India's energy hunt

Jul 1, 2008

In this issue:
» India's energy hunt suffers a setback
» Mittal seeks to hunt for more coal
» Global auto sector suffers a slowdown
» China slowdown a bit too
»  ...and more!

India's energy hunt marred by bad policy
The bids for the new exploration licensing policy (NELP-VII) ended yesterday. Out of a total of 57 blocks on offer, 19 got just one bid, while 12 blocks attracted no bids at all. Global oil majors like ExxonMobil, Chevron, Total and Shell did not participate. It would have been a complete embarrassment for the government had it not been for some new players who participated in the auctions. New entrants like LN Mittal & HPCL (1 block), BHP Billiton & GVK group (7 blocks), RIL-BP (1 block) and ONGC (3 blocks) bagged the blocks.

Previous rounds of NELP
Round Year No. of blocks No. of bids New Indian players New foreign players
I 2000 24 45 ONGC, OIL, IOC, GAIL, RIL, HOEC Cairn, Niko, Mosbacher, Gazprom
II 2001 23 44 GSPC Hardy
III 2003 23 52 Jubilant Geoglobal
IV 2004 20 44 BPCL, HPCL -
V 2005 20 69 NTPC, Focus ENI, Canoro, Geopetrol
VI 2007 52 165 Tata, RNRL, Essar, Adani, JP Associates BG, Santos, Newbury, Petrogas, Suntera, Naftogaz, Hallworthy, Silverwave

The main reason for the poor response is the concern over the lack of a tax holiday to gas producing companies. It may be noted that the closing date was postponed thrice over the same issue. NELP has assumed a great deal of significance as can be seen in the spurt of activity since the inception of the policy from the table below.

Success from NELP
% Increase
Exploratory wells 167 193 16%
No. of discoveries 27 49 81%

Given India's needs for energy in its march towards prosperity and its acute dependence on oil imports, we wonder if the policy makers can afford to alienate global capital and expertise in the domestic exploration.

  • Also read - The impact of high crude prices

    The Mittal juggernaut rolls on...
    India born steel tycoon Lakshmi Mittal plans to enter into a takeover bid for Anglo-Australian mining company Rio Tinto as reported by a leading financial daily. Rio Tinto is the biggest producer of iron ore in the world. It has around 145 m tonnes (MT) of iron ore and 156 MT of coal production capacity. Rio is the subject of a bid by Australian mining group BHP Billiton, which is being scrutinised by anti-trust regulators. It may be noted that Arcelor Mittal, the largest steel producer in the world with a capacity of 116 MT, requires 186 MT of iron ore and 116 MT of coal annually. This is a significant development as rising raw material prices are putting pressure on the margins of steel producers worldwide. And if Mittal succeeds, it will change the equations in the global steel industry.

    Slowdown...on 'auto' pilot
    Automobile manufacturers in the US continue to feel the pinch of economic and demand slowdown. As reported by The New York Times, one of the big three auto companies in the US, Chrysler has indicated that it will be closing down one of its two minivan plants; the company has also proposed to reduce output of a long-awaited new pickup truck - all this in response to a steep slump in demand for large vehicles. These actions will effectively lead to the company terminating 2,400 of the 3,500 hourly jobs over the next four months.

    Interestingly, the minivan plant that would be 'idled indefinitely' opened in 1959 and was closed for several years in the early 1990s. Chrysler's latest action follows similar announcements from its peers, General Motors and Ford over the past 2-3 months. It is indicative of the severe pressure faced by these companies both on account of slowdown in demand on one hand and rising cost pressure on the other.

    The situation is almost similar in India, only that the extent of damage is still lower as compared to that faced by US automakers. While auto sales rose for the second consecutive month in May 2008, we expect that rising input costs and high interest rates will continue to put pressure on the companies' demand and profitability in the months to come.

  • Also read - Will the 'Nano' force changes in game plan for Indian automakers?

    The dragon stops dancing
    Incessant efforts made to slow down the juggernaut proved in vain as the government of China effected several hikes in the interest rates last year to bring the GDP growth below the double digit figure. However, things have now changed. The country's manufacturing index expanded in June 2008 at the slowest pace in almost three years. This was primarily due to weak growth in export orders that China heavily relies on. A global economic slowdown triggered by the US housing slump has been exacerbated by increased borrowing costs as central banks tackle rising inflation. The World Bank forecasts show that China's growth will drop below 10% in FY09 to 9.8% YoY, for the first time since 2002. The same, however, is still a large figure since the base figure for 2007 on the back of a phenomenal growth rate of 11.9%.

    The Chinese economy that relies heavily on its manufacturing sector has been severely hit by the rising input and fuel costs. China is the world's third-largest net importer of oil after the US and Japan and forms nearly 40% of the total fuel demand in the world. Rising oil and coal costs have nearly halved the country's corporate profitability in the first five months of this year and fuel shortages have also been a drag on manufacturing.

    Cement can't expand...
    The ambitious plan of the Indian cement industry to add 80-90 m tonnes (MT) in three years seems to be dying out due to the adverse macro-economic condition and land acquisition problems. Most cement companies, which announced capacity expansion plans two years ago, are already lagging behind schedule. It may be noted that the companies expected a growth of 8% to 10 % over last year's production of 170 MT and demand of about 200 MT and planned the capacity additions accordingly. However, a slowdown in the construction sector due to costlier raw materials and stiff credit conditions have already put margins of cement manufacturers under pressure. So it seems difficult for the additional capacity expansion to go on stream on time.

  • Also read - A review of the cement sector

    ...neither can manpower
    The infrastructure sector is currently facing a huge skilled manpower crunch. Moreover, the demand for the professionals is rising significantly on account of huge capacity expansion plans in the sector as reported by Assocham (The Associated Chambers of Commerce and Industry of India). As a result, the attrition rate in the sector has gone to 40%. Industries like power, steel and petroleum will witness a requirement of huge manpower on account of their expansion plans that are due to go on stream in next couple of years.

    Today's investing mantra
    "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful." - Warren Buffett

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