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Bubbly crude, boiling rice & more - Views on News from Equitymaster
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  • May 27, 2008

    Bubbly crude, boiling rice & more

    Soros says crude's a bubble
    As crude oil prices rise above the US$ 130 per barrel mark (currently above US$ 133), voices have been raised citing the sharp rise in prices as a 'bubble'. "Rocketing oil price is a bubble", says George Soros and reports The Telegraph of the UK. The billionaire investor, famously known for breaking* the Bank of England in 1992, has a view that speculators are responsible for driving oil prices to their peaks in recent weeks and that it now looks as a bubble waiting to burst.

  • Days of 'cheap' oil are gone

    Mr. Soros has said that "although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation." Soros, however, goes on to warn that this bubble will not burst until both the US and the UK were in recession, which could lead to a sharp fall in oil prices.

    As for the rising crude's impact on India is concerned, a surging oil import bill, continued strength in domestic demand and expectations of moderating export growth suggest that the current account deficit will worsen this fiscal, probably to slightly more than 2% of GDP. That's bad news for the government's finances as also those of the oil marketing companies that have not been allowed to pass on the crude price hike to consumers.

    * On Black Wednesday (September 16, 1992), Soros became immediately famous when he sold short more than $10 billion worth of pounds, profiting from the Bank of England's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency. Finally, the Bank of England was forced to withdraw the currency out of the European Exchange Rate Mechanism and to devalue the pound sterling, and Soros earned an estimated US$ 1.1 bn in the process. (Source: Wikipedia)

    India's textile concerns
    Rising cotton prices, currency volatility and fuel supply issues have plagued the textile industry in the country. And companies across the board, especially the smaller ones are facing risk of extinction. However, what the larger companies - those with relatively deeper pockets - are doing is to diversify into newer markets like retailing, where they are setting up retail outlets of varying sizes to sell their brands ass also of competitors.

    Another area where these companies are betting big is the work and performance wear market - specifically, clothing for sportsmen and employees of hospitality, retailing and healthcare companies. This is what Arvind Mills, one of the largest textile companies in India, has indicated to us in today's research meeting. While the opportunity seems large and has been successful in the developed markets of the US and Europe, the fact that the company has studied this opportunity for a period of just one year makes us wonder whether enough research has gone into ascertaining the future market potential. This is specially considering the fact that some of the domestic textile mills have faced pressure recently on account of aggressive inorganic growth activities and poor performance of their organic operations.

  • Will Arvind Mills' value added products yield desired results?

    Rice on the boil
    Well, cotton is not the only agricultural commodity that is witnessing price rise. Rice, which along with lentils comprises the staple diet for many Indians, has seen its price boiling over in recent times. Visit any supermarket and you will notice that a kilo of rice, which would have cost you less than Rs 20 last year, now puts you out of pocket by about Rs 35 to even Rs 40! And despite these high prices, considering the fact that the demand for this staple food far outweighs the level of production globally, economists are of the view that the commodity will continue to see its price rise even more as the year progresses. Rice, as a matter of fact, is a staple food for over 3 bn people (half the world population).

  • What's worrying India's economy?

    Now, what is compounding this issue of inflation in rice's price is that Thailand, the world's biggest rice exporter, has already banned exports, causing countries all over the world to spend top dollar to grab up some of the limited rice which is available for sale. To add to the misery, the recent natural disasters in China (the world's largest rice grower and consumer) and Myanmar (the sixth largest rice producer in the world) have further fueled the price rise. These really are taxing times for the world's poor as food forms a major portion of their measly incomes. And especially for a poor Indian, given his low purchasing power, even a small increase in food prices contributes to s sharp fall in his real income.

    And what's hurting India's agriculture?
    Several factors, actually! But the most prominent of them are low rise in farm productivity, unremunerative prices for farmers and poor food storage facilities resulting in high levels of wastage (courtesy the Food Corporation of India's transportation and storage facilities).

    While the central government, in its Union Budget for 2008-09, announced a Rs 720 bn waiver of farmer loans and extended a jobs scheme (ensuring 100 days of work in a year entailing manual labour to every family demanding such work at the official minimum wage), we believe that none of these populist initiatives will really work until India's policymakers begin giving its ignored farms the importance they deserve.

    Today's Investing Mantra
    "Take a simple idea and take it seriously." - Charlie Munger, Co-chairman, Berkshire Hathaway

  • Some lessons from Munger's colleague, Warren Buffett



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    Aug 17, 2017 03:37 PM