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Oil slide, capital goods & more... - Views on News from Equitymaster
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  • Jul 24, 2008

    Oil slide, capital goods & more...

    Oil prices continued their slide yesterday as a barrel's cost declined by US$ 3. Crude oil traded on the Nymex (New York Mercantile Exchange) currently stands at US$ 124 a barrel (approx. 159 litres), and is down almost 16% over the past eight days. A US Federal Reserve's report of a weakening economy (consumer spending remains sluggish while house prices continue to weaken in the US) and stronger than expected inventory report has led to this decline in oil over the past few days. As reported in international media, high oil prices have already started pinching American households, who have altered their habits to decrease the amount of fuel they use.

    As reported by the IHT, "The Fed's beige book report for June and July, considered a snapshot of the economy, highlighted fears that economic growth will stagnate as Americans cut back in the face of a weak job market and higher gasoline prices. Consumer spending accounts for more than two-thirds of the nation's total growth. Prices are also rising, particularly for fuel and food, even as wages stay steady. And while some businesses said they had not raised prices for fear of losing customers, there were signs that inflation continues to bubble."

    The effect of rise in oil prices is though not fully seen in India, on account of the government not passing on the hike to consumers. And as such, oil marketing companies continue to take a large part of the hit on their books. Also, as we have gathered from some leading domestic consumer-centric companies, the impact (of rising prices) on broader consumption spending is not really being seen.

    In the meanwhile...
    Stocks in key Asian markets are currently trading mixed, possibly taking cues from the positive closing seen in the US and European markets yesterday. As stocks rise on the back of falling crude oil prices, gold is also feeling the pinch. The yellow metal is currently at its two week low - from a high of US$ 986 per ounce it touched on July 14th, gold prices have declined by almost 7% to the current levels of US$ 918. And the prices are expected to fall further if the current situation of sliding crude prices and rising stock prices continue.

    'Surprising' results from cap. goods companies
    There have been a few positive surprises in the results announced by some leading capital goods companies. While sales growth for most has been fairly decent, operating profitability (EBIDTA margins) have been stable to rising. The raw material costs (as percentage of sales) for most of these companies have declined, contrary to popular 'expectations' that the rising material costs shall pinch these companies on the margins front. While we still need to hear from several other companies on their April-June quarter performance, on the face of it, things do not look really bad as they were made out to be. Though we still need to wait and watch out for more companies announcing their quarterly results and what their managements see panning out over the next few quarters.

  • Also read - Our result analyses of capital gods companies



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