FEW people ever penetrate the dark side of money, but Jules Kroll is one of them.
Fortunes plundered, ransoms paid, deals cut — the uncovering of such secrets, and the million smaller confidences that are his history, have made Mr. Kroll a rich man.
It was nearly 40 years ago, when he practically invented the business known as corporate intelligence, that he first came to the attention of crafty boardrooms. At a time when “private eye” still conjured images of cheating spouses and seedy hotels, Mr. Kroll built a sort of private C.I.A. and went corporate. If a Fortune 500 company or an A-list investment house wanted the dirt, it hired Kroll Inc. to dig it up.
Which is why his latest venture seems at once so unusual and yet so very Kroll. At 69, an age when other multimillionaires are working on their backswings, he is getting into — of all things — the credit ratings business.
Yes, credit ratings: gilt-edged triple-A’s, middling double-B’s, ignominious D’s. You might wonder why anyone pays attention to them anymore. After all, the financial crisis of 2008 and 2009 laid bare the conflicts at the heart of the ratings game. The world learned that the three dominant services — Moody’s, Standard & Poor’s and Fitch — had stamped sterling ratings on mortgage investments that turned out to be nearly worthless. It was a lesson that nearly brought down the financial system.
Ratings agencies, to many, seem like Wall Street’s enablers. What is Jules Kroll thinking? This is the man the Haitian government hired to track down financial assets linked to Jean-Claude Duvalier. The man Kuwait hired to ferret out the oil wealth of Saddam Hussein. One of Mr. Kroll’s cases, involving kidnapping, inspired the movie “Proof of Life,” and plans are in the works for HBO and Scott Rudin, the producer of “The Social Network,” to make a pilot for a television series loosely based on his exploits.
Mr. Kroll says that if he can do all of that, why, he can get to the bottom of an investment security, too. He and his son Jeremy, 39, are staking the family name on a venture called Kroll Bond Ratings. They say the business will marry hard-nosed credit analysis with their trademark corporate sleuthing. Maybe the leading ratings agencies — a triumvirate some liken to an oligopoly — can learn a thing or two from the gumshoes of Wall Street.
“They never really looked under the covers, which is what I have done all my life,” Mr. Kroll says. “If they were in any other business, they would be out of business.”
THE pertinent question for Mr. Kroll is why anyone should listen to him on the subject. The fundamental problem with the dominant agencies, their critics say, is that they are paid by the companies whose securities they evaluate, under the so-called issuer-pay model.
Some small ratings services have challenged the establishment by having investors — that is, the people who actually buy securities — pay for ratings. But for all his talk about shaking up this industry, Mr. Kroll is hewing to the status quo. Like Moody’s, S.& P. and Fitch, Kroll Bond Ratings will be paid by the issuers, just as the big three are.
Wall Street types tend to look askance at credit ratings no matter who is providing them. Not even Warren E. Buffett, whose Berkshire Hathaway owns about 12 percent of Moody’s, says he depends on ratings in making investment decisions. Mr. Buffett prefers to make his own judgments on companies, he said last year while appearing before the Financial Crisis Inquiry Commission.
But ratings services, despite their apparent failures, still play a crucial role in the capital markets. Virtually every investor, big or small, is affected by what they do. And even the pros have to pay attention, because ratings often figure into the investment guidelines of big money management firms, banks and insurance companies.
Some wonder if Mr. Kroll is out of his depth this time.
“What does he know about giving me a rating on a security?” asks Richard X. Bove, an analyst at Rochdale Securities.
Others aren’t so quick to write off Mr. Kroll. Michael F. Price, the prominent value investor, is bankrolling Kroll Bond Ratings. So is Frederick R. Adler, one of New York’s most successful venture capitalists. And William L. Mack, the big real estate investor. The venture capital firms Bessemer Venture Partners, RRE Ventures and NewMarket Capital Partners have invested a combined $24 million in it. And Mr. Kroll has personally staked $5 million.
That is pocket change by Wall Street standards. But Rob Stavis, a partner at Bessemer, says Kroll Bond Ratings could well pay off. “We often go after industries where there are significant incumbents when we believe they’re ripe for disruption,” he says. His firm was an early investor in Skype.
Mr. Kroll, for his part, is thinking big — as he always has. He wants to grab 10 percent of this $4 billion-a-year industry within five years.
But even that seemingly modest goal may be a reach. Moody’s and S.& P. each have about 40 percent of the ratings market. The remainder is spread among Fitch and several lesser-known agencies.
“I think it’s a tough industry to break into, but if anyone can do it, it’s Jules Kroll,” says Michael Charkasky, the chief executive of Altegrity, which acquired Kroll Inc. last year. (Mr. Charkasky had worked for Kroll for more than a decade.)
IN the aftermath of the Panic of 1907, a self-taught financial analyst named John Moody pioneered the idea of assigning ratings to public securities. For much of its history, the industry he founded was a relative backwater — a steady if unglamorous moneymaker that tended to attract wonks or analysts who might not land jobs at a Goldman or a Morgan.
Then, in 1975, the Securities and Exchange Commission promulgated rules that anointed a handful of Nationally Recognized Statistical Ratings Organizations. The S.E.C. argued that assessing the safety of investments was so important to the soundness of the nation’s banks and brokerage firms that only respected ratings agencies should be allowed to do the job. In the early 1980s, there were seven of these organizations. By the mid-1990s, mergers had reduced that number to three. The S.E.C. has since added seven, bringing the total to 10.
Kroll Bond Ratings is one of them.
Saturday, February 26, 2011
Friday, February 25, 2011
3 Banks Warn of Big Penalties in Mortgage Inquiries
Several big banks warned investors on Friday that they could face sizable financial penalties as a result of state and federal investigations into abusive mortgage practices.
The disclosures by Bank of America, Wells Fargo and Citigroup came after a furor late last year over how foreclosures were being conducted.
Until now, the banks have emphasized that the foreclosure controversy was mostly a threat to their reputation, rather than a financial worry. But the disclosures, made in the banks’ annual financial filings with the Securities and Exchange Commission, suggest that a settlement with the government may affect both.
State attorneys general and federal regulators began examining the servicers’ practices last fall after reports that some foreclosures were being pursued despite lost or missing documents. In other cases, employees had signed off on thousands of pages of paperwork a month, after only a cursory look.
In some cases, banks mistakenly pursued homeowners who should not have been threatened with foreclosure, while other mortgage holders reported it to be nearly impossible to reach anyone at the banks to discuss their situation.
The review also includes more basic practices, including scrutiny of whether the original loans were made properly and whether modifications of existing home loans have been done fairly.
“The current environment of heightened regulatory scrutiny has the potential to subject the corporation to inquiries or investigations that could significantly adversely affect its reputation,” Bank of America said in the filing.
The state and federal inquiries “could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs,” Bank of America said.
Wells Fargo said in its filing that it was “likely that one or more of the government agencies will initiate some type of enforcement action,” including possible “civil money penalties.”
Citigroup acknowledged that federal and state regulators were investigating its foreclosure processes, which could result in increased expenses, fines and other legal remedies like a program to reduce the principal amount owed on some loans. While Citigroup has determined that “the integrity of its current foreclosure process is sound and there are no systemic issues,” it warned that it could be adversely affected by industrywide regulatory or judicial action.
Since last fall, a task force of federal bank regulators has been reviewing the foreclosure practices and internal controls of the 14 largest mortgage servicers. The examination has already identified a range of sloppy practices at all the servicers, including inadequate staffing, lax oversight of outside law firms and other vendors hired to assist with the foreclosure process, and errors with documentation.
In testimony before a Senate banking committee last week, John Walsh, the acting comptroller of the currency, which oversees national banks, said his agency and other federal regulators had ordered the servicers to take corrective actions.
“We expect that our actions will comprehensively address servicers’ identified deficiencies and will hold servicers to standards that require effective and proactive risk management of servicing operations, and appropriate remediation for customers who have been financially harmed by defects in servicers’ standards and procedures,” he said.
The banks have not yet received any formal proposals from either the attorneys general or the regulators. But a proposed settlement is expected to be ironed out in the coming weeks and then presented to the banks.
The banks are eager to put the foreclosure controversy behind them. Earlier this month, Bank of America’s chief executive, Brian T. Moynihan, said the bank was creating a special unit to hold billions of dollars in defaulted mortgages and other toxic debt.
Despite reports in recent days that a global settlement of the mortgage accusations was being floated by the Obama administration, for $20 billion or more, some bank officials and regulators expressed skepticism Friday that the eventual hit to the banks will be that high.
Indeed, many regulators in Washington are wary of too punitive a settlement for fear of hobbling their recovery just as they are turning around. Memories of the financial crisis in the fall of 2008 and the subsequent federal bailout are still vivid.
Still, even if any settlement with regulators and the attorneys general does not run into the tens of billions, the financial consequences of the housing boom and subsequent bust will haunt the banks for years. Private investors are seeking to force financial institutions to buy back tens of billions of dollars’ worth of mortgages in default, arguing the original loans were made improperly.
Over the last year, the biggest banks have set aside several billion dollars each to cover potential claims stemming both from the foreclosure mess and lawsuits by private investors holding soured mortgages.
The disclosures by Bank of America, Wells Fargo and Citigroup came after a furor late last year over how foreclosures were being conducted.
Until now, the banks have emphasized that the foreclosure controversy was mostly a threat to their reputation, rather than a financial worry. But the disclosures, made in the banks’ annual financial filings with the Securities and Exchange Commission, suggest that a settlement with the government may affect both.
State attorneys general and federal regulators began examining the servicers’ practices last fall after reports that some foreclosures were being pursued despite lost or missing documents. In other cases, employees had signed off on thousands of pages of paperwork a month, after only a cursory look.
In some cases, banks mistakenly pursued homeowners who should not have been threatened with foreclosure, while other mortgage holders reported it to be nearly impossible to reach anyone at the banks to discuss their situation.
The review also includes more basic practices, including scrutiny of whether the original loans were made properly and whether modifications of existing home loans have been done fairly.
“The current environment of heightened regulatory scrutiny has the potential to subject the corporation to inquiries or investigations that could significantly adversely affect its reputation,” Bank of America said in the filing.
The state and federal inquiries “could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs,” Bank of America said.
Wells Fargo said in its filing that it was “likely that one or more of the government agencies will initiate some type of enforcement action,” including possible “civil money penalties.”
Citigroup acknowledged that federal and state regulators were investigating its foreclosure processes, which could result in increased expenses, fines and other legal remedies like a program to reduce the principal amount owed on some loans. While Citigroup has determined that “the integrity of its current foreclosure process is sound and there are no systemic issues,” it warned that it could be adversely affected by industrywide regulatory or judicial action.
Since last fall, a task force of federal bank regulators has been reviewing the foreclosure practices and internal controls of the 14 largest mortgage servicers. The examination has already identified a range of sloppy practices at all the servicers, including inadequate staffing, lax oversight of outside law firms and other vendors hired to assist with the foreclosure process, and errors with documentation.
In testimony before a Senate banking committee last week, John Walsh, the acting comptroller of the currency, which oversees national banks, said his agency and other federal regulators had ordered the servicers to take corrective actions.
“We expect that our actions will comprehensively address servicers’ identified deficiencies and will hold servicers to standards that require effective and proactive risk management of servicing operations, and appropriate remediation for customers who have been financially harmed by defects in servicers’ standards and procedures,” he said.
The banks have not yet received any formal proposals from either the attorneys general or the regulators. But a proposed settlement is expected to be ironed out in the coming weeks and then presented to the banks.
The banks are eager to put the foreclosure controversy behind them. Earlier this month, Bank of America’s chief executive, Brian T. Moynihan, said the bank was creating a special unit to hold billions of dollars in defaulted mortgages and other toxic debt.
Despite reports in recent days that a global settlement of the mortgage accusations was being floated by the Obama administration, for $20 billion or more, some bank officials and regulators expressed skepticism Friday that the eventual hit to the banks will be that high.
Indeed, many regulators in Washington are wary of too punitive a settlement for fear of hobbling their recovery just as they are turning around. Memories of the financial crisis in the fall of 2008 and the subsequent federal bailout are still vivid.
Still, even if any settlement with regulators and the attorneys general does not run into the tens of billions, the financial consequences of the housing boom and subsequent bust will haunt the banks for years. Private investors are seeking to force financial institutions to buy back tens of billions of dollars’ worth of mortgages in default, arguing the original loans were made improperly.
Over the last year, the biggest banks have set aside several billion dollars each to cover potential claims stemming both from the foreclosure mess and lawsuits by private investors holding soured mortgages.
Asian Stocks Decline This Week as Oil Price Soars on Unrest in Middle East
Asian stocks fell this week amid concern instability in the Middle East and North Africa may derail a global economic rebound, reversing gains last week on signs the recovery was strengthening.
Hyundai Engineering & Construction Co., which gets 38 percent of sales from the Middle East, sank 6.2 percent in Seoul. Qantas Airways Ltd., Australia’s largest airline, slumped 6.3 percent in Sydney and Air China Ltd. tumbled 14 percent in Hong Kong as unrest in Libya drove fuel prices above $100 a barrel for the first time in two years. Toyota Motor Corp., the world’s largest carmaker, fell 3.4 percent in Tokyo.
“Share prices will have a tough time rebounding as long as investors have their eyes on the risks stemming from the uncertainty in the Middle East,” said Kenji Sekiguchi, general manager at Mitsubishi UFJ Asset Management Co., which oversees about $75 billion.
The MSCI Asia Pacific Index dropped 2.1 percent to 136.86 this week as Middle East rulers attempted to contain uprisings that have overthrown leaders in Tunisia and Egypt and spread to Bahrain, Yemen and Libya. That rolled back last week’s 3 percent gain after U.S. and Japanese central banks raised their growth outlooks and companies posted better-than-estimated earnings.
Japan’s Nikkei 225 Stock Average fell 2.9 percent this week; Australia’s S&P/ASX 200 Index lost 2 percent; while South Korea’s Kospi Index and Hong Kong’s Hang Seng Index sank 2.5 percent. China’s Shanghai Composite Index retreated 0.7 percent.
Middle East Uncertainty
“There’s uncertainty about what’s going on in the Middle East,” said Yasushi Noguchi, a strategist in Tokyo at SMBC Friend Securities Co. “Investors will increasingly be taking a wait-and-see stance.”
Hyundai Engineering slumped 6.2 percent to 75,500 won in Seoul. Samsung Engineering Co., which won contracts in Bahrain and Saudi Arabia this month, dropped 4.6 percent to 187,500 won. Chiyoda Corp., a contractor that gets almost half of its income from the Middle East, sank 4.5 percent to 721 yen in Tokyo.
Airline stocks and carmakers slumped as oil traded near the highest in more than two years amid concern crude supplies will be disrupted by the turmoil in the Middle East and North Africa.
Early in the week, Libyan leader Muammar Qaddafi vowed to fight a growing rebellion in a country that holds Africa’s largest oil reserves until his “last drop of blood.” The leader’s position weakened after a close adviser abandoned him, opponents consolidated their control of the country’s oil-rich east, and Switzerland froze some of his assets.
Qaddafi responded by reinforcing his defenses in and around the capital, Tripoli, with tanks and mercenaries.
Airlines, Carmakers Drop
Qantas plunged 6.3 percent to A$2.38 in Sydney as the risk of higher fuel prices curbed the earnings outlook for airlines. Cathay Pacific Airways Ltd. sank 9.6 percent to HK$17.70 in Hong Kong. Air China Ltd., the world’s biggest carrier by market value, tumbled 14 percent to HK$7.04. Toyota fell 3.4 percent to 3,755 yen in Tokyo.
“We’re having a natural reaction to the unrest with oil going above $100,” Todd Martin, Societe Generale’s Asia equity strategist, said in a Bloomberg Television interview in Hong Kong this week.
The MSCI Asia Pacific Index is little changed this year. The price of stocks in the gauge fell to an average of 13.7 times estimated earnings on Feb. 24, the lowest level since September.
Hyundai Engineering & Construction Co., which gets 38 percent of sales from the Middle East, sank 6.2 percent in Seoul. Qantas Airways Ltd., Australia’s largest airline, slumped 6.3 percent in Sydney and Air China Ltd. tumbled 14 percent in Hong Kong as unrest in Libya drove fuel prices above $100 a barrel for the first time in two years. Toyota Motor Corp., the world’s largest carmaker, fell 3.4 percent in Tokyo.
“Share prices will have a tough time rebounding as long as investors have their eyes on the risks stemming from the uncertainty in the Middle East,” said Kenji Sekiguchi, general manager at Mitsubishi UFJ Asset Management Co., which oversees about $75 billion.
The MSCI Asia Pacific Index dropped 2.1 percent to 136.86 this week as Middle East rulers attempted to contain uprisings that have overthrown leaders in Tunisia and Egypt and spread to Bahrain, Yemen and Libya. That rolled back last week’s 3 percent gain after U.S. and Japanese central banks raised their growth outlooks and companies posted better-than-estimated earnings.
Japan’s Nikkei 225 Stock Average fell 2.9 percent this week; Australia’s S&P/ASX 200 Index lost 2 percent; while South Korea’s Kospi Index and Hong Kong’s Hang Seng Index sank 2.5 percent. China’s Shanghai Composite Index retreated 0.7 percent.
Middle East Uncertainty
“There’s uncertainty about what’s going on in the Middle East,” said Yasushi Noguchi, a strategist in Tokyo at SMBC Friend Securities Co. “Investors will increasingly be taking a wait-and-see stance.”
Hyundai Engineering slumped 6.2 percent to 75,500 won in Seoul. Samsung Engineering Co., which won contracts in Bahrain and Saudi Arabia this month, dropped 4.6 percent to 187,500 won. Chiyoda Corp., a contractor that gets almost half of its income from the Middle East, sank 4.5 percent to 721 yen in Tokyo.
Airline stocks and carmakers slumped as oil traded near the highest in more than two years amid concern crude supplies will be disrupted by the turmoil in the Middle East and North Africa.
Early in the week, Libyan leader Muammar Qaddafi vowed to fight a growing rebellion in a country that holds Africa’s largest oil reserves until his “last drop of blood.” The leader’s position weakened after a close adviser abandoned him, opponents consolidated their control of the country’s oil-rich east, and Switzerland froze some of his assets.
Qaddafi responded by reinforcing his defenses in and around the capital, Tripoli, with tanks and mercenaries.
Airlines, Carmakers Drop
Qantas plunged 6.3 percent to A$2.38 in Sydney as the risk of higher fuel prices curbed the earnings outlook for airlines. Cathay Pacific Airways Ltd. sank 9.6 percent to HK$17.70 in Hong Kong. Air China Ltd., the world’s biggest carrier by market value, tumbled 14 percent to HK$7.04. Toyota fell 3.4 percent to 3,755 yen in Tokyo.
“We’re having a natural reaction to the unrest with oil going above $100,” Todd Martin, Societe Generale’s Asia equity strategist, said in a Bloomberg Television interview in Hong Kong this week.
The MSCI Asia Pacific Index is little changed this year. The price of stocks in the gauge fell to an average of 13.7 times estimated earnings on Feb. 24, the lowest level since September.
India Says Economy May Grow as Much as 9.25% Next Year Amid Inflation Risk
India’s finance ministry said economic growth may accelerate to as much as 9.25 percent in the next financial year, the fastest pace since 2008, and signaled a cut in the budget deficit to help slow inflation.
“With continued growth momentum, the prospects for sustaining and deepening the fiscal consolidation process remain bright,” the annual Economic Survey prepared by advisers to Finance Minister Pranab Mukherjee said yesterday. “Inflation is clearly the dominant concern.” Mukherjee is due to unveil the budget on Feb. 28 for the year starting April 1.
India needs to narrow the fiscal deficit alongside interest- rate increases to curb inflation that has been “uncomfortably high” this year, the ministry said. The gap in the nation’s finances will be the highest in 2011 among the so-called BRIC economies that include Brazil, Russia, India and China, according to the International Monetary Fund.
“The budget will focus on reducing the fiscal deficit and taming inflation,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. “The government may unwind the fiscal stimulus announced during the global financial crisis.”
Shankar expects Mukherjee to raise excise and service taxes, both currently at 10 percent, by one percentage point.
Stocks Gain
The Bombay Stock Exchange’s Sensitive Index rose 0.4 percent in Mumbai yesterday. The rupee gained 0.3 percent to 45.32 against the dollar. The yield on the 8.13 percent bond due in September 2022 was little changed at 8.13 percent.
India is the world’s fastest-growing major economy after China, according to Bloomberg data. China’s economic growth may be 9 percent this year, the People’s Daily reported on Feb. 25, citing the State Council’s Development Research Center.
“The reduced fiscal deficits will permit greater availability of credit to sustain growth, while tighter monetary policy starts to transmit its impact in reducing inflation,” the Indian finance ministry’s report said.
India’s benchmark wholesale-price inflation rate averaged 9.4 percent in the nine months through December, which is the most in the past decade, the report said. Inflation slowed to 8.23 percent in January, and “this trend may continue in the next two months,” it said. The economy may expand 8.6 percent in the year ending March 31, the government said Feb. 7.
‘Unacceptable’ Inflation
“The present level of inflation is unacceptable,” Kaushik Basu, the chief economic adviser in the finance ministry told reporters in New Delhi yesterday. “We want to bring it down much further.”
Prime Minister Manmohan Singh’s government is under pressure to contain price gains as inflation erodes the spending power of the more than three-quarters of Indians the World Bank estimates live on less than $2 a day.
Thousands of workers from across India rallied by trade unions marched toward the country’s parliament in central New Delhi on Feb. 23 protesting rising food prices, low wages and job insecurity.
The Reserve Bank of India, which has raised its benchmark repurchase rate seven times in the past year, estimated last month that inflation will slow to 7 percent by March 31. The repurchase rate is 6.5 percent. The central bank on Jan. 25 signaled it will raise borrowing costs further.
Anti-Inflation Stance
“Current growth and inflation trends warrant persistence with an anti-inflationary monetary stance,” the finance ministry said.
The state-controlled Indian Railways left passenger and freight charges unchanged in its budget yesterday, a move Prime Minister Singh said will help tackle inflation.
India’s federal budget deficit may narrow to 4.8 percent of gross domestic product in the year ending March 31, less than the earlier target of 5.5 percent of GDP, the finance ministry report showed. The IMF estimates a deficit of 8.5 percent of GDP by including the shortfall in state government budgets.
Mukherjee has room to maneuver in the budget because less bonds are due for repayment and the government earned double the targeted amount from the sale of phone licenses to companies including Vodafone Group Plc in the previous year.
Eight of 12 economists in a Bloomberg News survey predict policy makers will cut borrowing in the year starting April 1. The finance ministry may have 4.3 trillion rupees ($95 billion) in gross borrowing, about 5 percent less than planned this fiscal year, CLSA Asia-Pacific Markets said.
Policy Aim
“The issue of maintaining an environment where the cost and availability of credit is supportive of growth momentum, while ensuring that inflation falls back to more comfortable target levels, will be at the centre stage of policy consideration in the near term,” according to the report.
The ministry said that the inflation outlook depends on food prices and “demand-side pressures” in the economy.
“The domestic food price situation could be exacerbated by the increase in global food prices because of dependency on import of some food items like edible oil,” the report said.
Growth may accelerate as India’s savings and investment rates “have turned around,” the report said.
The savings rate rose to 33.7 percent in the year ended March 31, 2010, from 32.3 percent in the previous year, while the investment rate climbed to 36.5 percent, the report showed.
“Since savings and investments now show a positive momentum and the government is implementing a gradual exit from the stimulus package, the savings and investment rates are likely to rise further,” according to the report. “Hence, it is expected that the economy’s growth will breach the 9 percent mark in 2011- 12.”
“With continued growth momentum, the prospects for sustaining and deepening the fiscal consolidation process remain bright,” the annual Economic Survey prepared by advisers to Finance Minister Pranab Mukherjee said yesterday. “Inflation is clearly the dominant concern.” Mukherjee is due to unveil the budget on Feb. 28 for the year starting April 1.
India needs to narrow the fiscal deficit alongside interest- rate increases to curb inflation that has been “uncomfortably high” this year, the ministry said. The gap in the nation’s finances will be the highest in 2011 among the so-called BRIC economies that include Brazil, Russia, India and China, according to the International Monetary Fund.
“The budget will focus on reducing the fiscal deficit and taming inflation,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. “The government may unwind the fiscal stimulus announced during the global financial crisis.”
Shankar expects Mukherjee to raise excise and service taxes, both currently at 10 percent, by one percentage point.
Stocks Gain
The Bombay Stock Exchange’s Sensitive Index rose 0.4 percent in Mumbai yesterday. The rupee gained 0.3 percent to 45.32 against the dollar. The yield on the 8.13 percent bond due in September 2022 was little changed at 8.13 percent.
India is the world’s fastest-growing major economy after China, according to Bloomberg data. China’s economic growth may be 9 percent this year, the People’s Daily reported on Feb. 25, citing the State Council’s Development Research Center.
“The reduced fiscal deficits will permit greater availability of credit to sustain growth, while tighter monetary policy starts to transmit its impact in reducing inflation,” the Indian finance ministry’s report said.
India’s benchmark wholesale-price inflation rate averaged 9.4 percent in the nine months through December, which is the most in the past decade, the report said. Inflation slowed to 8.23 percent in January, and “this trend may continue in the next two months,” it said. The economy may expand 8.6 percent in the year ending March 31, the government said Feb. 7.
‘Unacceptable’ Inflation
“The present level of inflation is unacceptable,” Kaushik Basu, the chief economic adviser in the finance ministry told reporters in New Delhi yesterday. “We want to bring it down much further.”
Prime Minister Manmohan Singh’s government is under pressure to contain price gains as inflation erodes the spending power of the more than three-quarters of Indians the World Bank estimates live on less than $2 a day.
Thousands of workers from across India rallied by trade unions marched toward the country’s parliament in central New Delhi on Feb. 23 protesting rising food prices, low wages and job insecurity.
The Reserve Bank of India, which has raised its benchmark repurchase rate seven times in the past year, estimated last month that inflation will slow to 7 percent by March 31. The repurchase rate is 6.5 percent. The central bank on Jan. 25 signaled it will raise borrowing costs further.
Anti-Inflation Stance
“Current growth and inflation trends warrant persistence with an anti-inflationary monetary stance,” the finance ministry said.
The state-controlled Indian Railways left passenger and freight charges unchanged in its budget yesterday, a move Prime Minister Singh said will help tackle inflation.
India’s federal budget deficit may narrow to 4.8 percent of gross domestic product in the year ending March 31, less than the earlier target of 5.5 percent of GDP, the finance ministry report showed. The IMF estimates a deficit of 8.5 percent of GDP by including the shortfall in state government budgets.
Mukherjee has room to maneuver in the budget because less bonds are due for repayment and the government earned double the targeted amount from the sale of phone licenses to companies including Vodafone Group Plc in the previous year.
Eight of 12 economists in a Bloomberg News survey predict policy makers will cut borrowing in the year starting April 1. The finance ministry may have 4.3 trillion rupees ($95 billion) in gross borrowing, about 5 percent less than planned this fiscal year, CLSA Asia-Pacific Markets said.
Policy Aim
“The issue of maintaining an environment where the cost and availability of credit is supportive of growth momentum, while ensuring that inflation falls back to more comfortable target levels, will be at the centre stage of policy consideration in the near term,” according to the report.
The ministry said that the inflation outlook depends on food prices and “demand-side pressures” in the economy.
“The domestic food price situation could be exacerbated by the increase in global food prices because of dependency on import of some food items like edible oil,” the report said.
Growth may accelerate as India’s savings and investment rates “have turned around,” the report said.
The savings rate rose to 33.7 percent in the year ended March 31, 2010, from 32.3 percent in the previous year, while the investment rate climbed to 36.5 percent, the report showed.
“Since savings and investments now show a positive momentum and the government is implementing a gradual exit from the stimulus package, the savings and investment rates are likely to rise further,” according to the report. “Hence, it is expected that the economy’s growth will breach the 9 percent mark in 2011- 12.”
Thursday, February 24, 2011
Rising Oil Prices Pose New Threat to U.S. Economy
The American economy just can’t catch a break.
Last year, as things started looking up, the European debt crisis flustered the fragile recovery. Now, under similar economic circumstances, comes the turmoil in the Middle East.
Energy prices have surged in recent days, as a result of the political violence in Libya that has disrupted oil production there. Prices are also climbing because of fears the unrest may continue to spread to other oil-producing countries.
If the recent rise in oil prices sticks, it will most likely slow a growth rate that is already too sluggish to produce many jobs in this country. Some economists are predicting that oil prices, just above $97 a barrel on Thursday, could be sustained well above $100 a barrel, a benchmark.
Even if energy costs don’t rise higher, lingering uncertainty over the stability of the Middle East could drag down growth, not just in the United States but around the world.
“We’ve gone beyond responding to the sort of brutal Technicolor of the crisis in Libya,” said Daniel H. Yergin, the oil historian and chairman of IHS Cambridge Energy Research Associates. “There’s also a strong element of fear of what’s next, and what’s next after next.”
Before the outbreak of violence in Libya, the Federal Reserve had raised its forecast for United States growth in 2011, and a stronger stock market had helped consumers be more confident about the future and more willing to spend.
But other sources of economic uncertainty besides oil prices have come into sharper focus in recent days. After a few false starts, housing prices have slid further. New-home sales dropped sharply in January, as did sales of big-ticket items like appliances, the government reported Thursday.
Though the initial panic from last year has faded, Europe’s deep debt problems remain, creating another wild card for the global economy. Protests turned violent in Greece this week in response to new austerity measures.
Budget and debt problems at all levels of American government also threaten to crimp the domestic recovery. Struggling state and local governments may dismiss more workers this year as many face their deepest shortfalls since the economic downturn began, and a Congressional stalemate over the country’s budget could even lead to a federal government shutdown.
“The irony is that we just barely got ourselves up and off the ground from the devastating financial crisis,” said Bernard Baumohl, chief global economist at the Economic Outlook Group, who had been optimistic about the country’s prospects. “The recovery itself is less than two years in, and we haven’t yet seen jobs make a decent comeback. Now we’re being hit with this new, very ominous event, so the timing couldn’t be worse.”
Most economists are not yet talking about the United States dipping back into recession, and it is too soon to tell how far the pro-democracy protests that have roiled Egypt, Bahrain and Libya will spread. For now, most analysts are not predicting that Iran and Saudi Arabia, repressive governments that also happen to be two of the world’s biggest oil producers, will catch the revolutionary fever.
“But revolutions are notoriously difficult to forecast,” said Chris Lafakas, an economist at Moody’s Analytics who focuses on energy. Disruptions of oil supplies in Saudi Arabia and Iran in particular, he said, “would be catastrophic for prices. Saudi Arabia alone could cause maybe a 20 to 25 percent increase in oil prices overnight.”
In the last week, oil prices have risen more than 10 percent and even breached $100 a barrel. A sustained $10 increase in oil prices would shave about two-tenths of a percentage point off economic growth, according to Dean Maki, chief United States economist at Barclays Capital. The Federal Reserve had forecast last week that the United States economy would grow by 3.4 to 3.9 percent in 2011, up from 2.9 percent last year.
Higher oil prices restrain growth because they translate to higher fuel prices for consumers and businesses. Mr. Lafakas estimates that oil prices are on track to average $90 a barrel in 2011, from $80 in 2010, an increase that would offset nearly a quarter of the $120 billion payroll tax cut that Congress had intended to stimulate the economy this year.
Rising gasoline prices have already led Jayme Webb, an office manager at a recycling center in Sioux City, Iowa, and her husband, Ken, who works at Wal-Mart, to cut back on spending.
In the last month, they have canceled their satellite television subscription and their Internet service. They have also stopped driving from their home in rural Moville to Sioux City on weekends to see Ms. Webb’s parents.
Along with making their commutes to work more expensive, rising oil prices have driven up the cost of food for animals and people. So the couple have stopped buying feed for their dozen sheep and goats and six chickens and instead asked neighboring farmers to let them use scraps from their corn fields.
“It’s a struggle,” said Ms. Webb, 49. “We have to watch every little penny.”
A cutback in consumer spending reverberates through the economy by crimping businesses, making it less likely that employers will commit to the additional hiring needed to lower the 9 percent unemployment rate.
“Revenue is down, costs are up, and you can’t make any money,” said R. Jerol Kivett, the owner of Kivett’s Inc., a company that manufactures pews and other church furniture in Clinton, N.C. “You’re just trying to meet payroll and keep people working, hoping the economy will turn. But it just seems like setback after setback after setback.”
Last year, as things started looking up, the European debt crisis flustered the fragile recovery. Now, under similar economic circumstances, comes the turmoil in the Middle East.
Energy prices have surged in recent days, as a result of the political violence in Libya that has disrupted oil production there. Prices are also climbing because of fears the unrest may continue to spread to other oil-producing countries.
If the recent rise in oil prices sticks, it will most likely slow a growth rate that is already too sluggish to produce many jobs in this country. Some economists are predicting that oil prices, just above $97 a barrel on Thursday, could be sustained well above $100 a barrel, a benchmark.
Even if energy costs don’t rise higher, lingering uncertainty over the stability of the Middle East could drag down growth, not just in the United States but around the world.
“We’ve gone beyond responding to the sort of brutal Technicolor of the crisis in Libya,” said Daniel H. Yergin, the oil historian and chairman of IHS Cambridge Energy Research Associates. “There’s also a strong element of fear of what’s next, and what’s next after next.”
Before the outbreak of violence in Libya, the Federal Reserve had raised its forecast for United States growth in 2011, and a stronger stock market had helped consumers be more confident about the future and more willing to spend.
But other sources of economic uncertainty besides oil prices have come into sharper focus in recent days. After a few false starts, housing prices have slid further. New-home sales dropped sharply in January, as did sales of big-ticket items like appliances, the government reported Thursday.
Though the initial panic from last year has faded, Europe’s deep debt problems remain, creating another wild card for the global economy. Protests turned violent in Greece this week in response to new austerity measures.
Budget and debt problems at all levels of American government also threaten to crimp the domestic recovery. Struggling state and local governments may dismiss more workers this year as many face their deepest shortfalls since the economic downturn began, and a Congressional stalemate over the country’s budget could even lead to a federal government shutdown.
“The irony is that we just barely got ourselves up and off the ground from the devastating financial crisis,” said Bernard Baumohl, chief global economist at the Economic Outlook Group, who had been optimistic about the country’s prospects. “The recovery itself is less than two years in, and we haven’t yet seen jobs make a decent comeback. Now we’re being hit with this new, very ominous event, so the timing couldn’t be worse.”
Most economists are not yet talking about the United States dipping back into recession, and it is too soon to tell how far the pro-democracy protests that have roiled Egypt, Bahrain and Libya will spread. For now, most analysts are not predicting that Iran and Saudi Arabia, repressive governments that also happen to be two of the world’s biggest oil producers, will catch the revolutionary fever.
“But revolutions are notoriously difficult to forecast,” said Chris Lafakas, an economist at Moody’s Analytics who focuses on energy. Disruptions of oil supplies in Saudi Arabia and Iran in particular, he said, “would be catastrophic for prices. Saudi Arabia alone could cause maybe a 20 to 25 percent increase in oil prices overnight.”
In the last week, oil prices have risen more than 10 percent and even breached $100 a barrel. A sustained $10 increase in oil prices would shave about two-tenths of a percentage point off economic growth, according to Dean Maki, chief United States economist at Barclays Capital. The Federal Reserve had forecast last week that the United States economy would grow by 3.4 to 3.9 percent in 2011, up from 2.9 percent last year.
Higher oil prices restrain growth because they translate to higher fuel prices for consumers and businesses. Mr. Lafakas estimates that oil prices are on track to average $90 a barrel in 2011, from $80 in 2010, an increase that would offset nearly a quarter of the $120 billion payroll tax cut that Congress had intended to stimulate the economy this year.
Rising gasoline prices have already led Jayme Webb, an office manager at a recycling center in Sioux City, Iowa, and her husband, Ken, who works at Wal-Mart, to cut back on spending.
In the last month, they have canceled their satellite television subscription and their Internet service. They have also stopped driving from their home in rural Moville to Sioux City on weekends to see Ms. Webb’s parents.
Along with making their commutes to work more expensive, rising oil prices have driven up the cost of food for animals and people. So the couple have stopped buying feed for their dozen sheep and goats and six chickens and instead asked neighboring farmers to let them use scraps from their corn fields.
“It’s a struggle,” said Ms. Webb, 49. “We have to watch every little penny.”
A cutback in consumer spending reverberates through the economy by crimping businesses, making it less likely that employers will commit to the additional hiring needed to lower the 9 percent unemployment rate.
“Revenue is down, costs are up, and you can’t make any money,” said R. Jerol Kivett, the owner of Kivett’s Inc., a company that manufactures pews and other church furniture in Clinton, N.C. “You’re just trying to meet payroll and keep people working, hoping the economy will turn. But it just seems like setback after setback after setback.”
Indian rally raises pressure on Singh
Pressure mounted on Manmohan Singh, India’s prime minister, as thousands of workers marched in the capital to protest against inflation.
The opposition has been seeking to capitalise on the weakening position of Mr Singh, who is reeling from a spate of corruption scandals that threaten to undermine his reputation for integrity. His ability to manage the economy is also being called into question as India battles the highest inflation of any major Asian economy.
Wednesday’s march of daily wage labourers, organised by the leftist Centre of Indian Trade Unions, highlighted concerns that Mr Singh had failed to control inflation and that his ruling Congress party was not delivering on its promise of “inclusive growth”, but instead excluding all but a few from the benefits of fast economic growth.
The demonstration drew an estimated 40,000 people from across India. It was the biggest protest in Delhi since a march against corruption this year drew many, mostly middle class, people on to the streets.
Sushilabai Marawi, a farm labourer from the western state of Maharashtra, said: “We earn R120 ($2.65) a day. How can we afford to eat when costs are so high, from rice and wheat to sugar and vegetables? We want to send a message to the leaders of this country.”
The left and right are levelling severe criticism against Mr Singh’s tolerance of high inflation before the national budget on Monday. Mr Singh, 78, has pleaded on national television that he is not a “lame duck” prime minister.
The Hindu nationalist Bharatiya Janata party, emboldened by its victory this week in forcing the government to agree to a parliamentary investigation into a high profile telecoms scandal, has launched a stinging attack on Mr Singh’s pedigree as one of India’s top financial bureaucrats.
“What use is your experience as a distinguished economist if you are unable to really save the common man from the entire gambit of inflation that has set in in the last three years?” asked Arun Jaitley, a senior BJP leader.
Yashwant Sinha, a former BJP finance minister, challenged the government’s prized high growth strategy, arguing it was counterproductive if it was also accompanied by high inflation. He warned India had returned to a period of over-stimulating “excesses”, reminiscent of 20 years ago, by running wide fiscal and current account deficits.
Last week, Mr Singh publicly acknowledged more could have been done to curb inflation. But he said his government had wanted to keep intact India’s growth story and the recovery from the global financial crisis.
The prime minister had initially forecast that inflation, currently at 8.2 per cent, would fall to below 6 per cent by the end of last year. He has since revised his forecast to 7 per cent by the end of March.
The opposition has been seeking to capitalise on the weakening position of Mr Singh, who is reeling from a spate of corruption scandals that threaten to undermine his reputation for integrity. His ability to manage the economy is also being called into question as India battles the highest inflation of any major Asian economy.
Wednesday’s march of daily wage labourers, organised by the leftist Centre of Indian Trade Unions, highlighted concerns that Mr Singh had failed to control inflation and that his ruling Congress party was not delivering on its promise of “inclusive growth”, but instead excluding all but a few from the benefits of fast economic growth.
The demonstration drew an estimated 40,000 people from across India. It was the biggest protest in Delhi since a march against corruption this year drew many, mostly middle class, people on to the streets.
Sushilabai Marawi, a farm labourer from the western state of Maharashtra, said: “We earn R120 ($2.65) a day. How can we afford to eat when costs are so high, from rice and wheat to sugar and vegetables? We want to send a message to the leaders of this country.”
The left and right are levelling severe criticism against Mr Singh’s tolerance of high inflation before the national budget on Monday. Mr Singh, 78, has pleaded on national television that he is not a “lame duck” prime minister.
The Hindu nationalist Bharatiya Janata party, emboldened by its victory this week in forcing the government to agree to a parliamentary investigation into a high profile telecoms scandal, has launched a stinging attack on Mr Singh’s pedigree as one of India’s top financial bureaucrats.
“What use is your experience as a distinguished economist if you are unable to really save the common man from the entire gambit of inflation that has set in in the last three years?” asked Arun Jaitley, a senior BJP leader.
Yashwant Sinha, a former BJP finance minister, challenged the government’s prized high growth strategy, arguing it was counterproductive if it was also accompanied by high inflation. He warned India had returned to a period of over-stimulating “excesses”, reminiscent of 20 years ago, by running wide fiscal and current account deficits.
Last week, Mr Singh publicly acknowledged more could have been done to curb inflation. But he said his government had wanted to keep intact India’s growth story and the recovery from the global financial crisis.
The prime minister had initially forecast that inflation, currently at 8.2 per cent, would fall to below 6 per cent by the end of last year. He has since revised his forecast to 7 per cent by the end of March.
Investors Fleeing India Complicate Singh's Push for Asset Sales
Indian Prime Minister Manmohan Singh, who’s halfway to his fiscal-year target for share sales with 35 days to go, may have to set a more ambitious goal for the next 12 months even as investors shun the country’s stocks.
India’s government may seek a record 500 billion rupees ($11 billion) in the year starting April 1 as it tries to shrink the fiscal deficit, said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. Finance Minister Pranab Mukherjee will propose the fiscal budget on Feb. 28.
Singh’s administration delayed at least three sales of shares in state-owned companies in 2010 even as foreign investors poured a record $29 billion into Indian stocks. With few options for mending government finances, Singh may turn to banks including Citigroup Inc. to accelerate privatizations -- a process made tougher as persistent inflation and unrest in the Middle East dents demand for emerging-market equities.
“Last year was one of the best for the market and they couldn’t meet their target,” said Rakesh Arora, head of India research at Macquarie Group Ltd. in Mumbai. “There is no way foreign investors will be able to match the money they put into India in 2010,” Arora said in an interview on Feb. 22.
India’s Sensitive Index has fallen 14 percent this year, the worst performance among Asian benchmarks in local currency terms, according to data compiled by Bloomberg. The gauge fell 3 percent yesterday, the most in more than 15 months, as food- price gains accelerated. Foreign investors have sold a net $1.58 billion of Indian shares since Jan. 1, the data show.
Pending Sales
Singh, 78, raised 227.6 billion rupees since the start of this fiscal year through shares of companies including Coal India Ltd., the world’s biggest producer of the fuel. The sale of a 5 percent stake in Oil & Natural Gas Corp., scheduled for next month, may add another 113 billion rupees to state coffers, based on New Delhi-based ONGC’s closing price yesterday.
That would still leave the government 15 percent short of its fiscal-year target of 400 billion rupees.
Proposed sales of stakes in Indian Oil Corp., the country’s biggest refiner, and Steel Authority of India Ltd., its second- largest producer of the alloy, may help raise about 104 billion rupees next fiscal year, according to data compiled by Bloomberg. The Department of Disinvestment has also hired bankers for Power Finance Corp., a lender to Indian utilities, and Hindustan Copper Ltd., India’s only miner of the metal.
India’s cabinet in November 2009 approved a plan requiring the government to reduce its stake in profitable state-run companies to a maximum 90 percent. That made about 60 state-run companies eligible for sales, the finance ministry said at the time, including miner and power producer Neyveli Lignite Corp., National Fertilizers Ltd. and MMTC Ltd., the nation’s biggest state-run trading company.
Telecom Reprieve
The government has also been considering an initial share sale for former phone monopoly Bharat Sanchar Nigam Ltd. since at least 2003. A 10 percent stake would raise $10 billion, the company’s finance director estimated in January 2008. The government hasn’t decided on the initial share sale, Telecommunications Secretary P.J. Thomas said in July.
Singh’s administration won a reprieve on meeting its privatization target in the current financial year because of the 1.06 trillion rupees it raised from the sale of wireless permits and spectrum, said Sahay. Tax revenue also climbed 20 percent in the first 10 months of the fiscal year, driven by India’s economic growth.
The push to meet asset-sale targets may be “much stronger” in the new financial year, Sahay said.
India’s budget deficit may drop to 4.8 percent of gross domestic product by March 2012, from an estimated 5.2 percent by the end of next month, Chakravarthy Rangarajan, chairman of Singh’s Economic Advisory Council, said this month. That compares with 2.7 percent for the year to March 2008.
Diminishing Demand
A renewed push by Singh to sell state companies could be complicated by diminished demand for emerging-market equities. The MSCI Emerging Markets Index lost 6 percent this year, even as the MSCI World Index rose 4 percent through yesterday.
Indian companies raised 41 billion rupees in share sales since Dec. 31, less than a fifth of the amount collected in the same period of 2010, according to data compiled by Bloomberg. Citigroup is the top-ranked arranger of stock offerings in the country this year, maintaining the lead it had in 2010, followed by Deutsche Bank AG and HSBC Holdings Plc, the data show.
Intensified efforts to sell state-backed companies may spell trouble for private firms seeking to go public, said Abhishek Saraf, an analyst at Deutsche Bank in Mumbai. State companies paid underwriters near-zero fees in 2010, while commissions for private share sales averaged 3.5 percent, Bloomberg data show.
Government-owned companies also typically sell shares at lower valuations than private enterprises, said Jagannadham Thunuguntla, an analyst at SMC Global Securities Ltd.
“Disinvestment deals are more likely to go through than private paper,” said Saraf. That’s because the government may be more willing to ease up on pricing than company owners, he said.
India’s government may seek a record 500 billion rupees ($11 billion) in the year starting April 1 as it tries to shrink the fiscal deficit, said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. Finance Minister Pranab Mukherjee will propose the fiscal budget on Feb. 28.
Singh’s administration delayed at least three sales of shares in state-owned companies in 2010 even as foreign investors poured a record $29 billion into Indian stocks. With few options for mending government finances, Singh may turn to banks including Citigroup Inc. to accelerate privatizations -- a process made tougher as persistent inflation and unrest in the Middle East dents demand for emerging-market equities.
“Last year was one of the best for the market and they couldn’t meet their target,” said Rakesh Arora, head of India research at Macquarie Group Ltd. in Mumbai. “There is no way foreign investors will be able to match the money they put into India in 2010,” Arora said in an interview on Feb. 22.
India’s Sensitive Index has fallen 14 percent this year, the worst performance among Asian benchmarks in local currency terms, according to data compiled by Bloomberg. The gauge fell 3 percent yesterday, the most in more than 15 months, as food- price gains accelerated. Foreign investors have sold a net $1.58 billion of Indian shares since Jan. 1, the data show.
Pending Sales
Singh, 78, raised 227.6 billion rupees since the start of this fiscal year through shares of companies including Coal India Ltd., the world’s biggest producer of the fuel. The sale of a 5 percent stake in Oil & Natural Gas Corp., scheduled for next month, may add another 113 billion rupees to state coffers, based on New Delhi-based ONGC’s closing price yesterday.
That would still leave the government 15 percent short of its fiscal-year target of 400 billion rupees.
Proposed sales of stakes in Indian Oil Corp., the country’s biggest refiner, and Steel Authority of India Ltd., its second- largest producer of the alloy, may help raise about 104 billion rupees next fiscal year, according to data compiled by Bloomberg. The Department of Disinvestment has also hired bankers for Power Finance Corp., a lender to Indian utilities, and Hindustan Copper Ltd., India’s only miner of the metal.
India’s cabinet in November 2009 approved a plan requiring the government to reduce its stake in profitable state-run companies to a maximum 90 percent. That made about 60 state-run companies eligible for sales, the finance ministry said at the time, including miner and power producer Neyveli Lignite Corp., National Fertilizers Ltd. and MMTC Ltd., the nation’s biggest state-run trading company.
Telecom Reprieve
The government has also been considering an initial share sale for former phone monopoly Bharat Sanchar Nigam Ltd. since at least 2003. A 10 percent stake would raise $10 billion, the company’s finance director estimated in January 2008. The government hasn’t decided on the initial share sale, Telecommunications Secretary P.J. Thomas said in July.
Singh’s administration won a reprieve on meeting its privatization target in the current financial year because of the 1.06 trillion rupees it raised from the sale of wireless permits and spectrum, said Sahay. Tax revenue also climbed 20 percent in the first 10 months of the fiscal year, driven by India’s economic growth.
The push to meet asset-sale targets may be “much stronger” in the new financial year, Sahay said.
India’s budget deficit may drop to 4.8 percent of gross domestic product by March 2012, from an estimated 5.2 percent by the end of next month, Chakravarthy Rangarajan, chairman of Singh’s Economic Advisory Council, said this month. That compares with 2.7 percent for the year to March 2008.
Diminishing Demand
A renewed push by Singh to sell state companies could be complicated by diminished demand for emerging-market equities. The MSCI Emerging Markets Index lost 6 percent this year, even as the MSCI World Index rose 4 percent through yesterday.
Indian companies raised 41 billion rupees in share sales since Dec. 31, less than a fifth of the amount collected in the same period of 2010, according to data compiled by Bloomberg. Citigroup is the top-ranked arranger of stock offerings in the country this year, maintaining the lead it had in 2010, followed by Deutsche Bank AG and HSBC Holdings Plc, the data show.
Intensified efforts to sell state-backed companies may spell trouble for private firms seeking to go public, said Abhishek Saraf, an analyst at Deutsche Bank in Mumbai. State companies paid underwriters near-zero fees in 2010, while commissions for private share sales averaged 3.5 percent, Bloomberg data show.
Government-owned companies also typically sell shares at lower valuations than private enterprises, said Jagannadham Thunuguntla, an analyst at SMC Global Securities Ltd.
“Disinvestment deals are more likely to go through than private paper,” said Saraf. That’s because the government may be more willing to ease up on pricing than company owners, he said.
Mukherjee Cutting Debt Sales Drives Flattest Curve Since '08: India Credit
For the first time in seven years India’s government may be preparing to reduce debt sales, spurring a rally in longer-dated bonds.
Yields on 10-year bonds fell to within 27 basis points of two-year debt on Feb. 23, the least since December 2008, data compiled by Bloomberg show. Eight of 12 economists in a Bloomberg News survey predict policy makers will cut borrowings in the year starting April 1. The finance ministry may raise 4.3 trillion rupees ($94.6 billion), about 5 percent less than planned this fiscal year, CLSA Asia-Pacific Markets said.
Investors are already anticipating fewer offerings, helping drive a 0.7 percent return on rupee-denominated debt this month, the best performance in Asia after Indonesia, indexes compiled by HSBC Holdings Plc show. Finance Minister Pranab Mukherjee has room to maneuver in the federal budget on Feb. 28 because less bonds are due for repayment and phone-license sales last year may leave him with as much as 40 billion rupees of surplus cash.
“The drop in the spreads indicates that long-term growth fundamentals remain strong and the markets are less concerned about the budget deficit,” Killol Pandya, who manages the equivalent of $300 million as the Mumbai-based head of fixed income at Daiwa Mutual Fund, said in an interview yesterday.
India has run fiscal deficits every year for more than three decades. The nation’s debt obligations have risen from 28.71 billion rupees in 1981, according to earliest-available data from the central bank.
Fiscal Shortfall
The deficit shortfall in the nine months through December was 45 percent of the full-year target of 3.81 trillion rupees, official data show. In the new fiscal year, it may drop to 4.8 percent of gross domestic product from an estimated 5.2 percent in the current 12-month period, Chakravarthy Rangarajan, the prime minister’s chief economic adviser, told reporters Feb. 21.
The International Monetary Fund estimates the deficit, which includes state governments’ finances, will be the highest among the so-called BRIC economies at 8.5 percent of GDP in 2011. That compares with 3.6 percent in Russia, 1.9 percent in China and 1.2 percent in Brazil.
The yield on India’s 8.13 percent bonds due September 2022 touched 8.08 percent on Feb. 22, the lowest level since Jan. 5, on speculation demand is increasing due to the absence of new offerings. The rate on the most-traded government security was 8.14 percent yesterday, compared with 8.11 percent on Feb. 23.
Borrowing Plan
The government, which budgeted 4.57 trillion rupees in borrowings for the year ending March, scrapped one part of a 100 billion rupee sale in September. It has issued 4.27 trillion rupees of notes between April 1 and Feb. 7, according to data compiled by Bloomberg.
“The positive is there are no supplies scheduled for at least a month,” Anoop Verma, a fixed-income trader at Development Credit Bank Ltd. in Mumbai, said in an interview on Feb. 23. “That is spurring some buying.”
The difference between India’s 10-year bonds and similar- maturity U.S. Treasuries has shrunk to 467 basis points from this year’s high of 496 on Jan. 10 amid optimism growth in Asia’s third-biggest economy will push up state revenue. The government forecasts GDP will rise 8.6 percent in the current financial perdion, the most in three years.
Tax collections totaled 3.91 trillion rupees at the end of December, 73 percent of the full-year target. The government also earned 677.2 billion rupees in the form of license fees from third-generation phone licenses it sold in May, more than the budgeted 350 billion rupees.
Debt Repayments
The government needs to repay about 730 billion rupees in the coming fiscal year, compared with 1.12 trillion rupees in the 12 months ending March, according to budget documents.
“There is inherent buoyancy in the economy, which will lead to higher tax collections and lesser dependence on borrowings,” Madan Sabnavis, an economist at Mumbai-based CARE Ratings, said in an interview on Feb. 22.
The rupee has retreated 1.7 percent this year on concern an 11 percent surge in crude-oil prices in New York will raise the government’s subsidy burden. The currency dropped 0.7 percent to 45.48 per dollar yesterday, according to data compiled by Bloomberg.
The government compensates oil companies for selling cooking gas, kerosene and diesel at lower-than-market prices to shield 66 percent of the nation’s 1.2 billion people who live on less than $2 a day from spiraling prices. Subsidies account for about 10 percent of India’s budget.
‘Bearish on Borrowings’
“I am bearish on borrowings for the next year,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview on Feb. 22. “Tax revenues may not be as buoyant as they are this year and subsidies will be higher on oil prices.” She forecasts gross borrowings will be 4.9 trillion rupees in the next financial year.
The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, is little changed this month at 189 basis points, according to CMA prices.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
“India’s approach on deficit reduction will be gradual,” Rajeev Malik, a Singapore-based senior economist at CLSA Asia- Pacific Markets, said in an interview yesterday. “The bond market is unlikely to react negatively to the budget.”
Yields on 10-year bonds fell to within 27 basis points of two-year debt on Feb. 23, the least since December 2008, data compiled by Bloomberg show. Eight of 12 economists in a Bloomberg News survey predict policy makers will cut borrowings in the year starting April 1. The finance ministry may raise 4.3 trillion rupees ($94.6 billion), about 5 percent less than planned this fiscal year, CLSA Asia-Pacific Markets said.
Investors are already anticipating fewer offerings, helping drive a 0.7 percent return on rupee-denominated debt this month, the best performance in Asia after Indonesia, indexes compiled by HSBC Holdings Plc show. Finance Minister Pranab Mukherjee has room to maneuver in the federal budget on Feb. 28 because less bonds are due for repayment and phone-license sales last year may leave him with as much as 40 billion rupees of surplus cash.
“The drop in the spreads indicates that long-term growth fundamentals remain strong and the markets are less concerned about the budget deficit,” Killol Pandya, who manages the equivalent of $300 million as the Mumbai-based head of fixed income at Daiwa Mutual Fund, said in an interview yesterday.
India has run fiscal deficits every year for more than three decades. The nation’s debt obligations have risen from 28.71 billion rupees in 1981, according to earliest-available data from the central bank.
Fiscal Shortfall
The deficit shortfall in the nine months through December was 45 percent of the full-year target of 3.81 trillion rupees, official data show. In the new fiscal year, it may drop to 4.8 percent of gross domestic product from an estimated 5.2 percent in the current 12-month period, Chakravarthy Rangarajan, the prime minister’s chief economic adviser, told reporters Feb. 21.
The International Monetary Fund estimates the deficit, which includes state governments’ finances, will be the highest among the so-called BRIC economies at 8.5 percent of GDP in 2011. That compares with 3.6 percent in Russia, 1.9 percent in China and 1.2 percent in Brazil.
The yield on India’s 8.13 percent bonds due September 2022 touched 8.08 percent on Feb. 22, the lowest level since Jan. 5, on speculation demand is increasing due to the absence of new offerings. The rate on the most-traded government security was 8.14 percent yesterday, compared with 8.11 percent on Feb. 23.
Borrowing Plan
The government, which budgeted 4.57 trillion rupees in borrowings for the year ending March, scrapped one part of a 100 billion rupee sale in September. It has issued 4.27 trillion rupees of notes between April 1 and Feb. 7, according to data compiled by Bloomberg.
“The positive is there are no supplies scheduled for at least a month,” Anoop Verma, a fixed-income trader at Development Credit Bank Ltd. in Mumbai, said in an interview on Feb. 23. “That is spurring some buying.”
The difference between India’s 10-year bonds and similar- maturity U.S. Treasuries has shrunk to 467 basis points from this year’s high of 496 on Jan. 10 amid optimism growth in Asia’s third-biggest economy will push up state revenue. The government forecasts GDP will rise 8.6 percent in the current financial perdion, the most in three years.
Tax collections totaled 3.91 trillion rupees at the end of December, 73 percent of the full-year target. The government also earned 677.2 billion rupees in the form of license fees from third-generation phone licenses it sold in May, more than the budgeted 350 billion rupees.
Debt Repayments
The government needs to repay about 730 billion rupees in the coming fiscal year, compared with 1.12 trillion rupees in the 12 months ending March, according to budget documents.
“There is inherent buoyancy in the economy, which will lead to higher tax collections and lesser dependence on borrowings,” Madan Sabnavis, an economist at Mumbai-based CARE Ratings, said in an interview on Feb. 22.
The rupee has retreated 1.7 percent this year on concern an 11 percent surge in crude-oil prices in New York will raise the government’s subsidy burden. The currency dropped 0.7 percent to 45.48 per dollar yesterday, according to data compiled by Bloomberg.
The government compensates oil companies for selling cooking gas, kerosene and diesel at lower-than-market prices to shield 66 percent of the nation’s 1.2 billion people who live on less than $2 a day from spiraling prices. Subsidies account for about 10 percent of India’s budget.
‘Bearish on Borrowings’
“I am bearish on borrowings for the next year,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview on Feb. 22. “Tax revenues may not be as buoyant as they are this year and subsidies will be higher on oil prices.” She forecasts gross borrowings will be 4.9 trillion rupees in the next financial year.
The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, is little changed this month at 189 basis points, according to CMA prices.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
“India’s approach on deficit reduction will be gradual,” Rajeev Malik, a Singapore-based senior economist at CLSA Asia- Pacific Markets, said in an interview yesterday. “The bond market is unlikely to react negatively to the budget.”
Wednesday, February 23, 2011
Investors lap up SBI bonds again, issue subscribed three times
MUMBAI: The State Bank of India's retail bond issue has been oversubscribed three times within two days of its opening. The country's largest bank mobilised about 6,000 crore, but a huge portion has been subscribed by non-retail investors such as qualified institutional investors, corporates and high net worth individuals.
SBI chairman OP Bhatt said he expected a total subscription of around 10,000 crore by the time the issue closes on Monday. The SBI bond issue, which opened this Monday, aims to raise 1,000 crore with a greenshoe option of another 1,000 crore. The bank has decided to accept oversubscription from retail investors up to 10,000 crore.
Mr Bhatt, who was speaking at the sidelines of an ICRIER seminar, expressed regrets about the bonds not having a wider reach. "I am aware that a lot of investors have not been able to apply for these bonds and I am very sorry about it. We will make sure we have increased branch coverage for the next issue."
The issue has come under criticism for its lack of reach this time, with only 126 of its branches offering the bond applications, which accounts for less than 1% of its total number of 14,000 branches. Further, since these applications are available only in physical form, access to them has become even more difficult. Investors subscribing to the issue need to have dematerialised accounts.
While launching the bond issue, Mr Bhatt was confident that the bonds would be oversubscribed in the very first hour of the opening. "Our last issue was oversubscribed 19 times mainly because of our brand and attractive pricing," he added.
The issue comes with two options - 10-year bonds with a coupon of 9.75% and 15-year bonds at 9.95%. The 10-year paper has a call option after five years and it would pay only 9.30% for non-retail participants. The 15-year paper has a call option after 10 years and offers 9.45% for non-retail investors.
Mr Bhatt has been very confident of not only the success of the bank's latest bond issue in terms of the amount it raises, but also of deploying the funds.
At the seminar, he dwelt on Indo-Japanese trade prospects, saying he was for foreign banks coming to India as that made Indian banks more competitive. The SBI chairman said the bank would be more than happy to set up mid-corporate branches in Japan to cater to corporates exclusively.
Mr Bhatt denied reports of the bank making demands for a blanket permission for mergers with other subsidiaries to the Parliamentary Standing Committee on Tuesday. He said the report emanated from 'Parliamentary quarters' and he did not have much say in it.
SBI chairman OP Bhatt said he expected a total subscription of around 10,000 crore by the time the issue closes on Monday. The SBI bond issue, which opened this Monday, aims to raise 1,000 crore with a greenshoe option of another 1,000 crore. The bank has decided to accept oversubscription from retail investors up to 10,000 crore.
Mr Bhatt, who was speaking at the sidelines of an ICRIER seminar, expressed regrets about the bonds not having a wider reach. "I am aware that a lot of investors have not been able to apply for these bonds and I am very sorry about it. We will make sure we have increased branch coverage for the next issue."
The issue has come under criticism for its lack of reach this time, with only 126 of its branches offering the bond applications, which accounts for less than 1% of its total number of 14,000 branches. Further, since these applications are available only in physical form, access to them has become even more difficult. Investors subscribing to the issue need to have dematerialised accounts.
While launching the bond issue, Mr Bhatt was confident that the bonds would be oversubscribed in the very first hour of the opening. "Our last issue was oversubscribed 19 times mainly because of our brand and attractive pricing," he added.
The issue comes with two options - 10-year bonds with a coupon of 9.75% and 15-year bonds at 9.95%. The 10-year paper has a call option after five years and it would pay only 9.30% for non-retail participants. The 15-year paper has a call option after 10 years and offers 9.45% for non-retail investors.
Mr Bhatt has been very confident of not only the success of the bank's latest bond issue in terms of the amount it raises, but also of deploying the funds.
At the seminar, he dwelt on Indo-Japanese trade prospects, saying he was for foreign banks coming to India as that made Indian banks more competitive. The SBI chairman said the bank would be more than happy to set up mid-corporate branches in Japan to cater to corporates exclusively.
Mr Bhatt denied reports of the bank making demands for a blanket permission for mergers with other subsidiaries to the Parliamentary Standing Committee on Tuesday. He said the report emanated from 'Parliamentary quarters' and he did not have much say in it.
Load ban hasn’t affected inflows into MFs: Morgan Stanley
MUMBAI: MNC bank Morgan Stanley has debunked mutual fund industry’s pet theory that entry load ban and the resultant lull in new fund offerings have impacted its profitability. The MF industry has become more stable post-entry load ban, according to a Morgan Stanley report said. “The fund industry is gaining more stability since the Sebi ban on entry load on NFOs. This is obvious from the falling turnover in domestic MF flows,” the report said.
The report debates that counting out NFO subscription, net inflows into equity funds have been negative in 2004-08 — an opinion that was also voiced by former Sebi chief CB Bhave. “People like to combine the ban with inflows into the fund industry. This is just to confuse , as the ban on entry load has nothing to do with outflows ,” Bhave had said, brushing aside criticism that the ban has affected inflows into the industry .
According to Bhave, whose tenure as Sebi chairman ended last Friday, the public perception about distributors not selling MFs was not true. “The numbers tell us a slightly different story. Subscription figures have increased in existing equity schemes in 2010 than in 2008-09 . Money has gone down only in new fund offers (NFOs),” Bhave said.
The Morgan Stanley report says that the Sebi entry load ban has not affected the relative position of the industry in the equity market. The MFs’ AUM in market cap is intact, the report said. “Despite the entry loan ban in 2010, gross inflows in equity funds touched a 3-year high. Over the past three months, equity MFs have seen the highest cumulative inflows since August 2009. This is distinctly surprising in the context of market volatility,” the report said.
Though money has been trickling into equity MFs, NFOs failed to attract investment in 2010. Equity MFs — through 24 NFOs — collected just about Rs 3,000 crore in 2010, down by over 57% from 2009 and lowest in four years. Year 2007 saw 64 equity NFOs collecting Rs 39,327 crore; 48 equity offers in 2008 and 33 NFOs in 2009 collected Rs 12,722 crore and Rs 7,284 crore, respectively, as per AMFI data.
The report debates that counting out NFO subscription, net inflows into equity funds have been negative in 2004-08 — an opinion that was also voiced by former Sebi chief CB Bhave. “People like to combine the ban with inflows into the fund industry. This is just to confuse , as the ban on entry load has nothing to do with outflows ,” Bhave had said, brushing aside criticism that the ban has affected inflows into the industry .
According to Bhave, whose tenure as Sebi chairman ended last Friday, the public perception about distributors not selling MFs was not true. “The numbers tell us a slightly different story. Subscription figures have increased in existing equity schemes in 2010 than in 2008-09 . Money has gone down only in new fund offers (NFOs),” Bhave said.
The Morgan Stanley report says that the Sebi entry load ban has not affected the relative position of the industry in the equity market. The MFs’ AUM in market cap is intact, the report said. “Despite the entry loan ban in 2010, gross inflows in equity funds touched a 3-year high. Over the past three months, equity MFs have seen the highest cumulative inflows since August 2009. This is distinctly surprising in the context of market volatility,” the report said.
Though money has been trickling into equity MFs, NFOs failed to attract investment in 2010. Equity MFs — through 24 NFOs — collected just about Rs 3,000 crore in 2010, down by over 57% from 2009 and lowest in four years. Year 2007 saw 64 equity NFOs collecting Rs 39,327 crore; 48 equity offers in 2008 and 33 NFOs in 2009 collected Rs 12,722 crore and Rs 7,284 crore, respectively, as per AMFI data.
Low-risk short-term bonds a big hit on D Street
MUMBAI: Low-risk short-term bond funds are outperforming the high-risk equities as companies keep raising their interest rates for funds due to tight liquidity and policy rate hikes aimed at containing inflation.
Kotak Floater LT, Birla Sunlife ST Opportunities and BNP Paribas Money Plus, which invest in short-term bonds, are among the top performing funds in the category with returns as high as 8% since November. The benchmark Sensex has lost 7.7% during the period.
"Investors with 3-6 months horizon should invest now as interest rates are high, so they can take advantage of higher coupon rates and the additional benefit of higher capital appreciation in the April-June quarter," said Nandkumar Surti, chief investment officer at JP Morgan Asset Management. Its short-term bond fund has seen inflows of 200 crore in the past month.
Returns from fixed-income securities are going up as interest rates are rising due to high demand for money and the hike in policy rates. With inflation at more than 8%, RBI is expected to raise another 100 basis points this year, after raising it seven times in the past 12 months.
Banks are offering record rates for deposits and triple-A rated companies' yields are at more than 9.5%. Some banks are borrowing at 10% as there is a liquidity crunch.
These funds invest in bonds and other fixed-income instruments of high quality and low risk that have a tenure of around one year to 15 months and are best suited for short-term investors. The portfolio comprises treasury bills, certificate of deposits, commercial papers, securitised debt and advances in the call money market.
"The yields on the shorter-tenure paper had surged due to which the interest in the category was limited, but as far as the rate cycle is concerned, the worst seems to be over," said Lakshmi Iyer, head-fixed income & products, Kotak Mahindra Mutual Fund. Equity issuance and advance tax outflows could put rates under pressure in March but the influx of liquidity from April will see the curve becoming steeper, which will reflect in the funds' improved performance, she said.
An investor looking to invest in these funds for less than a year should look at the dividend option for tax benefits. The dividends are taxed at 13.841%. Funds declare dividends on these schemes to ensure investors' gains are taxed at a lower rate, making the monthly dividend option more attractive for short-term investors. If the period of investment is more than one year, and the growth option is preferred by investor, gains will be taxed at the rate of 10% without indexation or 20% with indexation, whichever is higher. The interest earned in an FD will be taxed at 30.9% if the investor falls in the top-tax bracket.
Kotak Floater LT, Birla Sunlife ST Opportunities and BNP Paribas Money Plus, which invest in short-term bonds, are among the top performing funds in the category with returns as high as 8% since November. The benchmark Sensex has lost 7.7% during the period.
"Investors with 3-6 months horizon should invest now as interest rates are high, so they can take advantage of higher coupon rates and the additional benefit of higher capital appreciation in the April-June quarter," said Nandkumar Surti, chief investment officer at JP Morgan Asset Management. Its short-term bond fund has seen inflows of 200 crore in the past month.
Returns from fixed-income securities are going up as interest rates are rising due to high demand for money and the hike in policy rates. With inflation at more than 8%, RBI is expected to raise another 100 basis points this year, after raising it seven times in the past 12 months.
Banks are offering record rates for deposits and triple-A rated companies' yields are at more than 9.5%. Some banks are borrowing at 10% as there is a liquidity crunch.
These funds invest in bonds and other fixed-income instruments of high quality and low risk that have a tenure of around one year to 15 months and are best suited for short-term investors. The portfolio comprises treasury bills, certificate of deposits, commercial papers, securitised debt and advances in the call money market.
"The yields on the shorter-tenure paper had surged due to which the interest in the category was limited, but as far as the rate cycle is concerned, the worst seems to be over," said Lakshmi Iyer, head-fixed income & products, Kotak Mahindra Mutual Fund. Equity issuance and advance tax outflows could put rates under pressure in March but the influx of liquidity from April will see the curve becoming steeper, which will reflect in the funds' improved performance, she said.
An investor looking to invest in these funds for less than a year should look at the dividend option for tax benefits. The dividends are taxed at 13.841%. Funds declare dividends on these schemes to ensure investors' gains are taxed at a lower rate, making the monthly dividend option more attractive for short-term investors. If the period of investment is more than one year, and the growth option is preferred by investor, gains will be taxed at the rate of 10% without indexation or 20% with indexation, whichever is higher. The interest earned in an FD will be taxed at 30.9% if the investor falls in the top-tax bracket.
Tuesday, February 22, 2011
Oil Soars as Furor Shakes Markets
HOUSTON — The political turmoil sweeping the Arab world drove oil prices sharply higher and stocks much lower on Tuesday despite efforts by Saudi Arabia to calm turbulent markets.
The unrest that has spread from Tunisia to Libya pushed oil prices to a two-year high and has spurred an increase in gasoline prices. The specter of rising energy costs and accelerating inflation in turn unsettled investors.
Oil is now at a price not seen since the recession began, and it is more than $20 above goals set in recent months by Saudi officials as strong enough to satisfy the top producers but not so strong they might suffocate the global economic recovery.
Although there are still plentiful supplies of oil and gasoline in the United States and in much of the world, American consumers are now paying an average of $3.17 a gallon for regular gasoline, a steep rise of 6 cents a gallon over the last week, according to the AAA daily fuel gauge report. With consumers paying roughly 50 cents more a gallon than a year ago, analysts are warning that prices could easily top $3.50 by the summer driving season.
“Higher energy prices act like a tax on consumers, reducing the amount of discretionary purchasing power that they have,” said Lawrence R. Creatura, a portfolio manager at Federated Investors. “It represents an additional, potential headwind for retailers.”
Those concerns helped send the Dow Jones industrial average down 178.46 points, or 1.44 percent, to 12,212.79. The broader Standard & Poor’s 500-stock index declined 27.57 points, or 2.05 percent, to 1,315.44, while the Nasdaq composite index lost 77.53 points, or 2.74 percent, to 2,756.42. Markets in Asia and Europe were also lower. Treasury prices rose in the United States.
Saudi Arabia’s oil minister sought to reassure the markets on Tuesday, saying that OPEC was ready to pump more oil to compensate for any decline. At least 50,000 barrels a day of output has already been halted in Libya. That is only a fraction of the country’s production, but with foreign oil companies beginning to shut down operations and evacuate workers and with local ports closing, more output could be lost.
“OPEC is ready to meet any shortage in supply when it happens,” the Saudi oil minister, Ali al-Naimi, said at a news conference after a meeting of ministers of oil producing and consuming nations in Riyadh, Saudi Arabia. “There is concern and fear, but there is no shortage.”
Europe appears most immediately vulnerable to the strife in Libya, which produces almost 2 percent of the world’s oil. More than 85 percent of its exports go to Europe; more than a third goes to Italy alone. Libya sends only a small fraction of its oil to the United States, but because oil is a world commodity, Americans are not immune to the price shock waves.
In New York, crude oil for March delivery gained $7.37, or 8.6 percent, to $93.57 a barrel, while oil for April delivery rose 6.4 percent, to $95.42 a barrel. Brent crude, a European benchmark traded in London, rose 4 cents, to $105.78. Refineries on the East and West Coasts also depend on Brent crude, meaning that the higher prices paid by Europeans are also pushing up gasoline and heating oil prices paid by many New Yorkers, New Englanders and other Americans.
Tom Kloza, the chief oil analyst at the Oil Price Information Service, estimated that the Saudis could pump an additional 1 million to 1.5 million barrels in a matter of days. As the largest producer, Saudi Arabia is by far the most influential member of the Organization of the Petroleum Exporting Countries, with a reserve capacity to deliver an additional four million to five million barrels to the world markets after several weeks of preparation. That is more than twice the oil that world markets would lose if production were halted completely by unrest in Libya.
“Unless this unrest spreads to the streets of Jeddah and Riyadh,” Mr. Kloza said, “I think it’s a very manageable situation and prices are closer to cresting than they are to exploding higher.”
While Libya has been the immediate cause for the spike in oil prices recently, oil experts said traders were driving up prices because of concerns that a long period of instability in the Middle East was just beginning. They identified the protests in Bahrain in particular as a disturbing sign that neighboring Saudi Arabia might not be immune to the spreading political contagion.
Bahrain produces little oil, but it is connected to the oil-rich eastern region of Saudi Arabia by a 15-mile causeway. The island nation has a majority Shiite population with cultural and religious ties to the Saudi Shiite minority that lives close to some of the richest Saudi oil fields.
Saudi rulers have long feared that its regional rival, Iran, could try to destabilize Bahrain as a way to cause trouble for the Saudi royal family. Iran’s intentions became all the more worrisome to the Saudis when it decided this month to send two warships through the Suez Canal for the first time in more than 30 years.
“No one knows where this ends,” said Helima L. Croft, a director and senior geopolitical strategist at Barclays Capital. “A couple of weeks ago it was Tunisia and Egypt, and it was thought this can be contained to North Africa and the resource-poor Middle East countries. But now with protests in Bahrain, that’s the heart of the gulf, and it’s adding to anxieties.”
Middle Eastern oil fields are generally well defended and far from population centers, but energy analysts say the continuing turbulence potentially threatens supply lines and foreign investment that producers like Libya and Algeria depend on to increase production.
World oil prices started rising sharply when demonstrators overwhelmed downtown Cairo earlier in the month because of concerns that unrest could block the Suez Canal and Sumed pipeline through which three million barrels of crude pass daily. Labor unrest continues to roil the canal, though shipments have continued without incident.
Unrest in Yemen potentially threatens the 18-mile-wide Strait of Bab el-Mandeb, a shipping lane between the Horn of Africa and the Middle East that serves as a strategic link between the Indian Ocean and Mediterranean through which nearly four million barrels of oil pass daily. Security for tanker traffic in the area became a concern after terrorists attacked a French tanker off the coast of Yemen in 2002.
The unrest that has spread from Tunisia to Libya pushed oil prices to a two-year high and has spurred an increase in gasoline prices. The specter of rising energy costs and accelerating inflation in turn unsettled investors.
Oil is now at a price not seen since the recession began, and it is more than $20 above goals set in recent months by Saudi officials as strong enough to satisfy the top producers but not so strong they might suffocate the global economic recovery.
Although there are still plentiful supplies of oil and gasoline in the United States and in much of the world, American consumers are now paying an average of $3.17 a gallon for regular gasoline, a steep rise of 6 cents a gallon over the last week, according to the AAA daily fuel gauge report. With consumers paying roughly 50 cents more a gallon than a year ago, analysts are warning that prices could easily top $3.50 by the summer driving season.
“Higher energy prices act like a tax on consumers, reducing the amount of discretionary purchasing power that they have,” said Lawrence R. Creatura, a portfolio manager at Federated Investors. “It represents an additional, potential headwind for retailers.”
Those concerns helped send the Dow Jones industrial average down 178.46 points, or 1.44 percent, to 12,212.79. The broader Standard & Poor’s 500-stock index declined 27.57 points, or 2.05 percent, to 1,315.44, while the Nasdaq composite index lost 77.53 points, or 2.74 percent, to 2,756.42. Markets in Asia and Europe were also lower. Treasury prices rose in the United States.
Saudi Arabia’s oil minister sought to reassure the markets on Tuesday, saying that OPEC was ready to pump more oil to compensate for any decline. At least 50,000 barrels a day of output has already been halted in Libya. That is only a fraction of the country’s production, but with foreign oil companies beginning to shut down operations and evacuate workers and with local ports closing, more output could be lost.
“OPEC is ready to meet any shortage in supply when it happens,” the Saudi oil minister, Ali al-Naimi, said at a news conference after a meeting of ministers of oil producing and consuming nations in Riyadh, Saudi Arabia. “There is concern and fear, but there is no shortage.”
Europe appears most immediately vulnerable to the strife in Libya, which produces almost 2 percent of the world’s oil. More than 85 percent of its exports go to Europe; more than a third goes to Italy alone. Libya sends only a small fraction of its oil to the United States, but because oil is a world commodity, Americans are not immune to the price shock waves.
In New York, crude oil for March delivery gained $7.37, or 8.6 percent, to $93.57 a barrel, while oil for April delivery rose 6.4 percent, to $95.42 a barrel. Brent crude, a European benchmark traded in London, rose 4 cents, to $105.78. Refineries on the East and West Coasts also depend on Brent crude, meaning that the higher prices paid by Europeans are also pushing up gasoline and heating oil prices paid by many New Yorkers, New Englanders and other Americans.
Tom Kloza, the chief oil analyst at the Oil Price Information Service, estimated that the Saudis could pump an additional 1 million to 1.5 million barrels in a matter of days. As the largest producer, Saudi Arabia is by far the most influential member of the Organization of the Petroleum Exporting Countries, with a reserve capacity to deliver an additional four million to five million barrels to the world markets after several weeks of preparation. That is more than twice the oil that world markets would lose if production were halted completely by unrest in Libya.
“Unless this unrest spreads to the streets of Jeddah and Riyadh,” Mr. Kloza said, “I think it’s a very manageable situation and prices are closer to cresting than they are to exploding higher.”
While Libya has been the immediate cause for the spike in oil prices recently, oil experts said traders were driving up prices because of concerns that a long period of instability in the Middle East was just beginning. They identified the protests in Bahrain in particular as a disturbing sign that neighboring Saudi Arabia might not be immune to the spreading political contagion.
Bahrain produces little oil, but it is connected to the oil-rich eastern region of Saudi Arabia by a 15-mile causeway. The island nation has a majority Shiite population with cultural and religious ties to the Saudi Shiite minority that lives close to some of the richest Saudi oil fields.
Saudi rulers have long feared that its regional rival, Iran, could try to destabilize Bahrain as a way to cause trouble for the Saudi royal family. Iran’s intentions became all the more worrisome to the Saudis when it decided this month to send two warships through the Suez Canal for the first time in more than 30 years.
“No one knows where this ends,” said Helima L. Croft, a director and senior geopolitical strategist at Barclays Capital. “A couple of weeks ago it was Tunisia and Egypt, and it was thought this can be contained to North Africa and the resource-poor Middle East countries. But now with protests in Bahrain, that’s the heart of the gulf, and it’s adding to anxieties.”
Middle Eastern oil fields are generally well defended and far from population centers, but energy analysts say the continuing turbulence potentially threatens supply lines and foreign investment that producers like Libya and Algeria depend on to increase production.
World oil prices started rising sharply when demonstrators overwhelmed downtown Cairo earlier in the month because of concerns that unrest could block the Suez Canal and Sumed pipeline through which three million barrels of crude pass daily. Labor unrest continues to roil the canal, though shipments have continued without incident.
Unrest in Yemen potentially threatens the 18-mile-wide Strait of Bab el-Mandeb, a shipping lane between the Horn of Africa and the Middle East that serves as a strategic link between the Indian Ocean and Mediterranean through which nearly four million barrels of oil pass daily. Security for tanker traffic in the area became a concern after terrorists attacked a French tanker off the coast of Yemen in 2002.
Singh's U-Turn on Telecoms Probe Panel Ends Impasse in India's Parliament
Indian Prime Minister Manmohan Singh agreed to a parliamentary probe into the sale of mobile-phone licenses, surrendering to three months of opposition demands that had derailed legislation and eroded investor confidence.
“We can ill afford the situation that our parliament is not allowed to function during the crucial budget session,” Singh, 78, said in the lower house of parliament six days before Finance Minister Pranab Mukherjee will deliver his policy statement for the next financial year. “It is in these special circumstances that our government agrees to setting up a joint parliamentary committee,” Singh told lawmakers.
The government’s legislative agenda has been paralyzed since November by protests over alleged revenue losses during a 2008 sale of 2G telecoms permits, with the ruling Congress party’s chief rival, the Bharatiya Janata Party, leading calls for an investigation by a bipartisan panel of lawmakers. The final parliament session of 2010 was the least productive in 25 years. Sushma Swaraj, a BJP leader, said today parliament should start running normally.
India’s benchmark stock index, the Sensex, has lost 10 percent this year, making it the world’s worst performing benchmark index after Egypt and Tunisia, as inflation, the most aggressive monetary policy in Asia, and concerns over prolonged political gridlock and corruption led investors to sell Indian stocks. The index was the best performer among the world’s 10 biggest markets last year, buoyed by strong growth and corporate earnings.
Singh Questions
Investors say that even after agreeing to the probe by lawmakers the governing alliance will struggle to regain authority to introduce the changes in the $1.3 trillion economy sought by business leaders when Singh won re-election in 2009. As he begins the third year of a potential five-year term, corruption and sliding support may have further diminished the already reticent Singh’s political stature, they said.
“There is such upside if the politicians could pull their finger out,” said Hugh Young, Singapore-based head of equities at Aberdeen Asset Management Plc, which manages $297 billion of assets. “But one has to question Manmohan Singh’s real ability to drive anything through.”
When Singh’s Congress secured its biggest election victory in 20 years in 2009, investors hoped that it would usher in policies to further open India’s economy. The rupee and stocks rose to record gains the month after the ballot as investors anticipated measures to encourage foreign investment.
Spending on Poor
Instead, Congress headed by party chief Sonia Gandhi has prioritized raising spending on a $9 billion program to guarantee 100 days of work for 41 million rural families and provide subsidized food grains for an additional 100 million poor among its 1.2 billion people.
“The government has not delivered to the extent that it should have in the second term because of a lack of leadership and cohesiveness,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. “As we move closer to the next election the government is likely to introduce more populist measures.”
Bills to change rules governing the acquisition of land for industry as up to $100 billion in investments remains stalled, including proposed projects of South Korea’s Posco and ArcelorMittal, and force miners to share profits with local communities were delayed late last year.
Wal-Mart Entry
While the government issued a discussion paper in July saying that allowing overseas multi-brand companies including the world’s largest retailer, Bentonville, Arkansas-based Wal- Mart Stores Inc., and Carrefour SA, ranked number two globally, to sell goods to Indian consumers would lower prices and benefit farmers, Singh has failed to act on a policy that may risk the livelihoods of millions of small shopkeepers.
The prime minister last week in a rare meeting with senior journalists vowed to punish those found guilty of fraud, acknowledging that a political atmosphere dominated by claims of wrongdoing by his ministers had hurt the image of India overseas. In a bid to refocus his government and rejecting media claims that he had become a “lame-duck” leader, Singh said Mukherjee’s Feb. 28 budget will signal a return to the administration’s “reform agenda.”
“We are a functioning democracy and must strive to resolve our differences in a spirit of accommodation and collaboration, not confrontation,” Singh said today. “This, I hope, will renew our confidence in India’s forward march.”
Investment Slump
An AC Nielsen opinion poll for the India Today magazine published last month forecast that Singh’s coalition may win 42 seats fewer than the 259 it secured in May 2009 if an election was called.
“It’s good that wisdom has dawned on the government,” Gurudas Dasgupta, a lawmaker of the Communist Party of India, said in parliament. “It’s better to be late than never.”
India’s chief auditor said in November the 2G licenses were sold for an “unbelievably low” $2.7 billion when they may have been worth at least 10 times more. Former telecommunications minister Andimuthu Raja, ministry bureaucrats and company executives have been questioned by the Central Bureau of Investigation. Raja, who has denied any wrongdoing, is now in jail under judicial custody.
India’s economy will probably expand 8.6 percent in the year ending March 31 from a year earlier, the fastest pace since 2008, the Central Statistical Office said on Feb. 7.
Foreign direct investment into India slumped last year, totaling only a quarter of its Asian rival China, the world’s fastest major growing economy, according to United Nations data. Investment in India fell by 32 percent to $23.7 billion in 2010, while in China it climbed 6 percent to $101 billion.
“We can ill afford the situation that our parliament is not allowed to function during the crucial budget session,” Singh, 78, said in the lower house of parliament six days before Finance Minister Pranab Mukherjee will deliver his policy statement for the next financial year. “It is in these special circumstances that our government agrees to setting up a joint parliamentary committee,” Singh told lawmakers.
The government’s legislative agenda has been paralyzed since November by protests over alleged revenue losses during a 2008 sale of 2G telecoms permits, with the ruling Congress party’s chief rival, the Bharatiya Janata Party, leading calls for an investigation by a bipartisan panel of lawmakers. The final parliament session of 2010 was the least productive in 25 years. Sushma Swaraj, a BJP leader, said today parliament should start running normally.
India’s benchmark stock index, the Sensex, has lost 10 percent this year, making it the world’s worst performing benchmark index after Egypt and Tunisia, as inflation, the most aggressive monetary policy in Asia, and concerns over prolonged political gridlock and corruption led investors to sell Indian stocks. The index was the best performer among the world’s 10 biggest markets last year, buoyed by strong growth and corporate earnings.
Singh Questions
Investors say that even after agreeing to the probe by lawmakers the governing alliance will struggle to regain authority to introduce the changes in the $1.3 trillion economy sought by business leaders when Singh won re-election in 2009. As he begins the third year of a potential five-year term, corruption and sliding support may have further diminished the already reticent Singh’s political stature, they said.
“There is such upside if the politicians could pull their finger out,” said Hugh Young, Singapore-based head of equities at Aberdeen Asset Management Plc, which manages $297 billion of assets. “But one has to question Manmohan Singh’s real ability to drive anything through.”
When Singh’s Congress secured its biggest election victory in 20 years in 2009, investors hoped that it would usher in policies to further open India’s economy. The rupee and stocks rose to record gains the month after the ballot as investors anticipated measures to encourage foreign investment.
Spending on Poor
Instead, Congress headed by party chief Sonia Gandhi has prioritized raising spending on a $9 billion program to guarantee 100 days of work for 41 million rural families and provide subsidized food grains for an additional 100 million poor among its 1.2 billion people.
“The government has not delivered to the extent that it should have in the second term because of a lack of leadership and cohesiveness,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in Mumbai. “As we move closer to the next election the government is likely to introduce more populist measures.”
Bills to change rules governing the acquisition of land for industry as up to $100 billion in investments remains stalled, including proposed projects of South Korea’s Posco and ArcelorMittal, and force miners to share profits with local communities were delayed late last year.
Wal-Mart Entry
While the government issued a discussion paper in July saying that allowing overseas multi-brand companies including the world’s largest retailer, Bentonville, Arkansas-based Wal- Mart Stores Inc., and Carrefour SA, ranked number two globally, to sell goods to Indian consumers would lower prices and benefit farmers, Singh has failed to act on a policy that may risk the livelihoods of millions of small shopkeepers.
The prime minister last week in a rare meeting with senior journalists vowed to punish those found guilty of fraud, acknowledging that a political atmosphere dominated by claims of wrongdoing by his ministers had hurt the image of India overseas. In a bid to refocus his government and rejecting media claims that he had become a “lame-duck” leader, Singh said Mukherjee’s Feb. 28 budget will signal a return to the administration’s “reform agenda.”
“We are a functioning democracy and must strive to resolve our differences in a spirit of accommodation and collaboration, not confrontation,” Singh said today. “This, I hope, will renew our confidence in India’s forward march.”
Investment Slump
An AC Nielsen opinion poll for the India Today magazine published last month forecast that Singh’s coalition may win 42 seats fewer than the 259 it secured in May 2009 if an election was called.
“It’s good that wisdom has dawned on the government,” Gurudas Dasgupta, a lawmaker of the Communist Party of India, said in parliament. “It’s better to be late than never.”
India’s chief auditor said in November the 2G licenses were sold for an “unbelievably low” $2.7 billion when they may have been worth at least 10 times more. Former telecommunications minister Andimuthu Raja, ministry bureaucrats and company executives have been questioned by the Central Bureau of Investigation. Raja, who has denied any wrongdoing, is now in jail under judicial custody.
India’s economy will probably expand 8.6 percent in the year ending March 31 from a year earlier, the fastest pace since 2008, the Central Statistical Office said on Feb. 7.
Foreign direct investment into India slumped last year, totaling only a quarter of its Asian rival China, the world’s fastest major growing economy, according to United Nations data. Investment in India fell by 32 percent to $23.7 billion in 2010, while in China it climbed 6 percent to $101 billion.
Ambani May Add Assets After BP Deal Doubles Reliance Cash
Reliance Industries Ltd., India’s biggest company by market value, may add overseas energy assets after doubling its cash to $14 billion through the sale of stakes in domestic oil blocks to BP Plc, investors said.
BP will pay the Mumbai-based energy explorer $7.2 billion for a 30 percent interest in 23 oil and gas areas in India, Reliance Chairman Mukesh Ambani said on a conference call yesterday. Reliance said Jan. 21 it had cash and equivalents of 318.3 billion rupees ($7.1 billion) as of Dec. 31.
Billionaire Ambani and BP Chief Executive Officer Robert Dudley sealed two years of talks with a deal that may increase in size to $20 billion with future performance payments and investment. Reliance committed $3.4 billion to U.S. shale gas projects last year and has said it may buy fields in the Gulf of Mexico and Brazil to hedge the risk of investing in India.
“Reliance will certainly acquire more assets now,” said Taina Erajuuri, who helps manage the equivalent of $1.2 billion of emerging-market stocks, including Reliance shares, at Helsinki-based FIM Asset Management Ltd. “All that cash will come into the balance sheet and give the company that much confidence.”
Shares Gain
Reliance gained 3 percent, the most since Dec. 10, to 984.85 rupees at the close in Mumbai. BP fell 1.1 percent at 10:21 a.m. in London, extending yesterday’s 0.3 percent decline. Reliance’s $1 billion in 4.5 percent bonds due in 2020 rose above 93 cents on the dollar today for the first time since Jan. 28, according to ING Groep NV. The yield fell to 5.427 percent from 5.48 percent, ING prices show.
The investment by BP will accelerate development and production from Reliance’s fields in India, Ambani, the country’s richest man, said yesterday. He didn’t say how the company plans to use the money from the stake sale.
Reliance may get an additional $1.8 billion from London- based BP if the two companies discover more oil or gas in some of the blocks covered by the agreement, according to yesterday’s statements.
The transaction includes a stake in India’s biggest natural gas deposit, the KG-D6 block in the Bay of Bengal, where reduced pressure at the reservoir has forced Reliance to cut production and delayed a plan to reach its peak output. A technical review of the field is under way, Ambani said.
“Reliance is cashing in on assets in India which have been partially explored and production is behind schedule,” said Walter Rossini, who manages $350 million of Indian assets, including Reliance shares, at Aletti Gestielle SGR SpA in Milan. “Maybe Reliance is de-risking its India business and will use the money it gets to buy fields in other parts of the world.”
Refining, Diversification
Declining gas production at the KG-D6 block resulted in Reliance shares rising 0.7 percent in the past year, trailing the 13 percent gain in the Bombay Stock Exchange’s benchmark Sensitive Index. Reliance has the highest weight in the 30-stock index.
Reliance, which operates the world’s largest oil-refining complex, is relying on profits from fuel production to boost earnings and is diversifying its business after delays in increasing gas production.
Crude oil in New York jumped to the highest in more than two years as violence intensified in Libya. Crude for April delivery rose as much as $8.77 to $98.48 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.07 at 8:55 a.m. London time. Reliance is shielded from government controls on fuel prices in India because it exports gasoline and diesel.
Atlas Venture
The company agreed to form a $1.7 billion venture in April with Atlas Energy Inc. to develop gas fields in Pennsylvania. On Jan. 10, Reliance wrote to Atlas’s directors that it was surprised at not being apprised of the negotiations that led to Chevron Corp.’s $3.6 billion offer for the company. Atlas shareholders approved Chevron’s takeover bid Feb. 16.
In addition to acquiring U.S. shale-gas assets, Ambani plans investments in telecommunications and power generation. Reliance has said it wants to bid for 4,000 megawatt power projects the government plans to auction in India, each requiring investments of about 160 billion rupees.
Reliance plans to spend $30 billion on petrochemicals, oil and gas exploration and telecommunications in the five years ending March 2015, said Sandeep Randery, an analyst with Brics Securities Ltd. in Mumbai, citing estimates given by Reliance in an investor conference this month. As much as $4.7 billion may be spent on telecommunications, he said.
BP will pay the Mumbai-based energy explorer $7.2 billion for a 30 percent interest in 23 oil and gas areas in India, Reliance Chairman Mukesh Ambani said on a conference call yesterday. Reliance said Jan. 21 it had cash and equivalents of 318.3 billion rupees ($7.1 billion) as of Dec. 31.
Billionaire Ambani and BP Chief Executive Officer Robert Dudley sealed two years of talks with a deal that may increase in size to $20 billion with future performance payments and investment. Reliance committed $3.4 billion to U.S. shale gas projects last year and has said it may buy fields in the Gulf of Mexico and Brazil to hedge the risk of investing in India.
“Reliance will certainly acquire more assets now,” said Taina Erajuuri, who helps manage the equivalent of $1.2 billion of emerging-market stocks, including Reliance shares, at Helsinki-based FIM Asset Management Ltd. “All that cash will come into the balance sheet and give the company that much confidence.”
Shares Gain
Reliance gained 3 percent, the most since Dec. 10, to 984.85 rupees at the close in Mumbai. BP fell 1.1 percent at 10:21 a.m. in London, extending yesterday’s 0.3 percent decline. Reliance’s $1 billion in 4.5 percent bonds due in 2020 rose above 93 cents on the dollar today for the first time since Jan. 28, according to ING Groep NV. The yield fell to 5.427 percent from 5.48 percent, ING prices show.
The investment by BP will accelerate development and production from Reliance’s fields in India, Ambani, the country’s richest man, said yesterday. He didn’t say how the company plans to use the money from the stake sale.
Reliance may get an additional $1.8 billion from London- based BP if the two companies discover more oil or gas in some of the blocks covered by the agreement, according to yesterday’s statements.
The transaction includes a stake in India’s biggest natural gas deposit, the KG-D6 block in the Bay of Bengal, where reduced pressure at the reservoir has forced Reliance to cut production and delayed a plan to reach its peak output. A technical review of the field is under way, Ambani said.
“Reliance is cashing in on assets in India which have been partially explored and production is behind schedule,” said Walter Rossini, who manages $350 million of Indian assets, including Reliance shares, at Aletti Gestielle SGR SpA in Milan. “Maybe Reliance is de-risking its India business and will use the money it gets to buy fields in other parts of the world.”
Refining, Diversification
Declining gas production at the KG-D6 block resulted in Reliance shares rising 0.7 percent in the past year, trailing the 13 percent gain in the Bombay Stock Exchange’s benchmark Sensitive Index. Reliance has the highest weight in the 30-stock index.
Reliance, which operates the world’s largest oil-refining complex, is relying on profits from fuel production to boost earnings and is diversifying its business after delays in increasing gas production.
Crude oil in New York jumped to the highest in more than two years as violence intensified in Libya. Crude for April delivery rose as much as $8.77 to $98.48 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.07 at 8:55 a.m. London time. Reliance is shielded from government controls on fuel prices in India because it exports gasoline and diesel.
Atlas Venture
The company agreed to form a $1.7 billion venture in April with Atlas Energy Inc. to develop gas fields in Pennsylvania. On Jan. 10, Reliance wrote to Atlas’s directors that it was surprised at not being apprised of the negotiations that led to Chevron Corp.’s $3.6 billion offer for the company. Atlas shareholders approved Chevron’s takeover bid Feb. 16.
In addition to acquiring U.S. shale-gas assets, Ambani plans investments in telecommunications and power generation. Reliance has said it wants to bid for 4,000 megawatt power projects the government plans to auction in India, each requiring investments of about 160 billion rupees.
Reliance plans to spend $30 billion on petrochemicals, oil and gas exploration and telecommunications in the five years ending March 2015, said Sandeep Randery, an analyst with Brics Securities Ltd. in Mumbai, citing estimates given by Reliance in an investor conference this month. As much as $4.7 billion may be spent on telecommunications, he said.
Monday, February 21, 2011
Prorietary traders seen keen on F&O bets ahead of budget
MUMBAI: Proprietary desks of institutions and well-informed traders are readying bets in futures and options in the run-up to the Union Budget on Monday. While a section of them is sticking to simpler strategies by buying or short-selling stock futures or options of companies that may be impacted by announcements in the Budget, savvier traders, mainly proprietary, are using combinations of options to bet on sharp moves in the benchmark Nifty, either side, around the event.
“Proprietary traders are going long on volatility ahead of the Budget when implied volatility usually rises,” said Shshank Mehta, derivative strategist, Nirmal Bang Securities. Implied volatility, a key aspect of options’ premium pricing and measures traders’ expectations of nearterm risk in the market, usually rises ahead of events such as the Budget or outcome of general elections. This is because traders are willing to pay higher premiums to buy options against sharp movements in the market.
India’s Volatility Index, which indicates the expected volatility in Nifty options over the next 30 days based on prices, rose to 24.91% on Monday, the highest closing since early June 2010, showing traders have been paying higher premiums of late.
“Premiums of near-month contracts usually start dipping in the penultimate week of the expiration of the current month contracts (February in this instance), but March contracts have not seeing such a drop last week,” said Amit Gupta, derivatives strategist, ICICIdirect.
“This means people are buying options even at these premiums as a cushion against shocks in the Budget,” he said Traders, who don’t want to bet on the direction of the market before an event, create options strategies that would benefit from rise or fall in implied volatility, known as volatility or vol trading in market parlance.
Simultaneous purchase of put and call options of the same contract and expiry would bet on an increase in implied volatility. Traders use option combinations to bet on implied volatility, as there are no products for this purpose unlike in developed markets. Traders expect implied volatility to rise up to 27% ahead of the Budget.
“Proprietary desks will remain long on vols at the most till 11:30 on the Budget day when vols are expected to peak,” said Dharam Chand Sethia, a trader at Kolkatabased Kredent Brokerage. Finance Minister starts the Budget speech by 11:00.
“Proprietary traders are going long on volatility ahead of the Budget when implied volatility usually rises,” said Shshank Mehta, derivative strategist, Nirmal Bang Securities. Implied volatility, a key aspect of options’ premium pricing and measures traders’ expectations of nearterm risk in the market, usually rises ahead of events such as the Budget or outcome of general elections. This is because traders are willing to pay higher premiums to buy options against sharp movements in the market.
India’s Volatility Index, which indicates the expected volatility in Nifty options over the next 30 days based on prices, rose to 24.91% on Monday, the highest closing since early June 2010, showing traders have been paying higher premiums of late.
“Premiums of near-month contracts usually start dipping in the penultimate week of the expiration of the current month contracts (February in this instance), but March contracts have not seeing such a drop last week,” said Amit Gupta, derivatives strategist, ICICIdirect.
“This means people are buying options even at these premiums as a cushion against shocks in the Budget,” he said Traders, who don’t want to bet on the direction of the market before an event, create options strategies that would benefit from rise or fall in implied volatility, known as volatility or vol trading in market parlance.
Simultaneous purchase of put and call options of the same contract and expiry would bet on an increase in implied volatility. Traders use option combinations to bet on implied volatility, as there are no products for this purpose unlike in developed markets. Traders expect implied volatility to rise up to 27% ahead of the Budget.
“Proprietary desks will remain long on vols at the most till 11:30 on the Budget day when vols are expected to peak,” said Dharam Chand Sethia, a trader at Kolkatabased Kredent Brokerage. Finance Minister starts the Budget speech by 11:00.
RIL-BP Deal: Analysts may de-rate RIL if value lower than expected
On the face of it, the decision of Reliance Industries to sell a 30% stake in its 23 exploration blocks in India to BP appears to be a great value-unlocking proposition. However, the implied valuation of these exploration blocks appears to be lower than what analysts had assigned to them earlier. If this really turns out to be the case, there is every possibility that analysts could de-rate the company in the near term. Reliance Industries controls 29 exploration & production or E&P blocks in India. The latest research reports put out by leading brokerages have pegged the net value of the domestic exploration portfolio at somewhere between Rs 450 - Rs 500 per share. However, the current deal values 80% of these assets at close to Rs 295 per share.
A report by Goldman Sachs dated Jan 17, 2011 has assigned a value of Rs 509 per share for RIL's exploration portfolio excluding the CBM and shale gas assets. In fact, the KG Basin D6 block alone is valued at Rs 250 per share. In its 21st January 2011 report on the company, brokerage firm Edelweiss assigned Rs 495 per share as value of its firm reserves and exploration upside.
The latest research report by HSBC on RIL is somewhat more conservative. It values the producing KG-D6 block at Rs 203 per share, other E&P blocks at Rs 68 and exploration upside at Rs 111, totalling at Rs 382 per share for assets excluding PMT and shale gas.
Analysts are miffed over the lower valuations, but are unable to explain further, as it was not immediately clear which 23 out of 29 blocks were part of the deal. So the 23 blocks could be predominantly exploratory, rather than in the development phase. Alternatively, the discount could be extended for gaining access to BP's technical expertise.
RIL had cash equivalent of nearly $7.1 billion on its books at the end of December 2010. When adjusted for cash, its net debt was close to $2.6 billion. The company's scrip, which gained 2.5% before this announcement was made, has been underperforming the broader markets for last several months. Since last February, RIL's scrip has lost around 2%, against a 13% gain in BSE Sensex
The deal, no doubt, unlocks a lot of value for the company by bringing in a chunk of cash towards future profits. However, investors should keep in mind the fact that this in itself may not prove to be a positive trigger for the company's scrip. Taken as a benchmark, this deal could lead to analysts lowering the value of the firm's exploration business as well as price targets.
A report by Goldman Sachs dated Jan 17, 2011 has assigned a value of Rs 509 per share for RIL's exploration portfolio excluding the CBM and shale gas assets. In fact, the KG Basin D6 block alone is valued at Rs 250 per share. In its 21st January 2011 report on the company, brokerage firm Edelweiss assigned Rs 495 per share as value of its firm reserves and exploration upside.
The latest research report by HSBC on RIL is somewhat more conservative. It values the producing KG-D6 block at Rs 203 per share, other E&P blocks at Rs 68 and exploration upside at Rs 111, totalling at Rs 382 per share for assets excluding PMT and shale gas.
Analysts are miffed over the lower valuations, but are unable to explain further, as it was not immediately clear which 23 out of 29 blocks were part of the deal. So the 23 blocks could be predominantly exploratory, rather than in the development phase. Alternatively, the discount could be extended for gaining access to BP's technical expertise.
RIL had cash equivalent of nearly $7.1 billion on its books at the end of December 2010. When adjusted for cash, its net debt was close to $2.6 billion. The company's scrip, which gained 2.5% before this announcement was made, has been underperforming the broader markets for last several months. Since last February, RIL's scrip has lost around 2%, against a 13% gain in BSE Sensex
The deal, no doubt, unlocks a lot of value for the company by bringing in a chunk of cash towards future profits. However, investors should keep in mind the fact that this in itself may not prove to be a positive trigger for the company's scrip. Taken as a benchmark, this deal could lead to analysts lowering the value of the firm's exploration business as well as price targets.
BP in $7.2bn partnership with Reliance
BP is to make a $7.2bn thrust into India by taking 30 per cent stakes in vast but difficult natural gas blocks controlled by Mukesh Ambani, the country’s richest tycoon.
The deal with Reliance Industries, potentially worth up to $20bn and subject to government approval, comes on the heels of a $16bn share swap with Rosneft, the Russian state oil company, and marks the latest stage of BP’s recovery since last year’s Gulf of Mexico disaster.
It also represents an endorsement of the prospects for continued rapid expansion of the world’s second-fastest growing major economy.
“This partnership will help unlock the huge potential of India’s vast but under-explored acreages,” Mr Ambani told reporters while unveiling the deal with Bob Dudley, BP chief executive, in London, ahead of a planned signing ceremony at 10 Downing Street with George Osborne, UK chancellor.
The deal is the biggest foreign investment in Indian energy and among the largest in any sector.
It further cements Anglo-Indian business ties, following Vodafone’s $10.7bn purchase of a 67 per cent stake in what became Vodafone Essar, India’s third biggest mobile operator, in 2007.
Mr Ambani, whose energy interests form the backbone of a conglomerate that has made him a fortune estimated by Forbes to be the world’s fourth largest at $29bn, said BP’s technical expertise would “accelerate” exploration.
All 23 blocks lie offshore, mainly off India’s east coast and at depths ranging from 400m to more than 3km.
The Indian group’s current output of 1.8bn cubic feet of gas per day – 40 per cent of India’s gas production – comes from the sole block that is in production.
BP agreed to pay an initial $7.2bn and additional performance-related payments of up $1.8bn. These payments and combined investment could amount to $20bn, the companies said.
“Reliance is a newcomer in this upstream business so it required a more experienced partner that could provide them the technology needed to extract deepwater oil and gas,” said an analyst with a global ratings agency.
The tie-up aims to supply the domestic market, where natural gas accounts for a small but growing share of energy consumption. BP forecasts that demand will more than double over the next 20 years.
The courtship between the two groups goes back five years. Since 2008 BP has operated a 50-50 joint venture with Reliance developing an offshore Indian oil block.
The blocks, covering a surface area the size of New Zealand, have an indicated resource of 15 trillion cubic feet of gas, Mr Dudley said.
Government approval is not necessarily a formality. The deal comes shortly after the Indian government blocked London-listed miner Vedanta’s efforts to buy the Indian assets of Cairn Energy for $9.6bn. BP shares in London closed down 0.7p at 492p.
The deal with Reliance Industries, potentially worth up to $20bn and subject to government approval, comes on the heels of a $16bn share swap with Rosneft, the Russian state oil company, and marks the latest stage of BP’s recovery since last year’s Gulf of Mexico disaster.
It also represents an endorsement of the prospects for continued rapid expansion of the world’s second-fastest growing major economy.
“This partnership will help unlock the huge potential of India’s vast but under-explored acreages,” Mr Ambani told reporters while unveiling the deal with Bob Dudley, BP chief executive, in London, ahead of a planned signing ceremony at 10 Downing Street with George Osborne, UK chancellor.
The deal is the biggest foreign investment in Indian energy and among the largest in any sector.
It further cements Anglo-Indian business ties, following Vodafone’s $10.7bn purchase of a 67 per cent stake in what became Vodafone Essar, India’s third biggest mobile operator, in 2007.
Mr Ambani, whose energy interests form the backbone of a conglomerate that has made him a fortune estimated by Forbes to be the world’s fourth largest at $29bn, said BP’s technical expertise would “accelerate” exploration.
All 23 blocks lie offshore, mainly off India’s east coast and at depths ranging from 400m to more than 3km.
The Indian group’s current output of 1.8bn cubic feet of gas per day – 40 per cent of India’s gas production – comes from the sole block that is in production.
BP agreed to pay an initial $7.2bn and additional performance-related payments of up $1.8bn. These payments and combined investment could amount to $20bn, the companies said.
“Reliance is a newcomer in this upstream business so it required a more experienced partner that could provide them the technology needed to extract deepwater oil and gas,” said an analyst with a global ratings agency.
The tie-up aims to supply the domestic market, where natural gas accounts for a small but growing share of energy consumption. BP forecasts that demand will more than double over the next 20 years.
The courtship between the two groups goes back five years. Since 2008 BP has operated a 50-50 joint venture with Reliance developing an offshore Indian oil block.
The blocks, covering a surface area the size of New Zealand, have an indicated resource of 15 trillion cubic feet of gas, Mr Dudley said.
Government approval is not necessarily a formality. The deal comes shortly after the Indian government blocked London-listed miner Vedanta’s efforts to buy the Indian assets of Cairn Energy for $9.6bn. BP shares in London closed down 0.7p at 492p.
Sunday, February 20, 2011
Blogs Wane as the Young Drift to Sites Like Twitter
SAN FRANCISCO — Like any aspiring filmmaker, Michael McDonald, a high school senior, used a blog to show off his videos. But discouraged by how few people bothered to visit, he instead started posting his clips on Facebook, where his friends were sure to see and comment on his editing skills.
“I don’t use my blog anymore,” said Mr. McDonald, who lives in San Francisco. “All the people I’m trying to reach are on Facebook.”
Blogs were once the outlet of choice for people who wanted to express themselves online. But with the rise of sites like Facebook and Twitter, they are losing their allure for many people — particularly the younger generation.
The Internet and American Life Project at the Pew Research Center found that from 2006 to 2009, blogging among children ages 12 to 17 fell by half; now 14 percent of children those ages who use the Internet have blogs. Among 18-to-33-year-olds, the project said in a report last year, blogging dropped two percentage points in 2010 from two years earlier.
Former bloggers said they were too busy to write lengthy posts and were uninspired by a lack of readers. Others said they had no interest in creating a blog because social networking did a good enough job keeping them in touch with friends and family.
Blogging started its rapid ascension about 10 years ago as services like Blogger and LiveJournal became popular. So many people began blogging — to share dieting stories, rant about politics and celebrate their love of cats — that Merriam-Webster declared “blog” the word of the year in 2004.
Defining a blog is difficult, but most people think it is a Web site on which people publish periodic entries in reverse chronological order and allow readers to leave comments.
Yet for many Internet users, blogging is defined more by a personal and opinionated writing style. A number of news and commentary sites started as blogs before growing into mini-media empires, like The Huffington Post or Silicon Alley Insider, that are virtually indistinguishable from more traditional news sources.
Blogs went largely unchallenged until Facebook reshaped consumer behavior with its all-purpose hub for posting everything social. Twitter, which allows messages of no longer than 140 characters, also contributed to the upheaval.
No longer did Internet users need a blog to connect with the world. They could instead post quick updates to complain about the weather, link to articles that infuriated them, comment on news events, share photos or promote some cause — all the things a blog was intended to do.
Indeed, small talk shifted in large part to social networking, said Elisa Camahort Page, co-founder of BlogHer, a women’s blog network. Still, blogs remain a home of more meaty discussions, she said.
“If you’re looking for substantive conversation, you turn to blogs,” Ms. Camahort Page said. “You aren’t going to find it on Facebook, and you aren’t going to find it in 140 characters on Twitter.”
Lee Rainie, director of the Internet and American Life Project, says that blogging is not so much dying as shifting with the times. Entrepreneurs have taken some of the features popularized by blogging and weaved them into other kinds of services.
“The act of telling your story and sharing part of your life with somebody is alive and well — even more so than at the dawn of blogging,” Mr. Rainie said. “It’s just morphing onto other platforms.”
The blurring of lines is readily apparent among users of Tumblr. Although Tumblr calls itself a blogging service, many of its users are unaware of the description and do not consider themselves bloggers — raising the possibility that the decline in blogging by the younger generation is merely a semantic issue.
Kim Hou, a high school senior in San Francisco, said she quit blogging months ago, but acknowledged that she continued to post fashion photos on Tumblr. “It’s different from blogging because it’s easier to use,” she said. “With blogging you have to write, and this is just images. Some people write some phrases or some quotes, but that’s it.”
The effect is seen on the companies providing the blogging platforms. Blogger, owned by Google, had fewer unique visitors in the United States in December than it had a year earlier — a 2 percent decline, to 58.6 million — although globally, Blogger’s unique visitors rose 9 percent, to 323 million.
LiveJournal, another blogging service, has decided to emphasize communities. Connecting people who share an interest in celebrity gossip, for instance, provides the social interaction that “classic” blogging lacks, said Sue Rosenstock, a spokeswoman for LiveJournal, which is owned by SUP, a Russian online media company. “Blogging can be a very lonely occupation; you write out into the abyss,” she said.
But some blogging services like Tumblr and WordPress seem to have avoided any decline. Toni Schneider, chief executive of Automattic, the company that commercializes the WordPress blogging software, explains that WordPress is mostly for serious bloggers, not the younger novices who are defecting to social networking.
In any case, he said bloggers often use Facebook and Twitter to promote their blog posts to a wider audience. Rather than being competitors, he said, they are complementary.
“There is a lot of fragmentation,” Mr. Schneider said. “But at this point, anyone who is taking blogging seriously — they’re using several mediums to get a large amount of their traffic.”
While the younger generation is losing interest in blogging, people approaching middle age and older are sticking with it. Among 34-to-45-year-olds who use the Internet, the percentage who blog increased six points, to 16 percent, in 2010 from two years earlier, the Pew survey found. Blogging by 46-to-55-year-olds increased five percentage points, to 11 percent, while blogging among 65-to-73-year-olds rose two percentage points, to 8 percent.
Russ Steele, 72, a retired Air Force officer and aerospace worker from Nevada City, Calif., says he spends up to three hours a day seeking interesting topics and writing about them for his blog, NC Media Watch, which covers local issues in Nevada County, northeast of Sacramento. All he wants is to have a voice in the community for his conservative views.
Although he signed up for Facebook this month, Mr. Steele said he did not foresee using it much and said that he remained committed to blogging. “I’d rather spend my time writing up a blog analysis than a whole bunch of short paragraphs and then send them to people,” he said. “I don’t need to tell people I’m going to the grocery store.”
“I don’t use my blog anymore,” said Mr. McDonald, who lives in San Francisco. “All the people I’m trying to reach are on Facebook.”
Blogs were once the outlet of choice for people who wanted to express themselves online. But with the rise of sites like Facebook and Twitter, they are losing their allure for many people — particularly the younger generation.
The Internet and American Life Project at the Pew Research Center found that from 2006 to 2009, blogging among children ages 12 to 17 fell by half; now 14 percent of children those ages who use the Internet have blogs. Among 18-to-33-year-olds, the project said in a report last year, blogging dropped two percentage points in 2010 from two years earlier.
Former bloggers said they were too busy to write lengthy posts and were uninspired by a lack of readers. Others said they had no interest in creating a blog because social networking did a good enough job keeping them in touch with friends and family.
Blogging started its rapid ascension about 10 years ago as services like Blogger and LiveJournal became popular. So many people began blogging — to share dieting stories, rant about politics and celebrate their love of cats — that Merriam-Webster declared “blog” the word of the year in 2004.
Defining a blog is difficult, but most people think it is a Web site on which people publish periodic entries in reverse chronological order and allow readers to leave comments.
Yet for many Internet users, blogging is defined more by a personal and opinionated writing style. A number of news and commentary sites started as blogs before growing into mini-media empires, like The Huffington Post or Silicon Alley Insider, that are virtually indistinguishable from more traditional news sources.
Blogs went largely unchallenged until Facebook reshaped consumer behavior with its all-purpose hub for posting everything social. Twitter, which allows messages of no longer than 140 characters, also contributed to the upheaval.
No longer did Internet users need a blog to connect with the world. They could instead post quick updates to complain about the weather, link to articles that infuriated them, comment on news events, share photos or promote some cause — all the things a blog was intended to do.
Indeed, small talk shifted in large part to social networking, said Elisa Camahort Page, co-founder of BlogHer, a women’s blog network. Still, blogs remain a home of more meaty discussions, she said.
“If you’re looking for substantive conversation, you turn to blogs,” Ms. Camahort Page said. “You aren’t going to find it on Facebook, and you aren’t going to find it in 140 characters on Twitter.”
Lee Rainie, director of the Internet and American Life Project, says that blogging is not so much dying as shifting with the times. Entrepreneurs have taken some of the features popularized by blogging and weaved them into other kinds of services.
“The act of telling your story and sharing part of your life with somebody is alive and well — even more so than at the dawn of blogging,” Mr. Rainie said. “It’s just morphing onto other platforms.”
The blurring of lines is readily apparent among users of Tumblr. Although Tumblr calls itself a blogging service, many of its users are unaware of the description and do not consider themselves bloggers — raising the possibility that the decline in blogging by the younger generation is merely a semantic issue.
Kim Hou, a high school senior in San Francisco, said she quit blogging months ago, but acknowledged that she continued to post fashion photos on Tumblr. “It’s different from blogging because it’s easier to use,” she said. “With blogging you have to write, and this is just images. Some people write some phrases or some quotes, but that’s it.”
The effect is seen on the companies providing the blogging platforms. Blogger, owned by Google, had fewer unique visitors in the United States in December than it had a year earlier — a 2 percent decline, to 58.6 million — although globally, Blogger’s unique visitors rose 9 percent, to 323 million.
LiveJournal, another blogging service, has decided to emphasize communities. Connecting people who share an interest in celebrity gossip, for instance, provides the social interaction that “classic” blogging lacks, said Sue Rosenstock, a spokeswoman for LiveJournal, which is owned by SUP, a Russian online media company. “Blogging can be a very lonely occupation; you write out into the abyss,” she said.
But some blogging services like Tumblr and WordPress seem to have avoided any decline. Toni Schneider, chief executive of Automattic, the company that commercializes the WordPress blogging software, explains that WordPress is mostly for serious bloggers, not the younger novices who are defecting to social networking.
In any case, he said bloggers often use Facebook and Twitter to promote their blog posts to a wider audience. Rather than being competitors, he said, they are complementary.
“There is a lot of fragmentation,” Mr. Schneider said. “But at this point, anyone who is taking blogging seriously — they’re using several mediums to get a large amount of their traffic.”
While the younger generation is losing interest in blogging, people approaching middle age and older are sticking with it. Among 34-to-45-year-olds who use the Internet, the percentage who blog increased six points, to 16 percent, in 2010 from two years earlier, the Pew survey found. Blogging by 46-to-55-year-olds increased five percentage points, to 11 percent, while blogging among 65-to-73-year-olds rose two percentage points, to 8 percent.
Russ Steele, 72, a retired Air Force officer and aerospace worker from Nevada City, Calif., says he spends up to three hours a day seeking interesting topics and writing about them for his blog, NC Media Watch, which covers local issues in Nevada County, northeast of Sacramento. All he wants is to have a voice in the community for his conservative views.
Although he signed up for Facebook this month, Mr. Steele said he did not foresee using it much and said that he remained committed to blogging. “I’d rather spend my time writing up a blog analysis than a whole bunch of short paragraphs and then send them to people,” he said. “I don’t need to tell people I’m going to the grocery store.”
India May Decide on 500,000 Tons Sugar Sale This Week
India, the biggest sugar user, may permit exports of 500,000 metric tons as output tops demand for the first time in three years and after food inflation slowed to a two-month low, industry officials said.
The government may take a decision as early as this week, Jonathan Kingsman, managing director of broker and researcher Kingsman SA, and Abinash Verma, director general of the Indian Sugar Mills Association, told a conference in Dubai today.
Supplies from the country may help cool food costs, which reached a record in January, according to the United Nations’ World Food Price Index. Raw sugar soared to 36.08 cents per pound in New York on Feb. 2, the highest level since 1980, on concern that global supplies will lag demand after a storm in Australia and drought in Russia crimped harvests.
The global market “has become viable for exports from India at a time when the country has a surplus,” said Verma. “We are pretty positive that the government will take a decision this week” as food inflation has eased, he said.
May-delivery raw sugar fell 1.5 percent to close at 28.42 cents a pound on ICE Futures U.S. in New York on Feb. 18. Prices have still doubled since the end of May.
India allowed the shipment of 500,000 tons under the so- called open general license in December and then kept the plan on hold because of high food costs. An index measuring wholesale prices of farm products including rice and vegetables rose 11.05 percent in the week ended Feb. 5 from a year earlier, the trade ministry said in a statement last week. The measure gained 13.07 percent the previous week.
Group Meeting
A ministerial group may meet tomorrow to decide on allowing exports, the Press Trust of India reported today, citing no one.
“India should first allow 500,000 tons and then look at permitting at least 1 million ton more,” Vinay Kumar, managing director of a producers’ group that accounts for almost half of the nation’s output, said in an interview at the conference.
The country’s production may total 24.5 million tons, more than the demand of 23 million tons, for the season ending Sept. 30, according to the government. Output for the period may be 25 million tons, exceeding consumption of 22.1 million tons, Verma said, matching Kumar’s forecast. There may be a surplus of 6.7 million tons at the end of September, of which 5 million tons will be carried over to the new season from Oct. 1, Verma said. That leaves 1.7 million tons for sales overseas, he said.
Production was 26.4 million tons in 2007-2008, the last time that output surpassed consumption, data from ISMA show.
The government may take a decision as early as this week, Jonathan Kingsman, managing director of broker and researcher Kingsman SA, and Abinash Verma, director general of the Indian Sugar Mills Association, told a conference in Dubai today.
Supplies from the country may help cool food costs, which reached a record in January, according to the United Nations’ World Food Price Index. Raw sugar soared to 36.08 cents per pound in New York on Feb. 2, the highest level since 1980, on concern that global supplies will lag demand after a storm in Australia and drought in Russia crimped harvests.
The global market “has become viable for exports from India at a time when the country has a surplus,” said Verma. “We are pretty positive that the government will take a decision this week” as food inflation has eased, he said.
May-delivery raw sugar fell 1.5 percent to close at 28.42 cents a pound on ICE Futures U.S. in New York on Feb. 18. Prices have still doubled since the end of May.
India allowed the shipment of 500,000 tons under the so- called open general license in December and then kept the plan on hold because of high food costs. An index measuring wholesale prices of farm products including rice and vegetables rose 11.05 percent in the week ended Feb. 5 from a year earlier, the trade ministry said in a statement last week. The measure gained 13.07 percent the previous week.
Group Meeting
A ministerial group may meet tomorrow to decide on allowing exports, the Press Trust of India reported today, citing no one.
“India should first allow 500,000 tons and then look at permitting at least 1 million ton more,” Vinay Kumar, managing director of a producers’ group that accounts for almost half of the nation’s output, said in an interview at the conference.
The country’s production may total 24.5 million tons, more than the demand of 23 million tons, for the season ending Sept. 30, according to the government. Output for the period may be 25 million tons, exceeding consumption of 22.1 million tons, Verma said, matching Kumar’s forecast. There may be a surplus of 6.7 million tons at the end of September, of which 5 million tons will be carried over to the new season from Oct. 1, Verma said. That leaves 1.7 million tons for sales overseas, he said.
Production was 26.4 million tons in 2007-2008, the last time that output surpassed consumption, data from ISMA show.
Sugar Market May Have Surplus Next Year, Kingsman Says
Global sugar production may exceed demand for the first time in four years if “normal weather conditions” return to the biggest growing nations, broker and researcher Jonathan Kingsman said.
The market may have surplus of 5.61 million metric tons in the year from April 1, compared with a deficit of 102,000 tons this season, as farmers in China, Brazil, Russia and Thailand boost acreage, Kingsman, managing director of the Switzerland- based company, told a conference in Dubai today.
Excess production may help cool global food costs which reached a record in January according to the United Nations’ World Food Price Index. Raw sugar soared to 36.08 cents per pound in New York on Feb. 2, the highest level since 1980, on concern that global supplies will lag demand after a storm in Australia and drought in Russia crimped harvests.
“Prices of over 25 cents for more than half of the last 18 months should have given strong signals to producers to expand production,” Kingsman said. “More normal growing conditions in 2011-2012 should allow for some relief for supplies, but that may take until late in 2011 before stocks turn the corner.”
A forecast for the sugar market swinging into surplus is in contrast to deficits in other crops, including wheat, which have helped push up prices and contributed to political unrest in nations in North Africa and the Middle East. Wheat has jumped 71 percent in the past year, corn is near the highest since July 2008 and soybeans have jumped 45 percent in the past 12 months.
Sugar for delivery from May 2011 through October 2013 is in backwardation, reflecting expectations that prices may ease in the coming months, Kingsman said in an interview Feb. 18. Backwardation occurs when near-term contracts are more expensive than those further out.
Weak Demand
“Given that recent sugar prices are at their highest since 1981, we expect there to be some loss of consumption, and at least some tempering of expected consumption increments in many countries,” Kingsman said. Demand will expand 1.48 percent in the 2011-2012 season, compared with the normal annual increase of 2 percent, he said.
Global production may expand by 8.15 million tons to 173.2 million tons, while consumption may grow by 2.44 million tons to 167.6 million tons, Kingsman said. The biggest gain in output will come from China, where production may climb by 1.85 million tons, followed by Russia and Brazil’s Center South region, which may boost harvests by 1.52 million tons and 1.19 million tons.
Kingsman in December predicted a deficit of 369,000 tons for the current year ending March. Estimates for 2011-2012 are made with “the assumption of normal global weather conditions, which haven’t tended to be all that common of late,” he said.
Stockpiles will stay low for the next year and the deficit may last for the first six months of 2011, Kingsman said today.
Cyclone Damage
Tropical Cyclone Yasi hit northern Queensland in Australia, a region growing a third of the country’s cane, cutting output potential in the area by about 50 percent, producers’ group Canegrowers said Feb. 4. That may keep exports from the world’s third-biggest supplier at a two-decade low of 2.2 million tons in 2011, according to Queensland Sugar Ltd.
“We’re still in the middle of the cyclone season and the uncertainty on the crop outlook isn’t over yet,” Queensland Chairman Alan Winney said in an interview at the conference. Production won’t return to normal levels of 4.2 million to 5 million tons until 2012-2013, he said.
Queensland Sugar accounts for more than 90 percent of Australia’s overseas sales of the commodity.
Frost damaged about 1.9 million mu (126,667 hectares) of cane in China’s Guangxi province, the China News Service said on Jan. 12, citing the local agricultural authority. The nation’s central bank Feb. 18 raised reserve requirements for lenders for the second time this year to counter inflation.
The market may have surplus of 5.61 million metric tons in the year from April 1, compared with a deficit of 102,000 tons this season, as farmers in China, Brazil, Russia and Thailand boost acreage, Kingsman, managing director of the Switzerland- based company, told a conference in Dubai today.
Excess production may help cool global food costs which reached a record in January according to the United Nations’ World Food Price Index. Raw sugar soared to 36.08 cents per pound in New York on Feb. 2, the highest level since 1980, on concern that global supplies will lag demand after a storm in Australia and drought in Russia crimped harvests.
“Prices of over 25 cents for more than half of the last 18 months should have given strong signals to producers to expand production,” Kingsman said. “More normal growing conditions in 2011-2012 should allow for some relief for supplies, but that may take until late in 2011 before stocks turn the corner.”
A forecast for the sugar market swinging into surplus is in contrast to deficits in other crops, including wheat, which have helped push up prices and contributed to political unrest in nations in North Africa and the Middle East. Wheat has jumped 71 percent in the past year, corn is near the highest since July 2008 and soybeans have jumped 45 percent in the past 12 months.
Sugar for delivery from May 2011 through October 2013 is in backwardation, reflecting expectations that prices may ease in the coming months, Kingsman said in an interview Feb. 18. Backwardation occurs when near-term contracts are more expensive than those further out.
Weak Demand
“Given that recent sugar prices are at their highest since 1981, we expect there to be some loss of consumption, and at least some tempering of expected consumption increments in many countries,” Kingsman said. Demand will expand 1.48 percent in the 2011-2012 season, compared with the normal annual increase of 2 percent, he said.
Global production may expand by 8.15 million tons to 173.2 million tons, while consumption may grow by 2.44 million tons to 167.6 million tons, Kingsman said. The biggest gain in output will come from China, where production may climb by 1.85 million tons, followed by Russia and Brazil’s Center South region, which may boost harvests by 1.52 million tons and 1.19 million tons.
Kingsman in December predicted a deficit of 369,000 tons for the current year ending March. Estimates for 2011-2012 are made with “the assumption of normal global weather conditions, which haven’t tended to be all that common of late,” he said.
Stockpiles will stay low for the next year and the deficit may last for the first six months of 2011, Kingsman said today.
Cyclone Damage
Tropical Cyclone Yasi hit northern Queensland in Australia, a region growing a third of the country’s cane, cutting output potential in the area by about 50 percent, producers’ group Canegrowers said Feb. 4. That may keep exports from the world’s third-biggest supplier at a two-decade low of 2.2 million tons in 2011, according to Queensland Sugar Ltd.
“We’re still in the middle of the cyclone season and the uncertainty on the crop outlook isn’t over yet,” Queensland Chairman Alan Winney said in an interview at the conference. Production won’t return to normal levels of 4.2 million to 5 million tons until 2012-2013, he said.
Queensland Sugar accounts for more than 90 percent of Australia’s overseas sales of the commodity.
Frost damaged about 1.9 million mu (126,667 hectares) of cane in China’s Guangxi province, the China News Service said on Jan. 12, citing the local agricultural authority. The nation’s central bank Feb. 18 raised reserve requirements for lenders for the second time this year to counter inflation.
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