• AUGUST 25, 2008

Oil's fall, India's power woes & more

Oil's decline buoy Asian markets
Key Asian markets are trading strong this Monday morning with the gainers' list being led by Hong Kong (up 3%), Japan (2%) and China (1%). These gains were led by crude oil's biggest plunge (of around US$ 6.6 per barrel to US$ 114 per barrel) in four years, which was a result of increased supplies following BP Plc.'s (Europe's second largest oil company) restarting of flows through a Caspian Sea pipeline. This decline in oil prices has seemingly eased concerns that inflation will accelerate and erode earnings in emerging economies, thereby leading to today's strong gains in Asian equities.

In the meanwhile, Jim Rogers, one of the world's best known commodities investor has maintained that he expects oil to continue to increase over the next 10 years. Bloomberg quotes Rogers saying, "Over the course of time, it's a bull market. While the oil price could fall to US$ 75 or rise to US$ 175, the market will continue to increase over the next 10 years." He has actually indicated that declines in commodity prices (like oil's) from record highs represent a temporary reversal in a bull market that will last for several years. Good for commodity companies, bad for consumers!

India not to give in to nuclear pressure
A crucial step for the landmark nuclear deal between India and the US got delayed, with India indicating that it would reject any new conditions imposed by nuclear supplier nations (Nuclear Suppliers' Group or NSG) for the lifting of an atomic trade ban on the country. Some participating countries from the NSG have reportedly demanded changes in the draft of the waiver to include their concerns about testing, periodic review of India's compliance and restricting export of sensitive enrichment and reprocessing technologies.

As reported by the International Herald Tribune, "The group ended a two-day meeting in Vienna on Friday without reaching agreement on a US-proposed draft statement that would allow India access to nuclear fuel and technology from other nations. The 45-nation group is expected to meet again on Sept. 4 and 5 to discuss proposed amendments to the draft." As a matter of fact, the NSG bans nuclear exports to countries (like India) that have atomic weapons but have refused to sign the Nuclear Nonproliferation Treaty. However, on the back of lobbying from the US, it has appeared willing to consider a waiver for India, which is essential for the finalising of a separate civil nuclear cooperation pact between India and the US.

India's power woes continue
The much-touted ultra mega power projects (or UMPPs), which were said to solve all of India's power problems have in fact been a non-starter. As reported in a leading business daily, even after three years of project approval, states like Orissa, Gujarat, Madhya Pradesh, Chhattisgarh and Karnataka have not been able to finalise location for these projects despite repeated reminders from the power ministry. Readers would do well note that the Indian government has planned a total of 9 UMPPs out of which only 3 have been allotted to far (1 to Tata Power and 2 to Reliance Power). A UMPP is expected to have generation capacity of 4,000 MW and project cost of US$ 4 bn (assumed at US$ 1 m or Rs 40 m per MW). As such, is all the nine UMPPs come up, they should bring in an investment of about US$ 36 bn. However, given the current news flows, this seems a far-fetched dream.

As was recently reported by the Central Electricity Authority (CEA), India's peak electricity shortage may widen to 18.1% in FY09 from 16.6% in FY08 as demand will outstrip supply in the world's second-fastest growing and second-most populous nation. While the government is targeting the power sector to add 78,700 MW of new generation capacity by the end of XIth five-year plan period (FY12), of which 10,178 MW is to be commissioned by FY09, the power generating companies continue to be dogged by fuel, equipment and labour shortages.

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