFCO Nidera (Agriculture) Private Equity buys stakes in commodity traders and supply chains Private Equity buys stakes in commodity traders and supply chains CIC CIC- - Noble, HOPU various Noble, HOPU various China (Shanghai) Free Trade Zone develops to grow international trading China (Shanghai) Free Trade Zone develops to grow international trading Global Companies register to use FTZ, SHFE locates INE in FTZ Global Companies register to use FTZ, SHFE locates INE in FTZ

GAME SET MATCH? New Banks enter the market and fill the void in financial and physical products New Banks enter the market and fill the void in financial and physical products First quarter commodities earnings by banks indicate a recovery ? First quarter commodities earnings by banks indicate a recovery ? New banks (along with certain incumbents) seize a growth opportunity New banks (along with certain incumbents) seize a growth opportunity Trade house saturate markets with new hires and growing capital commitments Trade house saturate markets with new hires and growing capital commitments Low volatility in major commodity markets spoil the party Low volatility in major commodity markets spoil the party Commodity earnings stagnate causing retrenchment Commodity earnings stagnate causing retrenchment Financial regulators relent, allow banks to have a presence in physical Financial regulators relent, allow banks to have a presence in physical commodities and reduce the most onerous portions of regulation commodities and reduce the most onerous portions of regulation L Loss of transparency, liquidity and competition impacts final rule making oss of transparency, liquidity and competition impacts final rule making Trade houses come under increase regulatory scrutiny Trade houses come under increase regulatory scrutiny Pressure from the global community forces Trade Houses to conform to bank Pressure from the global community forces Trade Houses to conform to bank like regulation and transparency like regulation and transparency Run up in commodity prices causes regulators to cast a wider net Run up in commodity prices causes regulators to cast a wider net

THE STRUGGLE BETWEEN PRICE MAKERS AND PRICE TAKERS WILL CONTINUE, HOWEVER MARKET FORCES WILL BRING THEM INTO BALANCE 1. 1. I have a suggestion for you. Raise your goddam fares twenty percent. I ll I have a suggestion for you. Raise your goddam fares twenty percent. I ll raise mine the next mourning . raise mine the next mourning . Crandall CEO American Airlines/Putnam Crandall CEO American Airlines/Putnam CEO Braniff Airlines CEO Braniff Airlines 2. 2. Our business is moving molecules from point A to point B and Our business is moving molecules from point A to point B and managing the credit, market and operational risk associated with that. managing the credit, market and operational risk associated with that. When there is more volatility people pay us more to do that . Yusef When there is more volatility people pay us more to do that . Yusef Alireza CEO Noble Alireza CEO Noble 3. 3. A billion dollars isn t what it used to be . Nelson Bunker Hunt Investor A billion dollars isn t what it used to be . Nelson Bunker Hunt Investor