Critical mass - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Critical mass 

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In this issue:
» Indian basket of crude falls...
» Attaining critical mass
» India vs. China in pharma
» Rupee hits a new low...
» ...and more!

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00:00   Indian basket of crude falls...
The Indian basket of crude declined to US$ 99 per barrel, after a stay of nearly five months above the three-digit level. This comes as a major relief for the public sector oil marketing companies (OMCs) - Indian Oil, BPCL and HPCL - whose under recoveries from future sales are likely to come down to Rs 1.5 trillion from around Rs 2.5 trillion projected in June. At these levels, the OMCs are incurring a loss of around Rs 10 per litre on diesel and Rs 3 on petrol. However, they are making a profit (of around Re 1 per litre) on branded petrol for the first time since mid-last year.

In fact, as per a leading business daily, the petroleum ministry is evaluating a proposal to reduce the price of diesel if the crude prices fall below the US$ 85 per barrel mark. The ministry will have to consider the move in order to help reign in the record inflation levels in a pre-election year. It may be noted that the price of petrol and branded fuels are likely to be left untouched.

There is another dampener for the OMCs though - the steady decline of the rupee against the dollar. As India imports around 70% of its crude oil, the adverse exchange rate scenario negates the benefits of the falling crude prices to the OMCs.

  • Also read - Fuel price hike: Impact on OMCs

    0.38   Much depends on the Saudis
    Member of the 13-nation OPEC, Saudi Arabia, has decided to defy its decision to lower production. After the OPEC meeting, Saudi officials reassured markets that they would continue to provide customers with as much oil as needed. Moderate and pro-western states like Saudi Arabia and the United Arab Emirates seem to be acutely aware of the fact that high prices are affecting consumers thereby pushing down demand and that it might force them to seek alternatives to oil. It may be noted that the International Energy Agency reduced its estimate for global oil consumption for both this year and the next and was of the view that US consumers were changing their lifestyles in response to high prices.

    Part of the Saudis' motive could also be to ease the political backlash against the OPEC. After the July peak of crude oil at US$ 147, the perception that OPEC was unwilling to help bring down oil prices quickly had brought sharp criticism from Western officials.

  • Also read - OPEC's crude decision

    1.05   Rupee hits a new low...
    The Indian Rupee fell below the Rs 45 to the dollar mark for the first time in nearly 2 years. It is widely expected that the slide is going to continue in the short to medium term. This expectation is based on the likely buying activity of the OMCs to meet their crude oil import requirements. Among the other concerns cited for the decline include a weak Indian stock market triggering more foreign fund outflows and arbitrage activity between the Indian market and rupee derivatives traded abroad.

  • Also read - Root lessons, rupee's slide & more...

    1.20   Pearls and pollution
    Pearl farms are earning less than 2,000 yuan per kilogram, or about 900 yuan a pound of pearls, down from a peak above 20,000 yuan more than a decade ago. The reason for this decline is the massive quantities of pearls produced by the Chinese pearl industry. In 2007, China produced 1,600 tons of pearls or over 95% of the world's total output as per the Gems and Jewelry Trade Association of China. The glut is not only bad news for the sellers as they earn lower prices; it is also for the environment.

    The disorderly growth of freshwater pearl cultivation in some regions has resulted in the dumping of large quantities of fertiliser into lakes and reservoirs, which has seriously damaged the water bodies. Concerned about environmental damage to lakes and reservoirs from pearl cultivation, the local Chinese governments are beginning to rein in production. Several cities and regions in China are being banned or restricted for pearl cultivation.

    These restrictions coupled with rising costs and falling prices are likely to cause Chinese pearl output to fall to 1,400 tons in 2008 and 1,000 tons by 2010, down more than one-third from last year. However, this will result in better realisations and bring in cheer for the industry as a whole.

    1.55   Attaining critical mass
    While it is well known that the quantity of mass determines weight, have you ever wondered what determines mass? If you are about to curse yourself for not being attentive enough during those science lectures at school, pull back and relax. This is the question that has been puzzling even the world's biggest scientists and physicists for years. Although theoritically, a gentleman who answered to the name of Peter Higgs, had postulated way back in 1960s that there is indeed a very small particle that is responsible for the mass of everything in the universe. The particle, which has since been named Higgs Boson (the word 'Boson' has an Indian connection to it), has however remained confined to documents as no one has even come close to proving its existence practically. This is likely to change if one of the biggest science experiments in recent times and the one that is currently underway proves successful.

    Yes, we are referring to the experiment that many are calling the 'Big Bang' and the one that took its first big step towards success yesterday when a highly charged 'Proton' was successfully sent to the other end of a long tunnel. And this is no ordinary tunnel. Called LHC (Large Hadron Collider), the tunnel is 27 km long surrounded by super conducting magnets, with a number of accelerating structures boosting the energy of the particles travelling in the ring. The idea is to let two highly charged particles, travelling at nearly the speed of light collide with each other, at which point the energy will be converted into mass, creating new particles, according to Einstein's well-known equation, E=mc2. These new particles, that as per the Economist, last only a millionth of a billionth of a billionth of a second, if at all created and subsequently recorded, will likely unlock the huge mystery surrounding the existence of mass. What more, the efforts can then be directed towards other things like the mysteries of gravity and doubling the number of known particles through a mechanism called supersymmetry and even generating miniscule black holes. Are our views of the world about to change radically? Only time will tell.

    2.55   Real estate woes continue...
    China has joined the countries plagued by a real estate slump. Sellers are cutting prices to accommodate the falling numbers of buyers across China, especially in the Southeastern region where the price decline is to the tune of 10% to 40%. There is a lesser price decline in the other regions, but volumes have gone down by as much as 66%. Economists now fear a broader deceleration in China's growth rate, although it is still likely to be much higher than rest of the world. However, the real estate trouble is unlikely to translate into a banking crisis because most Chinese pay for homes in cash and Chinese banks require a 30% downpayment on mortgages.

  • Also read - Real estate's brush with globalisation

    3.14   This one's truly for the masses...
    While high street bankers shrug off the responsibility of their 'priority sector lending' by parking funds with institutions like NABARD, a couple of PSU banks and government entities have taken up the mantle of taking the concept of 'banking' to the masses. The National Housing Bank (NHB) along with Standard Chartered Bank, International Finance Corporation and Union Bank of India are set to form an entity that will primarily lend to micro-finance institutions (MFI). The entity, yet to be christened Financial Inclusion Corporation of India (FICI), will be a non-banking finance company (NBFC). Besides lending, an equally important objective of the company will be to influence policy-making and regulations with regard to functioning of MFIs.

    The institutions behind this endeavour believe that since 65 to 70% of the Indian population is not covered under the formal banking system, financial inclusion can spin off business opportunities. While most public sector banks are taking initiatives to provide bank accounts in un-banked areas, the migration from informal sources could take a longer time. This is evident from the fact that the share of no-frills bank accounts is currently less than 1% of the total pie, while the MFIs themselves cover about 8.3 m borrowers.

    3.48   India vs. China in pharma...
    Before the Olympics started, China sent ripples throughout the global drug industry, when it announced the closure of various manufacturing units, which were identified as major pollutants. Many units manufacturing intermediates (used to make APIs) were amongst those that were asked to shut shop till the conclusion of the sporting event. This led to substantial rise in prices of intermediates and pharma companies across the world including India bore the brunt in the form of higher raw material costs. However, costs are likely to ease going forward now that the Games are over. But this raises a much bigger question. Exactly how strong is China's influence on the global pharma industry? While China has not exactly made waves in the branded and generics space, it has certainly emerged as a major supplier of intermediates. Infact many Indian pharma companies source these intermediates from China for the manufacture of APIs, which in turn are used for making finished dosages.

    Besides this, Chinese companies have forged growing relationships with top global pharma companies (referred to as Big Pharma) in custom manufacturing and also for outsourcing older APIs. India's advantage vis-a-vis China lies in R&D, availability of scientific manpower, laws that have begun to recognise intellectual property and Indian companies having alliances with global pharma companies in research, generics and manufacturing. As far as the global generics market is concerned, India is way ahead in the sense that while India accounts for 25% of the ANDAs filed in the US market, China filed its first ANDA this year. That said, China is expected to catch up with India soon (the latter's infrastructure being leagues ahead of India's) and therefore, Indian companies need to capitalise on the window of opportunity currently available before the competition from China begins to pose a significant threat.

  • Also read - Japan making strides in pharma

    4.37   In the meanwhile...
    Key Asian markets closed weak today. The losers' list was led by China (down 3.3%) and Taiwan (down 3.2%). Indian markets languished in the red through out the day and ended with substantial losses. The BSE-Sensex lost to the tune of almost 2.5%. Overall, losses in Asia were led by concerns that credit-market losses will increase and slowing growth will reduce demand for the region's exports. As per Bloomberg, US stock index futures declined, as participants feared that new reports on macro data such as trade balance, import prices and jobless claims would add credence to the fears of economic recession. European markets are also trading weak currently.

    4.54   Today's investing mantra
    "The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions." - Warren Buffett
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