GalaTime

Following up on yesterday’s post: Cement production, consumption & price trends, this one talks about steel.

Steel production has only gone one way for most of this decade, with Chinese capacity growing by leaps & bounds:

China leads the way in consumption growth, of course:

As for prices, they have been in a strong uptrend since 2002, but you can also see the cyclicality since 1981:

For a longer term view of the steel industry, do check out the World Steel in Figures report, published by the International Iron and Steel Institute (IISI).

Coming to India, I would think that steel prices will face most of the same head-winds in 2009 as cement - slower economic growth, slowing construction (both residential & commerical), oversupply, etc. One difference is the impact of imports - while cement has a short shelf life, steel does not. Thus, if the Chinese decide to dump excess steel all over the world and the Indian government doesn’t levy obscene import duties (want to reduce inflation - remember?), then domestic steel prices are bound to drop.

Now, Arcelor Mittal’s spectacular results would lead us to believe that the good times ain’t over for the steel industry, but note this:

. . . the company only shipped marginally more steel in this period compared to last year, 29.8 million metric tonnes versus 29.2 million metric tonnes in the second quarter of 2007. That means almost all of the company’s revenue increase was due to spiking steel prices.

As always, things appear the rosiest near the peak - my bet would be on a cyclical downturn in steel rather than a plateau at such high prices.

• BCA Research: Food And Energy Prices: A Prolonged Correction Underway?

• Capital Spectator: Pondering Real Yields

Remember that this gives a good sense of what our $300B+ forex reserves earn.

• Mint: Divestment drive may breathe life into market

India’s equity capital markets could see a revival around the fourth quarter of this calendar year (October-December) if the government goes ahead with reforms as it is expected to, according to investment bankers who are looking forward to at least half-a-dozen IPOs, FPOs, and strategic stake sales in state-owned companies.

“The government needs money,” said the chief executive of a large Indian investment bank, but he doesn’t expect the government to push too many deals before its term ends towards the middle of next year, when parliamentary elections are due.

Not one equity capital market deal has been reported from India thus far in July, including IPOs, qualified institutional placements (QIPs, where shares are sold to banks and other financial institutions), and issues of foreign currency convertible bonds (FCCBs) or depository receipts.

I’ve been researching industrial commodities of late, and have learnt quite a few interesting things about cement. First, this amazing chart, via The Oil Drum:

China produces almost 50% (1.3 giga tons) of worldwide cement, and apparently consumes most of it as well (exports account for less than 5%)! Olympics, highways, offices, housing, dams, power plants, mass urbanization, what have you. And this demand is projected to grow at 10% p.a. for a few more years.

That - combined with the ongoing super-ultra-mega construction boom in the Middle East - is the sort of stuff that gives cement producers wet dreams. And as expected, there have been a series of investments over the past few years in capacity expansion, with the result that many countries are now facing oversupply in 2009 - Saudi Arabia, US and even China!

Cement manufacturers in India are starting to feel the pain too; Economic Times: Bulk cement prices slide as new capacity boosts supply

A string of new capacities, which came onstream in recent months, has started impacting cement prices. Prices of bulk cement — bought by construction companies in large quantities directly from cement makers — have come down by at least Rs 100 per tonne. The cement industry added around 20 million tonne of capacity in the first half of calendar year 2008, leading to a demand-supply mismatch. The industry’s installed capacity is around 203 million tonne per annum currently.

This ought to get worse amidst increasing home loan rates, a slump in residential & commercial real estate, and further capacity expansion. While prices may not drop as fast as they rose, cement remains a cyclical commodity and we’re bound to see a meaningful price drop next year.

Historical price charts for cement aren’t easy to find; here are a couple:

Note that current market prices are Rs 275+ per 50-kg bag.

• Portfolio: What is a Covered Bond?

With a covered bond, the bank doesn’t sell its assets (in this case, its mortgages); rather, it continues to own them, and it borrows money against them.

There are two good things about covered bonds. The first is that because they’re secured rather than unsecured, they’re less risky than plain vanilla bank debt, which means that they constitute low-cost funding for the bank in question. And the second is that because the mortgages remain on the bank’s balance sheet rather than being securitized and sold off into the market, no one’s trying to sell mortgages in an environment in which the very concept is borderline toxic.

• Business Standard: Time to pay the piper

The US national debt as of March 2008 stands at $9.4 trillion — over $30,000 per citizen. Of the $4.7 trillion in private hands, $2.4 trillion (51 per cent) is held by foreign investors. Japan holds around $600 billion (24 per cent) and China holds $500 billion (around 20 per cent). The UK, Brazil and oil-exporting countries own about 6 per cent.

The dollar’s share of reserves has fallen from a high of 72 per cent to around 61 per cent.

The IMF estimated that Gulf Cooperation Council (Saudi Arabia, the United Arab Emirates, Qatar and other Gulf States) may lose $400 billion if they decide to stop pegging their currencies to the dollar.

When in debt, inflate your way out?

• Bloomberg: Crude Oil Trades Near 12-Week Low on Falling Gasoline Demand

U.S. motorists drove less for a seventh consecutive month in May, as vehicle-miles traveled on all U.S. roads fell 3.7 percent during the month from a year earlier, the Federal Highway Administration said in a report July 28. The seven-month slide is the longest downward streak since 1979.

U.S. refining profits have fallen because oil companies are making more gasoline than drivers need, as a result of running refineries to satisfy demand for diesel.

India, Vietnam, Malaysia and Indonesia have raised prices of diesel and gasoline in the past two months to cut government expenditure aimed at capping fuel prices and keeping inflation in check.

Note that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year.

Not sure what the deal is, but the NSE India VIX closed at 61.73 today! If VIX is supposed to be an indicator of fear, then it seems that a lot of people are really, really afraid.

Mind you, this is after the RBI rate hikes and subsequent crapping out of bank stocks. We have just 2 more days to go before July F&O expiry; the implied volatility for at-the-money Nifty puts is ~30% while that for calls is ~40%.

Something doesn’t add up.

First Quarter Review of the Annual Statement on Monetary Policy for the Year 2008-09:

Repo Rate increased by 50 basis points from 8.5 per cent to 9.00 per cent.

Cash Reserve Ratio to be increased by 25 basis points to 9.0 per cent with effect from the fortnight beginning August 30, 2008.

Going forward: Interest rates up, economic growth down, NPAs up, asset prices down!

Do also note the RBI’s stance on credit growth:

Money supply (M3) increased by 20.5 per cent on a year-on-year basis on July 4, 2008, lower than 21.8 per cent a year ago. It is necessary to moderate monetary expansion and plan for a rate of money supply growth in the range of around 17.0 per cent in 2008-09.

If necessary, the Reserve Bank would consider undertaking supervisory review of those select banks which are over extended in terms of their credit portfolios relative to their sources of funds.

Fighting words!

And the drama on CNBC was entertaining - “hawkish as hell”, “accused us of leaking” and what not.

• Hindu Business Line: Mall development slows in second quarter

The second quarter saw new mall supply of about two million sq ft, less than the anticipated six million sq ft. The shortfall was mainly due to delays in completion of interior finishing and fit-outs, and the ongoing liquidity squeeze.

“Despite lack of quality space in the market, the top eight cities in India are currently witnessing around 18 per cent vacancy across the 40 million sq ft of operational malls. This can be attributed to the fact that most of the supply has come within the same micro-markets targeting the same catchments, thereby creating an oversupply within respective neighbourhoods,”

• DNA: PMS investors are in for a rude shock

. . . every time a PMS fund manager buys or sells the shares, there is an incidence of capital gains tax on the investor, irrespective of whether the investor chooses to redeem his investment with the PMS or not.

PMS is a pass-through where the ultimate tax incidence is upon the investor. This is because, unlike a mutual fund, which has a separate identity conferred by the IT Act (Sec. 10 (23)(D), a PMS is just a service provided by the fund manager who acts like the agent of the customer or investor and for which he is paid a fee.

Since early January, the stock markets have fallen. Hence investors who had invested in PMS and have stayed invested without booking capital losses, have seen the value of their portfolios fall by around 30%.” In a double whammy of sorts, they also need to pay short-term capital gains tax.

• Business Standard: Credit card dues surge 87 per cent

. . . credit card outstanding rose 87 per cent to Rs 26,596 crore, with Rs 12,375 crore added between May 25, 2007 and May 23 this year. The rise was 45 per cent till May 2007. Banks are already complaining of rising defaults on unsecured advances such as credit cards and personal loans.

The flow of housing loans too has slowed down to 13.8 per cent till May-end this year, compared to 21.6 per cent last year. As of May 23, 2008, total outstanding home loans were estimated at Rs 2,62,486 crore, Rs 31,70 crore higher than the level at the end of May last year.

I imagine this will get worse in the near future.