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7/29/2019 Beyond Market - Issue 78
1/48
7/29/2019 Beyond Market - Issue 78
2/48
7/29/2019 Beyond Market - Issue 78
3/48Its simplified...Beyond Market27th Feb 13
DB Corner Page 5
Act Now For A Better Tomorrow
Th e co mmoditi es market in Ind ia will be nefit if certain Bi l ls
passed in the Parliament sooner than expected Page 8
Still Betting On Bullions?
Once the markets start pricing in rate hikes in the US, gold
are likely to enter into a major consolidation Page 13
As Confidence Returns To The Markets And Investors Re
To Equities, Gold Will Become More Attractive As A Stor
Wealth.
Mr Marcus Grubb, Managing Director, Investment at World
Council speaks about the factors influencing gold prices amother important issues pertaining to the yellow metal Pa
On A Stable Path
Th e outl oo k fo r cru de oil re mai ns fro m ne utra l to bu ll ish fo
first half of 2013, supported by improving oil demand and
recovery in the global economy Page 21
When Too Muc h Is Too Bad
Continuous increase in domestic production of shale oil an
in the US has resulted in oversupplied market conditions, l
ing the prices of this commodity Page 26
This Year, And Going For ward, The Foc us Shif ts Ba ck To
Health Of The Global Economy, As far As The Commodity
Markets Are Concerned.
Mrs Vandana Hari, Asia Editorial Director at Platts, speaks a
energies and their impact on the global economies Page
Riding On Sentiments
More than fundamentals, sentiments and expectations of s
ity are seen driving the prices of copper and nickel Page
Weather Uncertainties: A Deciding Factor
Decline in process of soybean in the first quarter should be
as a good opportunity to initiate long positions as dry wea
concerns during the 2013-14 planting season in the US ma
prices of this crop higher Page 42
olume 1 Issue: 78, 27th Feb 13
Editor-in-Chief & Publisher:Rakesh Bhandari
Editor: Tushita Nigam
Senior Sub-Editor: Kiran V Uchil
Art Director: Sachin Kamble
Junior Designer: Sagar Padwal
Marketing & Operations:
Divya Bhurat, Shreelatha Gollavathini
We, at Beyond Market welcome your views,
comments and feedback. Do help us to grow
better as per your liking. This is our attempt to
reach you better while crossing horizons...
Web: www.nirmalbang.com
Tel No: 022 - 3926 804 7
HEAD OFFICE
Nirmal Bang Financial Services Pvt Ltd
Sonawala Building, 25 Bank Street,
Fort, Mumbai - 400001
Tel. 022-3926 7500/7501
CORPORATE OFFICE
B-2, 301/302, Marathon Innova,Off Ganpatrao Kadam Marg,
Lower Parel (W), Mumbai - 400 013
Tel: 022 - 3926 8000/8001
Research Team: Kunal Shah, Somya Dixit,
Sunit Mehta, Ankita Parekh, Ravi Dsouza,
Vikash Bairoliya, Sameer Kazi, Mohammed Azeem,
Devidas Rajadhikary, Harshal Mehta,
Sakina Mandsaurwala, Ishwar Kelwadkar
7/29/2019 Beyond Market - Issue 78
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7/29/2019 Beyond Market - Issue 78
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(LTP: `213.30) and pharma stocks
like Lupin Ltd (LTP: `609.90) and
Sun Pharmaceuticals Industries Ltd
(LTP: `820.65) can be considered for
the purpose of investments. Also,
Ajanta Pharma Ltd (LTP: `597) looks
good around the`550 level.
All eyes will now be on P
Chidambaram who will be presentingUnion Budget 2013-14 in the
backdrop of a weak economy and
decelerating investment climate,
which have shaken the confidence of
corporates in India. Therefore, the
biggest task before the Finance
Minster would be to keep fiscal
deficit under check, while giving
stimulus to revive economic growth
of the countrY.
Its simplified...Beyond Market27th Feb 13
DisclaimerIt is safe to assume that my clients and I may have an investment interest in the stocks/sectorsdiscussed. Investors are required to take an independent decision before investing. Investment inequity is subject to market risk. Our research should not be considered as an advertisement oradvice, professional or otherwise. The investor is requested to take into consideration all the riskfactors including their financial condition, suitability to risk return profile and the like and takeprofessional advice before investing.
he previous fortnight saw
key developments around
the world as well as in
India. In the US, Federal
Reserve officials seemed divided over
monetary stimulus measures adopted
by the country.
At its policy meeting in the last week
of January, Federal Reserve officialsdebated over risks of high inflation
against the need for continued support
to revive a weak economy through
liquidity measures.
Similarly, growth issues in the Euro
zone continued to be a cause of worry.
And the Chinese government too has
been trying to deflate the rising real
estate bubble in the country by
cooling the property market.
In India, quarterly earnings results of
TIndia Inc were not too encouraging.
In fact, they were rather mixed. Also,
the Wholesale Price Index (WPI) fell
to 6.62% in January from a year ago,
beating market expectations and
fuelled hopes of a rate cut by the
Reserve Bank of India in its next
policy meet.
Market participants are advised toavoid fresh buying or overnight
positions due to the upcoming Union
Budget. If the Nifty breaches the
5,800 mark, then any buying in the
markets should be totally avoided.
However, the pharma and media
sectors look good from an investment
perspective. Media stocks like TV18
Broadcast Ltd (LTP: `25.20), Sun TV
Network Ltd (LTP: `427.10), Zee
Entertainment Enterprises Ltd (LTP:`218.55) and Den Networks Ltd
Market participantsare advised to avoid
fresh buying or overnigpositions due to the
upcoming Union Budg
Sensex: 19,331.69Nifty: 5,854.75
(As on 25th Feb 13)
7/29/2019 Beyond Market - Issue 78
6/48Its simplified...Beyond Market27th Feb 136
A LIQUIDITY RUSH
Kunal Shah
Head - Commodities Research,
Nirmal Bang
During the year 2012 neither the world nor the financial markets ended. A famous astrologer had forecasted that the world may comeend in 2012. And economists too, among many things, had said that the Euro zone may break up, China may face a hard landing and thmay again slip back into recession. But neither of these things happened.
Central bankers came to the rescue just in time and managed to save the financial markets from something which could have been worse
the crisis of 2008. While a crisis comes in disguise, the biggest difference between the crisis of 2007-08 and the debt crisis in the Euro zo
2012 was that everyone knew about the debt crisis in the Euro zone but very few were aware of the sub-prime housing crisis in 2007 o
bankruptcy of Lehman brothers in advance in 2008. Interestingly, more than actions, words were enough for the markets to heal. Coordi
actions by top central bankers helped postpone the crisis again. Massive infusion of liquidity by top central bankers, have led to a rally in
assets and liquidation in safe haven instruments.
The global economy is trying to recover from the rough patch and is showing signals of a halt in contraction, except in the Euro zone. Th
economy has done exceedingly well in the last two quarters, the Chinese slowdown has moderated and we are witnessing a cyclical rec
in the Chinese and Japanese economy, which are likely to register moderate growth in the first half of the year due to aggressive stimulusmarkets, as always, have run ahead of the actual fundamentals and we are yet to see the real economy, showing signals of strong growth
Commodities have remained in the lime light since the last four - five years thanks to the prevailing easy monetary policies, invest
demand and stimulus packages by central bankers. But the impact of these policies and packages are moderating. The actual demand i
not picking up at the same pace as it did in the year 2009 and correspondingly the supply side of many commodities has been getting str
and stronger. For sustained recovery in commodity prices, the demand side should get stronger, going forward. Many commodities are tr
way above their cost of production, encouraging producers to boost production. Inflows in top commodity index funds have remained r
and we believe this is one of the most important factors for prices to sustain at unreasonable high levels. More than actual demand, fina
demand has remained robust, giving support to prices.
In 2009, the turnaround story of China, after a huge stimulus by their central bank, led to a massive rally in commodity prices and the
was on investment-led growth, which eventually led to a housing bubble in China, where we have seen a rapid rise in prices followedsharp fall. In spite of a sharp contraction in economic activity in 2012, China has not come up with any aggressive rate cuts or stim
packages. This makes us believe that China is focusing on transforming its economy from an investment-led economy to a consumptio
economy, which will take time. Imports of various commodities from China still remain very low, except crude oil where we have seen
meaningful revival lately.
With the recent correction in commodity prices, it is becoming very clear that more than fundamentals, liquidity is driving prices. Rece
talks by Federal Reserve officials that the central bank might have to slow or stop buying bonds led to a massive sell off in bullions, ene
and metals. It clearly indicates that the run up in commodity prices is liquidity driven and talks of withdrawing excess liquidity led to a ma
correction. I am still waiting for the time, when commodities prices will be determined by their fundamentals not just by liquiditY.
I am still waiting for
the time, when commodities
prices will be determined
by their fundamentals
not just by liquidity.
7/29/2019 Beyond Market - Issue 78
7/48
www.nirmalbang.com
EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^| IPOs^| INSURANCE
MS BANG COM to 54646 | Contact: 022-3926 9550 / 9551 | e-mail: commodity@nirmalba
CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39R EG D . O F F I C E: S onawal a B ui l d i ng , 25 B ank S treet , Fort , Mum bai - 400 001. Tel : 022 - 39267500 / 7501; Fax : 022 - 39267510
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE26093913
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing.Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is not oering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commod
For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx
7/29/2019 Beyond Market - Issue 78
8/48
Act NowFor
A Better Tomorrow
The commodities market in India will benefit
if certain Bills are passed in the Parliament
sooner than expected
Its simplified...Beyond Market27th Feb 138
7/29/2019 Beyond Market - Issue 78
9/48Its simplified...Beyond Market27th Feb 13
he commodities market in India has been
growing gradually since its inception in the
year 2003. Post 2007-08 volumes in
commodities were seen rising exponentially.
This period also witnessed a huge investment demand and
a rally in commodities due to recession, aggressive
monetary easing by the Federal Reserve and the Chinese
Central Bank in 2009.
Apart from base metals, bullions and agri commodities too
saw a rally. Besides, oil too tested $150/barrel in 2008. All
these things led to an increase in awareness of
commodities among retail investors and traders. In fact,
commodities have done better in terms of volumes when
volumes in equity markets were dropping.
However, volumes in the Indian commodities markets
have stagnated after continuously posting growth since the
last five years. During April 12 and January 13, the total
volumes of MCX and NCDEX have not shown anyincremental growth. Commodities market participants
have been waiting for several reforms and amendments of
important acts, which can take this market to new heights.
The Indian commodities markets are facing a number of
hurdles in the path towards exponential growth in volumes
from here.
Cumulative volumes of Multi Commodities Exchange and
National Commodity Exchange Ltd are seen stagnating.
institutions in the futures market, diversifying the product
basket and strengthening the regulator. Despite opposition
from some parties in the Parliament, the government has
repeatedly taken this bill to the Cabinet, indicating the urge
to grow the commodities market, which is still grossly
underdeveloped in India.
However, the issue of FDI in retail took much of the timeat the winter session of the Parliament. Food and
Consumer Affairs Minister KV Thomas believes that the
Forward Contracts (Regulation) Amendment (FCRA) Bill
will be passed in the coming session of the Parliament. For
innovative products (Options, Index trading), wider
participation and portfolio management services, markets
need the FCRA Bill to be passed as soon as possible.
Levy Of Commodity Transaction Tax (CTT)
The Ministry of Finance is seeking to extend the tax
burden so levied on equity derivatives to commodityderivatives under the ambit of the Commodity Transaction
Tax (CTT). The proposal is being considered for Budget
2013-14.
In Budget 2008-09, P Chidambaram proposed to levy CTT.
However, the tax was never notified due to firm opposition
from the ministry of food and consumer affairs and
commodity exchanges. The proposal was to impose
0.017% tax on commodity derivatives trade, on the lines of
the securities transaction tax (STT).
Unlike the equities market, which can be termed as adeveloped market, the commodities market is still a
developing market and imposing CTT at this juncture will
do little good than impede the market activity in the long
run. There is an urge to develop this market and increasing
transaction cost may not prove to be a good move for the
market, which is generating job opportunities for masses
and giving traders, hedgers as well as investors new and
better opportunities.
Impact Of CTT On Hedging
As hedgers remain one of the vital participants in thecommodity markets, an overall increase in cost will
discourage such an activity.
The most important cost for hedgers apart from brokerage
transaction charges, loss of interest on margin and security
deposits is the difference between the bid and the ask price
of a commodity on its trading platform. The spread
difference of the bid and the ask price is inversely
proportional to the trading volumes in commodity
Source: MCX, NCDEX and NB Research
Exchange Turnover (MCX & NCDEX)
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
A pr'10-Jan'11 Apr '11-Jan'12 A pr'12-Jan'13
inc
rores
Waiting For Amendment In Forward ContractRegulation Amendment (FCRA)
Market participants were expecting the government to
clear the much-delayed Forward Contracts (Regulation)
Amendment (FCRA) Bill, 2010 in the winter session of the
Parliament in 2012, after it was approved in the Cabinet.
However, it has not been passed yet.
The bill is aimed at widening the participation of financial
T
7/29/2019 Beyond Market - Issue 78
10/48Its simplified...Beyond Market27th Feb 1310
Source: Bloomberg, NB Research
Source: Bloomberg, NB Research
derivative contracts. Smaller the trade volume, higher is
the difference in the bid-ask price, and vice-versa. The cost
of commodity trades increases with the fall in trade
turnover, and vice-versa.
Domestic physical traders seek to recover the increasing
cost or the risk of their hedging activity either by reducing
prices they pay to their suppliers or by raising prices atwhich they sell to their consumers. As a result, the margins
related to processing in a commodity trade and industry
will indeed increase, which will be detrimental to both
producers as well as consumers of not only commodities,
but also their products.
Impact Of CTT On Speculation
Speculation, which is similar to hedging, is a zero sum
game. A gain for one is indeed a loss to somebody else at
an aggregate level.
Most speculators, who generate trading volumes in a
commodity derivatives market, are day traders or jobbers.
They generate a lot of volume in the market by constant
buying and selling of commodities on an intra-day basis,
which means they close their positions at the end of the
day. Thus, as discussed earlier, more the trading activity,
less is the spread cost. Hence, they help market participants
in reducing the cost involved between the bid and the ask
price of the underlying.
To ensure that the overall cost in the commodity market is
as low as possible, it is essential to have maximumparticipation of intra-day traders. However, if CTT is
imposed, we may see a low intraday activity as it adds on
to the cost, thus challenging the purpose of the commodity
derivatives market.
Manipulation may hold ground in commodity markets if
there is low participation from hedgers and trading
volumes are also low.
If CTT is imposed, then Multi Commodity Exchange,
National Commodities and Derivatives Exchange,
National Multi Commodity Exchange would be affected.The introduction of a transaction tax would shoot up the
transaction cost and lead to higher volatility and lower
trading activity. Since CTT will discourage
physical-market functionaries from hedging, the purpose
of the functioning of the commodity derivatives market is
also lost. In the larger interest of the economy, the
government should desist from levying CTT.
The role of the commodity futures market becomes even
more compelling with India moving towards greater trade
liberalization, particularly in the context of agriculture and
getting further exposed to the volatilities of international
trade and finance.
Rupee Volatility Has Made Trading Difficult On The
Domestic Bourses
In India, rupee has always remained a major concern for
trading in dollar-denominated asset classes. Trading in
commodities has become even more difficult due to high
volatility in the rupee. Evidently, volatility in the rupee
surged post the sub-prime crisis in the US. Compared with
an annual range of 10% during 2003 to 2007, the rupee lost
roughly 18% in 2011 and 3% in 2012.
40
42
44
46
48
50
52
54
56
58
60
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Rupees
USDINR Spot
Stable
Highly Volale
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.0016.00
18.00
2007 2008 2009 2010 2011 2012
Percentage
Rupee Volatility
Indias burgeoning current account deficit (CAD) against
the backdrop of rising imports, coupled with weakerexports, made rupees fortune increasingly dependent on
the capital account. As a consequence, the rupee became a
symbol of risk proxy, following the vagaries of global
risk-on and risk-off environment.
Looking ahead, if global uncertainties diminish and the
prospects of growth revival in the emerging markets take
centre stage, then capital flows to the developing world
may not remain as volatile as we have seen in the last few
7/29/2019 Beyond Market - Issue 78
11/48Its simplified...Beyond Market27th Feb 13
years. This development may reduce rupee volatility in the
coming times and may make life slightly easier for
commodities traders.
Source: Bloomberg, NB Research
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg, NB Research
Commodities such as oil, gold, silver and base metals are
the first ones to take a hit from the USDINR movement.The positive correlation between commodity prices of
international and domestic markets has deteriorated,
tracking the volatility of the rupee.
We can take the example of gold price movement in MCX
and COMEX in two different time zones. Earlier, in 2010
the price reaction of international and Indian gold was
positively correlated. This can be justified by looking at
the percentage gain of COMEX and MCX gold in the year
2010 on a year-on-year (y-o-y) basis, which was around
29% and 24%, respectively. It shows parallel movement in
prices in both the markets.
However, in the second half of 2011, significant rupee
depreciation narrowed the gap between COMEX and
MCX gold prices, as international gold prices were under
pressure on the back of a stronger dollar. Hence, we saw a
32% annual return in MCX gold against a mild 10% annual
gain in COMEX gold.
Further, this correlation was disturbed recently in the year
0
500
1000
1500
2000
0
10000
20000
30000
40000
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Rupees
MCX & COMEX GOLD (2010-11)
MCX Gold COMEX Gold
Dollar
Due to a stronger dollar the price of gold in
COMEX came down and the gap between
COMEX and MCX gold narrowed .
40.00
42.00
44.00
46.00
48.00
50.00
52.00
54.00
56.00
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Rupees
USDINR (Spot)
47.00
49.00
51.00
53.00
55.00
57.00
59.00
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Rupees
USDINR (Spot)
1400
1450
1500
1550
1600
1650
1700
1750
1800
1850
24000
25000
26000
27000
28000
29000
30000
31000
32000
33000
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Rupees
MCX & COMEX GOLD (2012-13)MCX Gold COMEX Gold
Dollar
Due to Rupee Volality
2012 due to sustained dollar-rupee volatility. The
continuous depreciation in the rupee resulted in a rise in
MCX gold and it gained approximately 8% in 2012-13. On
the other hand, the stronger dollar caused a decline in the
COMEX gold price; it showed a negative annual return of
6.4% in 2012-13.
There are several issues, which are important for the
commodities market. They are:
1) In March 12, FMC had banned futures trading in guar
seed and guar gum, which are exported for use in oil and
gas industry, to curb price volatility and speculation. Guar
seed and gum were of highest interest among commodities
market participants and banning the contract had negative
repercussions on agri commodity traders and hedgers and
adverse impact on volumes was very visible.
Post that the Commissioner of Food Safety sealed six
warehouses over complaints of adulteration in pepper
stocks. Since then trading interest has dropped in one of
the most vibrant contracts of pepper. Therefore, traders are
still waiting for guar seed contract to be re-launched,
which can help revive volumes on agri bourses and resolve
the quality issue, ensuring that smooth deliveries can bring
hedgers, exporters and the trading community back to the
pepper contract.
7/29/2019 Beyond Market - Issue 78
12/48
Micro analysis. Mega gains.Trading at Nirmal Bang is based on extensive research and in-depth analysis, where we
focus on the smallest of details and turn them into an advantage for you.
Over the years, the analytical approach coupled with decades of experience has
helped us maximize returns for our investors and thereby inspire condence in them.
EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^| IPOs^| INSURANCE^| DP* www.nirmalbang.com
REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010
Disclaimer: Insurance is a subject matter of solicitation. Mutu al Fund investments are subject to market risk. Please read the scheme related document carefully before invest ing. Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is n ot oering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
SMS BANG to 54646 | Contact at: 022-3926 9404 | e-mail: [email protected]
Its simplified...Beyond Market27th Feb 1312
2) Some of the listed commodity contracts are illiquid.
Exchanges should put more efforts to make illiquid
commodities more liquid as it will bring more interest from
trading community of that particular commodity. Creating
awareness camps in the mandis, training programmes and
generating more interest among physical market
participants can bring more volumes in such contracts.
3) In agriculture commodities such as spices, pulses and
cereals, more commodities can be introduced on the
exchange platform, which will give more choice to traders
and market participants. Even in case of international
commodities, more commodities can be listed on the
domestic bourses.
4) Warehousing facilities is one the major hurdles to the
growth of the commodity markets in India. For commodity
futures to work efficiently, the seller must deposit the
commodity traded in a warehouse and the buyer should
take physical delivery of the commodity in a warehouse ata location of his choice.
5) However, at present, only a few warehouses can handle
such kind of delivery requests and that too for specific
commodities. Because of lack of adequate warehousing
facilities that can ensure the quality standards of the
commodities traded, traders and farmers still prefer local
rural markets for trading the commodities. This factor is
one of the major hurdles in the emergence of a nation-wide
commodity market in India.
Spot Markets In India
The National Spot Exchange Ltd (NSEL) has been a silver
lining in terms of giving new products to the commodities
market participants. NSEL is a market place where
farmers, traders, corporates, processors and importers can
sell and buy at the best possible and competitive rates,
where it provides guarantee in respect of all trades.
It also provides services like quality certification, storage
of goods and other customized value added services. After
the success of the commodities futures market in India, the
introduction and successful operation of the electronic spot
exchange has brought investors to the commodities market
as innovative e-series has done well in the last
one-and-a-half years.
NSEL has created national level institutionalized,
electronic, transparent spot exchange to enable farmers to
sell their produce directly to end users, processors andexporters without any intermediary. Apart from agriculture
commodities, it is spreading its presence in bullions,
metals and even bulk commodities. With the amendment in
the Goods and Services Act, the size and role of the spot
exchange in our country is likely to get bigger and bigger.
Policymakers should encourage commodities market and
passing of the FCRA Bill and Goods and Services Act, and
not levying Commodities Transaction Tax is the need of
the hour to scale the commodities market to the next leveL.
7/29/2019 Beyond Market - Issue 78
13/48
7/29/2019 Beyond Market - Issue 78
14/48Its simplified...Beyond Market27th Feb 1314
recious metals gave decent returns to investors in 2012 in countries where currencies have weakened against
the US dollar. And India is no exception to this since the rupee has been under pressure since some time. In
2012, bond yields of troubled countries from the Euro zone shot up dramatically, credit spreads widened
sharply and consensus that the Euro zone may break up grew, leading to a massive spike in prices of gold.
Interestingly, except the second quarter of 2012, investment demand, especially from exchange traded funds (ETFs)
remained healthy. Owing to fear that the Euro zone may break up, massive monetary debasement by western central
bankers - especially by Federal Reserve and European Central Bank, supply concerns in South Africa, continuous buyingby central banks and improvement in demand in India during the second half of 2012, gold holdings in Gold ETFs have
been rising constantly.
In spite of all bullish triggers gold prices registered nominal gains.
The most interesting thing is that since the inception of the crisis in 2008 till 2012, investors have preferred to remain
invested in bullions due to crisis of confidence. Even when central bankers were flooding the markets with liquidity,
industrialists as well as investors preferred to remain invested in safe haven instruments such as gold and US bonds.
Investing in gold has not led to economic growth of any country in the last five years.
Central banks aim to stimulate economies. However, this will not be achieved if investors keeps buying gold and do notinvest in industrial activities, new projects as well as acts that lead to economic growth. Despite quantitative easing
program or QE3 in the US and bullish sentiments in the markets, gold prices did not shoot up. In fact, it witnessed a
gradual decline with every stronger-than-expected economic report from the US and other developed economies.
P
2,739
-108
2,632
1,723
4,355
2,017
466
2,483
1,205
382
77
4,147
207
4,355
2010
2,610
-234
2,376
1,735
4,145
1,814
410
2,223
780
623
-34
3,626
519
4,145
2,827
10
2,836
1,669
4,505
1,972
453
2,425
1,519
185
457
4,586
-81
4,505
2011
2,841
-15
2841
1,686
4,512
1,860
440
2,300
1,226
270
470
4,266
109
4,375
2012E2009Supply (in kt)
Mine Production
Net Producer Hedging
Total Mine Supply
Recycled Gold
Total Supply
Demand (In Kt)
J ewellery Fabrication
Technology
Sub-total Above Fabrication
Total Bar & Coin Demand
ETFs & Similar
Official Sector Purchases
Gold Demand
OTC I nvestment & Stock Flows
Total Demand
Gold Demand And Supply
Source: Thomson Reuters GFMS, WGC, NB Research
152
55.6
207.6
Q1'12
187.6
103
290.6
-18.98
-46.02
-28.56
% Change (yoy)Q1'11India
J ewellery (In Tonnes)
Total Bar Coin And Investments
Total
Overall Gold Demand In India In The First Quarter
Source: WGC, NB Research
Loss of Indian gold demand in the first quarter impacted the overall demand for gold.
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^Z/^^K,DEZ^Z,
'&z:
Data for 2009-10 and for 2010-11 are revised
51413.3
61412.1
78149.1
111517.4
149166
185735.2
251439.2
303696.3
288372.9
369769.12
489417.4
4170.4
3844.9
6516.9
10537.7
10830.5
14461.9
16723.6
20725.6
28640.1
33875.8
56616.53
8.1
6.3
8.3
9.4
7.3
7.8
6.7
14.65
9.9
9.2
11.56*
Percentage Share(%)Total ImportYear Gold Import
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Indian Gold Imports - US Dollars (US $ million)
Source: RBI, NB Research
Source: RBI, NB Research
4.1704
3.8449
6.5169
10.5377
10.8305
14.4619
16.7236
20.7256
28.6401
33.8758
56
477.8
507.2
599.5
661.3
765.6
872.8
1138.5
1150.2
1293.5
1603.2
1796.2
0.87
0.75
1.08
1.59
1.41
1.65
1.46
1.8
2.21
2.11
3.48
% share of GDPGold Import
US$ billion
Year GDP ($ bn)
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12*
Indias Gold Imports Percentage Share In GDP
Balance Of Payment Of I ndia With And Without Gold
Why the Indian government is continuously
discouraging gold imports?
Share of Indias gold import in the total import bill has
been increasing at an alarming rate.
The demand for gold plummeted in the first quarter of
2012 due to a host of reasons. These include nationwide
strike by jewellers against excise duty on unbranded
jewellery, double import duty and government rhetoric to
cut gold imports. This also makes us believe that any
measure by the Reserve Bank of India to curb gold imports
can lead to a sharp drop in imports of gold, which can lead
to a correction in prices of gold.
However, the demand for gold rose in the third quarter on
a year-on-year growth rate of 7% and 12% in jewellery and
investment, respectively, in spite of record high prices.
Due to low inventory of jewellers and recovery in
monsoon, Indian gold demand picked up sharply during
the third quarter of 2012. Going forward, moving into
2013, we expect overall fabrication demand in the first half
of 2013 to remain weak. We expect a 5% drop in global
fabrication demand.
In 2012, investment demand of bars and coins remained
subdued. But that of ETFs remained robust. The demand
for gold ETFs shot up to 136 tonnes in the third quarter of
2012. Investment demand is a major driver of gold prices
and has remained subdued.
Going forward, in the first half of 2013 investment demand
of gold is likely to remain strong. After a drop in demand
of physical bars, we expect it to pick up in the first half of
2013 and ETF demand is also likely to remain strong
globally. Investment demand may cool down during the
second half of the year 2013.
Central bankers continued to purchase gold in the third
quarter of 2012. Brazil, Paraguay, South Korea, Russia,
Mexico as well as Venezuela added more gold to their
reserves as diversification. We expect official sector
buying to remain strong, going forward. This trend is
likely to continue in the year 2013. However, the pace may
be quite moderate.
In 2013, due to the evidence of green shoots of recovery,
we expect investment demand to remain subdued. India
has again hiked gold import duty from 4% to 6% inJanuary 13, which may lead to some drop in imports. We
expect gold imports by India to remain under pressure and
remain below 900 tonnes during the year. Monsoon will
play a pivotal role as far as rural demand is concerned.
In January13, Finance Minister P Chidambaram said:
Demand for gold must be moderated. We may be left with
no choice but to make it more expensive to import gold.
The matter is under government consideration.
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12*
-100000
-80000
-60000
-40000
-20000
0
20000
40000
US$million
Current Account Includin Gold Imports
Current Account ExcludinGold Import
Share of gold in the total import bill has been increasing
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from 8.1% to 11.5%. Indias love for gold is costing the
government huge sums of money, which is reflecting in the
widening current account deficit. Golds share in Indias
total import bill stands at an alarming 11.5%.
It is estimated that gold imports are 3.48% of our GDP,
which is quite high. On the other hand, China has become
the top producer of gold and imports of the yellow metalhave hardly put any pressure on its balance of payment.
The RBI panel headed by KUB Rao, an adviser to RBIs
department of economic and policy research had put
forward gold-backed financial products to discourage
investments in physical gold. The new products, according
to the panel, could be in the form of gold-linked accounts,
gold accumulation plans, modified gold deposits and gold
pension products. These gold-backed financial products
will be very important and, therefore, watched by all, from
gold miners to investors.
The demand for gold from India is likely to take a hit in the
first quarter of 2013 because of import duty hikes and other
initiatives by the government to discourage gold imports,
which will determine the fate of gold imports in the
coming times. We expect investment demand to remain
subdued. However the demand for jewellery will remain
robust and any expectation of appreciation of the rupee is
likely to put downward pressure on domestic prices of the
yellow metal.
Will The Negative Interest Rate Regime Continue?
As long as real rates remain negative, we feel a crash in
gold looks difficult. But if the US economy gets stronger
based on economic reports, it will be a dampener for gold
prices. Further, if unemployment rate drops below 7.5% or
inflation moves above 2.5%, then expectation of reversal
of interest rates can be expected, which still sounds
far-fetched.
We see strong floor for gold at $1,580/ounce for the next
two quarters of 2013 due to expectation that negative real
rates regime will continue.
Source: Bloomberg, NB Research *(U.S. Interest rates- U.S. Core CPI)
Source: Bloomberg, NB Research
Gold Price V/s U.S.Real Rate*
SPDR Gold Trust Holdings
Historically, we have seen that whenever negative real rate
regime persists, gold prices remain strong. Between 1970
and 1980, gold prices shot up as during this period,
negative real rates persisted in the US economy and after
that real rates gradually started turning positive, which led
to a massive sell off in the prices of gold from 1981 to
2000. And post 2006, the negative real rates regime started,
which along with other factors, led to a major spike in the
price of gold.
The above chart is interesting to say the least as it reveals a
lot about investment demand or financial demand. Gold
ETF holdings have shown good growth. We have not seen
any exponential rise in gold holdings in 2012 like we saw
in 2008, 2009 and 2010 in spite of the sharp rise in prices
during the second half of last year.
The ongoing quantitative easing programs by developed
central bankers will continue to drive investors towards
gold ETFs. The demand for gold ETFs may remain robust
during the second quarter of 2013 as deadline for debt
ceiling in the US is on May 18, which may lead to the
revival of safe haven demand and demand for gold ETF
holdings may surge at that time. But we are of the view that
even in 2013 we may not see exponential rise in gold ETF
holdings as once stability is restored in the financial
market, there will be redemption in gold ETFs too.
OUTLOOK ON GOLD
We expect gold prices to have a strong floor at
$1,580/ounce during the first half of 2013 and during the
first half of the year we may see a gradual recovery in
prices. Weakness in dollar, uncertainties in the Euro zone
and debt ceiling talks will remain the prime reason for the
potential upside in prices of gold. During the second half of
the year, gold prices are likely to remain under pressure
once developed economies become stable. When markets
-3
-2
-1
0
1
2
3
4
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Jan-0
5
Jun-0
5
Nov-0
5
Apr-06
Sep-0
6
Feb-0
7
Jul-07
Dec-07
May-0
8
Oct-0
8
Mar-09
Aug-0
9
Jan-1
0
Jun-1
0
Nov-1
0
Apr-11
Sep-1
1
Feb-1
2
Jul-12
USD/Ozs
Go ld Pr ice Re al Rate (RHS)
Percentage
0
200
400
600
800
1000
1200
1400
1600
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
MetricTonnes
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will start pricing in rate hikes in the United States, during
the same time gold prices can enter into a major
consolidation phase and gradual distribution shall take
place. We dont remain very optimistic on the outlook of
the yellow metal.
SILVER
Source: Thomson Reuters GFMS, NB Research
Source: Bloomberg, NB Research
22.27
6
0.49
29
2
13
6.81
2
24.32
5
-1
4.11
4.78
21.26
6
0.95
28
3
15
6.72
2
27.22
1
-0.26
0.97
3.15
23.37
7
1.37
32
2
16
6.8
3
27.68
4
2
5.74
4.12
23.69
8
0.36
32.03
2
15
6.4
4
27.17
5
0
5.19
-0.75
24.3
8.5
0.3
33.1
1.85
15.4
6.5
3.5
27.25
5.85
0
5.85
1.76
2010 2011 2012e2009000 Tonnes 2008
Mine Production
Old Scrap
Official Sales
Total Supply
Photography
Industrial
J ewellery +Silverware
Coins And Medals
Total Demand
Physical Balance
Net Producer Hedging
Net Balance
ETFs
Demand And Supply Of Silver
iShares Silver Trust Holdings
The demand from this industry jumped from 30 tonnes in
2002 to an estimated 1,860 tonnes in 2011. As per data by
Thomson Reuters GFMS, silver consumption in solar
panels, which was 1,860 million ounce in 2011, dropped to
1,244 tonnes in the year 2012. According to research firm
HIS, there were less than 150 global solar module and cell
companies in 2012 as compared to over 750 in 2010.
Going forward, we may see a cyclical upswing in the solar
industry during the second half of 2013, which will lead to
a recovery in industrial demand. The industrial demand for
silver in 2013 is likely to grow by 4-5% mainly due to
strong demand of consumer products like electrical
appliances, especially from the emerging markets.
Production of silver is rising at a rapid pace due to high
prices of the precious metal. It is believed that the marginal
cost of production of silver for major miners of this metal
is between $5 and $7. And if silver trades above
$30/ounce, then miners will be encouraged to produce
more of it.
Mining is a lucrative business and silver mining too is one
of the many profitable ventures. We expect new supply of
silver to inch up during 2013. But we wont be surprised ifsilver production moves up by 2-3% in 2013.
Demand for silver took a beating after prices of this metal
fell sharply in 2011 and 2012. After hitting a high of
$37.46 in February 12, silver prices made a low of $26.11
in June 12. Investors burnt their fingers during the fall in
silver prices. Quantitative easing by the US kept hopes
alive for silver bulls as before the onset of QE3, silver
prices rallied sharply and made a high of $35.36/oz. Indian
imports of silver for the year 2012 are estimated to be
down by 20-25%.
Demand for silver from jewellery and industrial sectors
was weak in the year 2012. One of the major demand
drivers for silver has been the solar industry. A huge
demand for this precious metal was expected from the
solar industry but due to trade fight and slapping of
anti-dumping duty as well as other restrictions by the
European Union and the United States, the Chinese solar
industry faced severe downturn, resulting into a major glut
of solar panels in the country.
0
50000000
100000000
150000000
200000000
250000000
300000000
350000000
400000000
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
Ounces
Silver coins and ETFs were the top demand drivers for this
precious metal. Silver ETF holdings shot up in 2012,
Silver ETF holdings have surged approximately by 5% ascompared to 2011. We expect the demand for silver ETF
holdings to remain relatively strong in the year 2013.
We are of the view that silver ETF demand will remain
strong as monetary easing by the developed worlds central
banks from developing nations may lead to good
investment demand for silver. Until a strong economic
recovery, there is little probability of heavy redemption in
silver ETFs.
OUTLOOK ON SILVER
The silver market is in surplus and new supply is negative
from fundamentals point of view but more than
fundamentals, looking at the macro economic scenario for
the first half of 2013, we find that silver has set a strong
floor at $28.50/oz . We may see moderate bullish trend in
silver prices during the first two quarters of 2013 in spite of
bearish fundamentals. The most important key to this
upside is robust silver ETF holdings demand and recovery
in the Chinese solar PV industrY.
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M arcus Grubb joined the World Gold Councilin June08. His key role is to be the goldstrategist for the World Gold Council,responsible for the organizations view of all aspects of the
gold market and to articulate it to investors, from privatewealth to institutional and sovereign investors worldwide.
He also acts as the global spokesperson, speaking at high
profile forums and events worldwide. He is responsible for
managing partner relationships in investment, such as ETF
Securities and Bull ionVault. Marcus has worked in
investment banking and capital markets for 20 years with
experience in management, sales, trading, research and
product origination. He was the Global Head of Equities at
Rabobank and a Board member, where he built and
managed global equities and equity derivatives business.
Marcus was the founder Chief Executive of Swapstream,
the largest inter-bank exchange for interest rate swaps, sold
to the Chicago Mercantile Exchange in 2006. In the
mid-1990s, he was a top-rated Senior Investment Strategist
running a part of research at the Union Bank of Switzerland
and Salomon Brothers and began his career in Eurobond
and swap origination at JP Morgan in the 1980s. Marcus
graduated in 1983 from Oxford University with top first
class honours in Modern History & Economics.
As confidence returns to
the markets and
nvestors return to equities,
gold will become more attractiveas a store of wealth.
Marcus Grubb
Managing Director,Investment at World Gold Council
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THE WORLD GOLD COUNCIL
The World Gold Council is the market development organization for the gold industry. Working within the
investment, jewellery and technology sectors, as well as engaging in government affairs, its purpose is to
provide industry leadership, whilst stimulating and sustaining demand for gold.
The Council develops gold-backed solutions, services and markets, based on true market insight. As a
result, it creates structural shifts in demand for gold across key market sectors.
It provides insights into the international gold markets, helping people to better understand the wealth
preservation qualities of gold and its role in meeting the social and environmental needs of society.
Based in the UK, with operations in India, the Far East, Europe and the US, the World Gold Council is an
association whose 23 members comprise of the worlds leading gold mining companies, representing
approximately 60% of global corporate gold production.
In an email interview with the
Beyond Market magazine, Mr
Marcus Grubb speaks about factors
influencing gold prices, among
other important issues pertaining to
the yellow metal.
Excerpts from the interview are asunder:
Q. I n spite of massive stimulus
package by the US and J apan
why are gold pr ices not moving
up? Is this because gold pr ices
are becoming immune to the
monetary stimulus?
There are many factors that
influence gold prices and its
movements are not merelyreactionary in relation to the
introduction of monetary stimulus
by central banks.
Q. The US avoided the fiscal cliff
at the start of the year. But
raising the ceiling on public debt
and borrowing has to be reached
by the end of February.
Moreover, an agreement on
long-term budget savings has not
been sorted out and if noconsensus is reached at, then
spending cuts will automatically
come in. What will be the impact
of this on gold prices?
We anticipate that the ongoing
economic uncertainty in the US
will continue to drive strong
demand for gold in 2013.
Q. During the year 2012, when
the European debt crisis was at
its peak, why were gold prices
trending down at that time?
The Euro zone crisis peaked in
2011, in 2012 the announcement of
Outright Monetary Transactions by
the European Central Bank and the
statement by Mario Draghi that
the ECB will do anything it takes
had the effect of reducing tail risksand peripheral bond yields in the
Euro zone.
Q. What is the outlook for
Chinese & Indian gold jewellery
and investment demand for the
year 2013? How much do you
expect the demand growth to be
in 2013 from India and China?
Economic improvement in Q4
bodes well for the Chineseeconomy and potentially for gold
demand in China in 2013. The
long-term growth trend is strong
although there has been a plateau
in demand in 2012. Therefore,
indications are for a modest rise in
demand in 2013. As a result, the
World Gold Council expects a
slight increase in demand in 2013
with the figure falling in the 780 880 tonne range. Demand in 2012
was 776.1 tonnes.
Concerns over continued political
focus on the gold market as well as
concerns over the Indian economy
give rise to a somewhat cautious
outlook. The first quarter of 2013
could be weak given stock building
in the fourth quarter. However,
appetite for gold remains strong
and there are significantly moreauspicious days in 2013 than 2012.
Therefore, we expect demand to
remain on its long-term growth
trend. We expect gold demand in
India to be in the 865-965 tonnes
range for 2013, representing a 5%
growth rate on average. Demand in
2012 was 864.2 tonnes
Q. Buying of gold by central
banks remained robust duringthe year 2012. Going forward, do
you expect the same trend to
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continue ?
At 534.6 tonnes, central bank
buying in 2012 reached its highest
level since 1964 and we expect to
see ongoing strong demand from
the official sector throughout 2013.
Q. The Indian government has
raised gold duty from 4% to 6%.
How will the raised duty impact
gold imports, going forward?
The overall demand for gold in
India in 2012 was strong, despite
measures aimed at reducing gold
demand, such as increase in gold
duty from 4% to 6%. The appetite
for gold remains strong in India
and there are significantly more
auspicious days in 2013 than 2012.
Therefore, we expect demand to
remain on its long term-growth
trend in 2013.
Q. The Indian government is
working on various schemes to
discourage gold imports. Roll out
of such schemes is yet to take
place. Once rolled out, what
impact will the schemes have on
gold imports of I ndia and how
significant will it be for the
global gold market?
The centuries-old cultural affinity
that Indians have with gold means
that they will continue to invest in
gold to meet their emotional,
cultural and financial needs,
regardless of government
intervention.
Gold is a protector of assets, animportant attribute during these
times of economic uncertainty
when wealth preservation is
paramount. It also has a key role to
play in hedging against currency
risk and inflation, both prevalent
economic issues facing India
today. We believe, therefore, that
the fundamental reasons for buying
gold remain as strong as ever.
Q. What is the importance of
having gold in a portfolio in the
context of the ongoing currency
war, where major economies are
deliberately devaluating their
currencies to boost their
respective economies?
Gold has a clear role to play as a
strategic asset within an
investment portfolio in relation to
currency risk on account of its
unique foreign exchange-hedging
characteristics.
Golds main attractions in relation
to hedging forex risk are the fact
that it is negatively correlated tothe US dollar and most developed
currencies as well as being a
cheaper hedging option than the
alternatives.
In addition, gold offers significant
additional benefits in optimizing
risk-adjusted returns during
periods of extreme market stress
and heightened currency tail-risk.
Over eight periods of crisisconditions, use of gold in currency
hedging strategies in an emerging
market portfolio offered
cumulative outperformance of
2.4% above an unhedged portfolio
and over 1% above a
currency-hedged portfolio.
Q. Economic scenario of the US,
China and many other countries
is getting better. Can this lead to
a major correction in gold pricesduring the year 2013? I f not, do
you see gold entering into a
major consolidation phase after
nearly 12 years of bull run?
The investment case for gold is
strongest when considered as a
diversifying asset held within a
portfolio containing risk assets. As
confidence returns to the markets
and investors return to equities,
gold will become more attractive
as a store of wealth.
As investors seek to profit from a
potential turning point in the
economic cycle, it should be bornein mind that we are in a credit
cycle as well, supported by
unlimited QE and competitive
currency policies, which are also
positive for gold in its role as a
hedge, which investors will not be
looking to sell.
At the same time, it should be
remembered that as the economic
situation in countries improves,
consumer jewellery purchases arelikely to rise as was witnessed in
H2 in India and China where
demand rose in Q4 as the economic
challenges of the first half of the
year began to ease.
Q. What is the role and
importance of Exchange Traded
Funds (ETFs) in gold markets?
Do you expect global Gold ETF
demand to remain robust during
the year 2013?
Gold ETFs provide investors with
a viable route to gain exposure to
gold other than the purchase of
gold mining shares or physical
holdings.
In 2012, full year net inflows into
ETFs were up 51% on the previous
year to 279.0t as investors turned
to gold in the face of ongoing
economic uncertainty andexpectations of further monetary
stimulus in the US Fed.
With both the US and Japan
committed to ongoing quantitative
easing in 2013, and with the
expected launch of a gold ETF in
China, we expect investor inflows
into ETFs to continuE.
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The outlook for crude oil remains from neutral to bullish
for the first half of 2013, supported by improving oil
demand and slight recovery in the global economy
rude oil remained positive and rose almost
10% in the first half of 2012 following
positive cues from the global financial
markets. The oil market was also well
supported as exports from Iran contracted sharply due to
tighter sanctions on the nation by the US and Europe to
control the nuclear activity going on in the country.
However, in the early second half of 2012, oil prices
C
On A Stable Path
contracted by approximately 20% following higher
production numbers from the Organization of the
Petroleum Exporting Countries or OPEC (mainly from
Libya and Saudi) and non-OPEC nations (such as US,
Canada and Russia). Higher output from all major
producing nations and continuous lower demand of oil
from both emerging and non-emerging nations further kept
oil prices under pressure.
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Sources: Reuters, NB Research
88.23
86.97
Q1
86.88
86
Q2
88.88
87.07
Q3
89.24
88.19
Q4
88.31
87.06
2011
88.51
88.93
Q1
88.64
88.99
Q2
89.68
88.35
Q3
89.41
89.48
Q4
89.06
89.09
2012
89.95
90.06
2013E(mbpd)
Total World Demand
Total World Supply
World
Oil demand is expected to improve slightly in 2013 following lower growth in 2012 on account of muted economicrecovery. Demand is expected to grow by 1 mpbd or 0.9% approximately on a year-on-year (y-o-y) basis in 2013
compared to a fall of 0.4% last year. Demand is expected to grow mainly from the emerging markets (non-OECD nations)
We expect demand from developing countries to overtake demand in developed economies. OECD nations are not
expected to show any major improvement in oil demand due to structurally weak growth in their nations. Emerging
markets are still expected to perform better and oil demand to remain strong, with the use of loose policy to offset
weakness in major export markets.
However, on the supply side, the market is expected to remain well-balanced throughout 2013, keeping the
supply-demand dynamics stable. Global supply is expected to increase by 1 mbpd approximately with the help of
increased production from the Organization of the Petroleum Exporting Countries (OPEC) and Non-OPEC members. Last
year, OPEC produced around 31.34 mbpd, which is higher by 1.34 mbpd than the production quota of 30 mbpd that wasagreed in the latest meeting. Crude oil supply from non-OPEC countries is expected to increase by 2.5% in 2013. The US
and Canada would be the major drivers as output grows with extraordinary production from shale oil in the US and
increasing production from oil sands in Canada.
DEMAND: OECD NATIONS
Oil demand in Organization for Economic Cooperation and Development (OECD) nations is expected to remain weak in
2013. Major oil consumers such as the US and Europe are constantly showing a fall in demand figures. US, the top
consumer of crude oil, has witnessed a fall of 2.09% in 2012 as compared to the previous year and a further fall of 0.5%
is expected in 2013. The weak demand figure in the US is justified by a slow growth in the economy.
European oil demand declined by 2.6% on a y-o-y basis and in 2013 the demand is expected to fall by 2.09% due to the
ongoing debt crisis in the country. The total OECD demand is expected to remain weak in 2013 followed by weak demand
from major oil-consuming nations and may fall by 0.5% as compared to a fall of 1% in 2012 on a y-o-y basis.
DEMAND: NON-OECD NATIONS
In the year 2013, the demand from non-OECD nations is expected to remain strong and overtake OECD nations demand.
Non-OECDs share of energy demand has grown from 36% in 1973 to 55% in 2010 as per International Energy Agency
(IEA). Further, it is expected to climb to 64% of the global energy demand by 2035.
Source: EIA, Reuters, NB Research
US Q-o-Q Demand Growth Europe Q-o-Q Demand Growth
-3.00
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
Q2 '1 1 Q3 '1 1 Q4 '1 1 Q1 '1 2 Q2 '1 2 Q3 '1 2 Q4'1 2
Percen
tage
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12Percentage
Source: EIA, Reuters, NB Research
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Source: EIA, Reuters, NB Research
China Q-o-Q Demand Growth Other Asia Q-o-Q Demand Growth
^ZEZE
h^E'>
3.6
2.99
3.61
1.55
9.76
21.52
3.36
2.98
3.31
1.57
10.02
21.23
3.66
2.93
3.1
1.59
10.06
21.35
3.77
2.94
3.35
1.59
10.67
22.31
3.6
2.96
3.34
1.58
10.13
21.6
3.89
2.94
3.36
1.54
10.82
22.55
3.82
2.94
3.23
1.55
10.86
22.41
3.85
2.95
2.97
1.56
10.76
22.1
4.04
2.93
2.94
1.53
11.21
22.66
3.9
2.94
3.13
1.55
10.91
22.43
4.14
2.89
3.1
1.53
11.44
23.1
Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 2013E(mbpd)
Canada
Mexico
North Sea
Other OECD
US
Total OECD
OECD Nations
China remains the second largest importer of oil followed by Japan, India and Russia. China has started showing signs of
recovery since August 12. The demand from China has slowly picked up from the fourth quarter of 2011. Higher demand
is very well supported by improving refining activity in the country. Recently, China imported 5.57 mbpd of oil, up 8%
on a y-o-y basis, supported by the new refining capacity added in the last quarter of 2012. With continuously improving
refining capacity we expect the same trend to continue in 2013 as well. Overall, Asian demand is also expected to remain
strong throughout the year.
SUPPLY
-8
-6
-4
-2
0
2
4
6
8
Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12Percentage
-5
-4
-3
-2
-1
0
1
2
3
4
5
Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12Percentage
We expect supply side to remain strong in 2013 with rising exploration of shale oil and tar sands mainly in the US and
Canada, respectively.
Oil production in the US has been rising steadily since the start of 2009. The jump in domestic production is mainly due
to oil extraction from shale rocks by enhanced fracturing and horizontal drilling methods. US oil production, including
NGLs and residual fuel, rose by 7.6% to 10.91 mbpd in 2012 and is expected to climb 5% more to 11.44 mbpd in 2013.
Canadian oil-sands deposit holds the worlds third largest reserves of crude oil after Saudi Arabia and Venezuela. Last
year, the oil production stood at around 3.9 mbpd, the second highest among non-OPEC countries, which is 10.74% higher
compared to a production of 3.52 mbpd in 2011, making it the worlds fifth largest oil producer. It is expected to rise
further by 6.2% in 2013 to 4.14 mbpd.
North Sea oil production fell 22.38% in the month of September 12 as compared to December 11. We have seen a fallof 8.22% in output of the nation on a year-on-year basis. However, some upward revision is seen in the month of
December 12 production numbers, which was around 2.69 mbpd. Exploration drilling has witnessed more than 50%
downside in the last few years, the lowest level since 1960. The main factors contributing to this decline are prolonged
field shutdowns and the ongoing credit crunch in the country.
Russian oil production has shown a constant increase over the past years. Oil output stood at 10.39 mbpd in 2012, which
was 1.27% higher compared to the production of 10.26 mbpd in 2011. The constant increase in production numbers is
supported by exploration of new areas in the country. Further, the production is expected to touch 11 mbpd by the end of
the year 2013.
Source: EIA, Reuters, NB Research
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Source: Reuters, NB Research
Saudi Arabia Libya
Non-OECD supply is also expected to remain well-balanced with no major loss in supply figures. The total production is
expected to rise by 0.5% and reach the level of 6.97 mbpd by the end of 2013.
OPEC Vs NON-OPEC PRODUCTION
In 2012, OPEC pumped around 31.53 mbpd of oil compared to 29.90 mbpd in 2011. We have seen a 7.88% rise in
production numbers on a yearly basis. The rise in production numbers was supported by recovery in oil production in
Libya, reaching its pre-crisis level. Also, there has been a continuous increase in output by Saudi Arabia till November
12, OPECs largest oil producer.
On 12th Dec 12, OPEC members decided to maintain its output ceiling at 30 mbpd for the current year, which will be
about 1 mbpd lower than the actual production.
The decrease in OPEC oil supply would be offset by increase in the production of non-OPEC countries by 1-1.3 mbpd in
2013. The increase in numbers is primarily because of increased crude oil production from tight oil in the United States
and Canadian oil sands.
According to IEA, the US is expected to contribute nearly 0.89 mbpd in non-OPEC output in 2013, for a total of 54.20
mbpd. This would be the highest growth in production since the year 2010.
Source: Reuters, NB Research
4.42
13.34
12.56
35.13
65.44
4.31
13.35
12.68
34.44
64.77
4.21
13.24
13.05
35.22
65.72
4.2
13.29
12.7
35.7
65.88
4.29
13.3
12.75
35.12
65.46
4.32
13.4
12.12
36.55
66.38
4.3
13.34
12.2
36.74
66.59
4.33
13.27
12.54
36.71
66.85
4.41
13.33
12.35
36.73
66.82
4.34
13.33
12.3
36.68
66.66
4.43
13.33
12.8
36.4
66.97
Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 2013E(mbpd)
China
FSU
Other Non-OECD
Total OPEC Supply
Total Non-OECD
Non-OECD Nations
8
8.5
9
9.5
10
10.5
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
On an average, crude oil production in Saudi was around 9.8-10 mbpd in 2012 and continues to be the top producer of this
commodity in OPEC. However, its production numbers slid 4.9% to 9.025 million barrels in December12 alone asincreased output from the US and Canada, coupled with recovering shipments from Iraq, increased concerns of an over
supplied market.
The sudden cut of 4,65,000 barrels was the highest monthly drop in production numbers since November 08. We expect
other OPEC members to reduce their output, due to expectations of increased output from non-OPEC nations in 2013.
Libyan oil production currently stands at around 1.43 mbpd close to its pre-war levels. The civil war ended in October 11.
Since then the Libyan oil production is ramping up constantly, with production jumping almost 1.2 mbpd compared to
March 11.
Source: Reuters, NB Research
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Irans exports have fallen more than 55% since January 12
following tough sanctions by the US. Historically, oil
exports comprised 80% of Irans forex earnings and
provided about two-third of its budget revenue. Last year,
oil exports were around 2.4 mbpd to about 20 countries,
making it the third largest oil exporter in the world.
However, sanctions from the US and pressure on othernations by Europe to cut down their imports from Iran
resulted in a sharp contraction in export numbers. Exports
declined to 1 mbpd, the lowest level since 1998. Looking
at falling export numbers, the countrys oil output also
dropped to 2.65 mbpd in the month of December12
Oil imports from major consuming nations are likely to be
stable in 2013. We expect demand from emerging markets
to remain strong and economic conditions to improve in
the first two quarters of 2013. However, developed
markets such as the US and Europe are not expected to
show any major improvement in import numbers.
European imports are expected to remain subdued due to
the nations on-going debt crisis, which would further
dampen the demand for oil in the coming quarters of 2013.
However, US, the top consumer of oil, has reduced itsreliance on imports in recent years as domestic production
is rising from shale formations and further demand is
expected to fall as domestic oil production is believed to
compared to the output of 3.58 mbpd in the same period in 2011. The decrease in exports is costing Iran $5 billion a day,
forcing the nation to reframe its budget and cut down its expenses on account of lower revenue. It is believed that Iran will
export around 1.5 mbpd average oil in the first quarter of 2013.
Recently, Iran agreed to resume nuclear talks after a break of eight months. Nuclear negotiation between Iran and other
nations is going to take place in Kazakhstan at the end of February13, which may have a negative impact on oil prices.
Earlier, Iran and six other powers, in June, had failed to reach an agreement over ending the nuclear programme.
Source: Reuters, NB Research
Source: Reuters, NB Research
IMPORTS: CRUDE OIL
IRAN OIL PRODUCTION AND EXPORTS
2.50
2.70
2.90
3.10
3.30
3.50
3.70
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
Jan-1
2
Feb
-12
Mar-1
2
Apr-1
2
May-1
2
Jun-1
2
Jul-12
Aug-1
2
Sep-1
2
Oct-12
Nov-1
2
Dec-1
2
mbpd
Exports Producon (RHS)
mbpd
0.00
4.00
8.00
12.00
2005
2006
2007
2008
2009
2010
2011
2012
mbpd
China US Germany South Korea Japan
remain robust. China, the second major consuming nation, is showing signs of recovery in demand after lowering demand
to 4 mpbd in October 10. Recently, China imported 5.57 mbpd of crude in December 12 which is 8% higher from a year
earlier. Higher import numbers were supported by new refining capacity coming up in the last quarter of 2012.
Oil imports by China eased in the second and third quarter of 2012 as overall growth and manufacturing activity in the
economy slowed. However, imports picked up in the last quarter as demand recovered and more refining units went into
operation. Chinas imports are expected to pick up further in 2013 by almost 7.3% as countrys refinery runs is also
expected to increase by 4% due to the addition of new refining capacity in 2013. In Japan, imports of oil are also expected
to remain strong in the first two quarters of 2013, following seasonal demand and overall recovery in the economy. Japanimported 3.71 mbpd of oil in the month of December 12, which was well above the average of 2011.
OUTLOOK
Combined efforts from all the major central bankers such as US, China, J apan and ECB have resulted in stable economic
conditions. Demand from Non-OECD nations is expected to pick-up further in the first half of 2013 especially from China
followed by Japan and India. We expect oil prices to remain stable in the coming quarter. Our view remains from neutral
to bullish for the first half of 2013, supported by improving oil demand and slight recovery in the global economy. We
expect oil prices to remain in the range of $93 - $97/barrel in the near terM.
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atural gas prices have remained under pressure and corrected almost 23% in the first quarter of 2012. Lower
demand, unfavourable weather conditions across the US and heavy surplus available in the market depressed
gas prices further. The heating demand fell sharply as temperatures remained above normal in major
consuming nations in the US.NInventories rose by 12.3% compared to the five year
average and stood at 3.29 tcf near an all-time high in the
month of December 12. The main reason behind theheavy surplus of natural gas is the boom in the production
of shale oil and gas in the US.
The introduction of new techniques such as horizontal
drilling and hydraulic fracturing have caused a rapid rise in
production numbers of shale oil and gas in the US.
Natural gas prices touched the bottom of $1.90/mmbtu on
20th Apr 12 due to rapid shale gas production in the
country and currently stand at around $3.30/mmbtu.
Source: EIA, Bloomberg, NB Research
26.17
14.77
20.03
16.74
63.79
11.04
6.53
17.11
Q1
7.59
5.89
17.59
19.71
65.96
8.95
4.79
10.42
Q2
3.74
4.42
17.14
27.6
66.3
8.96
5.14
-9.67
Q3
14.61
9.73
18.92
18.81
68.74
8.94
4.91
-0.51
Q4
13.03
8.7
18.42
20.72
66.2
9.47
5.34
-0.87
2011
20.69
12.12
19.72
21.69
68.85
8.97
4.55
10.72
Q1
6.3
5.43
17.82
26.61
68.9
8.36
4.17
-7.16
Q2
3.65
4.39
17.85
31.55
69.07
8.84
4.57
-6.33
Q3
16.74
10.49
19.13
20.72
70.04
8.83
4.24
4.11
Q4
11.85
8.11
18.63
25.14
69.22
8.75
4.38
0.33
2012
13.26
8.93
18.75
22.53
69.59
11.04
4.5
-0.1
2013E(bcf/d)
Demand
Residential
Commercial
Industrial
Electrical
Supply
Total Marketed Production
Gross Imports
Net Imports
Net Inventory Withdrawals
Demand and Supply Scenario - US
Source: Bloomberg
Henry Hub Natural Gas Price
As per Energy Intelligence Administration (EIA), the global demand for natural gas rose 4.5% in the year 2012, driven by
higher consumption by the United States of America, the top consumer of the commodity and strong demand growth in
Asia. The overall demand for natural gas in the US (residential, commercial, industrial and electrical demand) rose by
almost 5% in the year 2012.
However, the US consumption growth is expected to slow down in the year 2013 as well as 2014. Demand is expected to
show a negative growth of around 0.4% in the year 2013 on a year-on-year (y-o-y) basis.
The global natural gas output is rising continuously on the back of robust growth in production in the Middle East, the US
and Russia. It rose by 3.9% in 2012 and is expected to further grow with an annual rate of around 3.3%. Out of all nations,the US remains the top contributor in the overall production of gas. The total marketed production of natural gas stood at
69.33 tcf, which is 4.5% higher compared to a year ago.
It is expected that the ongoing exploration of shale gas and tight gas in the nation will further push production numbers
higher and reach the level of 69.59 tcf in 2013, 0.5% higher compared to the year 2012.
Higher domestic production of natural gas helped the US to reduce its reliance on imports which is justified by the
continuous downside in the import numbers since the year 2010. Imports fell by almost 18% in 2012 as compared to the
year 2011.
2
2.5
3
3.5
4
4.5
5
5.5
6
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
$/mmbtu
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Source: Bloomberg, NB Research
Source: EIA, NB Research
US PRODUCTION
Total Natural Gas Production Dry Gas Production
Natural Gas Coal
The production of US natural gas and dry gas has been rising constantly since the year 2000. Gas produced from shale
formations contributed to the current heavy surplus of natural gas in the US. Between the year 2000 and 2006, gas
produced in the US from shale formations grew by an average of 17% per year. Further, production rose by 48% per year
from 2006 to 2010. It is expected that shale and tight gas would account for 70% of the overall production of natural gasin the US by the year 2035.
Continuous increase in domestic production of natural gas will force the nation to cut gas imports further. EIA expects US
imports of gas to shrink to 1% by 2035, which roughly stands at around 12% at present.
COAL AND NATURAL GAS DEMAND FOR POWER GENERATION
55.00
57.00
59.00
61.00
63.0065.00
67.00
69.00
71.00
73.00
75.00
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
2013(E)
Bcf
1550
1650
1750
1850
1950
2050
2150
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Bcf
0
20000
40000
60000
80000
100000
120000
140000
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sep
Oct
Nov
Dec
000megawaho
urs
Max 2011 2012
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sep
Oct
Nov
Dec
000megawah
ours
Max 2011 2012
The above charts show the demand shift trend from coal to natural gas in 2012. Demand for natural gas and coal for
generation of electric power keeps shifting depending on the seasonal pattern. Natural gas prices were trading at a 10-year
low in April 12 when it was delivered to power plants.
Due to warmer weather conditions, the demand for natural gas remained low in the first half of 2012. The prices fell to the
level of $1.9/mmbtu, which was the lowest level since 2003 as the total heating demand reduced. Lower gas prices
encouraged users to prefer gas over coal, which is considered as the second largest source for generation of electricity.
According to EIA, despite seasonally low loads, natural gas-fired generation grew markedly and accounted for 30% of
overall net generation by March 12.
Coal generation decreased to the lows of five year average from April 11 to April 12, while natural gas generation
increased and reached a high of a five-year average. In April 12, coals share of total generation was 34% compared to
natural gas at 30%.
Source: EIA, NB Research
Source: Bloomberg, NB Research
7/29/2019 Beyond Market - Issue 78
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Its simplified...Beyond Market27th Feb 13
Source: EIA, NB Research Source: EIA, NB Research
Inventories Rigs
Natural gas inventories are at 12.3% above the five-year average and it currently stands at around 3 trillion cubic feet. The
heavy build-up of stocks is mainly due to the continuous rapid production and unfavourable weather conditions in the
United States since the start of 2012. Warmer than normal temperature in major consuming regions in the US have
lowered the demand for gas. Other than temperature, rising domestic production of shale gas has resulted in this elevated
level of stocks.
The decrease in the gas rig count is a clear indication of heavy surplus available in the market. However, on the other hand
the count of horizontal and vertical rig count is increasing constantly as the domestic production of shale oil and gas is at
its peak.
Looking at the high inventory build-up in the market we expect shale oil and gas production to slowdown in 2013. We
expect a draw down in the inventories of gas by the end of the first quarter of 2013 on account of lower domestic
production and a mild recovery in demand. However, in the latter half of the year 2013 we may see a build-up in stocks
on account of low seasonal demand.
OUTLOOK
Unfavourable weather conditions, followed by lower heating demand in the nation is expected to continue in the secondquarter of 2013. Continuous increase in domestic production of shale oil and gas in the US has resulted in oversupplied
market conditions and we expect a build-up in stocks of natural gas in the latter half of 2013. Considering the factors
discussed here, we expect natural gas prices to remain depressed and to trade in a tight range o