Monday, December 15, 2014

The Black Gold

The mining in India happens to be a major economic activity contributing significantly to the economy of India. The GDP contribution of the mining industry varies from 2.2% to 2.5% only, but going by the GDP of the overall industrial sector it contributes close to 11%. The Coal has a proven reserve of 860 billion tones is mined the most in the world. At the same time the demand curve for this sector is always on the rising side because of the soaring power demands in India and the ever growing worldwide steel production in the world. India is a prospering economy and the coal market is all set on the blocks to witness a huge boost in the near future because of drastic initiatives by the new government specially the reallocation of the coal blocks and the stake sales in the PSUs are some of the major steps taken which will not only aid in boosting the production but also lure the investors in the coal sector. But whatsoever the upward pressure would definitely widen the demand supply mismatch in the coming years and to monitor these concerns The Indian conglomerates are making the efforts in the overseas acquisitions as well as also exploring the unconventional alternatives such as coal gasification for supply of energy. 

There are varied coal gasification technologies which are ever evolving over the globe to replace the conventional methods of the power generation. The global coal resources have b been estimated at over 860 billion tons and out of which India amounts close to 286 billion tons of coal reserves. Coal meets to around 30.3% of the global primary energy needs and generates 42% of the world’s electricity. In this 2011 the coal happened to be the fasted growing forms of the energy after renewable sources and its share in the global primary energy consumption which was 30.3% which was the highest since the year 1969 and the coal production in the Asian Pacific region has grown tremendously and accounts to 67% of the total production globally as compared to 27% global contribution in 1981. The world’s five largest coal using countries are China, USA, India, Russia and Germany. India has the fifth largest coal reserves in the world and out of the total close to 88% are non-coking coal reserves and the tertiary coal reserves accounts for near 0.5% and the remaining is the coking coal. The Indian coal is typically known for its high ash content up to 45% and low on the sulphur content. 

The power sector is the largest consumer of the coal and close to the heals are the iron and steel and cement sectors. India’s coal production has increased from 431MTin 2006-2007 to 554 MT in 2011-2012 that is 28.5% growth. On the other hand if we look at the coal which has grown at a CAGR of more than 7% in the last decade and has reached around 600 MT. The India’s total demand supply gap including coking coal is paged by the Indian Energy book at 98 MT and out of this India’s imports about 85 MT of coal.

The sector wise coal consumption in India is – electricity-70%, steel—7%, cement—3% and others 20%. At present the government of India enjoys the monopoly in producing coal with over 90% of the production coming from the government controlled mines. The policy of captive mining was introduced in 1993 which opened the coal sector to private investments, India happens to be the world’s largest energy consumer accounting to 4.1% of the global energy consumption. Maharashtra is the country’s leading state in the electricity generation; the per capita only further indicates the high potential scope of growth in this sector. Out of the total electricity consumed in the country almost 81% is produced by coal and the other sources of electricity generation—Thermal—8.33%, Nuclear—3.69%, Hydro—14.88% and Imports—0.60%.

The Steel Sector—the coal happens to be a very essential input in the steel production. The worldwide steel production reached 1,518MT in 2011 clocking a growth of 6.2% over 2010. The per capita finished steel consumption in 2011 clocked to 215 kg as against 460 kg for China, while for India it is estimated to be 55kgs, which clearly hints at the vast scope in increasing the per capita steel consumption a factor which correlates with the coking coal availability and production within the country. India has very limited reserves of the coking coal which is the key raw material for the steel production. Coking coal accounts for only 15% of the country’s overall coal reserves which we have. In Jharkhand the Jharia coal field has the majority of the coking coal reserves. The steel production is projected to be 105 MT by 2016-17 and the corresponding requirement of coking coal for this quantity works out to be around 62 MT by 2016-17. The cement sector in India makes India as the second largest cement producer globally and obviously large amount of energy is required during the production of cement and the coal is used to meet the energy requirement as a source. In the process of the cement manufacturing coal is burnt in the form of the powder and around 450kg of coal is consumed to produce 900kg of cement.

 To add here the cement industry happens to be the third largest consumer of coal in the country because of the high cost and intermittent inadequate supply of oil and gas, so the coal happens to be the obvious choice of main fuel in the cement industry. But however due to the rapid adoption of the dry process the specific coal consumption for producing cement has dropped significantly and has improved the efficiency in the cement kilns and increased the use of fly ash which is produced in the power plants and granulated slag which is produced in the blast furnaces of steel in the production of cement.

Although India has the fifth largest reserves of coal in the world it is yet to meet its domestic demands, the overall long term demand of coal is closely linked to the performance of the sectors in the end use. In India the end user sector of coal are electricity, iron and steel, cement and some unorganized sectors bricks and ceramic industry.

The Ministry of steel (MoS) has projected to build the steel production capacities of 200MT by 2020 to meet the rising demands and out of this 70% of the steel will be based on basic oxygen furnaces (BOF) technolology. By 2035 India will be the second largest consumer of coal because the coal based thermal power projects will be the main drivers of demand in India. The projected coal fired generation capacity in India will rise from 95,000 MW. To 2,94,000 MW in this decade which is  300%  increase!!!! Coal prices also just like any other commodity are determined by the level of supply and demand, however the response of the overall demand and supply variation is slow due to the structure of the coal industry as well as the nature of the end user of the industry.

The government has recently sanctioned 200,000 mw of thermal power capacity and can be said in simple manner as Rs10 lakh crores in the coming decade., As the coal blocks are ready on the blocks to be auctioned again and the power industry is back on its heels for constructions the headwinds are blowing stronger in favour of the black gold once again as coal still enjoys the cheapest form of form of energy in the world. India’s peak demand comes when the sun sets so our country desperately looks for the other alternate sources.

India’s current power consumption is 6000 Twh and the projected consumption by next five years is just double i.,e 12000 Twh, 550 Thermal plants have been approved and total additional capacity approved is around 200,000. The other alternate sources of energy available in India are coal, hydro power, renewable energy, natural gas and nuclear energy. The nuclear energy has fission and fusion as its source and has low emissions environmental friendly and large capacities, but is difficult to dispose and has great risks of proliferation. Its future is grim for at least couple of five decades as all the countries has a coal stock of ten decades. Another alternate is solar energy which is freely available in day time only, requires ample area and is getting cheaper. Then there is geothermal which is also freely available but has some environmental disturbances but its future is a bit too grim, even hydro thermals are cost effective but difficult to maintain big dams, evacuation of people causing forced exodus, another option is wind mills but it is dependent on wind, another option is  biofuels also have some environmental concerns.  

Improvement required: - Operational issues like fund raising and so also exploration which is a very specialized job and is considered to be a risky venture and so the investment should be encouraged in this sector through professional initiative and also the security of the tenure. Performance, productivity and accountability is a must. The mineral associated are not reported and so the level of confidence among the investors to invest is not high and so it is the government who should promote the training camps held through IBM and DGM.

We can get rid of long queues of mining applications long pending at different levels of coo, state DGM, DGMS, tribunals, state and central agencies and multiple registrations for miners, transporters, traders and end users just by applying the Single Window Clearance Agency (SWCA), so that all the clearances from land, water, air, minerals, environmental, forests etc etc are cleared in one go. The time is not far away when we are thick into the Black Gold Rush.

Thursday, December 11, 2014

Crude Politics


The prices of crude have come sliding down to 40%. The Saudi Arab may want to put pressure on the Shell companies of America and Canada. This fall in prices in the crude has put pressure on the Shell Company which produces oil and gas and OPEC which is Organization of Petroleum Exporting Countries maybe treats it as opponent. OPEC is an permanent intergovernmental organization created in Bagdad conference by Iran, Iraq, Kuwait, Saudi Arab and Venezuela.

In one way in comparison to crude the cost of production of Shell is more, so in a way for Shell Company the price of the crude remains between 65 to 75 dollar than only it will be beneficial for production activity in Shell.

The problem area is that since June the crude price has tumbled down to 40% and despite this the OPEC has not cut down on its production and so the global requirement of oil is being met and so the prices are coming down. This will create further problems to the oil and gas producing Shell Company of America and Canada that is default in loan repayments. Shell Oil Company is the US based subsidiary of Royal Dutch Shell which is multinational oil major of Anglo-Dutch origin which is amongst the largest oil companies of the world.

 The US office is in Houston Texas. Shell Oil Company including its consolidated companies with its equity companies is one of the America’s largest oil and natural gas producers, natural gas marketers, gasoline marketers and petrochemical manufacturers. Shell Oil Company is in 50/50 percent partnership with the Saudi Arabian Government owned oil company Saudi Aramco in Motiva Enterprises which is a refining and marketing joint venture. Shell products include oils, fuels and card services as well as exploration, production and refining of petroleum products by the Shell formulation process. Shell formulation is made from sedimentary rocks which are under the sea, these rocks have kerogen from which oil and gas is produced.

Since past four decades no such tension was witnessed and in terms of India since there is no support at the base so further slide in the price of the fuel is inevitable. And when the oil price falls certain stocks rise as per the past trends of the stock market’s performances and since the Indian equities always do better in such conditions the FIIs will continue betting in a big way notwithstanding their current overweight position in the local equity market. MSCI Asia ex Japan in 9 out of 11 occasions when global crude oil prices have dipped more than 10%. The latest on Brent crude oil is that it is trading at $70 a barrel that is 40% LOWER SINCE June, and between 2008 and 2009 crude oil slipped by 67% following fears of global economic slowdown. Whenever the crude oil prices fall the direct beneficiaries are the public sector oil marketing companies and automobile sector.  

Thursday, December 4, 2014


It’s been a giant wheel ride for the Glittering Gold as the gold rose 200% from January 2008 to January 2013 to touch an all times high of Rs 32,943 per 10gm on August 2013 to the unexpected slide to 20% to Rs 26,645 per 10 gm on September 2014. On  3 January 2008 Gold was trading at 11,009 mainly due to global economic slide which struck in the latter half of the that year, and because all the global financial instruments were giving way so the investors clung to the gold just like the only log in deep seas.

 Although we have witnessed a steady growth of economy in the rise global indexes like US-NASDAQ, India-Sensex,France-CAC-40,Brazil-bovespa and Germany-DAX. More so the rise of interest rates announced by the US although however minor increase will have some effect on the markets globally because interest rates rise are directly proportional to the yields on bonds and cash in the form of money-market funds there by making the investors a little bit inclined away from gold as bonds and cash give a false sense of security and attractiveness.

Although the gold has been in bearish mode for most of the 2014 and this only indicates that one must invest in gold in phases because there will be some major backup from gold exchange traded funds (ETF). In a way the decline in gold was good for the Indian economy because the gold imports have been the biggest contributor to the current account deficit (CAD).Although the government in 2012 had imposed a host of curbs on gold imports like the import duty on gold was raised progressively from 2% to 10%  and also 20% of export mandatory for the gold importers !!!! , however the government gave one wild card by allowing the big gold importers to import gold on credit which was banned in 2013.

However CAD of India will be 1.7% of GDP in 2014-2015, and maybe the gold curbs will be lifted in the near future and by 2015-2016 the CAD will only rise to about 2.3% of GDP. So investing in Gold can be a very good move as GOLD can be HEDGE against possible losses in other assets classes, and GOLD is always a very good bet in case of any economic turmoil and geopolitical upheaval and thereby tensions fallout in west Asia, Ukraine and the Middle East, Pak or China, so gold is always a very safe paradise in the times of any uncertainties. So fresh buying and investing in gold for short, middle and long terms will prove to be a heaven.

The Extendables

There is lot happening in the stock market with streets coming alive n kicking with upbeat mood with buzz which is felt all over and big action amongst investors in domestic as well as foreign is seen. The market has clearly taken off the blocks and is out for what can be called as mother of all bull runs. This is one time when the investors tend to dump their caution thereby becoming complacent and become most greedy and break loose and chase returns as if there is no tomorrow ever. Although GDP has improved from 4.6% in 2013-14 to 5.7% in the first quarter of 2014-15.

 Even the commodity prices are falling globally to improve current account deficit and inflation numbers. The Brent crude oil prices have fallen by 32% from $112 during June to $85 in this Oct which will only help in bringing down India’s subsidy burden. After a long lull even the industrial production clocked 2.8%, and the wholesale price inflation and the consumer price inflation are gradually coming down. One will also have to take into the account the clouds of uncertainties hovering around European economy is too negative, and if the US increases interest rates offering better yields on debt securities which will be a shade safer option for FIIs. Also if the US Federal Reserve stops buying bonds there by drying up excessive global liquidity could trigger exodus of FIIs either ways.

The domestic investors have pumped in Rs 32,244 crore in equity mutual funds this year and the mood is upbeat and the sensex has climbed 25% this year even the FIIs have invested Rs83, 450 crores in equities. In such bullish times one must be careful about the exceptional gains in short time often camouflages years of poor performances. One of the common mistakes is that the investors enter at the near peak and panic at the first sign of the fall and start selling, although the Indian markets have risen very sharply since September 2013.

Now the NFOs and close-ended funds are on priority by the fund houses over the open-ended funds where the investor has got liberty of entering and existing anytime, so now the stress is on the closed-ended funds in which one can invest only during the new fund offer (NFO) period, so now the money is locked for the tenure of the fund, and here there is steady fee income. But still the open-ended funds are much chased one.

Everything that shines is not always gold and so one must balance their core of portfolio for the short, middle, and the long term, and the one of the best way is to choose those funds which have performed consistently well even during the bearish markets and also observe the returns of a stock over a complete market cycle.

Whenever the market starts rallying it is actually the best time to cleanup and restructures your portfolio, focusing on SIPs, specific sectors and mutual funds.

At good times the tendency of a person to become careless and recklessness creeps in and you tend to force into committing small mistakes which later on ends up in burning a big hole in your portfolio if the market cycle rebounds so one must be extra cautious because when the going gets easy you develop overconfidence that you have developed midas touch of a kind, whatever you touch becomes gold.

The continuous stellar performances are always to be planned and monitored judiciously, so the real test of stock picking ability are tested in the times when the markets are volatile and if you are in dual mind than the best solution to end the dilemma is to invest in the mutual funds One must try to understand the thin difference between investment and trading.

Also during the euphoria one must ensure so as not to lose sight of the fundamentals and valuations. One must also put a leash at borrowing to invest in the stock markets and see that those stocks which have given great returns in the past are not overvalued. So sticking to the basic principles will help you to avoid the bumpy road in the journey of your destination of becoming a successful investor.

Monday, December 1, 2014

Steel if we can

It became apparent in the ninth international conference on steel and steel making raw materials that India is marching and path breaking ahead to become the world leaders. India is to reach the global average of 220 kilo per capita. With the change in government there is now a new found confidence in the country. Earlier China ruled the roost but soon India is to replace China after facing the worst downturns in the history, and so it is natural to focus on their problems rather than focusing n deliberating upon bigger picture like structural reforms, raw materials, land availability, infrastructure projects, construction, labor reforms, forests and environmental clearances, freedom from the termite and parasitic regulations causing bottlenecks, need of transparency and so on.

The manufacturing contributes to a mere 15% to the nations GDP, and the age old perception of doing business in India is not easy and inability to compete in the international markets has been changed drastically in just one go by the prime minister of India. India’s prospects as a winning horse is alive and kicking due to very strong human resource, enterprising entrepreneurs and a very robust market transforming India from feather weight to a heavy weight. Manufacturing has only 20 million jobs while the steel sector has created 70 million jobs!!!! And under the new policy the manufacturing aims to contribute 25% of the India’s GDP, and if this is met than definitely India’s capacity will clock 250 million tons from the current 150 million tons.

 To add to it the Indian steel industry is just 100 years old. Now in these modern times steel is a very vital product with 5 lakhs of employees and clocking 60 billion dollars in 2011. The consumption per capita is merely 60 kgs in 2013 as against world’s average of 235 kgs and this only suggests the tremendous scope of growth. India is a very rich source of Hematite and magnetite are the most important ores, the volatility of the cost of raw materials will be easily taken care of by the raging demand by the strong middle class sector.

 In next 15 years domestically the demand will be close to 300 million tones, and the next budget is going to bring around the much needed reforms this industry desperately needs as a breather. Its effects can be felt that at 8.5% which is India’s growth pace has been the fastest among the steel producing countries. On the other hand all the major steel producing nations are registering a decline in production and India is performing much better as compared to the flat performance by other peers. 

Saturday, November 29, 2014

If It still Glitters It must be GOLD

The imports of gold have zoomed-up in spite of the fact that the price of the yellow metal is softening globally. Yes and this huge surge of Gold imports only proves one point and signals very strongly that GOLD has never in the past, present or in the future will ever lose its SHEEN and SHINE ever. Gold will always remain   to be the priority choice among the investors.

So much so that even the Indian government is getting lines on its forehead about this huge gold imports could undermine the nations payment positions and truly so with current account deficit is within limits of prudence due to diminishing of the global crude prices and on the other hand the extravagant foreign exchange on the imported gold will nullify these gains.

Although one fifth of the gold imported has to be exported and the remaining is for the domestic use for the premium and star trading houses and any attempt to desist to restrict the demand of gold through quantitative restrictions or other means like imposing higher import duties would only encourage otherwise sourcing of gold .

However the Gold will always remain to be the numero uno choice but the other financial instrument options are inflation indexed bonds which will also yield descent returns. It would be lot better that if goods and direct tax and service tax reforms will lower the rates and widen the base as well and highlight GOLD as the best choice as investors paradise !!!!!!!!!!! 

Tuesday, November 11, 2014

At the doorstep of 28 K

Bombay stock exchange (BSE) at the door steps of 28 K and its companies are too close to clock whooping 100 lakh crores . It’s the moment of sheer joy that our country joins the elite club of those countries which are in 100 lakh crores!!!! , so these are the companies whose market capitalization contributions are above 1 lakh crores – ONGC, Axis, HCL, TCS, RIL, Infosys, HDFC, Coal India, SBI, ICICI, Sun Pharma, HDFC, HUL, L&T, Bharti Airtel, Wipro, TATA Motors and NTPC.

Although the Reserve Bank of India has crashed the expectations of the market regarding the rate cut, but still the investors can make the hay while the sun shines by planning right away to make the most of the likely monetary easing over the next two years.

It would be more advisable to for the investors to invest half of their fixed income portfolio in a mixture of long duration funds, gilt funds and tax free bonds which are definitely very well poised to benefit than the falling interest rates.

As per the market’s expectations the key policy rate is to be cut by 75-100 basis points gradually during the next two years and as the interest rates fall the bond prices will move up and therefore the capital of the investors will get appreciated .To make a point clear over here is that the rates and bonds move in the opposite directions.

Even the consumer price inflation has dipped to 6.46% in September which is the lowest since the new series of consumer price inflation was released in January 2012 and so also the domestic fuel prices have dipped as the global crude oil prices have weakened to $82 per barrel inflicts a case for cut in the interest rates by next year, as the cut in diesel prices will bring pluck out the teeth of the inflation. So the long term income and gilt funds will fetch better yields on the ten year benchmark falls and will definitely give the investors a higher capital appreciation in long term and gilt funds. The fiscal deficit number projected by the government would play the main role in the direction of the ten year bond, if the fiscal deficit is on the lower side than what is projected than it would definitely boost up the rally bond market.

Another point to ponder is that when the rates fall the bond funds, gilt funds, tax free bonds with a longer maturity definitely benefit the most. In this bull run the markets are looking into the upward direction the market is too strong to take any hurdle in its strong march striding towards 35,000 and nifty at 10,000.