3 D's of Macro Push Deflation, Divergence and Deleveraging Reinforce Oversupply

July 8, 2015
Commodity Watch
The 3Ds of macro push

commodity markets lower
Commodities Research
Deflation, Divergence and Deleveraging reinforce oversupply

Finding new equilibria to balance forward markets
The search for new equilibria in commodity markets has once again
resumed, following a mid-year pause that was beginning to create
complacency that the spring rally had established the new set of equilibria.
We have remained firm that long-term surpluses in most commodity
markets require prices to remain lower for longer to balance both the nearterm physical supply and demand, but more importantly, the longer-term
supply and demand for capital to fund future investments in physical
production capacity, which is more severely imbalanced. Simply put,
commodity markets still have access to far too much capital relative to
future demand and a declining cost structure.
The 3Ds are Deflation, Divergence and Deleveraging

In late May we argued that the spring rally would likely prove transient as
three reinforcing macro trends, a decade in the making, are likely to take
years (not months) to resolve. We refer to these drivers behind our bearish
views as the three Ds: Deflation in costs and commodity prices, following
a decade of investment in commodity productive capacity. Divergence in
growth as the US remains on a divergent growth path relative to the rest of
the world, reinforcing a strong US dollar. Deleveraging in EMs to achieve
a balanced growth environment, following a decade of economic boom
that generated significant macro imbalances and debt, such as in China.
Deleveraging has weakened Chinas CapEx demand

Despite the focus on weakness in the Chinese domestic equity markets, we
view it as a catalyst and continue to believe that underlying demand
weakness, particularly in the commodity-intensive sectors, remains far
more important. Recent data suggest that investments contribution to GDP
growth declined from 50% of growth to 15% in the first quarter, helping to
push CapEx commodities like copper to new lows for 2015.
Jeffrey Currie
(212) 357-6801 jeffrey.currie@gs.com
Goldman, Sachs & Co.
Michael Hinds
(212) 357-7528 michael.hinds@gs.com
Damien Courvalin
(212) 902-3307 damien.courvalin@gs.com
Max Layton
+44(20)7774-1105 max.layton@gs.com
Goldman Sachs International
Christian Lelong
+61(2)9321-8635 christian.lelong@gs.com
Goldman Sachs Australia Pty Ltd
Abhisek Banerjee
+44(20)7552-9350 abhisek.banerjee@gs.com
Yubin Fu
+44(20)7552-9350 yubin.fu@gs.com
Amber Cai
+852-2978-6602 amber.cai@gs.com
Goldman Sachs (Asia) L.L.C.
Caroline Lu
(212) 934-0799 caroline.lu@gs.com
Raquel Ohana
+44(20)7552-4055 raquel.ohana@gs.com
Deflation and divergence reduce the need for capital

Cost deflation reinforced by weaker commodity currencies due to the
divergence in US growth lowers the capital requirement for commodity
markets. However, capital availability is too high, as $60/bbl oil, strong high
yield and equity energy markets have generated an increase in US drilling
last week in already oversupplied markets, which only lower prices will fix.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification
and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
Global Investment Research
July 8, 2015
Global
The 3D macro trends deflation, divergence and deleveraging

reinforce oversupply
The search for new equilibria in commodity markets has once again resumed. This follows
a mid-year pause that was beginning to create complacency that the spring rally had
established a set of new equilibria across commodity markets. We have held since last year
that long-term surpluses in many commodity markets will require prices to remain lower
for longer to balance both the near-term physical supply and demand, but more
importantly, the longer-term supply and demand for capital to fund future investments in
physical production capacity. Further, this capital imbalance is far more severe and will
likely take far longer to resolve, particularly in energy. Simply put, these commodity
markets still have access to far too much capital relative to future demand and a declining
cost structure.
If longer-term prices and future price expectations do not decline further to restrict capital
flows soon, the capital will eventually create increasingly larger physical surpluses in the
future that will force physical spot prices below cash costs and towards shut in economics.
Evidence of this dynamic has started to materialize in the past several weeks. Not only did
$60/bbl oil, strong high yield and equity energy markets create an increase in US drilling
last week, but the market structure of the New Oil Order has generated the incentives for
low cost producers such as core-OPEC and Russia to ramp up current and future
production. Acknowledging volatility in the data, the trend in low-cost production is clearly
up. This is all against a backdrop of already oversupplied markets.
The negative feedback loop is significant. The deflationary impulse created by lower
commodity prices reinforces a stronger US dollar, as witnessed by recent moves in FX
markets that resulted in weaker commodity currencies. This decreases the cost of
producing commodities in these countries through lower wage costs that are priced in the
weaker local currencies. Further, this deflationary impulse reinforces a stronger US
economy and higher rates. The higher rates in turn raise the cost of funding for emerging
markets, which reinforces the need for emerging markets such as China to deleverage and
deal with significant macro imbalances developed over the past decade. This ultimately
reduces the demand for commodities, particularly those that are tied to investment such as
copper and iron ore.
In 2015, the shift in the composition of Chinese economic growth away from investment in
productive capacity that is commodity intensive and towards more consumer-driven
economic growth has been significant. Recent Chinese macroeconomic data suggest that
investments contribution to GDP growth declined from 50% of growth to 15% in the first
quarter. This helped to push CapEx commodities like copper to new lows for 2015.
Although spot oil prices still remain above the lows of 2015, long-dated oil prices (a
measure of the normalized oil price), base metal prices, bulk prices and precious metal
prices have all made new 2015 lows in the past week.
While significant uncertainty remains around what long-term price levels will ultimately
generate a new set of equilibria to create stability in both the macroeconomic and microcommodity markets, we do have confidence that they are likely lower than current longdated price levels. In late May we argued that the spring rally would likely prove transient
as these reinforcing macro trends discussed above were decades in the making and will
take years to resolve, not months (see Commodity Watch: The macro reversal will likely
prove temporary May 22, 2015).
Goldman Sachs Global Investment Research
July 8, 2015
Global
Exhibit 1: Deflation after a decade of global productive

capacity investment in commodities
Exhibit 2: Divergence after nearly a decade since the

last interest rate hike in the US
Average age of US capital stock (years)
Real GDP (index, 2008Q4 = 100)

115
12
US
120
11
10
100
80
60
40
Euro zone
110
105
100
20
0
4
1925 1935 1945 1955 1965 1975 1985 1995 2005 2015
Investment phases
Age of capital stock: oil & gas extraction
Real oil price (rhs, 2014 $)
Source: BEA, Goldman Sachs Global Investment Research
95
90
04
05
06
07
08
09
10
11
12
13
14
15
Source: Haver Analytics, Goldman Sachs Global Investment Research

See: FX Views: While you were Greeking June 30 2015
To recap, the three mutually-reinforcing macro drivers behind our bearish views which we
refer to as the three Ds are:
1. Deflation: A decade of investment in commodity productive capacity and new
technologies has created excess capacity in most commodity markets, which will weigh on
both costs and commodity prices, creating a deflationary impulse globally (see Exhibit 1).
2. Divergence: Following nearly a decade since the last interest rate hike in the US and the
USs relatively quick implementation of a QE program, the US is on a divergent growth
path relative to the rest of the world, which reinforces a strengthening US dollar (see
Exhibit 2).
3. Deleveraging: Following a decade of economic boom in emerging markets, significant
macro imbalances were developed. This will require deleveraging debt levels and
rebalancing growth to achieve a balanced growth environment (see Exhibits 3 and 4).
Exhibit 3: Deleveraging after a decade of credit growth
outpacing GDP growth
Exhibit 4: across most EM economies

Credit to GDP gap (current minus trend level)
Credit to GDP gap (current minus trend level)

20
30
ppt
15
Credit-to-GDP growth
greater than trend
10
ppt
25
20
15
10
5
-5
-10
-5
Source: Goldman Sachs Global Investment Research

See: Emerging Markets Weekly: The EM Credit Cycle, Measuring the gap
before crunch time June 25, 2015
CZK
PEN
HUF
BRL
COP
MYR
ZAR
IDR
TWD
INR
PLN
PHP
2014
2011
2008
2005
2002
1999
1996
1990
1993
DM credit to GDP gap
-10
CNY
CLP
MXN
RUB
ILS
KRW
TRY
THB
EM credit to GDP gap
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
-15

See: Emerging Markets Weekly: The EM Credit Cycle, Measuring the gap
before crunch time June 25, 2015
July 8, 2015
Global
As we discussed in May, copper is the one commodity that is the most exposed to these
themes and illustrates the importance of the negative feedback loop. Deflation lowers the
energy and material input cost to producing copper while divergence weakens the Chilean
peso in US dollar terms, which puts downward pressure on local labor costs in Chile. And
then deleveraging in China reduces the demand for copper, all reinforcing the downside
risk in copper prices.
A decade ago, our confidence in the bull case for commodities was driven by the same
three macro themes in reverse short the dollar, long commodities and long emerging
markets. Commodity markets were facing significant underinvestment in productive
capacity with the need to attract capital while the US economy was facing a significant
leverage problem and relatively slower growth that was weighing on the US dollar. At the
same time, emerging markets had a tailwind driven by clean balance sheets. Today these
roles have been reversed.
The EMs look like the US did a decade ago, and commodity markets are facing substantial
overinvestment. Just like these themes reinforced each other in reverse to the upside
during the last decade, today the three Ds are reinforcing each other to find a new set of
equilibrium prices that are likely far lower than current levels. Ultimately rebalancing will
likely be achieved, but it will take years, not months to achieve, which reinforces our
bearish commodity views and our underweight recommendations.
Metals take a leg lower on weak China demand, as Deleveraging

trend continues
While we have been expecting lower prices for CapEx commodities (copper, iron ore) for
some time now, the speed of the recent declines has been unexpected, taking prices
rapidly towards our bearish 12 month forecasts. Furthermore, the metals where we had
been expecting higher prices later in 2015 on diverging supply fundamentals (nickel and
zinc) have also seen similar rapid prices declines over the last few days.
Weakness in the Chinese domestic equity markets has recently become a talking point.
However, we continue to believe that the equity sell off was mostly a catalyst in commodity
markets and that the more far reaching implications are more erosion in the confidence in
Chinese policy makers. For commodity markets, what really matters is underlying demand
weakness that started before the policy generated equity rally, particularly in the
commodity-intensive fixed investment and heavy industry sectors. As such, while recent
metals price action poses significant downside risks to our metals forecasts, it is still
consistent with our bearish macro views, as our Deflation, Divergence and Deleveraging
macro themes continue to play out.
Our suite of indicators continues to paint a downbeat picture for Chinese commodity
demand. Our China Current Activity Indicator (a broad-based alternative measure to GDP)
is tracking growth around 6%, FAI has fallen to 11.4%yoy (down from over 17% a year ago),
apparent steel demand continues to decline, and our GS China copper demand indicator is
also in negative territory.
July 8, 2015
Global
Exhibit 5: Our economists alternative activity measure

points to even greater weakness in China activity
Exhibit 6: consistent with weak metals demand and

lower prices
GS China Physical Industrial Output index vs. official IP

(%yoy)
S&P GSCI Industrial Metals Spot Index vs. GS China

Physical Industrial Output index
45
40
35
30
GS China "Physical Output"

Growth Indicator
500
60
475
50
China Industrial Production

Growth
450
40
425
25
400
30
20
375
20
15
350
10
10
325
300
275
-5
250
2008
-10
2008
2009
2010
2011
2012
2013
2014
2015
Source: NBS, Goldman Sachs Global Investment Research

See: Asia Economics Analyst: Gauging China Growth, June 22, 2015
0
-10
-20
2009
2010 2011 2012 2013 2014 2015

Metals price index (lhs)
GS China "Physical Output" Growth Indicator
Source: Bloomberg, Goldman Sachs Global Investment Research
Our Asia economics team has also recently published several new alternative measures of
activity in China (see Asia Economics Analyst: Gauging China Growth, June 22, 2015 for
more details). Among these is a Physical Output indicator (see Exhibit 5), which uses raw
quantity measures of output (e.g. kilograms of a good produced), as well as a series of GDP
growth implied from commodity consumption. In both cases our indicator is more volatile
than the official statistic, but most importantly, both have been significantly
underperforming the official statistic over recent months. Among the guts of the data,
weakness in our Physical Output indicator has also been most pronounced in commodityintensive heavy industries, such as Machinery production.
Exhibit 7: Chinese steel and copper demand remains very

weak
Exhibit 8: and Chinese easing has been muted once we

account for domestic equity market moves
% change yoy, 3mma
% yoy growth (lhs), GS China Financial Conditions Index

(>100 = tight conditions, rhs)
15%
0.30
0.25
10%
0.20
11
99
10
100
101
102
103
104
0.15
5%
0.10
0.05
0%
0.00
-0.05
-5%
GS China copper demand indicator
Jan-15
China steel apparent demand (rhs)
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
May-13
Jan-13
Mar-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
Mar-11
-0.10
105
2011
2012
China Current Activity Indicator
Source: Goldman Sachs Global Investment Research, CEIC.
2013
GS China FCI inverted (rhs)
2014
2015
GS China FCI excluding equities, inverted (rhs)
Source: Goldman Sachs Global Investment Research, CEIC
July 8, 2015
Global
Finally, regarding Chinese policy easing, the recent improvement in the GS China Financial
Conditions Index (FCI) pointed to an improvement in metals demand over the coming
months. However, the vast bulk of this easing had, up until two weeks ago, been driven by
an improvement in the (domestic) equity market component of the FCI. While the FCI has
historically been strongly correlated with metals prices, domestic equity markets have not
been. Excluding equity markets from the FCI, year-to-date easing has been minimal.
Looking ahead, with credit still growing at double the rate of GDP, it appears that the trend
slowing in metals demand may last for years, highlighting further downside risks to our
metals price forecasts. In particular, copper is heavily exposed to the (late) Chinese
construction cycle, dollar strength and oil price declines, as well as having a strong supply
growth profile over the next 12 months. Yet, we continue to see supply-side differentiation
among metals prices later in 2015 and into 2016. Current nickel prices represent a
buying/hedging opportunity (at c.$11,700/t). On zinc we are modestly bullish from here,
though we are waiting for prices to stabilise, while we expect aluminium prices to remain low.
Exhibit 9: given the lack of historical correlation
between domestic equity and metals prices
China A Shares Index vs. Metals price (S&P GSCI Industrial
Metals) spot index
5400
380
4900
4400
3900
3400
2900
mt (lhs), $/t (rhs)

1.40
7300
1.30
370
1.20
360
1.00
350
0.80
340
0.60
330
0.40
320
0.20
7100
1.10
6900
0.90
6700
0.70
6500
0.50
6300
0.30
6100
0.10
310
2400
1900
Jan 14
Exhibit 10: the reduction in copper net speculative

positioning is more reflective of bearish commodity
demand, not equity moves
300
290
Apr 14
Jul 14 Oct 14 Jan 15 Apr 15

Shanghai Compostie Index
Industrial metals spot prices (rhs)
Jul 15
Source: S&P, Bloomberg, Goldman Sachs Global Investment Research
5900
0.00
-0.10
5700
-0.20
-0.30
5500
-0.40
-0.50
Aug 14
5300
Sep 14
Oct 14
Nov 14
Dec 14
Jan 15
Feb 15 Mar 15
LME and Comex net speculative positioning
Apr 15
May 15
Jun 15
Copper price
Source: LME, Comex, Bloomberg, Goldman Sachs Global Investment Research
Lower oil prices on weak fundamental outlook and continuation of

Deflation and Divergence macro trends, not Greece
Our bearish oil view has been driven by our forecast that after a decade of productive
capacity investment and development of shale technology, the global market remains in
surplus with rising OPEC/low-cost production and resilient US output exceeding resurgent
demand in 2015. Simply put, we do not find that the amount of pressure that the industry
has faced - either through cash flow/oil prices or through access to capital - has been
sufficient to ration the forward surpluses.
While last weeks decline in oil prices coincided with the escalation of the Greek crisis and
weakness in other macro markets, the catalysts for crudes move lower have little to do
with Greece, in our view. Instead, last weeks oil data pointed to a still oversupplied market:
a surge in OPEC production, a rise in the US oil rig count and weakening refining margins.
While we acknowledge the volatility of each of these series, we also view these data points
as the key short-term symptoms of our view that the oil market has yet to rebalance.
On the supply side, June preliminary data pointed to production well above our forecast:
July 8, 2015
Global
Iraq production reached a record high of 4.30 mb/d, with OPEC surveyed production of
32.10 mb/d and Russia production growth at 150 kb/d yoy. OPEC production at such
levels would come in above our forecast 2015 and 2016 OPEC production growth and
add 1.10 mb/d of inventory build relative to our current forecast for an already 0.60
mb/d global oil market surplus in 2H15.
An agreement with Iran in the coming days could potentially lead to lift of oil sanctions
by year-end. Such a timeline would put at risk our forecast for stable but high oil
inventories in 2016 since we had intentionally and conservatively assumed no increase
in Iranian flows in 2016. The impact of sanctions relief on Irans production could
initially be a drawdown of floating storage of c.30 mb and production increasing by
several thousand barrels per day.
Finally, the US oil rig count rose by 12 last week for the first time since December 5,
2014. This increase in the rig count suggests that at WTI prices near $60/bbl, producers
can ramp up activity given improved returns with costs down nearly 30% and
producers increasingly comfortable at the current cost/revenue/funding mix. We
therefore view the spring rally in prices to $60/bbl as premature and self-defeating as it
will ultimately lead to higher US production.
Exhibit 11: Non-US supply has been growing rapidly

Production in kb/d
26,000
33,000
25,000
32,000
24,000
31,000
23,000
30,000
22,000
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Saudi Arabia, Iraq, Russia combined crude oil production
29,000
Jun-15
OPEC (rhs)
Source: Platts, IEA, Bloomberg, Goldman Sachs Global Investment Research.
With production exceeding even our aggressive forecast, oil demand growth is becoming
critical to the oil price outlook in 2H15. But while oil demand has so far this year come in
even above our out-of-consensus bullish forecast, we view this demand strength as partly
weather driven and broadly consistent with the expected response to the large observed
decline in prices. Importantly, we expect this response to remain short-term in duration,
leaving us comfortable with our current oil demand growth forecast of 1.4 mb/d in 2015.
To quantify the expected demand response to the large drop in oil prices over the past
year, in Exhibit 12 we present the impulse response function from a VAR model1,
which estimates the positive impulse to oil demand from a 1% change in prices and 1%
sequential acceleration in activity. Using OECD total products demand, WTI prices and
OECD Industrial Production, these results show that stronger growth translates roughly
1-for-1 into stronger demand, while a much larger (negative) price move is required to
As oil prices, oil demand and growth are all self-reinforcing, a VAR model attempts to control for the interrelated
nature of the data.
July 8, 2015
Global
move demand as much. In other words, oil demand is relatively inelastic in price, but
relatively elastic to growth. The majority of these effects are also expected within the
first six to nine months.
Exhibit 12: Our VAR analysis shows that demand
responses occur within 9 to12 months
Exhibit 13: and OECD demand appears to have

followed this trajectory over 2014H2 and early 2015
Estimated oil demand response (in %) to +1% shock to prices

or industrial production
Estimated oil demand response (in %) from -45% oil price

shock & +1.3% Industrial Production shock vs. realized
demand
Estimated Response to lower oil price & stronger growth
Industrial Production
0.3
Price (RHS)
0.25
0.8
0.2
0.6
0.15
0.4
0.1
0.2
0.05
-0.05
Nov 15
Sep 15
Oct 15
Aug 15
Jun 15
Jul 15
May 15
Mar 15
Apr 15
-1
Feb 15
-0.1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
months after shock
Dec 14
Jan 15
-0.4
+1.3%
IP
Effect
Nov 14
-0.2
45%
Oil
Price
Effect
Sep 14
Oct 14
OECD Demand
Jun 14
Jul 14
Aug 14
1.2
Source: IEA, Goldman Sachs Global Investment Research
In Exhibit 13, we use these results to approximate the demand response to the lower
prices and stronger growth seen over 2014H2. This exercise suggests that that it takes
nine months to translate a one-time 45% oil price shock and a 1.3% shock to Industrial
Production into incremental demand. This is important as it suggests that stronger
demand now requires another large fall in prices or persistently strong economic
growth. Importantly, neither our bearish oil price forecasts nor our economists
economic growth forecasts are large enough to absorb oil production growth at its
current level in 2H15.
Finally, while this analysis only looks at OECD oil demand, there has been increased
market focus recently on a large and growing miscellaneous to balance oil demand.
This is oil disappearance in excess of identified demand (supply minus OECD demand,
non-OECD demand and changes in inventories). Our analysis shows that historically
this miscellaneous series has been price sensitive and likely driven by tertiary
inventory builds (Exhibit 14). However, if this recent increase had been caused by
demand, refining margins would now be higher (not lower) as we near the peak in
refinery runs. Instead, Singapore complex refining margins have declined sharply over
the past weeks, with European refining margins holding up well only because of the
weakness in Brent prices (Exhibit 15).
Net, we forecast the global oil market surplus will materialize in a product surplus this fall,
pushing refining margins lower with higher OPEC production further overwhelming even
stronger demand growth (see European diesel needs to cool its engines, June 3, 2015). As
a result, we reiterate our fundamentally driven forecast for lower oil prices into this fall (see
Reality of oil market will trump perception and positioning, May 25, 2015).
July 8, 2015
Global
Exhibit 14: Miscellaneous to balance historically price

sensitive and mean reverting
Exhibit 15: Weaker refining margins also suggest its not

all demand
IEA Miscellaneous to balance (kb/d) vs. Brent price changes

(QoQ, %, rhs)
Refining margins in $/bbl
3000
-60%
2000
-40%
12
1000
-20%
10
0%
14
8
6
-1000
20%
-2000
40%
-3000
60%
1Q1986
2Q1987
3Q1988
4Q1989
1Q1991
2Q1992
3Q1993
4Q1994
1Q1996
2Q1997
3Q1998
4Q1999
1Q2001
2Q2002
3Q2003
4Q2004
1Q2006
2Q2007
3Q2008
4Q2009
1Q2011
2Q2012
3Q2013
4Q2014
Miscellaneous to balance
QoQ Brent price change (%, rhs, inverted)
Source: IEA, ICE, Goldman Sachs Global Investment Research.
0
Jan
Feb
2010
Mar
Apr
2011
May
Jun
2012
Jul
Aug
2013
Sep
Oct
Nov
2014
Dec
2015
Source: Platts, IEA, Goldman Sachs Global Investment Research.
July 8, 2015
Global
Commodities in a nutshell
Energy
Crude Oil: We maintain our bearish views
Fundamentals: Crude oil prices have declined sharply over the past week on growing
evidence that the market is still oversupplied. Specifically, June preliminary production
data came in well above our forecast with a surge in OPEC production, in particular Iraq.
Further, the first rise in the US oil rig count since December suggests that producers can
120
110
100
90
80
70
ramp up activity given improved returns at $60/bbl WTI with costs down nearly 30%. With
60
production exceeding even our aggressive forecast, oil demand growth is becoming
50
critical to the oil price outlook in 2H15. While oil demand has so far this year come in even
above our out-of-consensus bullish forecast, we view some of this demand strength as (1)
weather related, (2) front-loaded, and (3) concurrent with non-observable stock builds. In
particular, our modeling suggests that most of the positive demand impulse from lower oil
prices has now passed through. Further, had the miscellaneous to balance been real
demand, refining margins would be higher, not weaker, as observed this past week since
40
30
Jan 14
120
110
Jan 15
Jan 16
Brent Crude
$/bbl
Jan 17
Spot Price
Curve
3m Forecast
12m Forecast
100
90
80
70
we are nearing the peak in runs. Net, we continue to forecast the global oil market surplus
60
will materialize in a product surplus this fall, pushing crude oil prices and refining margins
50
lower with higher OPEC production further overwhelming even stronger demand growth
40
than we forecast. As a result, while developments in Greece after this Sundays surprise
Spot Price
Curve
3m Forecast
12m Forecast
WTI Crude
$/bbl
30
Jan 14
Jan 15
Jan 16
Jan 17
referendum result could exacerbate oil price volatility in the short-term, we reiterate our
Source: NYMEX, ICE, Goldman Sachs
fundamentally driven forecast for lower oil prices into this fall.
Global Investment Research
Price Outlook: Oil rebalancing remains in its early stages with the current cash flow and
funding mix stalling it. As a result we believe that as fundamentals reassert themselves
and we move past the seasonal peak in demand, oil prices will continue to sequentially
decline with our October price WTI forecast at $45/bbl. We keep our Brent-WTI spread
unchanged at $6/bbl at 3 and 6 months and at $5/bbl at 12 months.
Timespread Outlook: Evidence of a growing market surplus should weigh on
timespreads going forward
RBOB Gasoline: Demand driving US market

Fundamentals: Stocks have been drawing with demand growing at 3% on average.
However, imports have picked up with the arbitrage open from Europe. The strong RBOB
3.5
Spot Price
Curve
3m Forecast
12m Forecast
$/gal
3.0
heating oil spread is also incentivising refiners to maximize their gasoline yields at the
expense of distillate, though the scope is limited given that this incentive has persisted for
a while, limiting incremental switching. From mid-August to September we get into
2.5
2.0
hurricane season, which can see a lot of volatility in RBOB. Thereafter, we start the next
season of maintenance. In particular, Irving St John will be shutting their 70 kb/d FCC a
gasoline making unit - and one of its crude distillation units from midSeptember. This
will reduce imports into New York Harbor supporting RBOB. The end of the year should
see builds in gasoline inventories as demand drops seasonally and supply rises from
1.5
1.0
Jan 14
Jan 15
Jan 16
Jan 17
Source: NYMEX, Goldman Sachs Global

Investment Research
refineries returning from maintenance.

Price Outlook: We expect RBOB to remain supported and volatile in the coming months
due to strong demand and hurricane risk followed by the fall turnaround season.
Counterbalancing these factors is European resupply and yield shift by the domestic
refining system albeit with limited scope. Weakness will set in after refineries return from
10
July 8, 2015
Global
maintenance and demand declines seasonally.

Timespread Outlook: We expect spreads to remain supported in the near term with
softness setting in at the end of the year. We have our 3, 6 and 12-month spreads forecast
at -3%, 0.4% and flat, respectively. The change at the front reflects a roll of the contract
from summer to winter gasoline as well as a roll our forecast for crude.
NYMEX Heating Oil: Expecting inventory builds

Fundamentals: US distillate stocks have been building early this year and are now just at
the 5-year seasonal average. This is 14 mb higher than this time last year and 11 mb above
3.5
Spot Price
Curve
3m Forecast
12m Forecast
$/gal
3.0
the prior two years. PADD 1 (US East Coast) distillate stocks were at 5-year lows in March
and have since built rapidly and are now 7 mb higher than this time last year. We believe
that US distillate will continue to be weighed down by strong production, though there will
2.5
2.0
be some seasonal support during the fall refinery maintenance period and the winter. The
risk to the upside is if the arbitrage to Europe which is currently slightly open at the front
continues to remain open and exports increase. However, we view this risk to be limited
given our bearish view of European distillate.
Price Outlook: We expect heating oil to continue to be soft as inventories are at healthy
1.5
1.0
Jan 14
Jan 15
Jan 16
Jan 17

Investment Research
levels. There will be some support as we get into the maintenance period in the fall and
then into the heating season. The changes reflect the rolling of the contract.
Timespread Outlook: Spreads have softened commensurately with inventory builds. We
expect heating oil spreads to remain subdued.
NYMEX Nat. Gas: Modest uptick in price volatility on mixed fundamentals

Fundamentals: The US natural gas market experienced competing fundamental triggers
during the last month. US dry production recently started to recover from maintenancerelated weaknesses shown in May and June, driven by a rebound in gas output out of the
Marcellus and Utica shale plays. We expect this trend to continue in the near future, led by
the recent start-up of Transcos Leidy Southeast Expansion and the expected completion of
the Rockies Express Pipeline East-to-West project in early August. Despite a recent modest
uptick, industrial demand has been showing signs of weakness, being down by 0.3 Bcf/d
yoy in June. On the other hand, power burn spiked last month on a wave of coal
retirements which started taking place on May 31st, in addition to warmer-than-normal
weather, which also contributed to boosting cooling demand. Similarly, net exports to
Mexico rose to an all-time high as a result of their increasing gas consumption for power
6.0
$/mmBtu
Spot Price
Curve
3m Forecast
12m Forecast
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
Jan 14
Jan 15
Jan 16
Jan 17

Investment Research
generation and falling production. Net, the market surplus continues to require PRB coal to
gas substitution.
Price Outlook: We continue to forecast US gas prices of $3.25/mmBtu in 2H15 as
normalizing summer demand should help rein in current oversupply. On the back of our
view that continued productivity gains seen in shale oil will yield equal cost reduction on
the gas side, we maintain our 2016 price forecast to $3.50/mmBtu. Our forecast remains
above the forward curve as we are constructive on the potential for demand growth in
2016.
Timespread Outlook: Natural gas stocks have been building by c.16 Bcf faster-thannormal since the start of the injection season, boosting inventories at a surplus to 5-year
average levels. Should this continue, timespreads would likely depress in the next six
months.
11
July 8, 2015
Global
UK NBP Nat. Gas: Despite currently tight fundamentals, we still expect prices to fall
through 2015-16
Fundamentals: Despite the latest announcement of Dutch production cuts at Groningen
(to 30 Bcm/y, 6 Bcm below our previous estimate) which have yet again tightened the 2015
75.0
p/therm
Spot Price
Curve
3m Forecast
12m Forecast
70.0
65.0
outlook for northwest European gas markets, we maintain our bearish UK NBP into 2016
60.0
on a softer fundamental outlook driven by significant oversupply in LNG markets and
55.0
subsequently higher imports into European markets.
50.0
45.0
Price Outlook: UK NBP has rallied 5% over the past month, with low storage volumes
40.0
and the announcements of more cuts at Groningen driving demand for Russian imports.
35.0
As Brent has traded lower than we forecast in back in March, we now expect oil-indexed
30.0
Jan 14
Jan 15
Jan 16
Jan 17
Russian gas prices will remain steady through 2015 rather than falling further. Accordingly,
we now forecast NBP to stay at 42 p/th through 2H15. Current tight fundamentals only
provide limited upside risk as (i) our forecast for 2015 is close to the oil-indexed `ceiling
Source: ICE, Goldman Sachs Global

Investment Research
price, (ii) should prices rise, the UK coal-to-gas switching demand we forecast for 3Q15
would fall accordingly. Based on our oil teams latest forecast profile, we modestly lower
our 2016 NBP forecast by 5% to 38 p/th. We continue to expect that surplus LNG cargoes
will find their way to Europe in 2016 as a large wave of supply comes to market, keeping
prices low.
Timespread Outlook: As the global LNG market becomes increasingly oversupplied over
the course of the next 18 months, a softer European gas balance will likely be consistent
with weakening timespreads.
Industrial Metals
Copper: China construction cycle, crude, and currency outlook = sell
Fundamentals: Visible copper inventories (LME, SHFE, Comex and bonded) have
8,000
continued to fall slightly over the past month, in line with seasonal draws which tend to
7,500
occur each year between April and September. However, year on year growth in visible
7,000
inventories is clear cut, with stocks rising c.420kt yoy (including our assumptions of SRB
6,500
purchases) and c.200kt yoy (excluding them). Net speculative positioning on the LME and
6,000
Comex has fallen very sharply over the past month, though it remains above the January
5,500
lows.
5,000
Price Outlook: We believe that current prices represent a selling opportunity for
4,500
Jan 14
producers and investors alike. Chinas new normal of weakening commodity demand
Source: LME, Goldman Sachs Global
growth, forecast sustained weakness in late-cycle China construction completions (owing
Investment Research
Spot Price
Curve
3m Forecast
12m Forecast
$/mt
Jan 15
Jan 16
Jan 17
to the property inventory build-up N.B. China steel demand declines over the past six
months are the canary in the copper market), lower oil prices (shale), a stronger dollar,
and above-trend supply growth. The recent modest easing in Chinese financial conditions
and pick up in property sales will not result in a strong enough pickup in demand to offset
the strong acceleration in mine supply growth we expect over the coming 6-12 months.
Timespread Outlook: LME spreads remained soft over the past month. This has not
been associated with a rise in LME stocks, and as such we believe this reflects the
weakness in the physical market evidenced by low or falling physical premiums. The nearterm copper spread outlook continues to be complicated by the combination of physical
weakness and expected seasonal inventory draws.
12
July 8, 2015
Global
Nickel: After a very weak past 12 months, the outlook is improving

Fundamentals: LME nickel inventories have fallen by over 10,000t over the past month. LME
24,000
net speculative positioning remains around the lowest levels since LME data began in July
22,000
2014. The wide open SHFE to LME import arbitrage which was present last month has for the
20,000
most part closed on the back of a sharp decline in SHFE prices (-7% since the start of June vs
18,000
LME flat), following a sharp increase in Chinese refined and ferronickel imports in May.
16,000
Price Outlook: From current price levels of c.$11,600/t, nickel is our preferred metal long
exposure, with a bullish outlook for both supply (rising costs of nickel pig iron production
$/mt
Spot Price
Curve
3m Forecast
12m Forecast
14,000
12,000
should restrict output growth) and demand (nickel is relatively heavily exposed to the
10,000
Jan 14
consumer recovery in the US and Europe, and to Chinas eventual shift to a consumer-

Investment Research
driven economy). Nickel is also heavily exposed to a sustained pick up in China property
Jan 15
Jan 16
Jan 17
sales. Please see: Metal Detector Nickel market outlook: our preferred metal from
c.$11,600/t, published July 6, 2015, for details
Timespread Outlook: Nickel timespreads are in steep contango, reflecting the high level
of LME inventory. This is not expected to change in the near term.
Aluminium: Prices set to remain low until we see output cuts

Fundamentals: Global aluminium output growth accelerated sharply in April and May,
2,200
rising to 10% yoy growth (relative to trend of 6%), driven by an acceleration in low cost
2,100
Chinese supply growth. Set against sluggish global demand growth, the aluminium market
2,000
balance is in clear surplus. At the same time, costs of production have been in a
1,900
downtrend, on the back of lower energy prices and we estimate the 90%ile of ex-China
1,800
output costs is c.$1,875/t, vs current all in prices of $1,867/t (average US Midwest
1,700
transaction price and European duty paid all in price). Net speculative positioning on
1,600
aluminium is at its lowest levels since the LME data began in July 2014.
Price Outlook:. We believe that prices need to remain low in order to restrict output
growth, and it is difficult to see where sufficient cuts will come from given the burden will
Spot Price
Curve
3m Forecast
12m Forecast
$/mt
1,500
Jan 14
Jan 15
Jan 16
Jan 17

Investment Research
likely fall on ex-China producers rather than high Chinese producers. Having said this,
following the recent sell-off, we do not see a lot of further downside to all-in pricing from
current levels, with current prices likely sufficient to see a response, over time. We see
prices recovering somewhat in 2016 as low prices are the cure for low prices, and as
Chinese demand growth improves.
Timespread Outlook: LME aluminium spreads have softened significantly over the past
month. We expect them to remain soft in the near term.
Zinc: A strong bull narrativestill waiting as demand weak, net speculative positioning
stubbornly solid
Fundamentals: Zinc-intensive China infrastructure growth FAI slowed in 2Q15, as did
3,000
Chinese automotive output. We see both reaccelerating in the 2H15, supporting zinc
2,800
pricing. Two major mines are ramping down/closing over the next six months Century
2,600
and Lisheen. After recently reaching its highest level since mid-2014 last month, zinc net
$/mt
Spot Price
Curve
3m Forecast
12m Forecast
2,400
speculative length halved over the past month.

2,200
Price Outlook: After forecasting a continued pullback in prices over the past month, we
2,000
think zinc prices may continue to remain weak in the very near term. Having said this, we
believe that sub-$2,000/t zinc presents a solid buying/consumer hedging opportunity. This
1,800
Jan 14
is because we are bullish on the outlook for zinc beyond over the next 6-12 months,
particularly relative to other metals, such as copper. The relative bull case for zinc has
Investment Research
Jan 15
Jan 16
Jan 17
three drivers: a) zincs high exposure to China infrastructure and automotive sectors, b) its
13
July 8, 2015
Global
relative lack of exposure to dollar strength (marginal output costs are in China), and c) the
closures of the Century and Lisheen zinc mines.
Timespread Outlook: LME zinc spreads remained loose over the past month. LME zinc
spreads may tighten somewhat over the next 6-12 months should the market tighten.
Lead: Set to continue to trade alongside zinc

Fundamentals: Alongside zinc, lead prices have moved sharply higher in recent weeks,
2,700
after reaching their lowest levels since 2010. The China lead import arbitrage is closed, and
2,500
lead supply and demand fundamentals in our view remain weak.
2,300
Price Outlook: We continue to forecast lead at 2,200 in 12 months
2,100
Spot Price
Curve
3m Forecast
12m Forecast
$/mt
1,900
1,700
1,500
Jan 14
Jan 15
Jan 16
Jan 17
Investment Research
Precious Metals
COMEX Gold: Maintaining our bearish view
Fundamentals: We continue to expect continued strengthening of the dollar and gradual
increase in US real rates (as growth recovery resumes after a disappointing Q1 and we
move closer to the first FED rate hikes) to push gold prices further down.
1,400
Spot Price
Curve
3m Forecast
12m Forecast
$/toz
1,350
1,300
1,250
Price Outlook: Gold prices remained in a relatively tight range in June and early July,
1,200
with concerns over Grexit, a weakening of the US dollar against the euro, and rising US
1,150
real rates having little overall impact on pricing. Our gold price forecasts remain $1,180/oz
1,100
in 3 months, $1,150/oz in 6 months and $1,050/oz in 12 months.
1,050
Timespread Outlook: We expect the current 1-2 month and 1-12 month timespreads to
remain broadly unchanged until later in the hiking cycle.
1,000
Jan 14
Jan 15
Jan 16
Jan 17
Source: COMEX, Goldman Sachs Global

Investment Research
COMEX Silver: Downside risks as interest rates normalize

Fundamentals: Over the long run, silver prices tend to track gold prices. Accordingly, our
forecasts for interest rate hikes to kick off in 2015, continues to point to lower precious
24.0
21.0
has seen the silver to gold price ratio fall as silver demand weakens.
20.0
Price Outlook: We expect the silver/gold price ratio to normalize as global growth begins
18.0
the bearish factors to dominate and silver prices to fall over the next 12 months.
Spot Price
Curve
3m Forecast
12m Forecast
22.0
metals prices. At the same time, the downturn in global economic activity since mid-2014
to recover later this year and accelerates further over 2016/17. However, on net, we expect
$/toz
23.0
19.0
17.0
16.0
15.0
14.0
Jan 14
Jan 15
Jan 16
Jan 17

Investment Research
14
July 8, 2015
Global
COMEX Platinum: Prices into the cost-curve as producers fail to respond

Fundamentals: The platinum price is trading near its six-year lows, in our view reflecting
1,600
a structural fundamental surplus, rather than a temporary above-ground de-stocking
1,500
process. We believe this price weakness reflects disappointing demand and a ramping-up
1,400
of supply, not inventory liquidation, confirmed by the significant underperformance of
1,300
platinum despite strong ZAR and gold. With significant low-cost supply due online over
1,200
the next 2-4 years, and with gold prices expected to come under pressure, we believe that
1,100
the platinum price will remain under the marginal cost of production, which we see at
1,000
US$1,050-1,150/oz, in order to incentivise closures.

Price Outlook: Over the next 12 months we expect platinum to average c. $1,175/oz;
however if autos data disappoint or supply was to surprise to the upside there would be
$/toz
900
Jan 14
Spot Price
Curve
3m Forecast
12m Forecast
Jan 15
Jan 16
Jan 17

Investment Research
downside risk to our forecast.
COMEX Palladium: Major selloff on China demand weakness

Fundamentals: Palladium prices have underperformed on disappointing auto sales numbers
from China and media reports of increased supply from both primary and secondary sources.
Net speculative positioning has declined sharply over the past month, and more broadly, over
the past 6 months, in line with the deterioration in Chinese growth over that period.
1,000
$/toz
Spot Price
Curve
3m Forecast
12m Forecast
950
900
850
800
The fundamentals of palladium remain attractive in our view given we expect a
750
reacceleration in automotive output in China and have a positive outlook for gasoline
700
output growth in other markets. In addition, the fall in oil prices spurs larger engine size
650
car sales which have higher metal loadings. On primary supply we see little scope for
600
Jan 14
Jan 15
Jan 16
Jan 17
surprise. Regarding secondary supply there have been media reports that 30% of supply is
expected to come from secondary sources. On our estimates secondary supply is expected
to account for 30% of total supply yet we see the metal in a sustained deficit.

Investment Research
Price Outlook: Over the next 12 months we expect the palladium price to rise to $863/oz.
Agriculture
CBOT Corn: Weather adds uncertainty to acreage and yields, but bearish outlook
remains unchanged
Fundamentals: A bullish USDA June corn stock report (June 1 stocks 108 mil bu below
5.50
the consensus estimate) and 15/16 corn planted acreage below expectations saw prices
5.00
rise above $4 last week. While crop conditions remain favorable for now, there has been
4.50
some sequential deterioration over the last few week and risks to yields from overly wet
Spot Price
Curve
3m Forecast
12m Forecast
$/bu
4.00
weather, particularly in the Eastern Corn Belt, remain in place for now.
3.50
Price Outlook: Despite the recent stock adjustments we continue to see robust 2015/16
3.00
total supply (as 14/15 carry-out still remains high globally). This keeps our forecasts
anchored below $4 in the absence of a further deterioration in weather. With most of the
2.50
Jan 14
Jan 15
Jan 16
Jan 17
key growing period still ahead, and with El Nio conditions introducing greater weather
Source: CBOT, Goldman Sachs Global
uncertainty, pricing remains sensitive to weather forecasts over the coming weeks.
Investment Research
However, recent weather forecasts have been indicating cooler temperatures (which would
be supportive of yields) for most of the key US states.
Timespread Outlook: We continue to expect high global carry-out stocks and hence
continue to see negative roll yields persisting.
15
July 8, 2015
Global
CBOT Soybean: Planting delays in the US, but we continue to see robust 2015/16
production
Fundamentals: US planting progress got off to a fast start in May, but subsequent wet
weather saw progress fall below the 5Y average. Prices rallied last week above $10/bu as
16.0
13.0
estimate). While planted acreage estimates were revised upwards in the same report
12.0
(85.1mil acres, 0.5 mil acres above March planting intentions), this number may end up
11.0
optimistic as wet conditions may lead to high soybean prevent planting. Just as for corn,
10.0
as temperatures look set to cool in key growing states.

Price Outlook: Record 14/15 production from South America still points to elevated
global carry-in for 15/16, despite the recent US stock estimate revision. Global acreage is
Spot Price
Curve
3m Forecast
12m Forecast
14.0
the June USDA report put June 1 stocks at 625 mil bu (45 mil bu below the consensus
key growing conditions lie ahead but recent forecasts for US weather have been favorable
$/bu
15.0
9.0
8.0
7.0
Jan 14
Jan 15
Jan 16
Jan 17

Investment Research
also very likely to be higher than last year, helping to keep production elevated globally.
Accordingly, we remain bearish for 15/16.
Timespread Outlook: Large global 14/15 carry-out stocks points to inventories remaining
elevated for some time. We continue to see timespreads weaker than current market
pricing.
CBOT Wheat: El Nio continues to pose weather risks

Fundamentals: The USDAs June stock report saw higher than expected wheat stocks
(753 mil bu on June 1, 35 mil bu above the consensus estimate) and a larger planted area
8.0
$/bu
Spot Price
Curve
3m Forecast
12m Forecast
7.5
7.0
(56.1 mil acres, 0.2 mil above consensus). However, wheat prices followed corn and
6.5
soybeans higher. Weather remains a key concern and, while lower precipitation in
6.0
5.5
Australia has not yet posed a major risk to yields (thanks to cool temperatures), the Indian
5.0
monsoon has been in rainfall deficit.
4.5
4.0
Price Outlook: For now we maintain our forecasts at 530c/bu in 3, 6 and 12 months.
Careful monitoring of global weather conditions will be required as the current El Nio
episode progresses.
3.5
3.0
Jan 14
Jan 15
Jan 16
Jan 17

Investment Research
Timespread Outlook: Large 2014/15 carry-out stocks and robust production estimates for
2015/16 points to large inventories for longer. However, adverse weather on the back of El
Nio could see these stocks drawn more rapidly than expected.
NYBOT Cotton: Prices unchanged as supply weakness and uncertainty is matched by

demand
Fundamentals: Planting in the US lagged the 5Y average for almost the entire period, but
unlike corn & soybean prices, cotton has not been rallying on the back of this weak
100
Spot Price
Curve
3m Forecast
12m Forecast
c/lb
95
90
planting data keeping planting incentives skewed towards other crops. Non-US supply is
85
also likely to decline as China acreage estimates are at their lowest level since 1949, and
80
75
India (now the number one producer globally) faces significant weather risks from El Nio
70
and a rainfall deficit monsoon.
65
60
Price Outlook: The lack of market reaction to the current supply situation is likely due to:
55
(1) Uncertainty over the pace of global growth and; (2) Chinas cotton policy shift, which
50
Jan 14
Jan 15
Jan 16
Jan 17
will substantially reduce import demand. For now we maintain our forecasts at 60c/lb over
Source: NYBOT, Goldman Sachs Global
3, 6 and 12-month horizons, assuming broadly normal weather and a recovery in US and
Investment Research
global growth in line with our economists estimates.

Timespread Outlook: Timespreads and roll yields are likely to remain relatively weak
until more progress is made in reducing global stockpiles.
16
July 8, 2015
Global
NYBOT Coffee: Weather uncertainties (past and future) remain key

Fundamentals: Coffee continues to trade sideways in a 120c 140c/lb range. The key
uncertainty remains the Brazil harvest as CONAB production estimates (44.3m bags)
diverge substantially from USDA estimates (52.4m bags). In our view, this ultimately
reflects the still uncertain impact of drought in 2014.
260
Spot Price
Curve
3m Forecast
12m Forecast
c/lb
240
220
200
180
Price Outlook: While the next few months will show the outcome of last years weather,
160
adverse weather on the back of El Nio (which is forecast to persist for the remainder of
140
2015) remains a risk for this year and next. For now we maintain our forecasts at 150c/lb
120
over 3, 6 and 12 months.
100
Jan 14
Jan 15
Jan 16
Jan 17

Investment Research
NYBOT Cocoa: Supply concerns remain key, but demand may now be reaching a turning
point
Fundamentals: Cocoa prices rallied by more than 20% over Q2 as production estimates
for Ghana have been revised substantially lower over the last few months, offsetting
3,500
Spot Price
Curve
3m Forecast
12m Forecast
$/mt
3,400
3,300
upward revisions to Ivory Coast, Cameroon and Ecuador. Strong Harmattan winds earlier
3,200
in the year and reduced fertilizer application (GHS has depreciated by 36%ytd) were the
3,100
3,000
key drivers behind the downgrade. Current El Nio conditions also point to continued
2,900
downside risks to global production this year and next.
2,800
2,700
Price Outlook: While prices are now far above our $3,000/mt forecasts, and supply risks
2,600
are likely still skewed to the downside owing to El Nio conditions, we remain cautious on
2,500
Jan 14
prices. Weaker GDP growth saw Q1 grindings slow (particularly in Asia, -9.3%yoy). With
prices now up over 12%ytd, further demand destruction may be seen over the coming
Investment Research
Jan 15
Jan 16
Jan 17
months.
NYBOT Sugar: Prices near seven year lows, but El Nio still poses upside risks
Fundamentals: Harvest estimates for Brazil have been pointing to robust 2015/16
production, thanks to more supportive weather conditions in 2015Q1. While recent data
20
c/lb
Spot Price
Curve
3m Forecast
12m Forecast
19
18
released by Unica has shown greater ethanol production and lower sugar production by
17
Centre South Brazilian sugar mills (driven by price differentials), the cumulative 17% BRL
16
15
depreciation year to date, and reintroduction of export subsidies in India is likely to keep
14
the sugar market well supplied for some time, provided weather conditions remain
13
normal.
12
Price outlook: El Nio continues to pose the most significant downside risks to
10
Jan 14
11
Jan 15
Jan 16
Jan 17
production. While the Indian monsoon began with relatively high intensity, forecasts are
now pointing towards an eventual deficit. For now we maintain our forecasts at 13.0 flat
Investment Research
over a 3, 6 and 12-month horizon.
17
July 8, 2015
Global
Livestock
CME Live Cattle: Herd rebuilding and weak demand keep prices rangebound
Fundamentals: After peaking at just over 170c/lb in late 2014 cattle prices have remained
180
in a 145-155c/lb range since February. The latest USDA survey was in line with analyst
170
forecasts and continued to show feedlot placements down significantly year-on-year. This
160
weakness in placements is largely reflective of a combination of herd re-building through
c/lb
Spot Price
Curve
3m Forecast
12m Forecast
150
heifer retention and limited feeder cattle supplies. Slaughter is also significantly down
year-on-year consistent with higher dressed weights, as cattle remain on feed for longer.
140
130
Price Outlook: Given the competition from alternative meat supplies, such as pork, we
continue to see prices declining moderately over the next 12 months and maintain our
forecasts at 150, 145 and 140c/lb on a 3-, 6- and 12-month horizon, respectively.
120
Jan 14
Jan 15
Jan 16
Jan 17
Source: CME, Goldman Sachs Global

Investment Research
CME Lean Hog: Herd recovery and US$ strength to keep downward pressure on prices
Fundamentals: After reaching a 85c/lb peak in May prices have moderated, counterseasonally, to just below 80c/lb. The recent Quarterly Hogs and Pigs Report showed a
140
110
litter have recovered to 10.4, a record level.
100
First, there could still be more in the post-PEDv recovery, albeit this is likely now mostly
90
80
70
60
played out. Second, our FX strategists foresee additional dollar strength, which would
50
continue to weigh on exports. We roll our forecasts to 70, 70 and 75c/lb in 3, 6 and 12
40
Jan 14
months, from 80, 70 and 70 c/lb.
Spot Price
Curve
3m Forecast
12m Forecast
120
strong post-PEDv recovery: inventories are up +9%yoy (to 66.9 million head) and pigs per
Price Outlook: We maintain a moderately bearish outlook on prices for two key reasons:
c/lb
130
Jan 15
Jan 16
Jan 17
Source: CME, Goldman Sachs Global

Investment Research
Bulks
Iron Ore: Rally living on borrowed time
(62% fines CFR China)
Fundamentals: On the supply side, we expect the weaker than expected exports from
Brazil and Australia during April and May to normalize in the coming months. Past supply
underperformance appears to be caused by temporary factors such as weather disruption,
and the recent increase in freight activity at major export terminals, together with rising
freight rates, should result in a recovery in Chinese inventories and continued pressure on
spot prices. Meanwhile, mines that had been previously flagged for closure in Australia
and Sierra Leone are now due to restart operations. On the demand side, steel mill
margins have declined to a 5-year low as prices for steel and iron ore have diverged,
creating downside risks to demand.
Recent Market Activity: Spot prices declined for nine consecutive days to $49.75/t CFR
China amid broad sell-off of China equities and commodities. Fundamentally, we see
increased freight activity at major iron ore terminals and a halt of port inventory drops last
week.
Price Outlook: At this level, prices are below to our US$60/t estimate of all-in marginal
production costs, but we see limited upside as low prices are required to trigger adequate
18
July 8, 2015
Global
amount of closures in the resumed oversupplied environment. We expect prices to decline

over our forecast period down to US$44/t in next year and US$40/t in 2017.
Timespread Outlook: The forward curve should remain in backwardation given ongoing
hedging by producers and the combined impact of cost deflation and structural
oversupply. Inventory levels in China are low and declining due to weak exports, but
stocks should normalize in the coming months as we expect the disruptions to be
temporary.
Metallurgical Coal: Finding price support after two years of cuts

(Premium HCC, FOB Queensland)
Fundamentals: After two years of mine closures, total supply cuts are equivalent to 10%
of seaborne supply. Given the ramp up of new mines in Australia and Mozambique, further
production cuts are likely and the lower cost miners shall continue to displace higher cost
ones. On the demand side, we don't expect seaborne demand to grow further during our
forecast period to 2019, and China will inch closer to self-sufficiency in the medium term
but it is unlikely to become a net exporter. The imports by China in May was weaker than
many expected with only 1.88 Mt of coking coal imported, down 68% yoy.
Recent Market Activity: Prices improved 7% from their recent lows in May and was
relatively stable in the recent sell-off of commodities, currently at $87.75/t FOB
Queensland, still below the marginal cost. The 3Q benchmark price was concluded in
Japan at $93/mt FOB Australia, a $16/t qoq drop from the previous benchmark.
Price Outlook: Prices improved 9% from their recent lows, currently at $89/t FOB
Queensland, but its still below the marginal cost. The 3Q benchmark price was concluded
in Japan at $93/mt FOB Australia, a $16/t qoq drop from the previous benchmark. We
believe prices may have bottomed. However, any price upside is likely to be limited amid
muted demand and new projects in Australia and Mozambique ramping up.
Timespread Outlook: With prices trading below marginal cost, an eventual recovery is
likely but the timeframe for a sustained increase in prices is subject to a recovery in the
Chinese domestic market.
Thermal Coal: short term support from supply disruptions

(6,000kcal/kg NAR, FOB Newcastle)
Fundamentals: Low prices have caused a steep decline in Indonesian exports but the
market remains well supplied because these production cuts are offset by weaker Chinese
demand. Although Chinas role as the buyer of last resort may not continue indefinitely,
Chinese domestic coal prices remain the key anchor point for seaborne coal. Indian
demand remains strong but any price upside is limited by persistent overcapacity in China
and a dwindling number of growth markets in other regions.
Price Outlook: We believe prices have limited upside to US$65/t, provided that the
Chinese coal industry consolidates and domestic prices normalise.
Timespread Outlook: In a similar vein to metallurgical coal, the eventual recovery in
thermal coal prices is subject to the consolidation of the Chinese coal sector; excess
capacity must close in order for domestic prices to recover and provide some headroom
for seaborne prices.
19
July 8, 2015
Global
Price actions, volatilities and forecasts

Prices and monthly
changes1
Volatilities (%) and monthly changes2
Historical Prices
Price Forecasts3
units
06 Jul Change Implied2 Change Realized2 Change 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15
WTI Crude Oil
$/bbl
52.53
Brent Crude Oil
$/bbl
56.54
RBOB Gasoline
$/gal
1.92
NYMEX Heating Oil
$/gal
1.71
NYMEX Nat. Gas
$/mmBtu
2.76
UK NBP Nat. Gas
p/th
42.86
LME Aluminum
$/mt
1,695
LME Copper
$/mt
5,590
LME Nickel
$/mt
11,700
LME Zinc
$/mt
2,014
LME Lead
$/mt
1,766
COMEX Gold
$/troy oz
1,173
COMEX Silver
$/troy oz
15.8
COMEX Platinum
$/troy oz
1,066
COMEX Palladium
$/troy oz
676
CBOT Wheat
cent/bu
596
CBOT Soybean
cent/bu
1,015
CBOT Corn
cent/bu
427
ICE Cotton
cent/lb
67
ICE Coffee
cent/lb
125
ICE Cocoa
$/mt
3,278
ICE Sugar
cent/lb
12.5
CME Live Cattle
cent/lb
150.5
CME Lean Hog
cent/lb
76.0
Energy
-6.77
-0.11
-0.16
0.17
0.31
-6.60
3m
6m
12m
31.4
-0.65
40.3
4.84
98.61 102.99 97.25
73.20
48.57
57.95
50.00
49.00
57.00
30.9
-0.16
35.9
0.91
107.87 109.76 103.46 77.07
55.13
63.50
56.00
55.00
62.00
32.4
1.95
33.1
-0.40
2.78
3.00
2.75
1.98
1.60
2.00
1.40
1.49
1.81
30.7
1.57
37.6
6.49
3.01
2.95
2.83
2.32
1.80
1.90
1.58
1.74
1.81
42.2
0.16
43.5
6.37
4.72
4.58
3.95
3.83
2.81
2.74
2.80
3.30
3.50
17.6
-0.66
19.6
4.01
60.72
45.03
43.77
54.72
47.58
43.32
43.00
42.00
38.00
17.4
-0.86
12.7
-6.56
1,753
1,838
2,009
1,976
1,814
1,788
1,800
1,800
1,900
20.8
1.11
19.0
5.23
7,001
6,764
6,976
6,575
5,805
6,047
5,500
5,500
5,200
30.0
-2.25
30.8
2.63
14,702 18,519 18,670 15,926 14,437 13,082 14,000 14,000 15,000
20.6
-2.04
13.3
-5.46
2,025
2,079
2,315
2,242
2,090
2,191
2,100
2,200
2,500
20.7
-2.41
18.8
-6.00
2,124
2,121
2,194
2,011
1,820
1,948
1,800
1,900
2,200
13.8
-0.87
12.0
-0.93
1,294
1,289
1,281
1,202
1,217
1,193
1,180
1,150
1,050
24.3
-0.84
15.9
-9.92
20.5
19.6
19.7
16.5
16.7
16.4
16.4
16.2
15.2
17.2
-0.27
14.5
-1.85
1,429
1,449
1,434
1,231
1,192
1,128
1,170
1,170
1,200
19.98
0.43
22.3
3.32
746
816
863
788
786
758
825
850
861
28.5
1.31
43.1
3.58
617
652
528
556
523
504
530
530
530
21.4
1.61
27.4
14.28
1,356
1,471
1,149
1,008
990
965
875
875
875
25.5
0.89
33.5
15.49
452
479
360
372
385
366
375
375
375
19.4
0.88
20.9
1.10
88
87
66
62
62
65
55
55
60
34.0
-1.95
32.1
-3.09
153
185
181
190
152
134
150
150
150
20.6
0.51
16.1
1.49
2,881
3,004
3,180
2,962
2,889
3,025
3,000
3,000
3,000
22.2
-0.32
26.0
-1.75
16
17
16
16
14
12
13.0
13.0
13.0
11.5
-0.82
13.8
0.76
142
142
154
166
156
154
150.0
145.0
140.0
25.4
2.06
24.9
5.33
100
122
113
91
67
77
70.0
70.0
75.0
Industrial Metals
Precious Metals
Agriculture
-55
-347
-1475
-116
-23
-26
-75
79
77
66
-10
162
0.4
-0.1
-5.1
Monthly change is difference of close on last business day and close a month ago.
Monthly volatility change is difference of average volatility over the past month and that of the prior month (3-mo ATM implied, 1-mo realized).
3
Price forecasts refer to prompt contract price forecasts in 3-, 6-, and 12-months time.
4
Based on LME three month prices.
2
20
July 8, 2015
Global
S&P GSCI Enhanced Commodity Index and strategies total return and forecasts1
Current
Weight
(%)
S&P GSCI Enhanced Commodity Index
Energy
Industrial Metals
Precious Metals
Agriculture
Livestock
100.0
60.8
8.7
3.8
17.9
8.8
2013
-0.8
5.6
-13.0
-29.7
-18.0
-2.8
2014
-31.1
-42.2
-7.3
-4.1
-9.3
27.0
12-Month
Forward
2015 YTD 12-mo Forecast
-6.6
-6.8
-11.5
-1.0
-3.7
-8.2
0.6
3.5
6.0
-10.0
-12.0
6.0
YTD returns through Jul 06, 2015

Performance of S&P GSCI Enhanced Commodity Index and Strategies through July 6, 2015
Index and strategies
S&P GSCI Enhanced Index
Energy
Petroleum
Industrial Metals
Precious Metals
Agricultural
Livestock
Commodities
Energy
WTI
Brent
Unlead/RBOB Gas
Heating Oil
Gasoil
Natural Gas
Industrial Metals
Aluminum
Copper
Lead
Nickel
Zinc
Precious Metals
Gold
Silver
Agriculture
CBOT Wheat
KBOT Wheat
Corn
Soybeans
Cotton
Sugar
Coffee
Cocoa
Livestock
Live Cattle
Feeder Cattle
Lean Hogs
All data as of July 06, 2015 close
Dollar
Base Date
Weight
= 100
100.00 Dec-69
60.82 Dec-82
57.70 Dec-82
8.68 Dec-76
3.81 Dec-72
17.95 Dec-69
8.75 Dec-69
6-Jul-15
Level
455.8
856.7
967.6
165.8
304.4
106.2
216.8
2013
-0.8
5.6
5.8
-13.0
-29.7
-18.0
-2.8
2014
-31.1
-42.2
-43.1
-7.3
-4.1
-9.3
27.0
Total Returns (%)

1-Month 3-Month 12-Month
2015 YTD Change Change Change
-6.6
-4.8
-2.7
-38.8
-6.8
-8.9
-4.2
-48.2
-6.7
-9.5
-4.4
-48.9
-11.5
-5.8
-7.0
-20.9
-1.0
0.2
-4.3
-13.4
-3.7
9.2
3.9
-14.0
-8.2
-1.5
0.5
-9.5
19.82
19.98
6.03
5.16
6.70
3.12
Dec-86
Jan-99
Dec-87
Dec-82
Jan-99
Dec-93
924.4
1128.8
1667.9
690.3
768.7
91.1
6.3
8.1
3.8
0.7
3.5
2.0
-42.3
-44.3
-44.2
-36.6
-46.1
-23.3
-10.6
-10.2
13.8
-7.0
2.5
-9.4
-11.2
-10.8
-3.8
-8.4
-5.6
3.1
-5.8
-6.9
6.9
-5.6
-0.6
0.0
-52.8
-51.3
-38.9
-40.8
-42.8
-32.8
2.80
3.80
0.59
0.61
0.88
Dec-90
Dec-76
Jan-95
Dec-92
Dec-90
50.3
479.6
393.4
214.8
115.2
-21.1
-7.9
-7.8
-20.1
-7.4
-2.6
-12.6
-18.6
7.4
3.8
-11.0
-11.1
-5.8
-23.4
-8.3
-4.1
-5.9
-7.4
-11.3
-5.6
-7.1
-6.8
-6.7
-10.5
-5.8
-16.5
-20.9
-20.8
-42.1
-11.8
3.39
0.41
Dec-77
Dec-72
302.7
309.1
-28.6
-36.6
-1.7
-20.4
-1.2
0.2
0.4
-1.7
-3.8
-8.4
-11.5
-26.5
4.32
0.98
5.11
3.26
1.34
1.58
0.83
0.51
Dec-69
Jan-99
Dec-69
Dec-69
Dec-76
Dec-72
Dec-80
Dec-83
59.6
56.8
111.3
468.9
30.6
117.8
29.1
122.0
-26.5
-26.9
-29.0
10.2
5.7
-20.5
-30.8
18.8
-12.5
-4.7
-7.8
-3.2
-21.0
-29.0
38.3
7.0
-1.5
-8.2
-1.4
0.5
10.4
-17.7
-28.9
12.6
14.2
8.5
12.6
11.0
3.7
0.5
-8.9
5.3
11.0
0.9
3.5
5.8
2.6
-3.5
-17.5
17.3
-6.9
-18.5
-7.8
-10.7
-6.2
-41.0
-34.0
6.2
5.09
1.31
2.35
Dec-69
Jan-02
Dec-75
227.3
180.9
179.9
-6.1
-3.8
3.0
26.6
33.0
21.9
-1.4
-0.2
-25.2
0.7
-2.2
-5.6
2.1
-0.5
-2.5
2.4
3.8
-35.0
21
July 8, 2015
Global
Disclosure Appendix
Reg AC
We, Jeffrey Currie, Michael Hinds, Damien Courvalin, Max Layton, Christian Lelong, Abhisek Banerjee, Yubin Fu, Amber Cai, Caroline Lu and Raquel
Ohana, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by
considerations of the firm's business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
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3 D&#39;s of Macro Push Deflation, Divergence and Deleveraging Reinforce Oversupply

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3 D&#39;s of Macro Push Deflation, Divergence and Deleveraging Reinforce Oversupply

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July 8, 2015

The 3Ds of macro push

Deflation, Divergence and Deleveraging reinforce oversupply

The 3Ds are Deflation, Divergence and Deleveraging

Deleveraging has weakened Chinas CapEx demand

Deflation and divergence reduce the need for capital

The Goldman Sachs Group, Inc.

Global Investment Research

The 3D macro trends deflation, divergence and deleveraging

Goldman Sachs Global Investment Research

Exhibit 1: Deflation after a decade of global productive

Exhibit 2: Divergence after nearly a decade since the

Average age of US capital stock (years)

Real GDP (index, 2008Q4 = 100)

Source: BEA, Goldman Sachs Global Investment Research

Source: Haver Analytics, Goldman Sachs Global Investment Research

Exhibit 4: across most EM economies

Credit to GDP gap (current minus trend level)

Source: Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

DM credit to GDP gap

EM credit to GDP gap

Source: Goldman Sachs Global Investment Research

Metals take a leg lower on weak China demand, as Deleveraging

Goldman Sachs Global Investment Research

Exhibit 5: Our economists alternative activity measure

Exhibit 6: consistent with weak metals demand and

GS China Physical Industrial Output index vs. official IP

S&P GSCI Industrial Metals Spot Index vs. GS China

GS China "Physical Output"

China Industrial Production

Source: NBS, Goldman Sachs Global Investment Research

2010 2011 2012 2013 2014 2015

Source: Bloomberg, Goldman Sachs Global Investment Research

Exhibit 7: Chinese steel and copper demand remains very

Exhibit 8: and Chinese easing has been muted once we

% change yoy, 3mma

% yoy growth (lhs), GS China Financial Conditions Index

GS China copper demand indicator

China steel apparent demand (rhs)

China Current Activity Indicator

Source: Goldman Sachs Global Investment Research, CEIC.

Goldman Sachs Global Investment Research

GS China FCI excluding equities, inverted (rhs)

Source: Goldman Sachs Global Investment Research, CEIC

mt (lhs), $/t (rhs)

Exhibit 10: the reduction in copper net speculative

Jul 14 Oct 14 Jan 15 Apr 15

Source: S&P, Bloomberg, Goldman Sachs Global Investment Research

LME and Comex net speculative positioning

Source: LME, Comex, Bloomberg, Goldman Sachs Global Investment Research

Lower oil prices on weak fundamental outlook and continuation of

Exhibit 11: Non-US supply has been growing rapidly

Saudi Arabia, Iraq, Russia combined crude oil production

Source: Platts, IEA, Bloomberg, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research

Exhibit 13: and OECD demand appears to have

Estimated oil demand response (in %) to +1% shock to prices

Estimated oil demand response (in %) from -45% oil price

Source: Goldman Sachs Global Investment Research

Source: IEA, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research

Exhibit 14: Miscellaneous to balance historically price

Exhibit 15: Weaker refining margins also suggest its not

3 D's of Macro Push Deflation, Divergence and Deleveraging Reinforce Oversupply

3 D's of Macro Push Deflation, Divergence and Deleveraging Reinforce Oversupply