Trade with Commodities: June 2009

Sunday, June 28, 2009

Best Of Both Worlds? Copper and Silver

The rising industrial usage of silver as well as a rebound in investment demand portrays a positive scenario in the long term. However, due to its positive correlation with copper price volatility could continue

SINCE mid-2008, silver expereinced a huge dip of –57% while its precious metal counterpart, gold, remained resilient at –26% during the global commodity selling frenzy. The reason: a rising correlation of the white metal with base metals like copper — which declined by 67% during the period — and a rise in the industrial use of silver in the last couple of years. The premise held true for the subsequent run in the price of silver since December 2008. Against a gain of 31% in gold, silver appreciated 58%, almost tracking an over 70% rise in copper. The behaviour ofsilver highlights a pattern of following the price trend in gold, however, with increased price swings due to its correlation with copper. This is clear from the first chart that shows the average monthly price range as a percentage of the previous month's closing price for benchmark silver, gold and copper prices since 1999. The price rangeis the difference between the monthly high and low prices for the metals. A comparison of the price range with the previous close indicates the monthly pace of change in the prices. As is obvious, the price range of silver follows the directive moves of the price range in gold whileits value is closer to that of copper.
    This phenomenon seems supported by a detailed classification of the world silver demand since 2002. As the second chart shows, the contribution of industrial demand to the total demand has seen anaverage rise of 2% during the period. In fact, the pace of decline in the photography industry's contribution to the total demand seems to be stabilising. There were two distinct developments in demand distribution during 2008: on the back of a global recession, the industrial demand declined by nearly 1%, but the investment demand in terms of coins and medals rose by more than 60% from 2007.
    Silver's exceptional electric conductivity makes it ideal for use in electronics products and its unique chemical property makes it useful in preparation of catalysts. The metal's less-known anti-bacterialproperties are also leading to its increasing use in medical as well as water purification industries.
    Other sectors that are expected to see a rise in the use of the metal are food packaging and solar panels. The new-age addition to the industrial demand is expected from the rising use of radio frequency identification, or RFID, a tagging technology used in supply chain management that is expected to replace the bar code identification system in the coming years. While the industrial demand of the metal is expec ed to provide strong support to prices, the supply side could be affected by worldwide cuts in mine production of zinc and lead, of which silver is a by-product. The scrap supply added about 1% in 2005-06, but has declined 3% since 2007. Against a rise of 12% in 2005-06, the official sector sale has seen an average decline of 30% in the last two years. This leads us to the last aspect of the demand-supply equation: the investment demand. The retail demand for coins and medals saw a remarkable jump in 2008 while jewellery demand continues to remain subdued. However, the interest in products like exchange-traded funds (ETF) and silver futures has seen a revival this month.
    At the start of the 2009, the ETF holdings were believed to be nearly 266 million ounces (Moz) and net long positions in Comex — the commodities arm of the NYMEX — were about 240 Moz on June 19. This is a significant increase from the total net positions of 95.7 Moz in October 2008. The analysis of the relative value of silver to gold and its historic behaviour throws up interesting correlation. While silver has traditionally enjoyed the status of a value store, its use in industrial applications has diluted its status of a precious metal.
    The relation between price movements of these two precious metals can be studied by looking at the gold-silver ratio (GSR). It is a ratio of the daily close of benchmark gold price to that of silver and shows the number of silver ounces required to buy an ounce of gold. A high GSR means gold being relatively priced higher than silver while, conversely, a low ratio indicates a relatively high value of silver. So, the GSR maintains a negative correlation with silver prices. Historically, this ratio has averaged at about 58 and any deviation from this average is eventually met by a counter move.
    In the recent past, this ratio hit a high of 84 in October 2008 when silver prices plunged to $9.20 per ounce. However, the upmove in prices since March 2009 is on the back of GSR starting its move towards the historic mean and is currently at 66.
    In the short term, the price swings in silver will depend on the fluctuation in base metal prices and, hence, global equity markets. However, in the medium term, a healthy investment demand and apossible decline in supply could lend an important support. In the long term, a rise in industrial demand could enhance the prospects of the white metal.
    devangi .joshi @timesgroup .com

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Agriculture: Farmer's Picks

Green SHOOTS

In a bid to improve farm yield, the investment in agriculture has been on a steady rise globally reviving the fortunes of farm-input companies. ETIG's Ramkrishna Kashelkar and Kiran Kabtta Somvanshi advise the long-term investors to add a few such stocks to their portfolio

"AGRICULTURE is the best, enterprise is acceptable, but being on a fixed wage is a strict no-no," thus goes an old
    Indian proverb.
odern India has turned that adage on its head, and in an economy that's set to overtake China as the world's fastest growing, a high fixed wage is acceptable, enterprise is preferred, and agriculture, well, seems eminently avoidable.
    However, a grain crisis that erupted in the last few years has reinforced how central food security is to an economy, developed or emerging. The reality has dawned on policy makers that high food prices will cripple every other sectors of the economy, as consumers, struggling to put food on the table, tighten their purse strings on every other non-essential product.
    The world is today consuming more than what it makes, and massive farm-to-fuel programmes are limiting the available farmland for foodgrains. This practice is now under review in many countries ranging from the corn belt of the US to the sugar cane farms of Brazil.
    Back home, the government's investment in agriculture has grown steadily over the years and a boom in agri-commodity prices in the last couple of years means that the farmers are in a better position today to make long-term investments.
    For a long-term investor this is a good sign to invest in companies that supply key inputs to the agriculture industry. In view of this, ET Intelligence Group has cherry picked firms that could benefit from the rising demand for farm inputs and agricultural infrastructure.
    While the valuation of these stocks provides scope for appreciation, they could prove defensive bets in times of turmoil due to strong demand from agriculture segment. Food, after all, is a recession-proof business.
GROWING GOVERNMENT INVESTMENT
The direct government expenditure in agriculture has seen a sharp rise over last five years enabling better farm credit and creation of support infrastructure like irrigation (See chart).
    As a result, over last few years India has seen a spurt in the capital formation in the agriculture sector including initiatives such as irrigation projects, rural roads and communication infrastructure, sales and marketing infrastructure, production of fertilizers and pesticides, agricultural education, research and development of agricultural technology. Schemes like National Rural Employment Guarantee Scheme (NREGS) are also instrumental in improving the infrastructure in the rural areas.
THE GLOBAL SCENARIO IS CHANGING
Under the Renewable Energy Directive (RED) passed by the EU Parliament in January 2009, bio-fuel blending of 5.75% is envisaged by 2010 to be scaled up to 10% by 2020. In the US the ethanol consumption is set to quadruple to 36 billion gallons by 2022. In India also, the government has mandated a 5% ethanol blending to be raised to 10% next year.
    All this is necessitating the world to invest more in improving farm yields. This needs optimum usage of pesticides, farm nutrients including fertilizers, creation of infrastructure such as irrigation, warehousing and transportation and usage of automated processes from tilling to harvesting.
    Over the last few years, consumption of food grains has risen faster than the growth in supply. Although the higher foodgrain production in 2009 has assuaged the fears about immediate food scarcity, long-term worries remain. Most of the agrocommodities witnessed a sustained rise in prices in the last couple of years, which are currently at nearly double their 2001 prices.
    These factors reinforce a sustained rise in the demand for the farm inputs in the years to come. In fact, after a sluggish spell of five years, for the first time in FY09 the agrochemicals industry worldwide witnessed a robust double-digit growth.
    Similarly, India's fertilizer industry, which was stagnating till FY04, has picked up growth in the last five years. India's fertilizer consumption, which rose at a CAGR of just 0.6% from FY98 till FY04, jumped to a CAGR of 5.6% subsequently. For FY08, the country consumed over 20.9 million tonne of three major farm nutrients viz. nitrogen, phosphorous and potassium. Five years back, the corresponding figure was 17 million tonnes. The Potential Winners
THESE visible trends are expected to benefit the following companies. Most of those in these industries viz. agrochemicals and fertilizers are trading at price-to-book-value multiple of around 2 and price-to-earnings multiple in a single digit figure.
    United Phosphorous is India's largest pesticides manufacturer with over half its revenues coming from overseas markets. Over the last few years, the company has expanded its geographical footprint through a series of acquisitions, thereby safeguarding itself from the monsoon-led seasonal fluctuations in Indian market.
    Rallis India, which is part of the Tata Group, is another strong contender from the pesticide sector. It is one of the leading players in the domestic market and has seen turned around in the last 5 years and is now on a strong growth footing. The company is making targeted efforts to grow its exports, expand capacities and introduce new products periodically to sustain future growth.
    Tata Chemicals is one of India's leading manufacturers of urea and di-ammonium phosphate (DAP), with nearly half of its revenues coming from fertilisers. The company has recently expanded its urea capacity by 25% through debottlenecking, which is fuelled by natural gas.
    Chambal Fertilisers is India's largest urea producer in the private sector with a capacity of 1.73 million tonnes per annum. The company, which saw its profits wilt between FY05 and FY07, has recovered subsequently.
    Coromandel Fertilisers, which is part of the Murugappa group, is India's leading manufacturer of phosphatic fertilisers.
    RCF, the government-owned fertiliser company, was stagnating between FY99 and FY04, but has picked up steam over last few years. The supply of natural gas is expected to keep it firmly on the growth path in the years to come.
    Although all the fertiliser companies in India today market micronutrients and water soluble fertilisers to the domestic farmers, Aries Agro is the only listed company fully focussed on this niche business. The demand for these essential soil-enriching products is expected to rise at a double-digit rate in India in coming years.
    Companies in the production of seeds, one of the key agri inputs, also have good prospects. Advanta India, which shares its parentage with United Phosphorous is India's leading seeds producer, with global operations in seeds and leadership position in crops like sunflower, sorghum and sweet corn. This company, too, has been on an acquisition spree, acquiring Hyderabad based Unicorn Seeds and US based Garrison and Townsend in 2008 to expand product portfolio and geographical reach.
    One of the largest areas of public expenditure in agriculture is on irrigation projects. Companies like Patel Engineering and IVRCL Infrastructures and Projects have bagged some of the largest irrigation projects in the country.
    Any incremental spending in this area is likely to be positive for such companies. Companies like Jain Irrigation, the manufacturer of pipes, irrigation systems and such other farm equipment; Kirloskar Brothers, the manufacturers of pumps and pumping systems and Mahindra & Mahindra, one of the world's largest tractor manufacturer are the obvious contenders to benefit once a boom sets in in the farm sector.
    DCM Shriram Consolidated with business interests in sugar, fertilizers & chemicals, seeds and rural retailing (through Hariyali kisan retail stores) is also a good bet due to its varied businesses being closely associated with the farm sector.
CONCLUSION
A widening demand-supply gap and consequent high prices are
    helping the agriculture industry the world over to hike its ability to investment in the future.
    In India, the government-lead efforts have provided the necessary impetus to the domestic agriculture industry. These trends are likely to strengthen in the years to come as the food demand continues to grow in line with the global economic growth. The struggle to extract more out of the same piece of land year after year is set to generate more demand for various types of farm inputs, which augurs well for the producing companies. Long-term investors must include these stocks in their portfolios.
    Ramkrishna Kashelkar & Kiran Kabtta Somvanshi With inputs from Pallavi Mulay

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Wednesday, June 24, 2009

Delayed rains may ruin major crops

The First Kharif Sowing In Over 200 Talukas May Go Waste Due To Lack Of Showers

AN ELUSIVE monsoon portends another bad season for major crops across the state's western parts, as well as Vidarbha and Marathwada regions. The first kharif sowing in over 200 talukas spread over these regions faces the danger of damage due to lack of rains.
    Maharashtra had a disastrous farm season in 2008-09 and all major crops, including foodgrains, reported 25-50% drop in yield over the 2007-08 season. The state government has attributed drop in yields to erratic monsoon.
    Data put out by the Pune-based agriculture commissionerate says that sowing operations have been completed only in 1% of the total cultivable area for the kharif crops in Maharashtra by June 23. The state has more than 28 lakh hectares cultivable area spread over 300 talukas. Of this, only 1.55 lakh hectare area has been sown.
    According to the agriculture commissionerate, more than 200 of these talukas have received only 10% of their average rainfall in June so far and the sowing operations are negligible. Around 53 talukas have received between 20% and 40% of their average June rainfall and 22 tehsils have reported 40-60% showers. Only five talukas have reported 60-80% of their average rainfall so far. Delayed arrival of monsoon has put the kharif season in 96 talukas of Vidarbha in jeopardy followed by 34 in Marathwada, 27 in Konkan, 28 in Nashik and 15 in Pune.
    In Vidarbha and Marathwada, the major kharif crops of cotton, soyabean and paddy have been hit by dry spell, which can also affect the prospects of second phase of sowing. Horticulture and vegetable farming in Nashik and other parts of north Maharashtra could also take a severe hit. In western Maharashtra, the dry patch threatens a successive second bad season for the sugarcane industry.
    "Though the state reported a low farm output last season, the rainfall situation was better in 2008 as compared to 2009. By June 23, 2008, the state had received 59% of its 130 mm average rainfall for the month. This year, the state has received only 18% rainfall (41 mm) till the corresponding date," said an official with the agriculture commissionerate.
    Agriculture officials said farmers might also have to think of alternative crops if the monsoon gets delayed further. "In this scenario, the investment that farmers may have made in the first phase of sowing will go waste and it will also have an impact on the state's aggregate yields this season," said the official.
Declare drought in
state: Munde
MUMBAI: Senior BJP leader and MP Gopinath Munde wants the government to declare drought in the state and allocate a special Rs 2,000-crore package for relief measures. "Despite 4,500 villages being supplied water by tankers and municipal bodies announcing 20% water cut in most cities, the state government does not seem to be serious about this crisis. This drought threatens to be as serious as the 1972 drought," Mr Munde said.

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Monday, June 22, 2009

El Nino could wreck rain, growth prospects

Chances Of Freak Weather Pattern Soar

New Delhi: The risk of a failed monsoon has risen manifold with the World Meteorological Organisation (WMO) warning of a "substantially elevated risk'' of this being an El Nino year.
    El Nino is a periodic weather anomaly that saps the monsoon of its strength on most of the occasions it occurs. It is marked by the warming of Pacific waters that slows down the trade winds blowing from South America towards southeast Asia. WMO, the apex UN body on climate, warned that there was an above 50% chance of El Nino this year—double the normal probability in any other year.
    For a government already on the edge with a two-week delay in the monsoon, the warning couldn't have come at a worse time. The path to economic stability in the past two quarters has been built on robust results from the farm sector and economists have been hoping that continued buoyancy in agriculture could keep India on a relatively decent growth rate. The WMO's warning could force revisions in growth rate predictions.
    The monsoon system, sucked of some of its moisture by the cyclonic storm Aila over the Bay of Bengal, has already recorded a substantial delay in travelling up north, leaving large parts of central, north and northwest India scorched and devoid of rains.
    Actual rainfall for the country as a whole for the first half of June has been recorded at 39.5 mm against a normal of 72.5 mm, a deficit of 45%, with 28 of the 36 meteorological subdivisions experiencing less than normal rain.
    With WMO warning that the El Nino effect could pick up in the third quarter of this year, the chances of the monsoon being wrecked further could increase.
WHY NO RAIN IS BAD NEWS
What is El Nino? | A periodic climate phenomenon where the waters over the Pacific Ocean heat up beyond normal. It slows down trade winds blowing from Latin America towards southeast and south Asia. For the past 5 months, waters in the Pacific have been warming up
How does it impact monsoon? | As the central Pacific warms, the atmosphere above it heats up and rises. This induces a large, dry air mass to sink over India, depleting the monsoon showers. Not every El Nino year is bad for the monsoon, though
When did it last hit monsoon? |
El Nino's last impact on the monsoon was in 2004 when the rains were more than 10% below normal—technically, a drought year
Why should we worry? |
65% of kharif crop depends on rains. Crop failure could hit economic recovery. Food Security Act could be hit. Food prices could go up further El Nino is not the only factor
New Delhi: "The trend over the last five months, according to the best models, shows that El Nino could develop this year,'' said B P Yadav, spokesperson for the IMD. "It is factored into the model based on which we shall be making our fresh predictions for the months of July and August on June 25. It is well known that El Nino years have an impact on the Indian monsoon, so we are keeping a watch,'' he added.
    However, the IMD as well as WMO did point out that El Nino is not an isolated factor to affect different weather systems, including the monsoon, and the weatherman would have to factor in other parameters too to see how it would impact various regions. The last two times El Nino occurred, in 2002 and 2004, it caused deficient rains in the subcontinent. Historically, El Nino has roughly impacted the monsoon on two-thirds of the occasions that it has occurred. In view of the fears of a failed monsoon, the IMD has decided to hold a full-scale press conference on June 25 instead of the normal practice of releasing its estimates.
    Top echelons of the government are already worried about the monsoon with the cabinet deciding to set up a committee of secretaries to keep an eye on the skies. The panel has asked crucial states to make contingency plans if the monsoon fails, and will meet on June 25.
    For a government burdened with reviving the economy already hit by the global slowdown, trouble could brew on several fronts if the monsoon does not revive with expected force. While crops would suffer the most in rainfed areas—roughly 65% of the sown area would be directly hit—on irrigated lands, the demand for irrigation and therefore power consumption is bound to be higher, increasing the government's woes.
    But with water levels in most reservoirs having dropped below their 10-year average as well as last year's levels for this period, concerns are mounting on the power front. A good crop last season, supported by social spending through programmes like NREGS, was the bulwark of continued demand in the last two quarters, keeping the economy relatively healthy even as the manufacturing sector slowed down. A failed sowing in kharif will make it difficult for the UPa to secure the economic recovery it has promised.
    The food security act could also become a headache if crops fail. Falling food stocks as the threat of drought looms large and rising food prices would make it the worst time for the UPA to test the project. It would also be the time when expectations from the government that it put such an act in place would be the highest.

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Commodity transaction tax A THORN IN THE FLESH

THERE IS A STRONG CASE FOR THE government to remove the threat of commodity transaction tax (CTT) by deleting the relevant provision from the Finance Act 2008-09. The coming budget is the right opportunity for this. The proposed tax is untenable not only because it has the potential to drive commodity futures business overseas but also because the impost would not even serve its express purpose of reducing price volatility.
    It must be noted that the top 25 commodity derivative exchanges in the world are not subject to CTT. Also, there is no transaction tax in the currency derivative market and on gold exchange traded funds. A transaction tax will certainly have an adverse bearing on India's commodity exchanges that are struggling to grow. The tax would make the exchanges more expensive, forcing commodity businesses/ traders to dump them for cheaper exchanges abroad.
    According to the Finance Act 2008-09, CTT would be levied at the rate of 0.017% of the value of transaction. One estimate is that this would increase the cost of transaction by almost 800%, thereby making India's commodity futures exchanges the costliest in the world. If CTT is implemented, out of the total transaction tax, 85% will be towards CTT and the balance will be towards exchange fee, service tax, stamp duty, etc. So, the tax is not as small as it appears to be. After all, commodity futures is a volume-driven, extremely low-margin business. A 0.25% margin is something to aspire for in this business!
    As the number of transactions increases, the futures market will turn more efficient in performing its principal function of providing the benefits of price discovery to different types of producers, especially farmers. More transactions would mean better management of price risks. A large number of arbitrage transactions would help in linking the futures and options prices to real prices. CTT-induced lower trading volume, on the other hand, could lead to higher volatility in prices, impairing the market's price-discovery function.
    Immediately after the Budget 2008-09, there was a hue and cry over the proposed tax. The nationallevel exchanges — National Multi Commodity Exchange, Multi Commodity Exchange of India and National Commodity and Derivative Exchange— as well as the Forward Markets Commission, the regulator, pitched for withdrawal of the proposal. The prime minister's economic advisory council promptly examined the matter and reportedly recommended halving the tax. The government apparently buckled under the pressure of the contrarian popular view and therefore, the budget proposal has not yet been implemented. But the Finance Act 2008-09 very much has the provision for imposing CTT at any time the government wants it. This threat is unwarranted. It has had a psychological impact on Indian commodity bourses as well as those trading on them.
    Unlike in the stock market, investment institutions, mutual funds and foreign institutional investors (FIIs) are not permitted to operate in the commodity futures market. Besides, options contracts, index futures and futures based on intangibles are also prohibited in the commodity futures market. So, it is difficult anyway for undesirable elements to distort the markets.
    What's needed at this juncture, therefore, is to allow futures markets to play a more meaningful role in helping India's farmers to realise higher prices for their produce. Market participants, especially the farmers and co-operatives need to be encouraged to make additional investments in marketing infrastructure such as price dissemination networks, warehousing, storage facilities and testing laboratories. Robust commodity exchanges and a strong futures market are essential for creating the conditions conducive for such investments.

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Sunday, June 21, 2009

The spurt in crude oil prices may lead to a rise in costs for India Inc.

But it is not always such a bad thing, says ETIG's Ramkrishna Kashelkar

    THE latest inflation numbers might have fallen below the ground zero, but that does not change reality. The prices of commodities, food articles and energy are on a steady rise. Obviously, you couldn't expect to see a different picture after experiencing the roller coaster ride in crude oil prices. Within just four months, the crude oil prices have more than doubled from their lows of February 2009 – faster than even last year when the crude prices touched historic highs. While the crash in crude oil prices marked a plunge in consumer confidence and contraction of economic activity the world over, the reversal does indeed signal a change in mood. However, when a commodity like crude oil changes gears so fast, the impact goes far beyond just changing moods.
    Crude oil is the world's largest traded commodity and almost everything used in modern day life from pin to piano can be traced back to it, some way or the other. In 2008, the crude oil averaged $100 per barrel, while the world consumed 85.8 million barrels every day. At this rate, the world's total expenditure on crude oil was more than thrice India's GDP in 2008. It is no wonder that the industry using crude oil as a direct input is always the one to take the first hit when the oil prices fluctuate so fast. The petroleum refining industry, which was making merry in the June 2008 quarter when oil prices were on a rise, incurred heavy losses in the September and December 2008 quarters as the prices crashed. The impact, however, goes even deeper to the further downstream industries such as petrochemicals and polymers.
THE CRUDE IMPACT
The rising crude oil prices affect companies in two ways. It increases thee fuel cost for some, while for others it simply raises the feedstock costs. Although the availability of natural gas is fast increasing in India, a number of companies use liquid fuels derived from crude oil for their energy needs, either due to lack of availability of natural gas or lack of connectivity.
    RCF's liquid fuel consumption in
    FY2008 was Rs 1712
    crore or nearly 4.3 times
    its operating profit for the
    year. The company has long
    been suffering from insufficient
    natural gas to run its plants at optimum level. It had consumed over half-a-million tonne of naphtha in FY08 alone. Although the company's fuel consumption figures for FY09 are not available yet, it will save a chunk of that cost in FY2010 thanks to 3 MMSCMD of gas it is now getting from RIL.
    Several companies – particularly in southern India – are yet to find pipeline connectivity to avail natural gas in the near future. The spurt in crude oil prices will continue to haunt companies such as Tamilnadu Petroproducts, SPIC, Mangalore Chemicals and FACT.
LOGISTICS
For the logistics industry, the liquid fuels derived from petroleum crude oil form the basic raw material and they have very little scope of replacing it with natural gas. The players in this industry will be at the receiving end of a rise in petroleum prices.
    The fuel cost of Jet Airways jumped over two-and-a-half times in the first half of FY2009 to nearly Rs 3200 crore or half of its revenues for the period. With the crude oil prices falling subsequently, the company cut its fuel costs by around 25% in the second half. Still, for the whole year, the company's fuel bill was a staggering Rs 5850 crore or 44% higher against last year.
    The shipping and courier industries also witnessed a similar trend in FY09. Other expenditure, where their fuel costs are accounted for, bulged in the first half and eased in the second. The slowdown in traffic, due to the global economic slowdown, added to the woes of this industry.
PETROLEUM AS A FEEDSTOCK
Apart from being a major source of fuel, crude oil also accounts for chemicals used in various colours, fragrances, plastics and yarns, and as additives to boost the characteristics of other materials. Since crude oil is the common factor, a rise in crude prices lends a natural push to the prices of the dependent industries.
    However, it would be wrong to assume that a fall in crude oil prices would help these industries — petrochemicals, manmade fibres, rubber and tyre, plastic products etc — by reducing their raw material costs. In fact, historical analysis shows that their operating margins improve when the crude oil prices move up. (See the adjoining Chart).
    When the crude oil prices were hitting their bottom in the December 2008 quarter, these players reported their worst ever performance for over 20 preceding quarters. Most of them wrote off hefty inventory losses. Turnover suffered as customers postponed purchases in view of falling prices.
    The movement in the prices of these downstream petrochemicals and polymers also depend on the demandsupply dynamics. For example, basic petrochemicals such as ethylene and propylene gained around 25% since February this year despite the crude oil price doubling. The polymers derived out of these chemicals such as polyethylene and polypropylene have gained around 40% during the same period.
PLASTIC PROCESSORS
The plastic processing industry is at a peculiar juncture. As a number of new polymer production facilities are added in West Asia and China, the availability of polymers is set to go beyond its demand. Most upcoming projects in the West Asia are based on natural gas as feedstock, which is available abundantly and cheap there. HIGHER COST OR BETTER MARGINS
This could put the polymer prices under pressure in the years to come. At the same time, these low prices could induce replacement of metal products by plastic products. Thus, the plastic processing industry is likely to benefit both ways, by a reduction in raw material costs and a steady growth in demand over the next couple of years.
MARCH 2009 PERFORMANCE
The stability in crude oil prices helped Indian industries to recover in the March 2009 quarter from the debacle of December 2008 quarter. Our sample of 79 companies, representing petrochemicals, plastic products, rubber and tyre and synthetic fibres industries, showed a substantial improvement and this pushed the operating margins back to levels seen in good times. The petrochemical companies have displayed the best turnaround, while synthetic textiles industry experienced only a marginal improvement.
OUTLOOK
The reversal in crude oil prices has renewed the confidence among investors and is also likely to contribute to an improvement in the quarterly performance of India Inc. For one, the industry will not suffer any losses on inventories and the appreciation in rupee will prevent foreign exchange losses. The logistics industry should continue seeing pressure on margins before the traffic picks up. However, manufacturing companies from petrochemicals to plastics are likely to witness an improvement in performance when they announce their June 2009 quarter numbers.
    ramkrishna .kashelkar @timesgroup .com