SSPDL-Could This Stock Become The Proverbial Real Estate Multi-Bagger?
BSE 530821; CMP Rs 65
SSPDL (formerly Srinivasa Shipping and Property Development) is a three city Real Estate play on Bangalore, Hyderabad and Chennai markets. For the FY08, SSPDL reported a near Rs 100 crore in Revenues and an EPS of Rs 16. The scrip effectively quotes at a historical PE of 4 while the Industry led by the Real Estate biggies fetch a PE of 11.
Considering that SSPDL will deliver about 7 mn sq feet of built up space in the form of built up malls, commercial real estate, residential houses, apartments and villas in cities with a reasonably affluent populace, the current valuations are simply not reflective of the potential. With completion of ongoing projects SSPDL could become a Rs 1000 crore corporation by FY2012.
A recent study released by Cushman and Wakefield proclaims that Rental values and Real Estate markets have stabilised in most parts of the country and with the onset of the festive season that lasts over the next half of the year, things could indeed begin to brighten up for the sector.
SSPDL is a property development company primarily developing commercial (IT parks, Shopping Malls, Hotel projects, service apartments etc) and residential properties (gated communities, villas, apartments and serviced plots) in Chennai, Bangalore, Hyderabad and Kerala.
The company has a strong foot hold in the Chennai market and is gaining momentum in Bangalore and Hyderabad. The OMR (Chennai’s High Tech Corridor) is the main stay for the Company with over 3 million sq. ft (constructed and in planning) in the form of IT Parks, Shopping Malls, Hotel and Apartments.
Projects under Execution with expected dates of completion:
- Matrix Towers, Chennai – April 2008
- SSPDL Avion, Hyderabad – May 2008
-Bangalore Retreat – December 2009
-OMR Mixed Development Project, Chennai – September 2010
-OMR Residential Project, Chennai – December 2009
-Hyderabad Retreat, Hyderabad – December 2012
-The Retreat, Kallar Valley, Kerala – Dec 2010
The value of projects under execution exceeds Rs 2000 crore withover 7 Million Sq. ft of Built Up Space aggregating to a Sale Value of Rs.1800 Crores Plus in various stages of execution.
SSPDL has also announced plans to take up the following projects:
-Gundla Pochampally/Kompally, Hyderabad – a 40+ acre residential gated community
-Bangalore-Mysore Highway Project – a 60+ acre residential community
- Montieth Road Property Chennai – Office space.
The Retreat, Hyderabad has an SEZ as an integral part of the project. SSPDL has appointed Surbana, the Singapore based architects for this project and currently planning is underway. The earliest revenues will be recognized from 3rd quarter of 2008.
At Kallar Valley in Kerala SSPDL has acquired about 325 Acres of pristine Plantation Land with natural forest and waterfalls, springs etc. The site is located in the Hills and is a 2 hour drive from Kochi Airport.
SSPDL intends to put up a 20 acre world class resort with a Hospitality Partner. Besides that, it will promote Vacation Homes of super luxury quality by invitation only.
In addition, the Company has been awarded construction contracts aggregating to Rs 78.20 Crores for the following works from third parties.(i) Construction contract with NBCC, Hyderabad for construction of 1.5 lakh sq feet office building.(ii) Construction contract of warehouse for SAIL Ltd at Vizag.(iii) Construction contract for TCG IT Park, Chennai.(iv) Construction contract for 50 villas for Ferns-Regalia Realty Ltd, Chennai.2. SSPDL Infrastructure Developers Pvt Ltd, a SPV held jointly by the Company together with Innovative Realty Opportunity Fund Ltd have entered into a sate agreement with Accor Group of Hotels for hotel space in "The Promenade" Project, at Egattur, OMR, Chennai.3. SSPDL Ltd and Indiareit Fund Advisors Pvt Ltd through their SPVs have acquired 42 acres in Gundtapochampalty village, Hyderabad to develop a gated residential villa community "SSPDL Northwoods". Total estimated project value is Rs 250 crores.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
Bulls
Get Ready...for a Bull Ride !!!
Tuesday, August 12, 2008
What ended the reign of the mighty business families of Delhi?
Sitting next to a sandstone Buddha figurine in his large, elegantly modest room in Gurgaon , Arun Bharat Ram, the chairman of SRF closes his eyes and wonders what the economic clout of the erstwhile DCM group could have been if it hadn't splintered. The grandson of DCM's founder Sir Shriram, who today at 70 is part of the extended family's old guard, almost sounds like Mahatma Gandhi on the partition of India. "At the turn of the twentieth century, there was virtually no industry in the whole of North India including Pakistan. My grandfather was a pioneering entrepreneur who kickstarted the industrialisation of the North. Even after he died, in the mid-60 s, DCM was among the five biggest business houses in India. With each successive split, the economic clout of the family has spiralled downward. If we had stayed together, our combined valuation would have been among the highest in India," he says without trying to mask the sadness. Nostalgia is a condition as common as a common cold and rears its head more frequenly as you age, but Bharat Ram's lament is the tale of Delhi's traditional family business sultanate. At the time of Independence, the turnover of halfa-dozen Delhi-based big business families — the Dalmias, Thapars, Shrirams, Nandas, Modis and Singhanias — accounted for nearly 10% of the country's GDP. Seth Ramkrishna Dalmia, was in fact reported by Time Magazine, to be the third richest Indian industrialist behind only JRD Tata and GD Birla upto the mid-50 s. Now, large parts of the traditional Delhi family business empire is either dead or irrelevant, and the ones that have survived are nowhere close to the glory of the heydays. While it was the changing business landscape of the post license-quota raj and the inability to transform swiftly that did most in, intra-family squabbles and ego clashes rendered them too fragile to even mount a comeback bid. The ones who have survived are not outright market leaders in their substantial revenue generating businesses , but they are steady players, sticking to their core businesses without drastic diversifications. Says Rajiv Memani , managing partner, Ernst & Young India, who has often been a professional adviser for many erstwhile maharajas of Delhi: "The old set are mostly gone. Only some individuals and some sub-groups are doing well. None of these groups are in the premium position that they were in. In the new Delhi landscape, the new Sultans are Ranbaxy, Bharti, DLF ,HCL, Jaiprakash indus and Jindals. They are the new big league,"
Arun Bharat Ram who got the ownership of the tyre cords company SRF during the 1990 carve up of the DCM group — the largest of the Delhi family business of that time — feels that as with most large business families, DCM's undoing too was the inability to manage the differing aspirations of various family members, and professionalise management fast enough. "Although my grandfather was a competent businessman, his singular failure was that he couldn't prepare the next generation and use their skills in a complementary manner. There was too much dissension between my father and uncle even when I was young. There was a turf war going on within the family and as a result too many factions got formed in the company," he says. Today, armed with the benefit of hindsight, Bharat Ram says he has clearly defined the roles for his sons at the Rs 2000 crore SRF, in accordance with their aptitude and capabilities so that they don't step on each other's shoes. While elder son Ashish Bharat Ram, the MD of SRF looks after strategy, finance and management reviews, Karthikeya, the younger sibling, handles IT and quality management. Bhupendra Kumar Modi, the son of family patriarch Gujar Mal Modi, another significant member of the Delhi Club, says he parted ways with the family in the early 1980s because the undivided Modi group wasn't professional enough to accommodate his modern management ideas he tried to bring in after his US education . "Different people have different ways of thinking. I wanted to put up contemporary systems and processes in place, but nobody warmed up to the idea," says the chairman of Spicecorp and a self-styled interfaith harmony advocate. Known as the joint-venture king of India, Modi began a series of business alliances with global corporations, starting with Xerox , with the money he got after splitting from the family. "Some of my family members also failed to understand that in those days, access to technology was not available without giving away equity. JVs was the way to go," he says. Today, Modi says, he has completely dissociated himself from the old family and has developed a unique identity for his businesses away from the Modi name. Wearing his trademark brown cap, and clad in a white Polo Ralph Lauren tee, jeans and uber trendy red and white Puma sneakers, the Beverly Hills-based billionaire who drives a Rolls Royces when in Delhi (registered in the name of the Mahabodhi Society of India which he heads, if you must know), he even brandishes his business card to ram home the point.
It merely says Dr. BKM. "Tell me where's the Modi name. The cards I use only has Dr. M printed on it. You can call me doctor M," Modi adds for good measure. Having sold his mobile telephony firm Spice Telecom to Idea for Rs 2716 crore, Modi says he is in the process of totally restructuring his conglomerate , both in terms of its business focus and its geographical reach. Under his new grand plan, Modi's companies would only operate in areas where the products and technology can be taken global. Ergo, the telecom business, that only had the license to operate in parts of North India was sold, and he is in negotiations to sell off his handsets business to Sony Ericsson. "Our four distinct business lines will be mobile value added services (VAS) under the Cellebrum Technologies brand, retail , BPO, and entertainment," he says. "I want to be in businesses that don't require any kind of license, or are based on regulations, and that are non-political ," says Modi. All In The Family With funds from the Spice Telecom sale, Modi says he's scouting for acquisitions in the media and entertainment space. While his efforts to buy a 32% stake in Sony Entertainment Television have run into trouble, an unfazed Modi says there are plenty of other entertainment channels up for grabs and he has a more than adequate budget of $2-3 billion. As someone who professes a deep interest in dharmic religions (he has demanded Indian citizenship for the Dalai Lama) and Indic philosophy and culture, Modi wants his businesses too to recapture the glory and geographic spread of the ancient Indian civilization. "I want my business to span I-to-I ." That's Israel to Indonesia in Modispeak. Along with ushering in professional management and re-aligning his businesses , Modi is also making sure his two children in the business, Dilip and Divya Modi have non-competing roles. While Dilip Modi now heads the BPO and VAS business, Divya Modi handles the retail and mall ventures besides investor relations . "The biggest problem with the younger generation today is they don't want to work with their father. I don't teach them anything. They understand the language of the Mckinseys and the KPMGs better without realising that I implemented what these management companies are advocating today, several years back. So I let them train with them and hire those companies to work with my children," adds Modi.
The reason why most patriarchs are demarcating territories very clearly and laying down a strategic roadmap for the future is because they don't want history repeated. "The old Delhi families spent a lot of energy in in-fighting . Secondly, the old groups didn't have any strategic vision. They didn't enter the new sunrise sectors and missed the bus on several occasions. Post the opening up of the economy, these groups were unable to gear up and they didn't possess the entrepreneurial energy that was needed to harvest those new opportunities ," says Memani. SRF's Bharat Ram took his two sons to IMD in Laussane in 2003 to attend a course in managing family businesses, and was convinced that it was transparency and clear lines of communication that would prevent further splits. He soon constituted a family business council which comprised all members, including wives and children, who were not actively in business, and drafted a code of conduct that would act as the guide to resolve any issues that arise in the future. At DSCL, the agri inputs-to power group and another DCM splinter, now controlled by Ajay Shriram and his brothers Vikram and Ajit Shriram, the same principles of family management are employed. "We witnessed how the 1990 split led to a rapid degeneration of all parts of the DCM group. Once a year, the entire family goes for a threeday retreat with a consultant on board to sort out differences of opinion if there are any. Nothing is pushed under the carpet," says Ajay Shriram, chairman, DSCL. For the Shrirams, the experience of separation was too traumatic and stressful to let it happen again. Ajay Shriram recollects that after the marathon meeting that decided the trifurcation of the DCM group, they came out of the room with shirts totally drenched in sweat and utter confusion about what the future held for them. "It was decided that our family would get the fertilizer, chemicals and a part of the textiles business. We did not have a clue about what these businesses were. In fact, we knew absolutely nothing about what happened at our chemicals complex at Kota, except for the fact that something very complex was made," he says. All the businesses the brothers inherited were riddled with losses, and the textile unit Swatantra Bharat Mills alone was losing nearly Rs 1.5 crore every month. The cash flows were so bad that their Kota plant had to be shut down for a couple of weeks because the brothers did not have enough money to buy raw materials for their flagship business. On another ocassion, they did not have the money to pay customs duty for a shipment of raw materials at the Mumbai port and the consignment was stranded in the port's warehouse for so long that according to Shriram, the demurrage DSCL had to pay for it far exceeded the cost of materials.
"Once the textile division stopped bleeding , we were able to turn things around." Today, the Rs 2,770 crore group with interests in rural retail, sugar, agri-inputs and power generation is one of the better performing among the DCM-fold and is rated highly by analysts for its sound and transparent management. Shriram says that DSCL turned the corner with a strong faith in the company's core businesses and sticking to it even in times of adversity, without trying to diversify in desperation. Sticking to the core, and resisting the Lorelei lure of various sunrise sectors has been the strategy of some of the other old Delhi based family businesses such as Escorts and Apollo Tyres as well. The Nandas of Escorts were spared succession squabbles and splits, but fell prey to diversifications which were often half-hearted and hamstrung by the group's inability to pump in money to scale them up. Five years ago the Nandas decided to exit non-core businesses like telecom, healthcare, and IT and go back to the group's core. Apollo Tyres' founder Raunaq Singh Kanwar, an entrepreneur from Lahore, entered the tyres business by happenstance. At the height of licence raj in 1978, he bought a licence to manufacture tyres from a family that was desperate to sell. At a time when the economic viability of a new business was not as important as getting the license for it, the Kanwar family decided to add Apollo tyres to their flagship company Bharat Steel Tubes. Onkar Singh Kanwar was entrusted with the company that today by his own admission made terrible products and was besieged with labour problems. "When I took over Apollo Tyres, it was a sick company, with strong unions, a lousy product and a government that wanted to nationalise it," he says. Kanwar turned it around by what he claims was the one of India Inc.'s first attempts at workplace diversity , thorough market research and effective government lobbying. He decided to revamp the middle management by hiring bright people from patently middle-class backgrounds and avoiding Bschool grads. "The sons of school teachers were more likely to value workplace stability and go along with my ideas. The IIM types wanted to sit on my chair in the second day of their job," he says. Today, The Rs 5,000 crore Apollo Tyres is the market leader in most segments, and according to Kanwar, can become a big global force even in a commodity business. Last year, it acquired Dunlop's operations in South Africa and the rights to use the brand across the continent in a $60 million deal. Neeraj Kanwar, vice chairman and MD, is actively scouting for global acquisitions, besides the upcoming greenfield plant in Hungary that is part of his plans to take the company's sales to $2 billion by 2010.
Although Kanwar did dabble in a few new businesses like online lottery, UFO Movies (run by his other son Raaja Kanwar ) that digitizes movies to air-beam them straight to movie theaters via satellite, and hospitals, which seems to be his latest passion , Apollo has largely stuck to its core business without spending too much resources on the new ones. The core-focus apart, it looks unlikely that Apollo would face succession blues unlike other Delhi counterparts with Onkar S Kanwar anointing his younger son Neeraj as the heir apparent. "Neeraj has shown leadership qualities and is leading from the front. The operational part is already with him, and I only look at the strategy and the new businesses." They are no longer the Sultans of Delhi, but the city's old business families seem reconciled to a steady march as satraps in their core businesses. Source : ET
Arun Bharat Ram who got the ownership of the tyre cords company SRF during the 1990 carve up of the DCM group — the largest of the Delhi family business of that time — feels that as with most large business families, DCM's undoing too was the inability to manage the differing aspirations of various family members, and professionalise management fast enough. "Although my grandfather was a competent businessman, his singular failure was that he couldn't prepare the next generation and use their skills in a complementary manner. There was too much dissension between my father and uncle even when I was young. There was a turf war going on within the family and as a result too many factions got formed in the company," he says. Today, armed with the benefit of hindsight, Bharat Ram says he has clearly defined the roles for his sons at the Rs 2000 crore SRF, in accordance with their aptitude and capabilities so that they don't step on each other's shoes. While elder son Ashish Bharat Ram, the MD of SRF looks after strategy, finance and management reviews, Karthikeya, the younger sibling, handles IT and quality management. Bhupendra Kumar Modi, the son of family patriarch Gujar Mal Modi, another significant member of the Delhi Club, says he parted ways with the family in the early 1980s because the undivided Modi group wasn't professional enough to accommodate his modern management ideas he tried to bring in after his US education . "Different people have different ways of thinking. I wanted to put up contemporary systems and processes in place, but nobody warmed up to the idea," says the chairman of Spicecorp and a self-styled interfaith harmony advocate. Known as the joint-venture king of India, Modi began a series of business alliances with global corporations, starting with Xerox , with the money he got after splitting from the family. "Some of my family members also failed to understand that in those days, access to technology was not available without giving away equity. JVs was the way to go," he says. Today, Modi says, he has completely dissociated himself from the old family and has developed a unique identity for his businesses away from the Modi name. Wearing his trademark brown cap, and clad in a white Polo Ralph Lauren tee, jeans and uber trendy red and white Puma sneakers, the Beverly Hills-based billionaire who drives a Rolls Royces when in Delhi (registered in the name of the Mahabodhi Society of India which he heads, if you must know), he even brandishes his business card to ram home the point.
It merely says Dr. BKM. "Tell me where's the Modi name. The cards I use only has Dr. M printed on it. You can call me doctor M," Modi adds for good measure. Having sold his mobile telephony firm Spice Telecom to Idea for Rs 2716 crore, Modi says he is in the process of totally restructuring his conglomerate , both in terms of its business focus and its geographical reach. Under his new grand plan, Modi's companies would only operate in areas where the products and technology can be taken global. Ergo, the telecom business, that only had the license to operate in parts of North India was sold, and he is in negotiations to sell off his handsets business to Sony Ericsson. "Our four distinct business lines will be mobile value added services (VAS) under the Cellebrum Technologies brand, retail , BPO, and entertainment," he says. "I want to be in businesses that don't require any kind of license, or are based on regulations, and that are non-political ," says Modi. All In The Family With funds from the Spice Telecom sale, Modi says he's scouting for acquisitions in the media and entertainment space. While his efforts to buy a 32% stake in Sony Entertainment Television have run into trouble, an unfazed Modi says there are plenty of other entertainment channels up for grabs and he has a more than adequate budget of $2-3 billion. As someone who professes a deep interest in dharmic religions (he has demanded Indian citizenship for the Dalai Lama) and Indic philosophy and culture, Modi wants his businesses too to recapture the glory and geographic spread of the ancient Indian civilization. "I want my business to span I-to-I ." That's Israel to Indonesia in Modispeak. Along with ushering in professional management and re-aligning his businesses , Modi is also making sure his two children in the business, Dilip and Divya Modi have non-competing roles. While Dilip Modi now heads the BPO and VAS business, Divya Modi handles the retail and mall ventures besides investor relations . "The biggest problem with the younger generation today is they don't want to work with their father. I don't teach them anything. They understand the language of the Mckinseys and the KPMGs better without realising that I implemented what these management companies are advocating today, several years back. So I let them train with them and hire those companies to work with my children," adds Modi.
The reason why most patriarchs are demarcating territories very clearly and laying down a strategic roadmap for the future is because they don't want history repeated. "The old Delhi families spent a lot of energy in in-fighting . Secondly, the old groups didn't have any strategic vision. They didn't enter the new sunrise sectors and missed the bus on several occasions. Post the opening up of the economy, these groups were unable to gear up and they didn't possess the entrepreneurial energy that was needed to harvest those new opportunities ," says Memani. SRF's Bharat Ram took his two sons to IMD in Laussane in 2003 to attend a course in managing family businesses, and was convinced that it was transparency and clear lines of communication that would prevent further splits. He soon constituted a family business council which comprised all members, including wives and children, who were not actively in business, and drafted a code of conduct that would act as the guide to resolve any issues that arise in the future. At DSCL, the agri inputs-to power group and another DCM splinter, now controlled by Ajay Shriram and his brothers Vikram and Ajit Shriram, the same principles of family management are employed. "We witnessed how the 1990 split led to a rapid degeneration of all parts of the DCM group. Once a year, the entire family goes for a threeday retreat with a consultant on board to sort out differences of opinion if there are any. Nothing is pushed under the carpet," says Ajay Shriram, chairman, DSCL. For the Shrirams, the experience of separation was too traumatic and stressful to let it happen again. Ajay Shriram recollects that after the marathon meeting that decided the trifurcation of the DCM group, they came out of the room with shirts totally drenched in sweat and utter confusion about what the future held for them. "It was decided that our family would get the fertilizer, chemicals and a part of the textiles business. We did not have a clue about what these businesses were. In fact, we knew absolutely nothing about what happened at our chemicals complex at Kota, except for the fact that something very complex was made," he says. All the businesses the brothers inherited were riddled with losses, and the textile unit Swatantra Bharat Mills alone was losing nearly Rs 1.5 crore every month. The cash flows were so bad that their Kota plant had to be shut down for a couple of weeks because the brothers did not have enough money to buy raw materials for their flagship business. On another ocassion, they did not have the money to pay customs duty for a shipment of raw materials at the Mumbai port and the consignment was stranded in the port's warehouse for so long that according to Shriram, the demurrage DSCL had to pay for it far exceeded the cost of materials.
"Once the textile division stopped bleeding , we were able to turn things around." Today, the Rs 2,770 crore group with interests in rural retail, sugar, agri-inputs and power generation is one of the better performing among the DCM-fold and is rated highly by analysts for its sound and transparent management. Shriram says that DSCL turned the corner with a strong faith in the company's core businesses and sticking to it even in times of adversity, without trying to diversify in desperation. Sticking to the core, and resisting the Lorelei lure of various sunrise sectors has been the strategy of some of the other old Delhi based family businesses such as Escorts and Apollo Tyres as well. The Nandas of Escorts were spared succession squabbles and splits, but fell prey to diversifications which were often half-hearted and hamstrung by the group's inability to pump in money to scale them up. Five years ago the Nandas decided to exit non-core businesses like telecom, healthcare, and IT and go back to the group's core. Apollo Tyres' founder Raunaq Singh Kanwar, an entrepreneur from Lahore, entered the tyres business by happenstance. At the height of licence raj in 1978, he bought a licence to manufacture tyres from a family that was desperate to sell. At a time when the economic viability of a new business was not as important as getting the license for it, the Kanwar family decided to add Apollo tyres to their flagship company Bharat Steel Tubes. Onkar Singh Kanwar was entrusted with the company that today by his own admission made terrible products and was besieged with labour problems. "When I took over Apollo Tyres, it was a sick company, with strong unions, a lousy product and a government that wanted to nationalise it," he says. Kanwar turned it around by what he claims was the one of India Inc.'s first attempts at workplace diversity , thorough market research and effective government lobbying. He decided to revamp the middle management by hiring bright people from patently middle-class backgrounds and avoiding Bschool grads. "The sons of school teachers were more likely to value workplace stability and go along with my ideas. The IIM types wanted to sit on my chair in the second day of their job," he says. Today, The Rs 5,000 crore Apollo Tyres is the market leader in most segments, and according to Kanwar, can become a big global force even in a commodity business. Last year, it acquired Dunlop's operations in South Africa and the rights to use the brand across the continent in a $60 million deal. Neeraj Kanwar, vice chairman and MD, is actively scouting for global acquisitions, besides the upcoming greenfield plant in Hungary that is part of his plans to take the company's sales to $2 billion by 2010.
Although Kanwar did dabble in a few new businesses like online lottery, UFO Movies (run by his other son Raaja Kanwar ) that digitizes movies to air-beam them straight to movie theaters via satellite, and hospitals, which seems to be his latest passion , Apollo has largely stuck to its core business without spending too much resources on the new ones. The core-focus apart, it looks unlikely that Apollo would face succession blues unlike other Delhi counterparts with Onkar S Kanwar anointing his younger son Neeraj as the heir apparent. "Neeraj has shown leadership qualities and is leading from the front. The operational part is already with him, and I only look at the strategy and the new businesses." They are no longer the Sultans of Delhi, but the city's old business families seem reconciled to a steady march as satraps in their core businesses. Source : ET
Saturday, August 9, 2008
WHAT INFLATED THE COMMODITY BUBBLE?
Crude Oil has corrected over 20% from the top. Gold, Silver, Copper, Wheat and other commodities too have retreated from their respective highs. The heavy selling witnessed in last few days, has raised concerns that the air is leaking from the Commodity bubble and that a multiyear bull market might end soon. It has been pretty well established of late, that the commodity market has been exhibiting many of the characteristics of a bubble. Thus, we may be very well at the beginning of a bursting asset bubble. Historically, price bubbles have been destined to burst under their own weight, and at a moment's notice. No market travels in a straight line forever and what goes up inevitably comes down. And as the charts of the dot-com and housing bubbles show, the fall can be just as dramatic as the climb. Now, when the bubble in the commodity space is showing signs of collapse, an analysis of various factors that inflated the same will make for an interesting study.
Commodities prices have increased more in the aggregate over the last five years than at any other time in U.S. history. Commodity price spikes have occurred in the past as a result of supply crises, such as during the 1973 Arab Oil Embargo. But today, unlike previous episodes, supply is relatively ample: there are no lines at the gas pump and there is plenty of food on the shelves.
It can be said that what we are experiencing is a demand shock coming from Emerging economies like China and India. In recent years, the two countries, which together possess more than a third of the world's population, have witnessed rapid economic growth. There has been a jump in national income; consumption levels and standard of living in this part of the globe on back of heightened pace of industrialization, urbanisation and benefits of globalization. It is being suggested that this particular demand factor was something which attracted new category of participant in the commodities futures markets: Institutional Investors like Hedge Funds, Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments etc. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant. According to the US Department of Energy, annual Chinese demand for petroleum has increased in the past five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. In the same five-year period, Institutional investor's' demand for petroleum futures has increased by 848 million barrels. In other words, they have almost created another China in terms of demand. However, what was being ignored was that these economies are still not consumption/export driven. Also, the population and politics of these countries, unlike the western ones are quite price sensitive and any abnormal rise in price is met by demand destruction.
The rise in global food grain prices has also been attributed to the phenomena of "Agflation", i.e., diversion of crops and land for biofuel cultivation. A large portion of corn is being diverted to produce ethanol which has emerged as an attractive substitute for Crude Oil. A leaked internal World Bank study suggested that biofuels have forced global food prices up by 75%.
OPEC, which accounts for 40% of total World Crude Oil production has also been blamed for the high Crude Oil and commodity prices. However, despite repeated pronouncements about an increase in shipments, OPEC appears to be losing its ability to influence the price of oil. According to Societe Générale economist Deborah White. "It is no longer within the power of OPEC to keep prices at $28 a barrel, OPEC can only set the floor, not the ceiling." On its part, OPEC has repeatedly blamed financial speculation in Crude Oil, use of Ethanol as Crude Oil substitute, weaker Dollar and "mismanaged US economy" for high Crude Oil prices.
As has been the case earlier, whenever prices of anything have gone up dramatically, people readily blame it on "speculators." It has been suggested that the "Index Speculators" have now stockpiled, via the futures market, the equivalent of 1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve in the past five years. However, in a free and liquid market, it would be difficult for speculators to have that much influence. While speculators may have some short-term effect on prices, most investment professionals and institutions, largely discount such notions.
Globally, most of economists are now arriving at a consensus that the skyrocketing commodity prices can be best explained in terms of "Too much money chasing too few commodities". In recent times, monetary policy of US Federal Reserve has been seriously questioned and criticized. In order to arrest Subprime rout and Housing slump, the Fed slashed the Federal funds rate from 5.25% to 2% at a frenzied pace. Ben Bernanke, in a bid to put a floor under the housing and stock markets, cranked up the growth of the MZM money supply to an explosive 15.4% annual rate. As a result Dollar's value plummeted, sending commodities price to sky high. Already, due to turmoil in financial markets investors had began shifting from equity to hard asset. A combination of uncertain macroeconomic climate and growth in money supply only worked in favor of a commodity rally.
Dollar's value has special bearing on commodity space, as the chief commodity, i.e Crude Oil is priced in Dollars. "The Fed is printing money and are trying to prevent the recession, they are putting on Band Aids," commodities investment guru Jim Rogers said. Rogers added that "as long as the US central bank and the federal government keep making mistakes, you will have a longer period of slowdown, and it will be perhaps, one of the worst recessions we have had in a long time in America." However, Ben Bernanke cannot be entirely blamed for his act as he was merely responding to the Housing Crisis (or Subprime Crisis) brought about by a low interest rate policy of his predecessor Alan Greenspan. Alan Greenspan, on his part was forced to keep interest rate low as US economy was struggling from the IT bubble burst. Thus, to counter the ills of IT bubble burst, Greenspan slashed interest rate and thus encouraged bubble formation in US Housing sector. When the bubble in Housing sector got busted, Ben Bernanke was left with no option but to follow his predecessor's policy and led to the bubble formation in commodities. It is being suggested mildly now that IT, Housing and Commodities bubble are interlinked, with one leading to another. According to this view the recent bubbles have been largely an incidental byproduct of focus, policy and actions of Central Bankers, specifically that of US Federal Reserve.
Whatever may be the case, the effects of the abnormal run up in prices of commodities is now very much visible in the streets across the world. Price pressures across the world are reaching levels that may soon threaten economic, political and social stability. Global inflation levels have reached uncontrollable levels, food riots have broken out in Haiti, Egypt, Bangladesh, economic growth has moderated and even slowed, Equity market has been witnessing massive selloff and thousands of jobs across the world are being lost. Policymakers are themselves finding themselves in a fix as they are facing a lethal combination of high inflation and slowing growth, also referred to as "Stagflation. Thus, "Commodity Bubble" is certainly a bubble which everyone wants to be pricked!
Source:salmanspeaks.co.nr
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