Crude bubble bursts?

Jul 17, 2008

In this issue:
» India turning into a plastics giant
» Hotel industry faces expansion troubles
» Do top companies steal power?
» Is China really slowing down?
» and more!

Earn over 100% Returns In 3 Years ...With Minimal Risk! Click here.

End of the crude price bubble?
Crude oil prices weakened for a second successive day yesterday after the US Energy Information Administration reported an increase in inventory of crude, gasoline and distillates along with sluggish demand. The decline is the largest two-day loss in percentage terms in 19 months. In absolute terms, yesterday was the sharpest decline in a single trading session in dollar terms in 17 years. The two-day drop brought oil more than US$ 13 below the all-time peak attained last week. The document reports a 2% YoY decline in the demand for oil products in the US.

The steep decline in the oil price yesterday coincided with US Fed chairman Bernanke's half yearly forecast to US Congress saying there was a 'high degree of uncertainty' about the US economic outlook. In fact, oil prices started declining even as Mr. Bernanke was speaking.

Another reason for the decline in oil prices was the statement by a senior US official that the US was contemplating sending a diplomat to the talks between Iran and major powers over Iran's nuclear program. This is in contrast to Washington's previous stance of no negotiations with Iran unless it gave up its nuclear enrichment.

However, there are several factors which might still cause an upward rally in crude prices such as increased tensions between the US and Iran, disruption of facilities in a big producer country like Nigeria or major interruption in global refining capacity due to breakdowns or hurricanes.

However, fuel prices in India are unlikely to decline anytime soon as any change in oil price on the Nymex hits India by a lag of around a fortnight. Moreover, present retail prices correspond to a crude price level way below the international prices.

  • Also read - Impact of the fuel price hike on OMCs

    India turning into a plastics giant...
    Polymer makers in India plan to increase their capacity by almost 40% in the next three years. About 10 petrochemical companies are making investments of Rs 1.4 trillion in projects that would be commissioned between 2008 and 2011. RIL will incur a capex of Rs 385 bn, Haldia Petrochemicals will spend Rs 7.7 bn, Chemplast Sanmar plans an outlay of Rs 5.4 bn among others. Essar plans a capex of Rs 215 bn by FY12, while IOC plans a Rs 240 bn project and BPCL plans a Rs 55 bn plant. This will raise India's petrochemical production from the current 5 million tonnes per annum (mtpa) to about 7 mtpa creating jobs on a large scale and increasing per capital consumption of plastics in India.

    According to experts, the plastics industry is characterized by a virtuous cycle- higher supply results in higher consumption. Hence the increased capacity will co-exist with the current imports amounting to about 20% of the requirement in India. Moreover, the capacity expansion is likely to give the Indian plastics industry a better footing in the global market, where China is a dominant player.

    You'll still find getting hotel rooms tough...
    As per hotel consultancy HVS International, the shortage of hotel rooms across India is likely to worsen. This is because new hotel projects, which were planned earlier have not progressed satisfactorily due to higher cost of construction on the back of wage hikes and higher interest rates. Supply will eventually come about but is likely to be delayed from FY08 to FY10. The report suggests that out of over 101,971 branded hotel rooms under construction in India, a mere 58% are moving ahead. Out of the 80 new hotels with 19,400 rooms coming up in Delhi NCR, only 56% is likely to be ready for the Commonwealth Games.

    Capital has become a major issue for the industry. The sector is not allowed to use external commercial borrowings resulting in a fund crunch. Moreover, the cost of capital for new projects has shot up by 12 to 15%. On the operational side, property maintenance, energy costs, raw materials and pay roll costs have shot up.

    Revenue growth rates have also shrunk due to the slowdown with revenue per room in hotels dipping by 4 to 6% this quarter. Moreover, occupancy rates have also dipped in FY08 on a YoY basis.

    City FY07 FY08
    North Mumbai 69 68
    South Mumbai 76 76
    Delhi 75 74
    Bangalore 74 70
    Chennai 73 71
    Kolkatta 75 75
    Goa 70 70
    Hyderabad 71 69
    (Source: Company)

    Do top companies steal power?
    Mahavitaran, the distribution arm of Maharashtra's power utility detected power thefts in a special drive in the industrial areas of Navi Mumbai, Vashi and Mhape. It found a 3% incidence of theft out of a total 8,352 connections it inspected. What was disturbing is that in some instances reputed industrial consumers were illegitimately using high-tension power supply. Prominent names such as L&T Infotech, GTL, Pfizer India and Kores figured among them. It may be noted that the charge for regular usage of power is at about Rs 5.50 per unit and Rs 12.50 per unit for other uses. Since these companies were using power for construction, they should have been paying the higher charge. The companies have denied any wrongdoing and say that there has been some misunderstanding about the power usage and are working with the authorities to clarify the matter.

  • Also read - T&D losses over the years

    Steel prices need to be hiked - Mr. Muthuraman, Tata Steel
    Mr. Muthuraman, MD of Tata Steel feels that the current domestic prices of steel are not sustainable as the difference between domestic and international prices has increased to around Rs 15,000-20,000 per tonne levels. He is also of the opinion that it is only the steel industry which absorbed the escalating input prices and that the consumers of steel and the government have not done their bit to cope with the situation.

    He urged the government to play an active role and cut 14% excise duty on steel as the collections are expected to double this year. Overseas steel players also find it remunerative to sell their products in India, thus pushing domestic producers into a difficult situation. It maybe noted that the three month self imposed moratorium on prices ends in August and steel companies are expected to hike prices due to a rise in prices of coking coal.

    The steel secretary R S Pandey has responded that if inflation continues to go up then they will intervene especially when the EBIDTA margins of steel producers remained at healthy 20% even as late as June 2008.

  • Also read - The iron ore irony

    At 10.1% China is cooling, really?
    As reported on Bloomberg, the Chinese economy grew at the slowest pace since 2005 in 2QFY09 clocking a growth rate of 10.1%. The decline is attributed to the weakening of exports and lower government spending.

    China's growth rate for the fourth quarter in succession is still growing more than 4 times the growth in the US, which clocked a 2.5% growth in 1QFY09. As the decline comes on the back of the high growth rates it has established in the past, it is perhaps not correct to read too much into the slow down. The slowdown is orderly and not a dramatic one. In fact, China's growth is still the fastest of the world's 20 largest economies.

  • Also read - Chinese Inflation

    Ranbaxy in finger pointing mode
    After the US government initiated legal action against Ranbaxy, its CEO and MD Malvinder Singh defended the firm stating that a few rival firms, including a global pharma company and a leading Indian company and a clutch of stockbrokers, were propagating wrong information in order to bring down its share price and buy stakes. He said that the company was "collecting data from the market" on this manipulation to forward to the concerned authorities for investigation. However, he did not specifically name the companies.

    He also said that the company's share purchase agreement with Daiichi Sankyo was binding and was on track.

    Regarding the US government's legal action, he said that it was a merely a motion to seek information and that any information sought by the US government will be sent to them. Having said that, if the allegations prove to be correct, then it will be detrimental to Ranbaxy as the US accounts for 24% of total revenues.

  • Also read - The Honest Truth on Ranbaxy

    In the meanwhile...
    Taking cues from global peers, the BSE-Sensex opened with a positive gap of over 300. Thereon, the indices steadily gained momentum with every successive trading hour as buying activity intensified among index heavyweights. The BSE Sensex closed over 500 points higher. The overall market breadth was positive with gainers outnumbering losers by a ratio of 1.9 to 1 on the NSE. As far as global markets are concerned, while Asian markets closed a mixed bag, European indices have opened on a positive note.

    Today's investing mantra
    ""There seems to be some perverse human characteristic that likes to make easy things difficult." - Warren Buffett

  • Today's Premium Edition.

    Recent Articles

    All Good Things Come to an End... April 8, 2020
    Why your favourite e-letter won't reach you every week day.
    A Safe Stock to Lockdown Now April 2, 2020
    The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
    One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
    A stock with strong moat is currently trading near 5-year lows.
    Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
    This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

    Equitymaster requests your view! Post a comment on "Crude bubble bursts?". Click here!