The world's biggest power plant

Jun 25, 2008

In this issue:
» RBI's anticipated unanticipated move
» The world's biggest power plant
» US consumer confidence plummets to 16 year low
» Nigeria's spanner in UAE works
» ...and more!

  RBI's anticipated unanticipated move
In a move that is likely to flush out liquidity in the money markets to the tune of Rs 170 bn and result in higher interest rates for consumers, RBI, India's central bank, last night raised its key lending rate by half a percentage point to 8.5% and enhanced the quantity of reserves commercial banks need to park with it i.e., the CRR to 8.75%.

Inflation, which had surged to a 13- year high of 11.1% for the week ended June 11, was the key influence behind the central bank's move. Although banks did anticipate this move, the magnitude of the same has left them a little perplexed. Consumers and companies are expected to have tough times ahead as banks will most likely hike their lending rates to minimise the impact on the margins they make on loans. Thus, with consumer demand expected to slow down, it could have a dampening effect on the economy too, with some economists already downgrading their GDP estimates for the current fiscal. It should be noted that this is the fourth such move in two months, made necessary due to the relentless surge in crude prices and other essential commodities. If inflation did not show any signs of getting tamed in the coming weeks, more such action cannot be denied.

  • Also read - RBI's move, playing havoc with banks

      In the meanwhile...
    RBI's dual hike seemed to have no impact on the markets as both the benchmarks viz., the BSE-Sensex and NSE-Nifty closed in the positive today, edging higher by 1%. The buoyancy could be attributed to bargain hunting at lower levels as the recent slide had turned quite a few stocks attractive from a valuation perspective. Volatility though was on the higher side as the indices went on a roller coaster ride, starting off below the break even and then moving steadily upwards. Buoyancy was also witnessed among other Asian indices, most of who managed to close well in the green.

    European markets too have opened on a strong note. Crude oil prices were steady in Asian trading on Wednesday in the midst of concerns that higher prices are having an impact on US demand, the world's biggest guzzler of the commodity. As far as gold price is concerned, it jumped nearly US$ 6 per ounce on a weaker dollar on Tuesday in New York. However, it is still well below its record high of US$ 1030.8 hit in mid-March.

      US consumer confidence hits 16 year low
    It is not only India's consumers that are threatening to pull down its GDP growth. If a private firm in the US is to be believed, the consumer confidence in US has plummeted to a 16-year low, reinforcing fear that the world's largest economy is headed into a recession. According to news published by New York Times, the survey said that many Americans feared they might lose their jobs or be unable to find work.

    The proportion of respondents who described employment as "plentiful" fell to 14.1% in June, and more than 35% said they expected fewer jobs would be available in the next six months. This makes the Fed's job even more difficult as while higher inflation necessitates hiking rates, it could also induce lower consumption, thus hurting GDP growth and prolonging recovery. If the woes weren't brimming over, another report mentioned of falling home prices in 20 metropolitan areas across the country. Difficult times indeed!

      The world's biggest power plant
    Do you know which is the world's biggest power plant? No, it is not located on earth but is out there in the galaxy and is known as 'Sun'. Over centuries, mankind has been using Sun's energy, both directly and indirectly, for its sustenance and development. However with indirect energy sources fast depleting, attention has shifted towards sourcing the energy directly i.e., in the form of solar power.

    With costs of more traditional sources of energy fast rising, solar power is once again coming into prominence and in improved avatar. As per Mckinsey, if harnessed properly, the technology could add as much as 206 GW (giga-watts) of power generating capacity by 2020 globally. To put things in perspective, this is a little more than 1.5 times India's total power generation capacity as it stands now. Currently though, the industry is still in its infancy with a lot of players competing to win accolades on the cost front.

    The cost structure assumes importance, as the main reason the technology got into the backburner was its high cost. Although costs have come down by as much as 20% reckons Mckinsey, it still has a long way to go before it can deliver energy at the same cost as the other contemporary sources. We are indeed waiting with bated breath as this will not only reduce dependence on fossil fuels but will also make the world greener.

      Did you get your time in the Sun?
    Talking of solar energy and sun, next time you roll up that glass shield in your car to protect your skin from sun's UV rays, you could well be depriving yourself of Vitamin D and thus exposing yourself to a host of diseases including osteoporosis and heart disease.

    According to a research published in the archives of internal medicine, those with the lowest vitamin D levels have more than double the risk of dying from heart disease and other causes over an eight-year period compared with those with the highest vitamin D levels. The institute has put the blame squarely on 'decreased outdoor activity' and goes on to add, "When the sun's UV-B rays hit the skin, a reaction takes place that enables skin cells to manufacture vitamin D.

    If you are fair skinned, experts say going outside for 10 minutes in the midday sun - in shorts and a tank top with no sunscreen - will give you enough radiation to produce about 10,000 international units of the vitamin. Dark-skinned individuals and the elderly also produce less vitamin D, and many folks don't get enough of the nutrient from dietary sources like fatty fish and fortified milk." While this is indeed bad news for cosmetics companies that sell 'UV protection' products by the truckloads, it is music to the ears of pharma companies that specialize in selling 'Vitamin D' supplements.

  • Also read - Pharma: The year that was

      Nigeria's spanner in UAE works
    Facing pressure from all sides, the kingdom of Saudi Arabia finally relented and decided to raise its crude output in a bid to cool down prices. However, little did it know that no sooner will it allow output to rise by 200,000 barrels per day, insurgents in far away Nigeria will completely outweigh the decision. Africa's second largest producer of crude oil will mostly see its output fall by 300,000 barrels per day as these insurgents have attacked oil major Chevron's pipeline and also a platform owned by Royal Dutch Shell, forcing both firms to cut production.

    In any case, Saudi Arabia's output hike was just 0.2% of global supply and would have had negligible impact if any on the prices. As per the Economist, such a puny increase in output is baffling given the fact that the kingdom is capable of pumping as much as 11 m barrels per day (bpd), a good 13% more than its current output of 9.7 m bpd. Looks like there is no relief to higher oil prices in sight.

    Arjun Murti, the feted oil analyst at Goldman Sachs and among the first ones to pull the plug on lower crude prices, echoed similar sentiments at a conference call he held with India based analysts recently. While he believed that we might have not reached peak oil just yet, increasing supply has definitely been difficult to come by and it will be some years before the same increases considerably.

      Private funds eyeing the lucrative Indian infra space
    While rising crude prices and the resultant inflation have sent the Asian equity markets into a downward spiral, it has not stopped some of the biggest financial institutions from raising bug bucks for investing in the region's fledgling infrastructure projects, especially China and India. As per various reports, with trillions of dollars to be spent on infrastructure in India, China and other emerging markets, private funds are making a beeline for the sector where although opportunities are tremendous, it has also has its fair share of risks.

    India alone is expected to spend US$ 500 bn over the next five years to rid it of its chronic power shortages and congested roads. Furthermore, with the government unable to bridge the gap on its own, private players will assume an ever-increasing role. As per estimates of the Planning Commission of India, 26% of the total amount is expected to come from the private institutions. The road though is going to be anything but smooth as big infrastructure projects besides being capital intensive have long gestation periods, thus exposing them to economic cycles.

  • Also read - Opportunities in Infrastructure

      Today's investing mantra
    "I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffett

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