Fairval

Notes on Indian equities, sectors and economy

Archive for the ‘Commodities’ Category

Commodities beat equities in the last 3 years

Posted by fairval on April 14, 2011

Commodity versus Equity Returns

The table is self explanatory. Over the last 3 years, one would have been better off investing in commodities rather than equity markets, over most periods. While gold’s run is well known, even agri beats equities hands down over last 1 year, and even over a 3 year period

Posted in Commodities, Markets | Leave a Comment »

Central Bank could provide support to gold prices

Posted by fairval on November 5, 2009

Article by Quantum on RBI’s gold purchase

International Monetary Fund (IMF) announced on its website that India has bought 200 tonnes of gold from a total of 403.3 tonnes that they had planned to sell. This transaction was completed during the period of October 19th – 30th 2009 with daily purchases at the prevailing market prices.
The point to note is that not only has the Reserve Bank of India (RBI) purchased gold – but it has done so at a price that was not at a discount to the spot prices.

The reason for buying
According to a Reuters report, an IMF official quoted that the sale took place at an average price of about $1,045 an ounce. The payment for the same would be made in “hard” currency – and not in SDRs, the currency of the IMF.
This means that the purchase of nearly $6.7 billion of gold would be made from RBI’s dollar reserves.
The message: the RBI is diversifying – it is moving some of its money from US dollar paper notes to gold.
The RBI says: “This was done as part of the Reserve Bank’s foreign exchange reserves management operations.”
Hmm… The RBI, as a central bank, is the fund manager of India’s reserves. Given the uncertainty surrounding the dollar, the RBI seems to think that it is prudent to diversify some of its dollar reserves to gold.

Learning from the past
During the balance of payment crisis in 1991, India mobilized its gold reserves to serve as collateral against a $400 million loan from the Bank of England. India shipped a total of 47 tonnes of the country’s gold reserves to the Bank of England as collateral. It also leased a further 20 tonnes of confiscated gold to Union Bank of Switzerland with a six month buyback option to raise a $200 million loan. The funds were used to help India meet its short-term debt obligations – and its rising import bill.
A central bank of a country serves as a lender of last resort. We saw this happen in the severe financial crisis of 2008. But, as seen above, gold has many a times served as an asset of last resort for these central bankers – just like it did for India in 1991.
Central bankers see gold as the ultimate currency and have often in the past acknowledged this fact by words and by actions.
The debasement of currencies by central bankers around the world – especially in the U.S and in UK – has led to an erosion of confidence in paper currencies. This has ignited a need to diversify reserves away from the US Dollar. Countries like Russia, China and the Middle East have often voiced their concerns and were amongst the likely nations to grab the IMF gold for sale.
India buying almost half of IMF’s available gold for sale has come as a surprise to many. Especially since, the gold markets never placed India anywhere near the top of the list of prospective buyers. Also, this has come at a time when prices are ruling near record highs.
India’s total forex reserves have grown significantly over the years whereas gold holdings (in tonnes) were unchanged. This led to a steep fall in gold reserves when expressed as a percentage of total reserves. India’s gold holdings declined from more than 8% of total forex reserves at the beginning of 2000 to less than 4% before this purchase from IMF.

This purchase of 200 tonnes of gold will lift the proportion of gold expressed as a percentage of total reserves to almost 6%.

Who’s next?
India has moved swiftly. China and Russia were considered more likely to grab the IMF gold.
There are chances that China might rush to grab the remaining gold for sale by the IMF, without any further delay. China’s gold reserve as a percentage of total reserves stands at 1.6%. While China has huge dollar reserves which are increasing each day, it has also voiced its concerns regarding the uncertainty surrounding the U.S dollar.
This potential sale of gold by the IMF was one of the lingering threats for gold prices. Now we have real takers for the IMF gold: 50% swallowed by India in one gulp. This will certainly lift the sentiments amongst those that believe in gold as the ultimate form of currency.
(A Quantum MF article)

Posted in Commodities | Leave a Comment »

What was that again..Valuations of Cement Cos

Posted by fairval on August 27, 2009

The funny valuation methods analysts employ in a bull market..

Came across this report by a broking firm which values the cement business of Jaiprakash Associates at Rs 12,300 crore. One more example of somewhat perplexing valuations analysts sometimes tend to give (to put it more bluntly, an example of the lenths brokers will go to justify a recommendation). Take a look at valuations of top cement companies at this time.

All of them are quoting at EV/EBITDA or EV/million ton numbers which are much lesser than Jaypee. When you have leading companies quoting at 7-8x trailing EV/EBITDA, what can be the logic of valuing Jaypee at 7x FY11e EBITDA?. And BTW, the report says this is at a 10% discount to peers. It sure is a 10% discount, but if the EV/EBITDA is the trailing one, not the FY11 for peers.
Of course, the report on Jaypee is a buy report (Jaypee is a conglomerate, cement is only 40-50% of the value of Jaypee). But what would you buy – a Jaypee Cement at 7x FY11, or a Shree Cement at 6x FY09, and we are ignoring management quality here.

Posted in Commodities, Valuation, What was that Again? | 2 Comments »

Now Cement sales slowdown

Posted by fairval on September 6, 2008

Cement sales are also slowing down. Somehow could lay my hands only on data till April’08, where rolling 12 months sales had slowed down to around 8% y-o-y. Sales should have sales down even further. In Aug, the industry could well have registered a negative growth rate. August sales for Aditya Birla group, second largest producer behind Holcim, were down around 8% y-o-y. Most likely the industry should have followed the same trend.

Posted in Commodities, Data | Tagged: , | Leave a Comment »

Cement prices – Alternatives

Posted by fairval on March 11, 2007

Lets see further why capping cement prices was not necessarily the best solution to the problem — and firstly lets define the problem correctly. What is the problem we are trying to solve here – affordable cement? not really.

What we really want to make is afforable housing and affordable infrastructure.

For that there could have been separate policy measures. We all know urban housing prices are driven more by speculative forces. So how about measures like: No house can be sold for a period of 5 years from purchase (or have differential stamp duty depending on frequency of sale, or length of time the house was owned)? Make any house sold within say 3 years be deemed as speculative investment, and attract capital gains of say 50%? Maybe a declaration of all immovable property each time a person wants to buy a house?

If you really want to break the speculative forces in housing market, a lot can be done. But most politicians are hand in glove with builders, so they wouldnt do this. So what is the govt’s favorite way to cool housing prices? Raise interest rates. But that hurts the genuine buyer badly, since he really needs to loan. An investor often does not need a loan to buy a house.

For infra projects, one way is to simply let it be charged off over next 20 or 30 years of BOOT concession period. Other, more complex way, could be to mandate say say of cement at a certain price to govt approved infra projects. But would be perhaps difficult to implement and monitor.

Posted in Commodities, Indian Economy, Real Estate / Construction | Leave a Comment »

Cement Prices – Random Populism

Posted by fairval on March 11, 2007

Media has universally panned govt’s move to cap cement prices for one year and rightly so (see story).

This is merely a populist move by a Cong govt beginning to increasingly show its socialist stripes with an eye on various upcoming elections. What needs to be analysed a bit is – Just who does this price capping help?

Lets see who buys cement in India:

Govt: These days very little I think. There was a time when govt used to buy 30% or so of cement. Now this could be less than 10%. Most infra construction is now done by the pvt sector
Construction Cos: Yes, their projects would have become somewhat expensive. But how much is cement as a % of total cost of says a road, or a power plant? This needs to be checked first.
Builders: What builders sell is a house, and housing prices have gone up dramatically in all top cities of India. That price rise has nothing to do with cement prices.
Individuals for their own homes: This is the real segment which govt may be trying help out. This is an off the cuff number, but this population may not be even 20% of India’s population. Lets see why. Urban India has 30-35% of India’s pop. Of that, atleast 30% stay in houses made by builders, where prices have their own logic (speculation is a larger element). 20%-40% or urban population is slums. In rural India, where 65% or so of India lives, how many live in pucca housing? Very little, even at all India basis, as the following data shows:

Check it, only less than 3% of households (data in that table is % households) live in proper concrete houses. Most of India lives in brick houses, which I think refers to what u see in rural India – brick and mortar houses not covered by concrete. These houses use very little cement, as part of the mortax mix. Atleast 50% of houses in India have nothing to do with concrete. Of the remaining 50%, my guess is the rich urban India, living developer made houses, may consume a lot of cement. Here house prices are driven more by speculation.

Posted in Commodities, Indian Economy | 1 Comment »

Agri commodity prices to soar?

Posted by fairval on October 9, 2006


China’s apparently going through its worst drought in 55 years! That sounds like something to take note off. A Nomura report (chart from this report) says domestic wheat prices have begun to rise in China. Presumably,this could affect global prices. Same could happen to other agri commodities.

Posted in Commodities | Leave a Comment »

Commodity cycle over, says MS

Posted by fairval on September 21, 2006

A recent Morgan Stanley report says current commodity run has almost matched the best ever bull run in commodities. That occurred in 1971-73. The report asserts that the current run is bigger since inflation is now lower compared to the ’70s.

Within this, the report says it is metals which has seen the best run. Here the gains are twice those of the next best rally, which was again in the same early ’70s period. MS says commodity boom is over.

The commodity bulls like Jim Rogers wont be happy to hear this. He has been saying commodities ahve a 20 year cycle, and that will peak between 2010-15.

Posted in Commodities | Leave a Comment »

Cement – Gathering strength

Posted by fairval on January 27, 2006

Cement demand is finally showing signs of strength. From Apr-Dec, it is running at 11%, crossing into double digits after 5 years. We checked cement data from 1973. It appears cement demand growth rarely crosses into 2 figures. In the last 3 years or so, infra spends and housing both, have grown at strong rates. Infra construction companies like Gammon, Hindustan Construction etc have grown at 40-50% topline growth. Urban housing market is growing at over 30% again. So why does cement find it so difficult to reach even 2 figures?

Cement companies have never given satisfactory answers. One reason could be rural demand. Rural india has had 2 years of above normal monsoon. So maybe there is demand picking up there. Other reason could simply be cement companies reporting sales more honestly, given that stock market is riding high.

Whatever be the reason, capacity utilisations are edging up. From around 83% 2 years ago, they are now closing in on 87% level. Prices have moved up this year, average 15-20% more than last year. Cement profits are doing well, though not for all companies. Ultratech for ex, still has 76% or so capacity utilisation. Cement stocks have moved up, but some are still cheap. Grasim, Ultratech, Prism for example. Grasim-Ultratech (AV Birla Group) looks good.

Posted in Commodities, Data | Leave a Comment »