• AUGUST 24, 2000

Stock markets: Crude concerns

Crude prices have crossed the US$ 32 per barrel mark, 255% over the lows recorded in early 1999. The governmentís options are limited to hiking prices. The question is when and by how much.

A hike in fuel costs would definitely delay the recovery in atleast the transportation sector. Commercial vehicle manufacturers, which had earlier in the year projected a robust volume growth of 20%, have already had to moderate their projections due to effects of the drought. A hike in fuel costs will further suppress demand, as sluggish freight rates may make it difficult for operators to pass on the rise in diesel costs. The transportation sector is only one of the many sectors that will be adversely affected.

A rise in fuel costs will permeate economy wide, as the cost of transportation and diesel power generation (among other cost push effects) will rise. Consumers will have to cut back on spending, as fuel bills will rise. This will result in an increase in the overall price levels. A higher inflation rate could in turn have implications for the exchange rate and the monetary policy.

The government on the other hand is faced with limited options. The subsidy bill is rising, although it is off-budget. Nevertheless the shortfall is to be met. The petroleum minister has stated that one option is to reduce the customs duty on crude, in effect transferring money from the budget account to the oil pool account. Well that sounds fine, if the government were to clarify on how it plans to then meet the deficit in the budget account.

The government needs to increase the prices of fuel. Okay, a part of it can be transferred from the budget account (by reducing the customs duty), but this is not a permanent solution. What if crude oil prices continue to rise? Customs duty cannot be reduced every time crude prices rise (It canít go below zero!).

The stock markets have probably factored in a fuel hike, and this is evident from the valuations accorded to commercial vehicle manufacturers. Sectors such as cement, which spend a large part of their operating costs on transportation and power, too have seen their valuations declining in recent months.

The stock markets have taken note of the situation. Itís high time the government tread the same path.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407