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Commodities, Indian inflation & more...

Mar 25, 2008

  • Against a backdrop of falling Indian stock market and property prices, commodities seem to be charting an upward path. Prices of commodities such as gold, crude oil, foodgrains and some metals have been rising for a variety of reasons and are expected to remain firm in the medium term atleast. This has largely been attributed to supply not being able to keep pace with the rising demand. Besides this, investors are flocking to commodities as an investment avenue given the meltdown in the global stock prices and the housing market. This explains why gold has been hitting highs recently as this precious metal is looked upon as a safe haven in times of turbulence in other asset classes. Prices of metals such as copper and aluminium have been moving northwards due to fears of power shortage in Chile and South Africa respectively. Crude prices have been escalating as China and India continue to guzzle oil. Besides this, given that the output from oilfields have been depleting, energy companies will have to not only scour for reserves in remote places but also employ advanced technologies to extract more oil from the fields - an increasingly difficult task indeed. Also, since prices are heavily subsidized in India and China, consumers in both these countries are not feeling the pinch and hence the demand has stayed firm.
  • Inflation in India is slowly creeping up and is largely being attributed to supply side factors and the rise in global commodity prices. Inflation (WPI) for the week ended March 08, 2008 at 5.92% was a hair's breadth away from the 6% mark. The main culprit seems to be the rising food prices. With the WPI inflation breaching the upper level of the RBI's target band of 5% to 5.5%, there might be pressure on the central bank to take note of the same and suggest some monetary adjustments so that the impact of rising prices is lowered on consumers. Further, with the crude oil prices touching US$ 110 per barrel, the pressure on domestic energy prices is also expected to increase, thus having the potential to increase inflation at a higher rate going forward.

  • The generics market in the US continues to be highly competitive with the prices of drugs going off patent falling by as much as 95% to 99% on day 1 itself. That said, there has been some semblance of stability as far as the base business of generics companies is concerned. Domestic pharma are increasingly focusing on niche product areas with growing focus on biotechnology, challenging patents and also settling legal suits. One of the growth drivers for generics in the US includes a strong marketing and distribution network. Since most of the domestic pharma majors sell unbranded generics in the US market, a strong sales force coupled with strong relationships with the distribution chain in the region will assume significant importance. Thus, even if a drug goes off patent, the revenue generating potential is likely to get undermined if the distribution and marketing network is weak. Other important strategies to sustain growth in this market include cost competitiveness, consolidation, continuous product flow and a balanced product mix in terms of Para IV opportunities and niche products.

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