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Key infra sectors growth plunges to 2.3%
Growth in six infrastructure industries plummeted to 2.3% in August 2008 as compared to 9.5% a year ago i.e. in August 2007 including crude oil and petroleum refinery, showing depressing performance.
Crude oil showed a negative growth by 1% in August 2008 compared to a positive growth rate of 6.5% in August 2007.
Growth in petroleum refinery products fell sharply to 2.5% in August 2008 from 8.2%, The crude oil production registered a negative growth of 0.9% during April-August 2008-09 compared to 1% during the same period of 2007-08.
Coal production registered a growth of 5.9% in August 2008 compared to growth rate of 8% in August 2007. Coal production grew by 7.3% during April-August 2008-09 compared to an increase of 2.1% during the same period of 2007-08.
Electricity generation registered a growth of 0.8% in August 2008 compared to a growth rate of 9.2% in August 2007.
Cement production showed a growth of 1.9% in August 2008 compared to 16.7% in August 2007.
Finished (carbon) Steel production witnessed a growth of 4.4% in August 2008 compared to 9.6% in August 2007.
We have seen major downside in our markets since January 2008, we are seeing the effect of US sub prime & later collapse of financial institutions there. Our top politician made us to believe that Indian markets are insulated from the US. If these numbers are anything to go by writing is very clear on the wall….
Its not only sentiments and emotions but the very fundamentals that Indian economy is on target & may miss the mark by 1% seems hard to believe.
May be more pain still left to be seen…. Happy Investing
NELP VII : Future of Oil exploration
In the recently concluded NELP VII round of bidding under the new exploration licensing policy (NELP) the government has offered 57 oil & gas blocks under NELP-VII. This included 19 deepwater blocks, 29 are onland blocks and nine blocks are in shallow water.
NELP So far
In previous six rounds, the government awarded 162 blocks. So far, the largest commitment of $3.32 billion investment was received in under NELP-VI where 52 blocks was awarded. Under NELP rounds, 49 oil and gas discoveries have already been made in Cambay onland, North East Coast and Krishna Godavari deepwater areas, accreting over 600 million tonnes of reserves.
NELP VII
Out of 19 deepwater blocks, GVK-BHP got seven blocks, ONGC bagged three blocks and Cairn has been lucky with one deepwater block and BP-RIL bagged one. There has been no takers for seven deepwater blocks. The bidding round (launched on December 13, 2007) was originally scheduled to be closed on April 11. The deadline was first extended to April 25, later it was changed to May 16 and finally to June 30.
Big player Missing from Show
Big oil companies like ExxonMobil, Chevron, Total and Shell, among others, preferred to stay away.
New entrants like LN Mittal (one block with HPCL), BHP Billiton (seven blocks with GVK group), RIL-British Petroleum combine(one deepwater block).
DGH Response
“Response for gas expecting blocks are lukewarm because of lack of clarity on policy related issues,” said Director General of Hydrocarbons VK Sibal on the response and the bids. Exploration companies have taken a conservative approach and have bid cautiously, given the uncertainties in the tax regime, an analyst said.
“The bidding was low and the response was lukewarm,” a senior official from the director general of hydrocarbons said. While 12 blocks, out of a total of 57, failed to get even a single bid, as many as 19 got just one bid. As many as seven of the no-show blocks were in the deep water region. The response for the smaller fields, however, was relatively good.
Source : DGH, Media Reports, Industry
PCPIR, Kakinada AP: $85 Billion Investment
Hyderabad: ONGC Ltd has decided to exit the proposed refinery-cumpetrochemicals project at Kakinada in Andhra Pradesh, making way for the GMR Group, which will hold 51% equity in the project that was originally to cost Rs 31,000 crore.
The project is part of Andhra Pradesh’s Petroleum Chemical and Petrochemical Investment Region (PCPIR) proposed over 600 square miles and envisaged to attract investments worth Rs 340,000 crore over the next ten years.
GMR’s entry is expected to put PCPIR on the fast-track now.
However, the refinery project is likely to cost close to Rs 40,000 crore with GMR indicating that it would like to increase the capacity upwards of 20 million tonnes to make it more viable, sources privy to the proceedings of a board meeting today told DNA Money.
It is understood that GMR has proposed a higher capacity upwards of 20 million tonnes of refining to make the export oriented project more viable.
Reliance Industries had started its own refinery with a capacity of 30 million tonnes and was now going in for an expansion, it was pointed out at the board meeting held on Monday.
ONGC had hiked the initial proposal of 7.5 million tonnes to 15 million tonne and 4.5 lakh tonne per annum petrochemcial complex within the PCPIR to improve viablilty.
But unhappy with the AP government’s reluctance to grant tax sops to the tune of Rs 16,000 crore over eight years, ONGC had been dilly-dallying with the proposal for some time. The two had signed an agreement for the project in September 2006.
ONGC subsidiary Mangalore Refinery and Petrochemcials Ltd (MRPL), held 46% in project, while the Infrastructure Leasing & Financial Services Ltd and the Kakinada Sea Ports Ltd were to hold 51%. The Andhra Pradesh Industrial Infrastructure Corporation (APIC) was to own the remaining 3%.
With the enty of GMR, as per the revised equity structure IL&FS and the Kakinada Sea Ports will hold 46%,while APIC will continue to have its 3% equity. “All issues were resolved at a board meeting on Monday,” Sam Bob, principal secretary, industries department, AP, told DNA Money.
“Apart from GMR, the Hundujas and Essar were the other contenders for the project and we decided on the former seeing their past record,” Bob said. GMR will have management control of the project and will come up with its own detailed project report based on the initial work done by ONGC.
“It is good that we now have GMR in the picture which is a local company and known for its speedy implementation of project,” said APIC vice chairman and managing director B P Acharya.
Another refinery proposed to be developed by the HPCL near Achutapuram near Visakhapatnam at the other end of the proposed PCPIR, is the second anchor for the ambitious special zone.
“The project will be undertaken through a special purpose vehicle of the GMR Holdings Group,” a GMR official said, adding that the group believes the project will help it achieve its overall growth objectives apart from delivering value and creating jobs.
Source : DNA
Currency Valuation: forces on play
What are Currency Appreciations and Depreciations?
If nominal exchange rates change so that one Dollar buys more Rupees, then the dollar has appreciated in nominal terms. And the Rupee has correspondingly depreciated in nominal terms because a Rupee can buy fewer U.S. Dollars.
If the real exchange rate between the U.S. and India changes, which can occur because of changes in the nominal exchange rate or relative goods prices in the two countries, or both, then there is a real (purchasing power) appreciation of one currency relative to the other.
What Determines Exchange Rates?
Nominal exchange rates are determined by supply and demand in the foreign exchange market—the market for international currencies. Suppliers and demanders of currencies trade in the foreign exchange market, and trading determines prices (i.e., nominal exchange rates).
The exchange rate between the dollar and the rupee varies from minute to minute as participants in the foreign exchange markets adjust the amounts of currencies they demand from and supply to the market. Those adjustments are responses to changes in economic conditions or news that might influence future conditions. Economic conditions (See :Indian Trade and Its Impact on Economy) that seem most relevant to exchange rate determination include relative interest rates, inflation rates (see Inflation: Impact on Economy), and output-growth rates across countries.
Who Demands and Who Supplies Currencies in the Foreign Exchange Market?
There are many players in foreign exchange markets. Consider the exchange rate between the Dollar and the Rupee. Who demands Rupees and supplies dollars? The list includes:
Ø U.S. companies that import from India, they have Dollars but need Rupees to purchase goods produced in India and imported to the U.S.
Ø U.S. investors who invest in Indian assets.
Ø Speculators who have Dollars but want Rupees because they believe the Rupee will appreciate.
Ø Indian companies who remit Dollar profits back from U.S. operations to headquarters in India and want to convert them to Rupees.
On the other side of the market, who demands dollars and supplies yen? The list includes:
Ø Indian companies that import from the U.S. They have Rupees but need Dollars to purchase goods produced in the U.S. and imported to India.
Ø Indian investors who invest in the U.S. They have rupees but need Dollars to purchase assets denominated in Dollars.
Ø Speculators who have Rupees but want dollars because they believe the Dollar will appreciate.
Ø U.S. companies who remit Rupees profits back to the U.S. and want to convert them into Dollars.
Inflation : Impact on Economy
Understanding inflation is crucial to investing because inflation can reduce the value of investment returns. Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates, to government programs, tax policies, and interest rates.
What is Inflation?
Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy.
What Causes Inflation?
Economists do not always agree on what spurs inflation at any given time. However, certain forces clearly contribute to inflation.
- Rising commodity prices are perhaps the most visible inflationary force because when commodities rise in price, the costs of basic goods and services generally increase.
- Higher oil prices, in particular, can have the most pervasive impact on an economy. This, in turn, means that the prices of all goods and services that are transported to their markets by truck, rail or ship will also rise.
- Exchange rate movements can presage inflation. As a country’s currency depreciates, it becomes more expensive to purchase imported goods, which puts upward pressure on prices overall.
- Over the long term, currencies of countries with higher inflation rates tend to depreciate relative to those with lower rates. Because inflation erodes the value of investment returns over time, investors may shift their money to markets with lower inflation rates.
How Can Inflation Be Controlled?
Central banks, attempt to control inflation by regulating the pace of economic activity. Management of the money supply by central banks in their home regions is known as monetary policy. Raising and lowering interest rates is the most common way of implementing monetary policy.
- Lowering short-term rates encourages banks to borrow from the central banks and from each other, effectively increasing the money supply within the economy. Banks, in turn, make more loans to businesses and consumers, which stimulates spending and overall economic activity. As economic growth picks up, inflation generally increases. Raising short-term rates has the opposite effect: it discourages borrowing, decreases the money supply, dampens economic activity and subdues inflation.
- Central banks can also tighten or relax banks’ reserve requirements. Banks must hold a percentage of their deposits with the central banks as cash on hand. Raising the reserve requirements restricts banks’ lending capacity, thus slowing economic activity, while easing reserve requirements generally stimulates economic activity.
- The federal government at times will attempt to fight inflation through fiscal policy. The government can attempt to fight inflation by raising taxes or reducing spending, thereby putting a damper on economic activity; conversely, it can combat deflation with tax cuts and increased spending designed to stimulate economic activity.
Indian Currency: Impcat of High Crude Price
The fall in the rupee is primarily being attributed to the high crude oil prices, which touched all-time high of over $135 per barrel on May 22, 2008.
India imports 73 per cent of its crude oil requirements, thus raising concerns over its widening trade deficit-the difference between the value of goods and services exported and imported by a country. The trade deficit, which is already estimated to be about 10 per cent of the GDP, will further worsen with the rising crude oil prices as oil importing companies will have to buy a higher amount of dollars to meet their needs.
Falling Indian Currency:
Uncertainty about global crude oil prices coupled with heavy demand for US dollar from oil majors to pay the higher crude bill.
Dollar Inflow in terms of FII & FDI money has remained muted since the fall of Indian stock market from its peak in January 2008.
Rising crude oil prices also have a cascading effect on the already soaring inflation, currently above 8% mark.
High Trade deficit leading to further devaluation of the currency (According to estimates, a $10 per barrel rise in crude oil prices may lead to the trade deficit moving up by about $6.5-7 billion or 7 per cent).
Impact of falling Currency:
For export-oriented companies, which were feeling the pain of the appreciating rupee just a few months ago, this reads like good news.
Will lead to higher cost of imported goods & make some of the capital intensive projects more expensive to execute.
Will increase the cost of dollar loans taken by companies.
Oil prices making headlines..
‘Drowning in oil’ – Economist March 1999
“$10 might actually be too optimistic. We may be
heading for $5.”
‘Oil reaches $30 a barrel’ – BBC 15th Feb 2000
“This rise in price is purely temporary”
-OPEC Secretary General Dr Lukman
‘Oil hits new record above $80′- FT 14 Sept 2007
“too little, too late,” verdict on decision by OPEC to raise output
by 500,000 barrels a day….global oil production is estimated to
have shrunk by 650,000 b/d in the third quarter”
‘Oil prices steady near $133 a barrel’
The Associated Press , BANGKOK, Thailand. Wednesday, May 28, 2008
Reliance, building assets world over
Reliance Industries (RIL) and Kuwait Petroleum (KPC) are planning for a mega joint collaboration across the oil and gas vertical. KPC, the national oil major of Kuwait, is keen to rope in RIL as a partner in its upcoming projects in Kuwait in both refining and petrochemicals. Kuwait, which commands about 10% of the world’s oil reserves, is building its downstream capacities including refineries and petrochemical plants to capitalise on its oil assets. Both the companies are planning to explore possibilities of investments particularly in Kuwait’s refining and petrochem business. The deal would help RIL to get access to more oil reserves.
One more reason to go long on RIL….
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