- 1. December 2011, Volume: 33ISSUEVOLUMEInvesteursChroniclesNews
In Focus Cover Story Perfect Storm: Volatility in News on Industry
and All routes to India:Emerging Markets commodity pricesworlds top
recipients of remittancesOpen Forum.Stats Watch ....... OutlookIs
depreciation the new normal?Gross DomesticRubber Products Quartile
Estimate
2. Call Rates as on 3rd December 2011 6.90% - 8.50%Figure
FactsForexForward Rates against INR as on 3rd December, 2011 Spot
Rate 1 mth3 mth 6 mthUS 51.31 51.62 52.0152.55 5,050.Euro 69.18
69.63 70.1870.9516,846 15Sterling 80.48 80.95 81.5182.28
.83Yen65.89 66.37 66.9467.7815,946 4,778.Swiss55.95 56.35
56.8457.57 .10Franc35Source: Hindu BusinessLineLibor RatesLibor % 1
mth 3 mth6 mth 12 mth SensexNiftyUS 0.270.52 0.74 1.06Euro 1.131.40
1.64 2.00Sterling 0.741.03 1.33 1.82Yen0.140.19 0.33 0.55Swiss
Franc0.030.05 0.09 0.3228,948 55,702 28,688Forward Cover .00.00.00
1 mth 3 mth 6 mthUS 7.35% 5.53% 4.90%54,415Euro 7.91% 5.86% 5.19%
.00Sterling 7.11% 5.19% 4.54%Yen8.86% 6.46% 5.82%Swiss Franc8.70%
6.45% 5.87%As on 3 rd December, 2011 Source: Hindu BusinessLine
Gold (10 gm) Silver (1 Kg)CommoditiesAluminum (1000 kg)
102100109.94Copper (1000 Kg) 409750 52.16Zinc (1000 kg) 100350Steel
(1000kg) 31600107.00As on 3 rd December2011 51.21 Crude Oil
($/barrel) Dollar Data from21st November 2011 to 3rd December 2011
3. Stats WatchYEAROutlook -Rubber RubberThe Association of Natural
Rubber Producing Countries (ANRPC), whose members account for92 per
cent of global rubber output and exports, pegged output at 10.023
million tons in 2011,up 6.6 per cent from 9.490 million tons in
2010. According to ANRPC in 2011 world naturalrubber production is
estimated to reach between 11.55 million tons and 11.66 million
tonswhile world demand for natural rubber would be 11.40 million
tons.Compared to the previous year (2010), when world natural
rubber production could not meetmarket demand so there was a
shortage of 400,000 tons, causing the rubber price to rise
toUS$4.95 per kg, current scenario is quite optimistic. In the
coming year global natural rubberoutput could rise 3.6 percent to
10.388 million tons, but growth is expected to be slower thanin
2011 as falling prices affect yield. The current phase of low
rubber prices has reduced theenthusiasm among the dominant
smallholders for continuing the good agricultural
practices(stimulated harvesting or rain guarded tapping) which are
necessary for optimizing the yield.The price of Thai RSS3 tyre
grade, often considered the benchmark physical price, has
halvedsince hitting a lifetime high at US$6.40 (RM20.40) a kg in
February 2011 on fears Europesdebt crisis could hurt demand, and
after main consumer China recently sought torenegotiate prices.
Overall, rubber prices had dropped 37% in the current year.Indeed,
the crisis in the US and Europe has affected the price of rubber.
Theres a slowerGlossArms length Transactiondemand in the crisis-hit
countries. But on the other hand, theres a jump in demand
fromemerging market including India and China, so theres no way for
the rubber price to plungefreely. Rubber price of $4 per kg is
considered quite healthy as the breakeven point forfarmers is at
$3.5 per kg. It is expected that rubber price in 2012 to range
between $4-4.5 perA business deal between unrelated persons or
organizations in whichkg on continuing strong demand from India and
China. there is no conflict of interest for either party. 4.
Perfect Storm: Volatility inCover Story commodity pricesWhen
commodity prices slumped in the aftermath of the global financial
crisis in 2008,many market observers were quick to call an end to a
sustained five-year commodityprice bull market.But as the
post-crisis economic recovery gathers pace, prices have rebounded.
Since theend of last year, agricultural, energy and industrial
commodity prices have surged, inmany cases bringing prices back to
or above pre-crisis levels.Talk is back of a super-cycle that will
sustain commodity prices at historically high levelsfor years to
come, thanks to rising demand and limited scope for an increase in
supplyfor a number of key commodities. Brent crude prices broke
through the $100 a barrelbarrier in early February, copper prices
hit a record high in mid-February, while theUNs food price index
rose to an all-time high in February.Has the global economy entered
an era of persistently high, volatile commodity prices?Atleast,
market sentiments of late suggest so. During the past eight years
alone, theyhave undone the decline of the previous century, rising
to levels not seen since the early1900s. In addition, volatility is
now greater than at any time since the oil-shocked 1970sbecause
commodity prices increasingly move in lockstep.Going forward, a
trend reversal is not expected. Infact, world is bracing itself for
higherdemand and volatility in commodities. Demand for energy,
food, metals, and watershould rise inexorably as three billion new
middle-class consumers emerge in the nexttwo decades. Led by China
and India, consumption is set to rise in multiple
segments,comprising food, infrastructure and luxury goods. To cite
an example, in India, calorieintake per person is expected to rise
by 20 percent during the period till 2030, while percapita meat
consumption in China could increase by 60 percent, to 80 kilograms
(176pounds) a year. 5. Repeat of the feat The prominent of these
factors being the growth of emerging markets such as Brazil,Such
dramatic growth in demand for commodities actually isnt unusual.
Similar Russia, India and China. As the populations in those
countries improve their standard offactors were at play throughout
the 20th century as the planets population tripledliving, they
consume more meat, coffee and other staples of a middle-class diet.
Thisand demand for various resources jumped anywhere from 600 to
2,000 percent.shift in eating habit is further evident by the
increase in consumption of processed andYet, burgeoning demand at
that time was met through improvements injunk food. Till a decade
back, extensive use of agri commodities for end products,
likeexploration, extraction, and cultivation techniques which kept
supply ahead of chips, pizza base, and burger was unheard of. But
with increased globalization, foodever-increasing global needs.
Infact, this ability to access cheaper resources habits of the
developing countries have been influenced by that of the
developedprovided the groundwork for a 20 fold expansion f the
world economy then.countries at a higher level. That increases
demand for the commodities required to produce those goods.However,
current scenario is different. Firstly, world has become
progressivelyaware and concerned about the potential climatic
impact of carbon emissionsThe other prominent factor, but marked by
controversy is speculative trading in theassociated with surging
resource use. Secondly, we have almost hit the point commodity
futures markets by hedge funds and other investors. Of late,
commoditieswhere supply of commodities has become inelastic.
Long-term marginal costs are have become a standard part of the
portfolios of many hedge funds, which use them asincreasing for
many resources as depletion rates accelerate and new investmentsa
way to protect themselves against inflation. If hedge funds are
betting on inflation,are made in more complex, less productive
locations. theyll shift more money into commodities, which move the
market higher. If theyre selling, theyll drive prices down.Third,
the linkages among resources are becoming increasingly
important.Consider, for example, the potential ripple effects of
water shortfalls at a timeIdentifying how much of the recent
volatility is being caused by speculators iswhen roughly 70 percent
of all water is consumed by agriculture and 12 percent impossible,
but they are widely believed to be at least partially responsible
for theby energy production. In Uganda, water shortages have led to
escalating energy recent run-up in commodity prices.prices, which
led to the use of more wood fuels, which led to deforestation and
soil In recent months, for example, as investors concerns over
Europes debt woesdegradation that threatened the food supply.
mounted, many hedge funds became more worried about deflation. This
caused them toIt now seems that the 200809 trough was merely a
temporary blip in a larger liquidate their commodity positions,
which caused grain prices to plummet.commodities super-cycle which
still has plenty left to run with a predicted Current Scenario and
the road aheadcontinued strong demand, major uncertainty
surrounding supply and future spare Although, ground seem to be set
for a super cycle in commodity market, yet, acapacity of a number
of key commodities, most notably oil, copper and corn. combination
of factors such as eurozone debt worries and the looming likelihood
ofContributing Factors failure from the U.S. Congressional super
committee have pulled down the commoditySurging development in
emerging markets, reawakening demand in North prices in the last
couple of months.America, low inventories and production
difficulties in some areas have combined Energy prices in October
2011 edged down 1%. Non-energy prices sharply extendedto create a
sudden, dramatic rise in the global cost of key commodities used in
the their decline by 7.6%; food prices fell by 5.4%; beverages down
by 7.3%; raw materialsmanufacture of a variety of products. prices
dropped by 6.3%; metals plummeted by 11.2%; fertilizers remained
unchanged. 6. Further, the International Monetary Fund has
downgraded its outlook for commodity prices, citing slower global
economic growth. In its biannual World Economic Outlookreport, the
IMF has forecasted global economic growth for 2011 and 2012 to 4.0
per cent, down 0.3 and 0.5 percentage points respectively, from its
June projection. The lower-than-expected economic growth is in part
the result of high oil and commodities prices earlier this year.
But the institution has warned of potential spikes for oil and
foodcommodities prices due to geopolitical factors and adverse
weather. The benchmark Reuters-Jefferies CRB index, a basket of raw
materials including copper, oil and wheat, hita 1-year high in May
on the back of rising energy prices, but since then has fallen
nearly 13 per cent as the global economy cools.Investors are
betting on further falls.According to a latest report by Morgan
Stanley, commodities show limited potential for gains in 2012 as
the global economy slows and risk aversion boosts the dollar.
Acomprehensive solution to Europes debt crisis remains elusive,
while economic indicators signal a slowdown and deleveraging and
fiscal austerity should impair growth,providing a "myriad of
headwinds" for expansion. Commodities had their worst quarter since
2008 in the three months to September 30 on concern that Europes
debt crisiswas spreading, while 18 of 24 commodities tracked by the
Standard & Poors GSCI Index dropped in November.Dollar-
denominated commodities tend to move inversely to the currency. The
Standard & Poors GSCI Total Return Index lost 12% in the three
months to September 30, thebiggest drop since 2008, as the dollar
rallied 5.7% against a six currency basket including the
euro.Upside for commodities as an asset class is likely limited
given the fragile state of the OECD while the non-OECD should
continue to support global growth albeit at a slowerpace. 7.
Finally, order compelling open access in powerFinance Ministry
supports 26% FDI in aviationThe Union power ministry has told all
state governments,Amidst differences within the industry, the
Financepower regulators and distribution utilities to delay no
Ministry has lent its support to the Department ofmore in
implementing the open access provisions of theIndustrial Policy and
Promotions (DIPP) on allowingManufacturing drags GDP growth to 6.9%
in Q2Electricity Act, 2003. Open access, meaning freedom toforeign
airlines to pick up up to 26 per cent equity inA noticeable
slowdown in the manufacturing sector,choose the supplier, was being
denied for consumers domestic airlines. The 26 per cent limit is
considered todecline in mining output and some delay in decision
wanting 1 Mw or above, owing to a perceived ambiguity be a better
option for any foreign investor as it allowsmaking pulled down the
Indian economys growth in the in the relevant provisions. veto
rights in board decisions. The 24 per cent limitsecond quarter to
6.9 per cent, much lower than the 7.7 makes an investor an ordinary
shareholder withoutper cent growth recorded in the previous quarter
this Ranbaxy launches Lipitor genericveto powers on the board of
the airline.fiscal. This second quarter GDP growth performance, A
last-minute marketing approval from the United Stateswhich is the
lowest in nine quarters, is also lower thanmedicine regulator, Food
and Drugs Administrationthe downward adjusted revised growth of 8.4
per cent(FDA), and a profit-sharing agreement with Israels
Tevarecorded in the same quarter last fiscal. have helped Ranbaxy
launch the generic version ofPfizers biggest revenue-earning drug,
Lipitor, withoutSAIL-led group gets a big bite of Afghan mining
delay. The drug had clocked $7.89 billion in the USpie through
September. While the development has put anA month after signing a
strategic partnership deal with end to the uncertainty surrounding
Ranbaxys ability toAfghanistan, a consortium of Indian companies
baggedlaunch the drug on time, it has raised questions overmining
rights for three of the four iron ore blocks in theearnings from
the deal, due to the profit-sharingHajigak deposit in mountainous
Bamiyan province, 130agreement with Teva.kilometre west of the
capital, Kabul. Led by SteelAuthority of India Ltd (SAIL), the
consortium of public S&P assigns stable tag to Indian banks
SBI, HDFC,and private sector companies has gained access to
1.28ICICI and othersbillion tonnes of high grade iron ore, a
critical input for International rating agency Standard & Poors
hassteel making. The deal would be among Afghanistans assigned a
stable outlook to leading Indian bankslargest ever foreign
investment agreements, as theindicating that a downgrade is
unlikely in the next 18-24country plans to attract $14.6 billion in
foreign months. The agency has also said that four
banks-Stateinvestment over the next 30 years.Bank of India, HDFC
Bank, ICICI Bank and Indian Bank-have a better stand-alone credit
profile than that of theIndian government. 8. Emerging
MarketsRussia, Europe Agree on Overflights Europes financial crisis
deepens, Brazil remains a rareThe European Unionand the
Russiangovernment bright spot in the battered global economy.
However,SA growth forecast cut on eurozone woes announced the
settlement on 1st December, of a long-Brazil isnt immune from the
crisis, as an influx of capitalEconomists cut their forecasts for
South Africas running dispute about how airlines are charged for
flightsfrom investors looking for safe harbor has driven upeconomic
growth for this year and the next two dueover Siberia. prices and
cooled industrial production. Experts say thatto the impact of the
ongoing eurozone debt crisis, a"From Jan. 1, 2014, any charges EU
airlines have to pay Brazil has too much on its plate to be able to
contribute toReuters poll showed.Seventeen economists surveyed for
flying over Russian territory will be cost-relatedrescuing European
economies right now, and some sayfor the November Econometer poll
showed gross and transparent. They will not discriminate between
that offering a bailout would be counterproductive.domestic product
(GDP) growth was expected to airlines," the EU said in an e-mailed
statement.average 3.1% this year, slowing to 3.0% in 2012 and RI
books first trade surplus with China3.7% in 2013, all forecasts
lower than those given in Ukraine Gets Third 6-Month Extension on
$2Bln Indonesia recorded a trade surplus with China for thethe
previous poll just a month ago. VTB Loanfirst time since the
implementation of a free tradeUkraines government won a third
six-month extensionagreement (FTA) despite signs of slowing export
growthSouth Africa: The price of secrecyof a $2 billion loan from
VTB Group, Russias second- to the countrys major buyers, the
Central StatisticsAs many African countries push for greaterlargest
bank, to ease its effort to finance the state budgetAgency (BPS)
says. Despite lowering the trade surplustransparency, South Africas
controversial statedeficit, its Finance Ministry said.The original
six-month and slowing export growth in October, Indonesias
tradesecrets bill has unnerved investors who worry the loan,
granted in June 2010, has an interest rate of 6.7 balance booked
the first surplus of $106.9 million withcontinents top economy may
try to hide widespreadpercent. The government wonits firstsix-month
China, as non-oil and gas exports to the worlds second-corruption,
driving up the cost of business.extension in December 2010 and had
an option for more largest economy jumped while imports declined,
said BPSParliament has passed a bill that allows anytime, according
to the agreement. The loan comes as director for distribution
statistics Satwiko Darmesto.government agency to apply to have
informationUkraine is seeking to reduce the natural gas price it
pays"valuable" to the state protected. The bill alsoto Russia and
hopes to sign a new fuel accord by year-end.criminalises the
possession and distribution of state It wants to cut the price to
about $230 per 1,000 cubicsecrets.meters of gas from $400 it pays
now.Battered Europe looks to Brazil, which has its ownproblemsThe
visit by International Monetary Fund head ChristineLagarde to
Brazil this week was the latest sign that while 9. InFocusOpen
Forum All routes to India: worlds top recipients of Is depreciation
the new normal?remittancesThe sharp fall in the rupee has given the
contrarians their moment in the sun. ForecastsFor the fourth
straight year, India has narrowly edged out China to emerge as
theof Rs 57 and Rs 58 to the dollar are being taken seriously by
the markets and not beingworlds top recipient of officially
recorded remittances. According to the latest issueconsigned to the
cranks corner. The majority view, however, is that after some
moreof the World Banks Migration and Development Brief released on
30th November,wobble, the rupee will appreciate again and slip
below the 50-mark. In short, there willcontaining estimates for
2011 remittances, India is expected to receive $58 billionbe gain
after this bout of pain, as a newspaper headline succinctly put
it.this year, followed by $57 billion flowing to China, and $24
billion to Mexico.Perhaps we should give the contrarians their due
this time around. Lets not forget thatIndias inward remittances
have grown from $13 billion in 2000 to $58 billion thiscontinuous
depreciation, not appreciation, was the norm in the nineties and
this trendyear, while remittances to China have jumped from $5
billion to $57 billion duringpersisted until 2003-04. The rupee
shed value, on average, every year despite athe same period. The
share of remittances in Chinas GDP is just under one per
cent,continuous improvement in the current account deficit, the
latter being driven bywhile the inflows made up three per cent of
Indias GDP last year.aggressive exports of the sunrise industries
like IT and pharmaceuticals. Of course, rupeeWorldwide remittances,
including those to high-income countries, will reach
$406depreciation itself helped the improvement in current account
since it helpedbillion in 2011, of which $351 billion will flow
into developing countries. competitiveness.According to the brief,
high oil prices helped provide a cushion for remittances to The
rise of the rupee was actually a relatively short episode that
lasted between 2003-04South Asia from the Gulf Cooperation Council
or GCC countries this year. Aand 2007-08. Brics-mania was rising,
Chindia was in fashion and these pulled indepreciation of
currencies in large migrant-exporting countries like India, massive
amounts of foreign capital. This left the economy with massive
capital surplusesBangladesh and Mexico also contributed to the rise
in remittances. However, going that appreciated the rupee despite a
continuously deteriorating current account deficit.forward,
persistent unemployment in Europe and the United States will
affectBrics-mania, incidentally, was not just a lot of hype based
on the endless possibilities thatemployment prospects of existing
migrants and harden political attitudes toward favourable
demographics would yield after a couple of decades. It was
under-girded bynew immigration in those regions. rapidly improving
fundamentals the fisc was consolidating, growth was high
andinflation benign.The contrarian case is the following.
Brics-mania is ebbing as China and India post limpmacro and
corporate data. India clearly seems headed for a bout of
hard-landing on theback of policy waffle and high interest rates.
Inflation remains sticky and the room toreverse the monetary gear
is limited. The fiscal deficit, too, seems out of control
despiterepeated assurances from the government. Massive expenditure
on things like food 10. security is pending and it seems unlikely
that the government can piece together a credible strategy for
getting the fisc back into the genies bottle. The current account
deficitis worsening and dwindling capital inflows mean that there
simply arent enough dollars going around to service it. To top it
all, global uncertainty is running high and the safe-haven bid for
the US dollar remains strong. The result: rising pressure on the
rupee to adjust this imbalance by shedding value against the
dollar.The extreme denouement of this drama would be a balance of
payments crisis that could ride on two sets of twin-deficits. The
decade of the eighties culminated in a balanceof payments crisis
brought on by the interplay of a rising current account deficit and
a rising fiscal deficit. This spilled over to the other twin
deficit a negative currentbalance and a negative capital account
balance. If this were to happen again, the rupee has a long way to
depreciate against the dollar before it finds its feet again.While
this scenario is possible, we are not entirely sold on this
forecast. For one thing, the relationship between the fiscal
deficit and the current account deficit has beensomewhat weak over
the past decade than in the eighties. Why could this be?
Macro-economics 101 tells us that the current account deficit is
the sum of the private savingsand investment gap and the fiscal
deficit. Over the past decade, the private gap has broken the nexus
between the external deficit and fiscal deficit. Between 2003-04
and 2007-08, the fiscal deficit improved continuously and yet the
current account deteriorated because high growth implied a rising
deficit of private savings over private investments.Flip this
argument around and you should get a sense of why a doomsday
scenario might not hold. As growth dwindles on the back of limp
private investments, the savings-investment deficit is likely to
compress and keep the current account deficit under control. Thus,
even with a worsening fisc, we might not get a yawning current
account gap.That could prevent the rupee from falling too sharply.
To fall back on the jargon used by economists, the current account
could act as an automatic stabiliser.That said, we believe that
instead of an appreciation bias, the rupee is likely to have a
deprecation bias over the next few months. Thus, levels of 54 or
even 55 to the dollarcannot be ruled out. What can certainly be
ruled out is a quick move back to the 47-48 range. Also, even if
the rupee were to somehow consolidate at current levels, we mightbe
stuck in a completely new trading range against the dollar that
involves much weaker levels for the rupee than in the past.In the
very near term, there is some scope for consolidation. For one
thing, the Reserve Bank of India seems to be getting quite antsy
about conditions in the currency market.If it sees another round of
depreciation pressure, it might take more aggressive measures to
curb it. One option that it could exercise is to supply the
dollar-hungry oilcompanies from foreign exchange reserves and take
the pressure off the markets. Besides, the rupee seems a trifle
oversold and there could just be a technical pull-back thatcould
lend it temporary stability. However, any significant reversal
could come only if capital flows come back. If the situation in
Europe worsens as it threatens to, thatsunlikely to happen in a
hurry. However, if there is indeed a comprehensive resolution going
forward (we remain eternally hopeful) to Europes impasse or if the
US Fed doesanother round of liquidity easing, we might see a turn
in the exchange rate that might just sustain. 11. About Investeurs
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