IN A NUTSHELL :Commodities

Gold slips more than 2% on dollar rise

• LONDON: Gold prices slipped more than 2% on Thursday, and nearly 5% from session highs as the dollar firmed against the euro. Spot gold fell 2.1% to $738.20 an ounce, compared to $754.30 an ounce late in New York on Wednesday. The metal earlier hit $776.30 an ounce, its highest in a week. Meanwhile, in Mumbai, all commodity markets, including bullion and oilseeds remained closed on Thursday for Bhau beej festival. Copper falls 10% on demand fears

• LONDON: Copper fell by 10% on Thursday as rising London Metal Exchange stocks halted this week's shortcovering rally in industrial metals and recessionary worries returned. Copper for three months delivery fell 10% to an intraday low of $4,190 a tonne after LME stocks came in at 223,875 tonnes, up 6,575 tonnes. Copper was last seen at $4,220, down from $4,655 at the close on Wednesday, when it surged 12.6%. Nickel, which surged 14% on Wednesday fell on Thursday to a low of $11,900, down 12.8%. It stood at $11,950 against $13,640 on Wednesday. Lead dropped, down 8.5% to a low of $1,445 before tracking back to $1,460 versus $1,580. Zinc stocks also came in higher at 182,100 tonnes, sending prices to a low of $1,145 a tonne. It was last seen at $1,155, down 8.3% versus Wednesday's $1,260. Tin shed 6.1% to $14,300 against Wednesday's close of $15,225. Aluminium was 3.7% lower at $2,071, down from $2,151 on Wednesday. Sugar traders unlikely to get extension of sops for exports

• NEW DELHI: The food ministry is believed to have informed the cabinet committee on economic affairs (CCEA) about the decision not to extend the subsidy on sugar exports beyond the 2007-08 season ended September. Official sources said the decision on not extending the subsidy to the current season has been conveyed to the CCEA. The cabinet committee on prices (CCP) had last month decided that the sops should end this September as prices were higher than the last year's rates. Cotton procurement nears 10 lakh quintals till Oct 29

• NEW DELHI: The government agencies have procured nearly 10 lakh quintals of cotton till October 29, with farmers rushing to them following a decline in prices below the minimum support price level in open markets. According to the Cotton Corporation of India (CCI), purchases of the white commodity have crossed 9.9 lakh quintals till October 29. The government has sharply increased the minimum support price (MSP) of standard cotton (long staple) to Rs 3,000 per quintal for 2008-09 from Rs 2,030 in the previous year. The MSP of medium staple cotton has been raised to Rs 2,500 per quintal from Rs 1,800.

Falling rupee to make imported pulse costlier

Ishta Vohra NEW DELHI

 IMPORT of pulses is expected to increase steadily over the next ten years as demand is growing while domestic production is stagnant. This could be bad news for consumers as the rupee is depreciating, pushing up the price of imported pulses.
    Global producers are also taking advantage of India's pulse shortfall by hiking their prices, according to Assocham's Pulse Production Report 2008. According to the study, imports would increase to 27 lakh tonnes by 2019-20. Canada, Australia, Myanmar would be major suppliers of the commodity to India, benefiting from growing demand and rising prices.
    Since virtually every household in the country uses pulses, the report is significant. The government is also concerned since prices of urad, moong, masur and gram has shot up due to shortage in domestic supplies and higher import prices. This is affecting the per capita consumption of pulses, which has plummeted to 12.7 kg/year now from a peak of 27.3 kg/year attained in 1958-59. The negative CAGR of 1.58% is a cause of concern, according to Assocham's director general D S Rawat. Pulses are a key source of protein for the vegetarian sections of the population.
    India is the world leader in pulses production, contributing about 24% or 14.5 million tonnes to the global production of 61.33 million tonnes in 2007. However, production has registered a paltry growth at CAGR of 0.26% over the last five decades. Production has been virtually stagnant over the past decade, he added.
    The lack of growth in production has led to growth in imports, leaving the country dependent on overseas suppliers for the past 30 years. India's pulses imports have risen at a CAGR of 10.38%, with net imports rising from 4.6 lakh tonnes in 1998-99 to 20.4 lakh tonnes in 2006-07. Canada, Myanmar, Australia, and the US contribute about 40%, 27%, 9% and 6%, respectively, to the country's pulses basket. The quantum of pulse import from Canada has more than doubled during the last five years. In 2006-07, Canada's share in pulses import touched 905.325 tonnes, out of India's total imports of 2,255.649 thousand tonnes.
Partial relaxation of ban on non-basmati rice exports likely
NEW DELHI: The group of ministers (GoM) on food, which will meet on November 3 to review food prices, may partially relax the total ban on non-basmati exports, commerce secretary GK Pillai has said, reports Our Bureau. He, however, added that the total export ban will not be lifted. The GoM is also expected to re-impose import duties on edible oil. Mr Pillai was speaking to mediapersons after a meeting organised by the Council for Leather Exports in the Capital on Wednesday. In a bid to tackle rising inflation, the government had announced ban on export of non-basmati rice on March 31. It had also scrapped the import duty on crude edible oil and brought down the customs duty on refined edible oil to 7.5%.

Oil slips to $64 on fears of slump in demand

Reuters LONDON

OIL prices fell below $65 Thursday to reverse earlier gains, pressured by concerns demand might continue to weaken as the US economy shrank in the third quarter. The world's largest economy shrank at a 0.3% annual rate in the third quarter, the sharpest contraction in the US in seven years. The spectre of recession prompted businesses to cut investment and unnerved consumers, who slashed spending at the sharpest rate in 28 years.
    US light crude slipped by more than $2 and it was trading was sown $3.05 at $64.45 a barrel by 22:00 pm IST. London Brent crude was down by $3.03 at $62.44.
    "Oil markets seem to be pricing for a deep and long recession that will derail oil demand growth this year and next," Jan Stuart with UBS said in a research note.
    Oil has more than halved from its record high of $147.27 struck in July and is down by 30% so far this month, putting it on track for its biggest ever monthly fall. Earlier, it rose to as high as $70.60, supported by a weak dollar and hopes that interest rate cuts in the US and China would bolster the world economy.
    Asian stock markets gained for a third day and European shares opened higher on signs that investors were rediscovering an appetite for risk in response to global efforts to prevent a deep recession.
    The US Federal Reserve cut interest rates by half a percentage point, taking its target for overnight bank lending to 1%, the lowest since 2004, in an attempt to revive the sagging economy.
    China also cut its interest rates on Wednesday, kicking off what is likely to be a global round of interest rate cuts, with Norway already having followed suit, and Taiwan and Hong Kong cutting rates on Thursday. The Fed cut pushed the dollar lower, making dollar-priced commodities like oil cheaper and more attractive for holders of other currencies.
    Also supporting oil were Opec's decision last week to cut output by 1.5 million barrels per day, or about 5%, to prop up prices and hints that it might further reduce supply. Nigeria's state oil company said in a statement that it would reduce crude oil export volumes by 5% in November and December because of the Opec cutback.

The prices of many commodities have returned to their ’05 levels

The prices of many commodities have returned to their '05 levels. Such a huge decline in commodity prices, and that too, over a short period, raises questions about their future direction. Kiran Kabtta elaborates

    EVEN AS THIS article was being written, gold fell to $713 per troy ounce and was heading towards one of its biggest weekly losses. Crude oil has already hit $65 per barrel, having fallen 56% since its peak of $147 per barrel in July this year. Prices of base metals, one of the worst performers of recent times, are down by 40-50% since the beginning of the year.
    The prices of many commodities have returned to their '05 levels. Such a huge decline in commodity prices, and that too, over a short period, raises questions about their direction in future. The commodity markets, which have witnessed a bull run since '05, have not remained unaffected due to the global financial crisis and the ensuing credit crunch.
    As the equity meltdown continues, the commodity markets have witnessed aggressive selling. The domino effect among various asset classes has taken its toll on commodities as well.
    Equities were at the forefront during the last bull run in financial assets, which began in '03-04. The boom in equities acted as a leading trigger and source of funds for investors in other asset classes.
    Ranging from energy and agriculture commodities to precious and industrial metals, the market started finding reasons to buy into them with a bullish outlook.
    Higher crude oil prices post Hurricane Katrina, drought in major wheat-growing areas of the world, the El Nino and La Nina effects, which caused floods and droughts in various parts of the world, were some of the physical factors that were pushing up commodity prices.
    The China Olympics proved to be yet another trigger for a rally in industrial commodities. The ensuing construction boom in China managed to push up the prices of most base metals.
    That was then. The weakening of equity markets following the subprime crisis changed things dramatically, impacting commodity markets as well. The first to feel its effect were base metals and agricommodities. The energy basket dominated by crude oil and the precious metals basket led by gold managed to pull over, even while other asset prices had started to cool down. Crude oil prices peaked out amidst bearishness in global equity markets. This was primarily due to shifting of investment demand from equities to liquid commodities like crude oil and gold.
    However, the crude oil market could not sustain the investment boom for long. With the world's largest economy steadily being strangulated by the credit crisis and claiming its victims in the form of erstwhile top financial institutions, fund managers had to withdraw from the oil market.
    The month of October has proved to be a major dampener for the commodity markets. The S&P Goldman Sachs Commodity Index, which showed a modest gain of 1% during the nine months ended September '08, is now in the red with a 28% loss. The index value, at a little over 5,000 points, is the same as it was at the beginning of '05.
    So, is this meltdown in commodities a blip in the long-term bull run or a conclusion of a threeyear bull run? Now that the surplus investments are out, the markets are likely to stabilise around the fair fundamental values in case of each individual commodity.
    Probably, a recovery in equity markets may yet again signal an entry into commodities on a case-to-case basis. However, investors are definitely going to be more cautious the next time. As a result, we may not see such mountain-like formations for quite some time to come.
    kiran.kabtta@timesgroup.com 

Gold buying gains pace ahead of Diwali

But Spot Price Falls To Rs 12,155 After Scaling Rs 14k On Oct 10

 THE 'sarafa' markets across the country witnessed some action on the auspicious day of 'pushya nakshtra', when people make new investments or start a new venture.
    Gold prices, which have fallen over the past two days, further supported buying that pepped up otherwise dull sales in the markets. In some cities, such as Udaipur and Indore, sales were in line with the trend of the previous years but in some other places like Ahmedabad and Mumbai, sales were still just half of what was registered the previous year. Pushya nakshtra occurs several times in a year but the one that falls before Diwali is considered auspicious for gold purchase.
    Although the global liquidity crunch, has impacted most asset classes including commodities, gold is still considered a safe bet, despite volatile prices and general economic negative sentiment over the last few months. Demand has been price-driven, and not consistent.
    After touching $909 per ounce level in first week of October, prices are down by 17% to $753. In the domestic markets, the fall has been of the order of 13% since October 10, at Rs 12,155 per 10 gm in the Mumbai physical market due to the weakening of the rupee.
    Bullion dealers and jewellers reckon that prices need to fall further between Rs 11,200 — Rs 12,000 level for demand to perk up. "Gold prices need to go below Rs 12,000 to generate a good demand," said Rohit Choksi, MD, Ishwarlal Harjivandas Jewellers based in Ahmedabad. Mr Choksi said that sales picked up on Wednesday but it is still over 50% down compared to last year.
    Other cities such as Indore in Madhya Pradesh and Udaipur in Rajasthan showed good sales on Pushya Nakshtra. Sumit Anand of Punjab Saraf Jewellers who is also the regional director of Gem and Jewellery Federation Madhya Pradesh said that there was a good rush. Narendra Singhvi who is the president of Sarafa Association of Udaipur said that sales were better compared to last year. "With share markets and property markets crashing people are buying more gold," he said.
    Gold prices took a beating following the strengthening of the dollar and the fall in crude oil prices. With the improvement in liquidity following various governments measures around the globe, investors are selling gold which they were buying earlier as an alternative investment. Amar Singh, head of research at Angel Commodities said that the short term trend looks bearish for gold if dollar remains strong. "Spot gold prices will have a crucial support at $736 as demand is expected to come at low level," Mr Singh said.
    Bombay Bullion Association president Suresh Hundia said that demand for gold will significantly improve at price levels of Rs 11,200. He added that there was some improvement in demand on Wednesday.
    Liquidity crisis hits
    diamond industry hard
MUMBAI: THE global financial crisis has hit the local diamond industry hard. With liquidity drying up, diamond manufacturers are finding it tough to meet their commitments for buying rough diamonds from mining companies abroad. As a result they could lose their licences to acquire the rough diamonds from these companies, reports Maulik Vyas. India is the largest importer of rough diamonds in the world and Indian companies specialise in exporting the stones after polishing them. Local diamond companies import rough diamonds worth over Rs 40,000 crore per annum under "site holding agreements" with the mining majors under which they are required to purchase all the rough diamonds that are excavated from a particular mine. If the Indian companies fail to purchase the diamonds, they stand to loose the raw material procuring contracts. Concerned over the possibility of the companies losing their licences, the diamond industry body has written to global mining majors asking them to reduce their supply of raw material till the situation improves. The Gems and Jewellery Export Promotion Council (GJEPC) has written to mining majors like DTC, Rio Tinto, Alrosa, BHP and Aber recently. "If mining companies continue to supply, the manufacturing companies have to buy it as per the terms of the contract and in the current scenario, Indian companies will find it difficult to pay up. But if the miners cut supplies, Indian manufacturers, reeling under a liquidity crunch, benefit without losing the rights over a mine," said GJEPC chairman Vasant Mehta.

Oil continues to slide on recession threat

US Crude Prices Drop $4 To $67 A Barrel; London Brent Falls Below $66

 OIL fell to a new 16-month low below $70 a barrel on Wednesday, as a big rise in US fuel inventories last week provided further evidence of an economic slowdown in the world's biggest energy consumer. Gloom about the global economic outlook could limit the impact of any oil supply cuts Opec might agree at a meeting on Friday.
    US light crude for December delivery was down $4.30, or 5.9%, at $67.88 a barrel by 22:30 pm IST. It touched a session low of $67.50, its lowest since June 2007. London Brent crude was down $3.76, or 5.4%, at $65.96 a barrel.
    US crude oil stocks rose by 3.2 million barrels last week, more than the 2.6 million barrels analysts had forecast. The Energy Information Administration also reported a rise of 2.7 million barrels in gasoline stocks versus forecasts for a 2.8 million increase.
    "The numbers look bearish on virtually all fronts," said Jim Ritterbusch of Ritterbusch & Associates, adding "The data reinforces our bearish view and ups the probability of $62 crude".
    Oil has been tracking downward moves in global equity markets, which have been reacting to increasing evidence of a global slowdown. Steep falls in European and US stock markets, plus the US dollar's rise to a 2-year high against a basket of currencies on Wednesday helped drive down oil and other commodities.
    "The relationship between oil and equities could be tested by any decision by Opec to reduce production at this week's meeting," said Frances Hudson, global thematic strategist at Standard Life Investments.
    The price of oil has more than halved from a record high above $147 in July as the financial crisis has started to hit energy demand in the US, the world's largest energy consumer, and other industrial countries. The Organisation of the Petroleum Exporting Countries called an emergency meeting this Friday, when the producer group is widely expected to agree to cut supply to defend prices.
    Opec secretary general Abdullah al-Badri has said that the world would face a huge oversupply of oil next year, if production continued at current rates. Badri is in Moscow where he met Dmitry Medvedev, president of Russia, which is the world's second largest oil exporter after Saudi Arabia.

Global meltdown takes oil to $70

Reuters LONDON

 OIL fell towards $70 on Tuesday, pressured by expectations that a global recession will crush demand for oil, which could limit the impact of any supply cuts by Opec.
    US light crude for November delivery was down $3.85 at $70.40 a barrel by 22:00 pm IST, after earlier hitting a session high of $75.69. The market hit a record high above $147 in mid-July. London Brent crude was $3.56 down at $68.47 a barrel.
    The Organisation of the Petroleum Exporting Countries is due to meet in Vienna on Friday, when the producer group is expected to reduce output to defend prices. Iran has said a drop in demand could push Opec to cut output by 2-2.5 million barrels per day.
    Opec is meeting after a 50% fall in oil prices in just three months from a record peak above $147. The sharp drop partly reflects falls in demand from the US, the world's top energy consumer and other industrial countries, which are suffering the effects of the credit crisis. "A cut of about 2 million barrels per day will only offset the amount of US demand that has been lost on a year-overyear basis," said Edward Meir of broker MF Global.
    Opec could face an intense debate at their meeting on how much oil they should take off global markets as they balance their price needs against risks to a fragile world economy. The International Energy Agency, which advises industrialised countries, has said an Opec output cut could prolong a global economic slowdown.
    Oil and other commodities have been tracking moves in equity markets in the past few weeks. "I think they moved in line with equities on Monday and are now pulling back, using stock markets as a barometer for demand," said Christopher Bellew at Bache Commodities.
    European shares gave up early gains that had followed a rise in U.S. stock markets on Monday on hopes of more government aid to the economy.
    The US currency was near one-and-halfyear high versus a basket of currencies, which put pressure on dollar-denominated commodities, including oil and gold.

India, Pakistan restore cross-LoC trade

PTI CHAKAN-DA-BAGH (JAMMU & KASHMIR)

  AFTER a gap of over six decades, India and Pakistan on Tuesday restored cross-LoC trade by launching truck services on the Srinagar-Muzaffarabad and Poonch-Rawalkote roads, scripting a new chapter in bilateral ties.
    Tasleem Arif, a driver from Srinagar, drove the first goods laden truck from the Salamabad checkpost in Jammu and Kashmir to Chakoti on the other side of Line of Control (LoC) with the hope that one day he would not need permit or any documents to cross the Aman sethu at Kaman post.
    "This has been a 61-year-long cherished dream of many Kashmiris to travel across the LoC without having to acquire a passport or without being on the wrong side of the law. I am happy that I will be the privileged man to cross the LoC today," said an excited Arif, who was driving the lead vehicle of the 13-truck convoy to Chakoti as part of cross LoC trade.
    Governor NN Vohra flagged off the goodsladen trucks which marked resumption of trade ties between the divided parts of Kashmir after 61 years.
    Three trucks carrying gifts (fruits and vegetables) were also flagged off by HH Tayabji, adviser to the governor from Rangar international trade terminal in Chakan-de-Bagh in Poonch amid tight security.
    "Today is historic day marking yet another chapter of friendship in Indo-Pak bilateral relations. It will strengthen the trade relations between the two sides," Mr Tayabji told reporters as he hugged Pakistan officials at the Chakan-Da-Bagh crossing point of LoC.
    The formal beginning of trade has also raised hopes of revival of traditional trade ties and return of peace to the strife-torn region.
    "We hope that this initiative of trade between the two parts of Kashmir will lead to revival of the traditional trade ties between Muzaffarabad and Kashmir Valley as was the practice during pre-1947 days," Abdul Ahad Bhat, a fruit grower from Baramulla district said.
    The septuagenarian has seen the pre-1947 days as well as when goods used to be carried by labourers in baskets on their backs. "One basket would have fruit equivalent to today's two and half boxes," he added. At Rawalakote, Pakistan officials led by the deputy commissioner Mohmmad Afzal received the trucks carrying gifts and were taken to Titrinote trade centre.
    Local traders of Poonch (Jammu & Kashmir) and Rawalakote (POK) exchanged sweets, pleasantries and fond memories.
    "My father's dream has come true today. He wanted to do business in Rawalkote, where the family was running a shop in old market area before shifting to Poonch in 1947," said Sardar Manohar Singh, son of 84-year-old Keekar Singh.

Vehicles with goods cross the Aman Sethu on the way to Muzaffarabad. Srinagar-Muzaffarabad road was thrown open to cross-LoC trade on Tuesday. — PTI

Most of the base metals have fallen significantly in the past two months

It's A Zero Sum Game

Most of the base metals have fallen significantly in the past two months, with prices coming close to their marginal cost of production. There is only limited downside from here onwards

DEVANGI JOSH I & SANTAN U M I SH R A ET I NTELLIGENCE GROU P

BASE METALS as a whole have witnessed significant declines amid rising concerns over possibilities of a global recession. Plunging stock markets across the world and deepening global credit crunch continue to weigh on the outlook of base metals in general. Chinese demand — a factor that largely contributed to the bull run in the past five years — has also started showing signs of a slowdown. As most of these metals have a direct correlation with the overall economic growth, weakness in the world economy has pulled down their prices.
    Another indicator of demand slowdown is the rising level of inventory at the London Metal Exchange (LME). The inventory level for zinc and aluminium has increased by more than 30% in the past six months, whereas copper inventory rose by 90% during the same period. Hence, it's not surprising that copper prices have fallen the most (almost by 40%) during the same period.
    However, the recent plunge in commodity prices has pushed most metals close to their average marginal cost of production and hence, most market participants expect prices to have a limited downside from here. This does not necessarily mean that base metals are expected to regain their winning streak, considering sluggish demand against the backdrop of slowing economies across the world.
COPPER: Prices have taken a beating in the past few weeks. They are off by more than 40% from their July highs of near $8,645 per tonne and are currently trading just above $4,700. Recent problems in the financial markets and subsequent fears of a global slowdown or possible global recession are expected to cap prices.
    However, the $4,200-4,500 range is seen as a strong downside support that coincides with lows reached in late '05. While China, the biggest consumer of the metal, is not expected to escape the tremors of the slowdown in world's major economies, the production cycle of the past four years indicates a decline in output for the next 3-4 months.
    Most domestic non-ferrous metal producers get their revenues from the treatment and refining charges (TC/RC margins), which are a function of the availability of copper concentrate and prices of final copper metal. But the TC/RC margins have been under pressure for quite some time.
    If there is any cut in the production of mined copper and a consequent fall in supply, the TC/RC margins will come under further pressure. But if there is no closure of mines, the supply of mined copper may be in surplus, improving TC/RC margins.
    Among the two big players in India, Sterlite Industries gets 50% of its revenue from the copper business, while Hindalco gets 63% (on a standalone basis) from this segment. Sterlite's margin is also slightly better than that of Hindalco because the former sources some of its concentrate from captive sources.
    Sterlite is also developing its copper mines in Africa, which will further increase the availability of mined copper. We believe that Sterlite is better positioned to tackle the current volatility in copper prices.
ALUMINIUM: Prices have started moving downwards since July '08 and the market is expected to remain oversupplied this year. In the first eight months of '08, China produced 8.9 million tonnes (mt) of metal and is on track to produce more than 13 mt in the whole of '08 — twice the output seen in '04.
    This is at a time when the LME inventory is at a much higher level compared to '04. This may result in prices further coming under pressure, unless smelters announce significant production cuts.
    Currently, aluminium is trading near $2,200 per tonne — well below the global marginal cost of production near $2,500. The decline is expected to find a strong support near March '05 lows closer to $2,000. On the other hand, the medium-term upside is expected to be capped by the $2,500-2,700 range.
    Most domestic aluminium producers are integrated and even at the current price level, there is still some room to generate profits. If the current trend continues, the operating margins for most players will almost get halved. Hindalco enjoys higher operating margin among the three big players.
    But Novelis, the company it acquired last year, has still not turned around and the current credit market crisis may force it to go slow on expansion plans. In this space, Nalco is relatively better placed with huge cash reserves and zero debt. This will help it to implement new projects and expand volumes.
ZINC: Prices have seen the sharpest decline from their peaks in late '06. Prices have been in a downtrend for nearly 18 months and are down nearly 65% from their May '07 highs of around $4,120 per tonne. Among base metals, zinc has continued to move downwards for quite some time now and is currently trading well below its estimated cost of production of $1,600 per tonne. At this price level, 10% of the world's zinc production may be forced out of production. But looking at the weak economic scenario, this may not put much upward pressure on prices. A further downside is expected till its strong support at $1,100 level.
    Hindustan Zinc, the subsidiary of Sterlite Industries, is the largest integrated player in this segment. And if the current price level is sustained, more than 70% of its operating profit will be wiped out, compared to its peak level in FY07. We advise investors to avoid exposure to this stock.
    devangi.joshi@timesgroup.com 

Commodity prices come crashing down

Record Harvests, Recession Fears Drive Downward Spiral

As the dark clouds of an economic slowdown gather over the world, the prices of most primary commodities are sliding worldwide. Only a few months earlier, prices of many key commodities, like foodgrains, crude oil and metals, had reached dizzy heights. Now they are in a free fall.
    Wheat had touched $481.5 per metric tonne (pmt) in March, while rice zoomed up to $772 pmt in May this year. These were all-time highs, causing riots to break out in over three dozen countries and a global uproar. At the end of the first week of October, wheat prices had tumbled by nearly twothirds to $272 pmt, while rice prices nearly halved to $412 pmt, according to latest data released by the Food and Agriculture Organisation (FAO) of the United Nations. Other agricultural commodities too have seen a slump. Soybean prices have gone down from a peak of $586 pmt in July to $371 pmt and palm oil from $1,249 pmt in March to $885 pmt.
    According to the latest FAO estimates, the main reason behind this dramatic across-theboard decline is record harvests in most crops. World cereal output touched 2.2 billion metric tonnes, a new record, and 5% more than last year. Wheat production increased by about 11%, fed by a phenomenal 25% rise in Europe. It could have been more but for declines in Argentina, Turkey, Iran, and a less than expected rise in the Australian harvest. Rice production too has increased by 2% over last year's record harvest. China has reported a record soybean harvest.
    While increased availability has eased prices, future increases cannot be ruled out for two reasons—the balance between global production and consumption continues to be poised on a razor's edge, and latest sowing data indicates a decline in the area covered under wheat in the Western countries. So, while the world may benefit from the downward trend in the near future, prospects in the middle term are not too rosy.
    Meanwhile, crude oil prices, which had set a blistering pace throughout last year and the first half of this year to reach an all-time high of $147 per barrel in July, dipped dramatically to $69 per barrel on Thursday. That's a decline of more than 50% in three months. A different set of factors is working here. Demand is declining due to the economic slowdown and fears of an allconsuming recession. DOUBLE-EDGED SWORD
    According to the Short Term Energy Outlook released last week by the Energy Information Administration (EIA) of the US government, oil consumption in the advanced countries covered under the OECD is expected to fall by over 1.1 billion barrels per day in 2008.
    In the US, which consumes 24% of the world's oil, daily consumption has remained at 18 billion barrels per day, which is the 1999 level. This is a direct result of the downturn in manufacturing activity and cost cutting by families facing a financial crunch. Output from factories, mines and utilities has dipped by 2.8% last month in US, the most since 1974, according to Bloomberg.
    Less noticed, but key to driving worldwide inflation are metal prices. Gold prices have risen steeply as jittery investors withdrew from risky markets and sought safe havens following the housing bubble burst last year. In the first quarter of this year, gold touched a record high of $927 per ounce.
    But, that too
Commodity price
fall boon & bane for poor nations
slipped to about $830 per ounce by September. Copper rose to $8,443 pmt in the second quarter this year, but it is now selling at $6,991, a decline of over 17%. While iron ore prices have largely remained static this year at around $140 per dry metric ton, this actually represents a slowdown in a six-year-long price surge.
    Experts say that prices will dip by next year as demand slows down. The World Bank's steel products price index rose continuously over the year to a high of 342 in August but dipped marginally to 338 in September. These declines in metals too are a direct consequence of the economic slowdown as it ripples across the world.
    Falling commodity prices have major implications for underdeveloped countries — they are a double-edged sword. While food prices going down helps in fighting hunger in food-deficit countries, crashing primary commodity prices also means less incomes for farmers and miners who export them to developed countries. Since the US and EU constitute a huge chunk of the global economy, the recession there is effectively exported to the third world through declines in commodity prices and job losses.

Does it make sense to invest in gold now?

HISTORICAL trend shows that crude and gold prices have a positive correlation. But in recent times, though crude prices have plunged to around $70 levels — which is almost half the price of its recent record high — gold prices are on an upswing and are making new peaks which shows that gold prices have moved against the historical trend and are showing negative correlation with crude. This is mainly because of the recent turbulence in global financial markets which has spurred the international gold price, given its safe haven status. The depreciating rupee against dollar, along with seasonal festive demand, have also contributed to the recent highs seen by gold prices in domestic market.
But does it make sense to invest in gold when the metal or the ultimate monetary asset is in on an upswing? My answer will be why not? When you can grab more returns with same level of risk in the portfolio, why not invest in the gold. An example will help you understand this better.
TACTICAL APPROACH
When one is bearish on equity markets, but bullish on gold, one can increase allocation to gold and viceversa. This view, based on the market performance, is called tactical asset allocation. It is, however, difficult for an ordinary investor or even professional investors to put this in practice as predicting markets is not an exact science.
STRATEGIC APPROACH
The other approach is the strategic approach which is more scientific with less dependence on subjectivity and forecasting markets. This approach is about adding gold to the portfolio for diversification benefits. Theory says that diversification leads to lower risk at the same expected return level or higher expected returns at the same risk. But does it really work?
WHY GOLD?
Chart A and B plot the returns expected at each level of risk taken. Consider chart A. We have two financial products we can buy — debt (bonds, PF, PPF, FDs are all examples of a debt product) and equity (direct stocks, equity funds and Ulips are examples of equity). At point 2, we are fully in zero risk bonds at an expected return of 6%. This means there is no risk of capital loss to my money, but my return is just 6% per annum. At point 1, all our money is in equity, so the risk (measured by standard deviation) is at 12%, but expected return is as high as 20%. At point 3, we are half in equity and half in debt that reduces risk to 6% and expected return to 13.47%. All points along the line 1-3-2 are points on the efficient frontier — which shows the maximum risk possible for a given level of risk. Any point below that is inefficient, because we can increase return by increasing equity for the same level of risk.
    Now comes the interesting part. We can increase return for the same level of risk by introducing a third asset in this example (See chart B). This asset needs to have a negative or low correlation with debt and equity. This means that it moves in a more or less independent or opposite direction to these. We now have an asset allocation of 50% equity and 50% gold (remember this is for purely illustrative needs, actual asset allocation to gold needs to be no more than 10% in an average portfolio). At the same 6% risk level, the expected return is now 15.86%.
HOW TO BUY GOLD?
The best way to invest in gold is through gold ETFs because it has tax efficiency, is available in small denominations at international price without premiums and has cost efficiency. It is also convenient for long term holding and most importantly, has liquidity.

Govt may buy 15% of cotton crop to prop up local prices

THEgovernment may buy 15% of India's cotton crop this season to prop up crashing mandi prices. Cotton prices have dropped below the MSP for the first time in Punjab and Haryana as harvest began arriving. This season's MSP is a 40% jump over last year to factor in higher input costs. But traders are reluctant to pay farmers this price for now because a bearish global market has made both exporters and local textile mills leery. Cotton futures in New York hit a 16-month low last week.
    Cotton Corporation of India, the government's nodal procurement agency, this week began buying in the mandis of Punjab, Haryana and Andhra Pradesh. "Sentiment is down among traders in Punjab. But prices are again above MSP in Haryana because traders there are covering existing contracts,'' officials said.
    Though traders are absent right now, CCI expects that it may need to continue procurement only till December. After that market forces will push up prices above MSP. "Traders and ginners may not want to incur interest and carrying costs for six months by buying in October itself. But they can't sit idle for ever. We are expecting private sector purchases to pick speed from January onwards. That's when the lean season starts,' they added. CCI can potentially buy 150 lakh bales.
    Currently, mandi prices of benchmark Shankar VI variety are significantly below the record levels seen last year. But cotton is still upto 20% more expensive than the lowest price last year. Traders have no option but to wait and see how the international market moves before buying. Indian cotton has little demand overseas because prices in main importer China are still lower than India. However, demand from Indian textile mills may revv up because even at zero duty, imported cotton is more expensive right now than the Indian crop.
    For CCI, the lack of parity between imported cotton and the Indian crop means it will find plenty of customers for its bales. "CCI will price its stocks at par with fob export prices. That will ensure that mills get cotton at competitive rates without forcing CCI to incur a loss. We want to assure mills that there will be ample cotton available within the country. But the supply won't be subsidised,'' officials said.
    CCI exported close to 2 lakh bales in 2007-08. The Rs 1700-cr company was able to ensure a 45% jump in net profits due to savvy trading despite stiff private sector competition.
    The government has been clear from the start that it will not adopt any non-tariff barrier that protects local textile mills at the cost of farmer returns. "Indian farmers are successfully competing with other growers around the world by facing zero import duty. Then why should textile mills find it tough to face global competition? The old situation of very cheap yarn is now over,'' sources here said.
Procurement cost seen at Rs 1,200 cr
NEW DELHI: The textile ministry has asked for sanction of Rs 1,200 crore from finance ministry to procure cotton, anticipating largescale purchases due to a dip in cotton rates below the minimum support prices.The ministry has only Rs 149 crore for market intervention. It has demanded from the finance ministry for sanction of Rs 700 crore for cotton procurement till March 2009 and another Rs 500 core for the remaining six months of the cotton season.

Indian basmati exports lose price advantage as Pak removes MEP

Nidhi Sharma MUMBAI

BASMATI exporters from India are in a spot despite a sharp fall in the value of rupee versus the US dollar. Although a weaker rupee is good news for them, the removal of the minimum export price (MEP) by the Pakistan government have given basmati exporters from that country an edge over their Indian counterparts.
    MEP for Indian basmati is currently $1,200 per tonne, while Pakistan is offering a much lower rate of $700-900 a tonne for its equivalent variety. As a result, several importing countries like Iran and Saudi Arabia have lowered the price they are willing to pay for Indian basmati to $1050 a tonne.
    To stem rising inflation caused by high commodity prices, the Indian government had recently announced several measures, including certain curbs on rice exports. It banned non-basmati rice exports and fixed the MEP at $1,200 per tonne for basmati rice, inclusive of the export tax of $200 per tonne. Ironically, when the rupee was strong, Indian exporters still managed good earnings as they were getting a price of over $2,000 a tonne with the commodity trading at alltime highs to cater to increased demand.
"With basmati rice from Pakistan quoting nearly $400 lower than the Indian variety, leading importers are preferring to buy from Pakistan," said All-India Rice Exporters Association president Vijay Sethia. He added that government should either remove MEP or lower it to facilitate exports.
    Globally the price of rice has crashed significantly from all-time highs earlier this year, said Mr Sethia. Currently, Thailand is quoting $500 for its Jasmine variety, down from $1,000, and Indian basmati is down around 50% at $1050.
    In 2007-08 crop year ending September, India produced over 96 million tonne of rice. It exported close to 1.2 million tonne of basmati and 3.2 million tonne of non-basmati rice, according to estimates by the Agricultural & Processed Food Export Development Authority (APEDA). India is the largest exporter of basmati rice and its domestic production is close to 3% of the total rice production.
    This year, India is likely to produce nearly 100 million tonne of rice because of the increased acreage. This has reduced the price of paddy by 20-30% in the local markets from last year. Exporters have urged the government to allow exports of non-basmati rice by setting a minimum export price, said Pawan Agarwal, a rice exporter.
    nidhi.sharma1@timesgroup.com 

Recession fears drag crude oil to 13-month low

Oil dropped nearly $3 on Wednesday, touching 13-month lows on expectations that the deepening economic slowdown will cut into already weakening demand. Investors scurried to safe-havens and global stock prices fell sharply as concerns over a potential global recession wiped away optimism seen earlier this week over governments' steps to avert a financial meltdown.
    US crude fell $2.87 a barrel to $75.76 in afternoon trades, after hitting $74.62, the lowest since September 2007 and down nearly 50 percent since hitting a record over $147 in July. London Brent crude traded down $3.20 to $71.33 a barrel.
    European leaders pressed for an overhaul of global financial structures, building on trillion-dollar bank bailouts announced this week. US retailers suffered their biggest monthly drop in sales in more than three years in September, adding to concerns of a potential recession in the world's top consumer.
    Slumping demand in the United States and other developed economies, as well as a flight of investors out of oil and into safer havens, has sent oil tumbling from July's record. "The fall in crude futures prices today reflects movement in the stock market, which mirrors fears about a recession that will cut into demand for crude oil," said Joe Possillico, broker for MF Global in New York City. Analysts have scaled back global demand growth estimates, with the Organization of the Petroleum Exporting Countries cutting its forecasts for world demand for crude next year in its latest monthly report.
    "Even if governments are successful in calming equity markets and unfreezing credit markets in the near future, the fallout on the real economy from financial market headwinds is expected to be considerable," the producer group said.
    Opec is due to hold an emergency meeting in Vienna next month to review the impact of the global financial crisis on the oil market. JP Morgan cut its forecast for average oil prices next year to $74.75 a barrel, citing the weak economic outlook.
    "The oil market is caught in the wake of four tsunamis," the US bank said. Traders will scrutinise weekly US inventory data on Thursday for indications on US oil demand. Analysts in a Reuters poll expect increases in crude and oil product products. The data was forecast to show a 1.9 million barrel build in crude stocks, a 600,000 barrel build in distillates and a 2.9 million barrel rise in gasoline inventories last week.
Investors take sell positions with crude seen declining further
MUMBAI: Even as high volatility in equity markets is making investors more riskaverse, commodity investors have spotted a good opportunity in the falling crude oil price. On MCX, commodity traders are taking sell positions in crude oil as the near to mid-term view is that prices could fall further, reports Deepa Krishnan. On Wednesday, crude prices for the MCX November contract declined nearly 5% to Rs 3,740 per barrel. The October contract, which expires on Wednesday, closed more than 5% lower at Rs 3,682. In the international markets, crude oil traded at $76 a barrel levels in early trading sessions in New York, a new low for 2008. "Indians are momentum players, there seems more downside left for crude, prompting the selling," said T Gnanasekhar of Commtrendz Research. The general economic sentiments in the US and fears about whether the US government's plan to inject $250 billion into their banking system would prop up the demand caused oil prices to fall further, analysts pointed out. In the crude oil market, the focus has moved from supply to demand concerns. The global economic slowdown is expected to reduce demand by nearly 15-18%, said Subodh Gupta of Anand Rathi Commodities. Mr Gupta said even if the OPEC meeting scheduled for November 18 hints at cutting supplies, fundamentals indicate higher supplies. And to add to the bleak demand forecasts, OPEC has lowered demand growth for 2009 by 100,000 barrels a day, keeping the projected global growth at 800,000 barrels a day in its monthly report on Wednesday. Some analysts said production cuts by refiners due to falling margins could lead to supply shortage, although the effect of such a move on the prices will be marginal.

Investors flock to gold, price up

WITH financial crisis deepening around the globe, investors are flocking to gold. This has kept the yellow metal price up while most other commodities headed southwards during the week. In spot market gold moved up 1.62% compared with the previous week and closed at $849 per ounce after making a high of $931. In futures, the October contract on Comex closed up over 3% at $859 after making a high at $924.
    Locally on MCX the October contract closed up over 4% at Rs 13,372 per 10 grams after making a high at Rs 14,320. The local prices were supported due to the depreciation of rupee which fell by over 4% since past ten days to 48.3 levels against the dollar.
    Due to the collapse of financial institutions throughout the world the liquidity crisis deepened and the rise in gold prices was due to its preference as a safe-haven asset.
    However, later in the week, on October 10, gold price fell by over 9% to a low of $826 level reversing the gains made earlier the day as a wave of panic prompted the investors to sell assets across the board to meet liquidity need. The prices later recovered.
    Subodh Gupta from Anand Rathi Commodities said going forward gold will follow global economic turmoil more than anything. "Looking at trend in gold prices $840 is a very critical support and a breach of this might see gold at $800 per ounce and on upside one can see gold at $900," he said.
    Dollar tends to look stronger as compared to Euro and week as compared to yen. "It seems that for the time being gold has lost correlation with the currency markets," Mr Gupta added.
    In the local markets demand has taken a backseat due to the high price and people are just selling to book the profits. But a research report from Angel Commodities expects the demand in India to pick up by Diwali.
    nidhi.sharma@timesgroup.com 

BANKS IN FOR A ‘COLLATERAL’ SHOCK

ET INTELLIGENCE GROUP

INDIA Inc may have escaped the sub-prime crisis with a few minor bruises, but lurking in the background is a potential source of big risk for banks. According to an ETIG study, the share of unsecured borrowings of India Inc has risen steadily in the past five years, with close to half of total borrowings offering no collateral. The share of unsecured borrowings, which was just 31.1% of the total borrowings of Corporate India in FY03, has shot up to 43.9% during FY08. And the top 20 borrowers accounted for 56% of the total volume of unsecured loans.
   Unsecured borrowing refers to the practice of borrowing without any asset provided by the borrower to back it. Lenders such as banks usually negotiated such loans with their bigger and older clients who have a good credit history. As the lender has no claims on any asset, there is a bigger risk of loss in case of a default.
   Usually, such unsecured loans are short-term in nature, but can be rolled over, which means that the tenure of such loans can be extended.

RIL,Tata Steel among biggest unsecured debt holders


   THE ETIG study, which considered a sample size of more than 2,000 listed companies, showed the total unsecured borrowings stood at Rs 2.92 lakh crore (about $62 billion at current exchange rates) during FY08, more than three times the figure during FY03, when it was a mere Rs 93,246 crore.
   "Many companies' working capital requirements were met through short-term borrowings as the market conditions were very good and cost of funds was low. For short-term fund requirements, firms could have gone for unsecured borrowings. As a lender, I see the balance sheet and project before lending. If the end-use of the funds is ensured then there is no problem in giving unsecured loans," says Bank of Baroda's MD & chairman, MD Mallya.
   Other bankers also say a rise in unsecured lending may not necessarily mean indiscriminate lending. "The banking industry has changed its focus in the past few years, from a security-oriented lending to more risk-assessment based lending where the borrower basically has to have a good track record and a sound project to be able to borrow. The world over, there has been a shift in lending to risk-assessment-based lending. Going by security-based lending, even a bad guy would become eligible as the loan would be secured," explains PNB's chief GM (bank credit) Arun Kaul.
   He adds that one of the reasons for large increase in unsecured loans could be due to lending to infrastructure projects. Lending in infrastructure projects, which has picked up big time over the past five years, is mostly through unsecured loans. The study reveals the practice is more pronounced in case of larger borrowers. For the top 20 borrowers, who account for 42% of total debt of the companies in the sample, unsecured borrowing constitutes 58.6% of their loan portfolio, up from 40% in FY03. For these companies, almost 70% of fresh loans taken during FY03-08 period has come in the form of unsecured borrowing. Among the companies who have high debt levels (Rs 5,000-crore plus) and have a big chunk in the form of unsecured borrowings are Bharti Airtel, Reliance Industries and Tata Steel, besides some public sector majors — IOC, HPCL, BPCL and NTPC. All these companies have more than 75% of their debt in the form of unsecured borrowing. However, for the three oil sector majors a large part of such loans are short term in nature. Companies such as Essar Oil, Essar Steel, Ispat and Jet Airways have a low level of unsecured borrowings at 10-12%.
   Mining and oil sector show the highest level of unsecured borrowing at 86% and 68%, respectively. Transport equipment and power are otherS with more than 55% of unsecured debt. Textiles and cement & cement products have relatively low levels of unsecured credit. Notably, textiles and power are the only sectors,which have seen a reduction in the level of unsecured debt during FY03-08 period.

Bailout deal fails to halt oil slide

Crude Price Falls Over $4 To $94 As Fuel Demand Seen Dipping

OIL prices fell more than $4 towards $94 a barrel on Thursday, as the US dollar rose and as the US Senate's approval of a $700 billion bailout of the financial sector failed to allay concerns over weakening fuel demand in the world's top energy consumer. 
    US light crude for November delivery fell $4.39 to $94.14 by 21:40 pm IST, erasing earlier gains above $100. It had settled $2.11 lower at $98.53 on Wednesday, when US government data showed supplies rising and as the dollar firmed. London Brent was down $4.33 at $91 a barrel. 
    The Senate's approval of the rescue plan initially reassured European stock markets, but US stocks fell sharply after weak US economic data. The dollar's advance to a near 13-month high against the euro and a basket of major currencies put pressure on oil, which is priced in dollars. 
    But oil's fall also reflected a shift in sentiment to focus more on falling demand in industrialised countries. "Expect crude to track firmer equity markets for a little while longer," said Edward Meir, of broker MF Global. 
    "On its own, we think crude will not fare as well, and will be particularly vulnerable heading into Q4," he said, adding "We would not be surprised to see $75-$80 on WTI (US crude) by the end of the year." 
    Latest US government data on jobless claims and factory orders provided more evidence of an economic slowdown. The number of US workers filing new claims for jobless benefits rose to their highest in seven years in the week to September 27, but this was partly due to the impact of Hurricanes Ike and Gustav. 
    Oil prices have tumbled from record highs above $147 a barrel on July 11 on signs of slowing oil demand from industrial economies. US government data on Wednesday showed crude oil inventories up 4.3 million barrels last week as output from the Gulf of Mexico continued to recover from disruptions caused by Hurricane Ike. 
    Gasoline inventories also showed a surprise 900,000-barrel rise as more refinery capacity came back online following the storm, which caused the worst disruption to the US energy sector since the 2005 hurricane season. 
    Total US oil product demand over the past four weeks was down 7.1% from a year earlier, providing evidence of the impact of the financial crisis and high fuel costs on US consumption. 
    Oil prices have also come under pressure from investors shifting money out of commodities into safe haven investments such as cash and government bonds because of the financial sector crisis.