What’s cooking with coal

By: Kumar Shankar Roy

Coal prices inevitably impact the fortunes of sectors ranging from power to steel. A look at the possible effects.

Reams have been written about rising crude oil prices and its ramifications on our lives. Amidst the hullabaloo, most of us have not noticed that the price of another important fuel has gone up sharply too––coal. Those interested in commodities would know that Big Sandy Barge coal is now trading at $105 dollars per short tonne. It was just $50 dollars in September 2007!
If the doubling of crude oil prices happened in one year, it took coal prices just nine months flat to do the same. Coal’s importance lies in its role in generating power. Being a widely-used fuel in industry, coal prices inevitably impact the fortunes of sectors ranging from cement to steel. What could be the possible effects of rising coal prices?

Why the rise

The reasons behind the price rise range from increasing demand from thermal power plants, the spiralling prices of crude oil and supply-side issues created by poor infrastructure to demand from developing economies.
Rapid economic growth, primarily in China and India, will push global demand for benchmark steam coal up to 800 million tonnes a year in 2009, from 589 million tonnes in 2007, coal information provider, McCloskey Group, has forecast.
Reports also suggest that the availability of coal will remain limited over the long-term. This is because the coal export market has seen a transition driven by China, Indonesia, and Vietnam — which are exporting less coal than in 2007. Key exporter South Africa is expected to follow suit to meet domestic demand.

Effect on earnings

Coal is supposed to remain the backbone of global energy supply for the next quarter of a century, according to experts. Among the sectors that may be directly impacted by constraints on coal availability would be metals, power-generation and cement.
Coal is mainly available in two types, thermal and coking varieties. While thermal coal - the more expensive one - is used by power plants, the coking variety is chiefly used as one of the inputs by steel and cement companies.

Steel companies: They in particular have much to fear from the rise in coal prices. For example, Steel Authority of India Ltd (SAIL) could end up paying more for imported coal now. In the absence of long-term contracts which could have saved costs, some companies will have no other option than to pay up more.
Reports suggest that high-grade coking coal prices have gone up to about $300 a tonne, against $95 a tonne a year-and-a-half ago. Rise in input prices could escalate costs, bringing down margins, if these companies are unable to pass on the hike to consumers.
Earlier this month, the government persuaded steel makers to roll back price hikes in a desperate bid to control inflation. However, companies such as Tata Steel may be able to handle coal shortage better, since they have stakes in coal mines abroad.

Cement companies: Firming coal prices have cemented more worries in the board-rooms of cement makers. The manufacturers are in a fix due to skyrocketing coal prices, which is pushing up the production cost. Cement companies face an additional hurdle: The Government is determined to bring down cement prices. Cement companies use permits to get coal domestically. While Coal India has recently cut the quantum of coal to be allocated to an individual company, coal prices have also been increased three times last year by major suppliers.
Thus, to counter the supply shortage cement companies are trying to opt for the costlier-by-the-minute ‘imported coal’. Since power costs account for a substantial portion of cost of cement, profitability may come under pressure, in the absence of any relief on the price-front.

Power companies: The latest price spikes might also put question marks on the profitability of power generation companies. Ultra-mega thermal stations operating on imported/domestic coal could face pressure as they are not allowed flexibility on tariffs. For companies such as NTPC which plan to import several million tonnes of coal in 2008-09, costs could swell.
The silver lining seems to be an assurance from the Coal Ministry that it will not increase prices this year. The power sector accounts for 75 per cent of the total coal demand.
But if coal demand from power generation companies outstrips domestic supply, they too will be sucked into the vortex of imported coal — prices of which show no signs of calming down soon.

he Inevitable Rise Of Platinum

By Gabriel Andre

How do you describe an investment that explodes for a 50% gain in 40 days? Boom!
A more accurate word would be "platinum".Since its initial burst, platinum eased off the accelerator and dropped back down to the stratosphere. It remains on a bullish trend, however. After the correction, buyers took advantage, and got back into a good fundamental trade.

What correction? Well, platinum got a lot of press while it was rising. Less as it fell. Platinum gave back 20% in March.

Since then, it's moved again. The reason we like it today? It just broke a key resistance.


Before we discuss the chart, there are two factors at work in the platinum market. Firstly, US$130 oil is making mining it more expensive. Secondly, it's a precious metal. That scarcity of supply makes it a key alternative for the US currency.

We don't see the European Central Bank cutting rates anytime soon. No European money will be flowing into the greenback. But precious metals stand to see a bit of cash slosh their way.

Above all, the energy crisis in South Africa is still disrupting production.

Now...on the chart, there's an obvious support line at US$1,830. You can see the double-bottom pattern between March and early May. The surge of buying following this has taken us past resistance of US$2,100. We see the renewed momentum taking platinum further up, at least as far as US$2,281. That's where the double bottom began to form.

The MACD indicator is also clearly bullish. Platinum was oversold at the beginning of May, when the indicator fell below the zero line. Since then, it crossed back up. It hasn't become overbought yet, adding weight to the new momentum.

Here's a new indicator: the On-Balance Volume chart. It calculates a running total of volume. It basically shows whether money is flowing in or out of an asset. An upward sloping line indicates a good in-flow, and an uptrend in price. The OBV chart confirms for you that investors are coming back into platinum in a big way.

Where to from here? Well, it's a clear sky above US$2,821, so we can only speculate. But if the price moves through US$2,281 (and we expect it to go that far at least), you could see a platinum move all the way to US$2500.

Oxford Analytica: Is Another Depression On The Cards?

The boom/bust cycle in asset prices typifies the present downturn, as it did the Great Depression. This has led to suggestions that the world economy could operate far below capacity (i.e., with high unemployment) for an extended period--as it did in the 1930s.
Key characteristics of the current business cycle are reminiscent of the Great Depression (1929-1933):

Credit flows and asset prices.

Today, the centrality of credit flows and asset prices is fueling interest in the "Austrian school" approach to the business cycle, which emphasizes difficulties inherent in unwinding credit-driven asset price bubbles:

-- Asset locus. Both the current credit crisis and Great Depression saw U.S. debt to income levels deviate significantly from long-term averages, driving up asset prices and leading to a "mean reversion" entailing significant asset-price reversals.

-- Boom/bust. The bust followed a long period of favorable conditions for asset-price bubbles. Low inflation allowed the Fed to keep interest rates low in the 1920s. Indeed, it relaxed policy during the 1928-1929 stock market boom, drawing criticism that it was fueling stock market exuberance. (It also reduced the discount rate in an effort to ease pressure on the U.K. external account to help the Bank of England adhere to the gold standard.)

Financial shock.

During both periods, the key disturbance was to the financial system, originating from disturbances elsewhere, that is:
--the stock market crash in the inter-war episode; and
--the subprime crisis in the current episode.
This contrasts with most post-war recessions, where inflation played the key role:
--Monetary tightening dented the real economy as higher interest rates depressed aggregate demand.
--Casualties in the banking system were secondary, and easily contained

--even the 1980s savings-and-loan crisis came in the aftermath of recession, rather than preceding it.
Emergency response. A further parallel entails crisis management:

-- Inter-war. The emergence of the Fed in 1912 confused the response to financial crisis. The private sector's own crisis-management mechanisms ("banking holidays" organized through clearinghouses) were not triggered after the 1929 stock market collapse and subsequent bank runs, in deference to the new central bank.

Yet the Fed viewed crisis management--i.e., liquidity provision--as incompatible with its mandate to keep the currency convertible into gold, and failed to fulfill its role as lender of last resort to the banking system. The modern consensus is that this failure turned a downturn into the Great Depression.

-- Today. The Fed today is under no such restraint. Yet crisis management in the financial sector is in similarly uncharted territory--in the "shadow banking" sector in particular (i.e., the non-bank financial institutions with short-term liabilities and long-term assets, such as hedge funds or structured investment vehicles).

Best responses to the current credit market seizure might become clear only after the fact, when more moderate responses have been proved inadequate. One example is public purchase of private assets such as subprime mortgage-backed securities. Even if this proves necessary to restore financial intermediation, it will probably not be exercised until lesser remedies fail--at considerable pain to the economy.

Silver lining?

Overshadowed in historical recollection by the Great Depression and Second World War, the late 1930s saw a dramatic U.S. recession that had the makings of another global depression. Yet the sharp U.S. downturn, which itself was quickly reversed, did not badly affect the world economy. Parallels with today are striking:

"Decoupling." The 1937 episode provides the only antecedent for the "decoupling" hypothesis of today's emerging markets. The emerging markets of that era were net international creditors--as they are today, and have not been at any time in between. Their huge stores of foreign reserves allowed them to sustain domestic demand even as export receipts temporarily tailed off.

Currency pegs. That era's emerging markets were known as the sterling bloc, a group of net exporters whose currencies were faithfully pegged to sterling. In fact, today's East Asian exchange-rate arrangements are far more similar to the sterling bloc's than Bretton Woods, to which they are frequently likened. In both cases, pegs were de facto, consensual and unilateral, rather than internationally obliged, as under Bretton Woods.

Govt may levy income tax cess to bail out oil firms

A cess or surcharge on income tax and corporate tax may be levied to bail out oil firms reeling under high global oil prices as petroleum ministry's proposal to raise petrol price by Rs 10 a litre, diesel by Rs 5 per litre and that of LPG by Rs 50 per cylinder finds few takers.
The new proposal follows Finance Minister P Chidambaram's reluctance to cut duties on crude oil and petroleum products unless alternate source of revenues are identified.
Petroleum Minister Murli Deora met Chidambaram on Tuesday but failed to convince him of the urgency to cut import and excise duties to avoid the Rs 2,00,000 crore (Rs 2,000 billion) revenue loss expected on petrol, diesel, domestic LPG and kerosene this fiscal.
BPCL [Get Quote] and HPCL [Get Quote] have cash to buy crude oil only till July while Indian Oil [Get Quote] can finance imports till September. The three firms face huge liquidity crisis as they are unable to realise full value of products sold.
"We don't want to see scarcity of petroleum products particularly kerosene and LPG," Deora told reporters after the meeting. "Oil companies are in a precarious state and we need urgently find solutions."
Deora said some proposals were discussed but "nothing has been agreed."
Sources said a cess or surcharge like the one levied after the Kargil war, may be imposed on income and corporate tax to make up for the cut in customs duty on crude oil to zero from 5 per cent and an excise duty cut on petrol and diesel.
Petroleum ministry is proposing to raise petrol price by Rs 10 a litre, diesel by Rs 5 per litre and that of LPG by Rs 50 per cylinder cut the Rs 580 crore (Rs 5.8 billion) per day loss made by the three oil firms by one-third. S Sundereshan, additional secretary in petroleum ministry, said oil companies cannot wait for another week for the decision.
"We are hopeful that a decision will be taken soon," he said. "The crisis needs to be defused at the earliest."
Deora said some in the government want petrol prices to be deregulated, a move that may see rates being hiked by Rs 16-17 a litre, but continue subsidies on diesel.
Petrol contributes has negligible weightage in inflation and so its deregulated prices moving in tandem with global prices will not lead to price hike. Diesel, on the other hand, is used by transport industry and replicating the same for the fuel would have cascading effect on inflation.
Sources said petroleum ministry sought lowering of customs duty on crude oil to zero from 5 per cent and that on petrol and diesel to 2.5 per cent from current 7.5 per cent.
It also wanted excise duty cut on the two fuels but finance ministry is not obliging.
The petroleum ministry is not in favour of compensating Indian Oil, Bharat Petroleum and Hindustan Petroleum beyond one-third of the total under-realisation on fuel sales.
It is also for limiting the burden on upstream firms like ONGC [Get Quote] at 33 per cent as had been in the previous year and wanted the rest of the revenue loss to be met through either price increase or duty rejig, sources said.
Currently, the government meets a little over half of the under-realisation through oil bonds. Retailers do not favour oil bonds as they do not provide the liquidity needed to run operations.

http://www.rediff.com/money/2008/may/27oil1.htm

Lehman-Is There A Commodities Bubble?

With due apologies to Commodity Bulls like Jim Rogers, we might have just created a monstrous bubble that will blow away off its own weight, says a study by Lehman.

The reasons are simple, 40 feet containers carrying Bulk Loads from Chinese ports to Eastern North American ports, now cost $ 8000, up from $ 3000 last year. If Crude were to go to $ 200 per barrels as most analysts now agree, this fare will rise to $ 20,000.

The result; increased domestic production in the US, reduction in trans China-US bulk trade and possible stress on pan Asian Commodity trade.

Simply speaking, the Commodities bubble is unsustainable and will collapse under its own stress. If not, there cannot be a one-sided move in Commodity prices without that being reflected in the fundamentals of Commodity producers.


-Commodity index investors bypass speculator position limits set by the CFTC
-About $90 billion has flowed into commodity indices since 2006
-Commodity markets are much smaller and illiquid compared with equities & bonds
-Dollar weakness and inflation expectations are behind fund inflows and this causes a substantial price effect for some commodities.
-Fundamental loosening can be disguised by Saudi Arabia and China.
-Equities go up long-term with human progress; not always true for commodities
Past performance, dollar weakness, and inflation expectations have driven substantial financial inflows to commodity indices, potentially feeding into higher prices.

~Financial Inflows to Commodities

Oil prices this week reached all-time highs above $125/bbl, topping off a $50+ run-up since September 2007, perhaps the most visible increase of the across-the-board rise in commodity prices.

A fierce debate has erupted over the permanence of this bull run: some analysts arguethat the massive price increases are the rational market response to tight supply-demand fundamentals, while others point to speculator activity as proof of its bubble-esque nature.
The debate also carries a political dimension, as OPEC has resisted calls to increase production by blaming speculators for rising prices.
Undoubtedly, financial investors have made huge commodity investments in the past five years. One channel for this flow has been commodity indices such as the GSCI and the DJ-AIG Commodity Index. These indices bypass traditional speculative position limits imposed by CFTC regulations, allowing pension funds and other investors to assume massive longpositions in hitherto untouchable markets.
It is difficult to ascertain the exact size and effect of these indices, but based on their known positions in certain commodities and their reported cross-commodity weightings, one can estimate their overall size.

We estimate that total assets under management (AUM) in commodity indices ballooned from about $70 billion at the beginning of 2006 to $235 billion by mid-April this year. Of this $165 billion increase, about $90 billion is accounted for by financial inflows into these indices, with the other $75 billion stemming from price appreciation of the originalunderlying investment.
These figures may seem miniscule compared with the trillions of dollars sloshingaround in global bond and equity markets, but commodity markets are comparatively small and illiquid. Even a $1 million inflow, as we shall see, can have a major effect in certain commodities.
Inflows have seen a major spike since December last year, with the lion's shareof the contribution coming from the energy-heavy GSCI index

What Causes Index Inflows?
Financial investment in commodities is commonly considered a hedge against twoconcerns: dollar weakness and inflation. Another reason might be a general flight away from the underperformance of more traditional asset classes such as equities.

Regressing our estimates of financial inflow against past 1-week returns on the dollar and breakeven inflation on 5-year T-notes, we find that dollar weakness and breakeven inflation indeed predict inflows for both GSCI and DJ-AIG, both at high levels of significance.

We also find that underperformance of the S&P also predicts inflow, although at weak significance levels (Figure 3). But perhaps most interesting, we find that the performance of the GSCI and the DJ-AIG over the past month also strongly predict inflows to the indices, suggesting a significant amount of momentum-chasing.
Do Index Inflows Affect Prices?

Given these substantial financial inflows to commodity indices, can we measure their effect on prices? Unfortunately, this analysis presents considerably higher obstacles. Ideally, we would want to measure the true liquidity-adjusted inflow to capture the true market impact, but outside noise from fundamentals, the annual reweighting of the indices, and unobserved over-the-counter activity cloud the picture.
There seems to be substantial variation in the market impact of index inflows across commodities, likely because of differences in liquidity. For WTI, a relatively large and liquid market, a $100 million inflow appears to cause a +1.6% rise in price at the 0.1% level ofsignificance, whereas a $1 million inflow alone into cocoa appears to cause a 3.2%price jump.

Furthermore, inflows to the GSCI seem to have a substantially higher effect on commodity prices than similar inflows to the DJ-AIG index, possibly reflecting the higher share of GSCI-mimicking lookalikes in the index universe.

Ingredients of a Bubble

Given the aforementioned causes and effects of financial inflows, we see many ofthe essential ingredients for a classic asset bubble. Performance-chasing financial inflows to commodities cause prices to rise, thus delivering good performance and, in turn, attracting even more inflows. This phenomenon can be self-fulfilling, especially in an environment inwhich lack of information about the true state of inventories in China or spare production capacity in Saudi Arabia delays any fundamental market correction.
But in the buzz around commodities, investors may have forgotten the obvious:commodities are inherently cyclical assets whose prices fluctuate around some longterm (but potentially changing) equilibrium level, while equities are shares in the future cash flow of dynamic firms providing long-term returns from technological progress.

For commodities, technological progress increases both demand and supply, making long-term price appreciation, even for non-renewable commodities, uncertain at best. Adjustment to a higher equilibrium price may mimic superior returns in the short term, but they are unlikely to last forever.

Source: Internet

India Equity Strategy -Owning India Inc - Foreigners Flee?

Citibank Smith Barney
Foreign ownership has single-largest quarterly fall-Latest data show foreign institutional ownership of the Indian corporate universe dipped sharply in the first quarter of the year.

FII (FI+ADR+GDR) share of the BSE500 now stands at 17.8%, down nearly 2ppt from Dec2007, and almost back to June 2005 levels.Promoters pick up the slack-Promoter share of the BSE500 picked up ~2.9ppt, rising to 58.2% in the quarter - the highest level in 32 quarters, suggesting continued promoter confidence even in a weakening market.

Public shareholding continues to dip (9% now vs. 9.4% earlier), and domestic institutions continue to maintain share at 8%.Foreigners top sellers-FIIs have been the top sellers in the correction, bucking the trend of rising foreign ownership leading to market performance. Even as the drop in public shareholding was a continuation of the downward trend since March 2001, the fall in FII ownership was the sharpest over the same period.

Financials out of favour with domestic players, Telecoms liked by all - From a sector perspective, domestic institutions were strong sellers of Financials in the quarter, moving from an overweight to an underweight. Telecom companies were strongly in demand overall, while the consensus outlook on Industrials and IT Services was neutral.

FIIs had contrarian positioning vis-à-vis domestic institutions on Materials and Utilities. In our model portfolio, we are overweight Financials, Telecoms, IT Services and Pharma. We are neutral on Energy, Consumer and Industrials, and negative on Materials and Utilities.