Union Budget 2010-2011 - Engine for growth

(Non-agricultural)

The Union Budget 2010-11 has mainly focused on broad-based growth for the country and priority has been given to food security. The budget has incorporated measures covering the investment scenario, fiscal consolidation and infrastructure. Initiatives have been introduced for sustained and inclusive growth. The main focus of the Finance Ministry is now to revert to the high GDP growth, remove weakness at different levels of governance, improve public delivery mechanism and ensure better management of supply-demand imbalance.

Import duty on Silver has been raised from Rs1,000/kg to Rs1,500/kg and this move could affect the demand pattern of the white metal. Precious metal prices have risen sharply in the last year and this has affected demand for these commodities in India. If cost pressures on the commodity continue to rise then demand could be affected further.

Customs duty on Gold and Platinum has also been raised from Rs200 per 10 grams to Rs300 per 10 grams. This rise in customs duty is negative for the gems and jewelry sector in India. The move will make gold and platinum costlier commodities, thereby hurting demand and imports will come down. But one aspect for gold demand from the Indian perspective is that demand for jewelry can never die out as gold has a traditional value attached in India. The country has held its position as the world's largest gold consuming nation in 2009 as consumer demand boosted in the fourth-quarter.

Basic customs duty on Gold Ore and Concentrates reduced from 2% ad valorem to a specific duty of Rs140 per 10 grams of gold content with full exemption from special additional duty. Further, excise duty on refined gold made from such ore or concentrate reduced from 8% to a specific duty of Rs280 per 10 grams. This move will help to boost domestic gold refining capacity in India.

Petrol and diesel prices will now be levied with excise duty of Re 1/litre. This will lead to inflationary pressures as currently oil prices are as it is hovering around $80/bbl and further addition of this excise duty will lead to a rise in prices. India's current inflation condition is also on priority but this move of rise in excise duty of petrol and diesel may add to the inflationary pressures. This move by the Finance Minister has raised the opposition party who has termed this as an inflationary budget.

But the budget has overall tried to incorporate measures for each sector. This gives the country scope for further improvement in GDP growth. Special emphasis is placed on infrastructure growth which could help to boost demand for steel. The budget provides Rs173,552cr for infrastructure and this accounts for more than 46% of the total plan allocation. Though no specific mention has been made with regard to Steel, growth in infrastructure will obviously translate into growth for the steel sector as well. The Finance Ministry has also decided to formally give a symbol to the Indian Rupee. This will help to give a stand to India's currency especially as India has now ventured into currency futures.

For the metals sector as well, the budget could prove beneficial as 46% has been allocated for the infrastructure space. This could lead to demand for steel and other metals. But the rise in excise duty for petrol and diesel could lead to inflationary pressures. Markets may perceive this as negative but we have to understand that petrol prices in India are mainly rising because of the sharp rise in international oil prices which are above $80/bbl. This rise in excise duty may not be the only contributing factor to the rise in inflation. Hence, we welcome the move by the Finance Ministry and call this a well-balanced and healthy budget for the Indian economy.

Commodity Market Update---February 22, 2010

Chana
Market Commentary
Chana futures witnessed a very volatile session last year with Chana March contract correcting by almost 700 rupees after touching high of Rs.2944/quintal in the month of November 2009 to currently trade around Rs.2170 levels. Initially lower production & higher prices in the other pulses such as Tur led a surge in prices. However, prices were capped on the higher side due to steps taken by the government to curtail rising prices such as stock limits imposed in Gujarat, Maharashtra, Rajasthan and Andhra Pradesh and good carry overstocks led prices to witness sharp fall. Prices after making a high are constantly falling due to expectation of higher production in overall pulses segment.
High prices encouraged farmers to go for improved plantings. Plantings in pulses specifically Chana was boosted by the post monsoon rains in the month of November 2009. Area under Rabi pulses according to the Agriculture Ministry improved, the main contributor being Chana. The increased acreage is prominently visible in chana sowing, which improved to 8.76 million hectares as compared with 8.3 million hectares in the same period previous year. According to the second advance estimates released on Friday (12th Feb, 2010), Production of Rabi pulses this year is expected at 10.53 million tonnes – the first time it has crossed the 10 million tonnes mark. This is mainly on account of gram (Chana) output touching an unprecedented 7.46 million tonnes against 7.05 million tonnes last year.

Outlook

Initially in the short term (till mid of March) prices are expected to correct due to second advance estimate figures given by agriculture minister. However, the output of other Pulses is estimated to remain unchanged and thus prices of these Pulses like Tur, Urad and Moong which had declined in the last few weeks is not expected to fall much. Thus, tracking other Pulses, we do not expect much downside in the Chana prices till March. Further, demand ahead of marriage and festival season may provide support to the prices. In the long term (April onwards),Chana prices are likely to trade with bearish sentiments once prices consistently trade below Rs.2000 levels as fresh arrivals from Rajasthan and MP coupled with estimates of higher production may pressurize the prices.

Commodity prices slump on Dollar strength

Prices of international commodities slumped sharply in the last week as strength in the US dollar put pressure on prices. A stronger dollar makes dollar-denominated commodities look expensive and unattractive for holders of other currencies. Along with the stronger dollar, debt woes in the Eurozone raised concern over the strength and pace of the global economic recovery. Economic data from the US in the first-half of the week was disappointing and led to risk aversion in the financial markets. Lower risk appetite for higher-yielding and riskier investment assets led to selling pressure in commodities. The first week of February has been one of almost constant risk aversion sales, which has wiped out the start to 2010. Sentiment has been soured on worries that China may tighten its monetary policy, the US may crack down on elements of bank trading and sovereign debt worries in the Eurozone.

The concerns about sovereign debt contagion in the Eurozone - Greece, Portugal, Ireland and Spain have unsettled markets, and raised the possibility of a double dip in the economy. This weekend's G7 meeting will be critical next week for the markets as it depends on the developments and measures. Also, activity from the world's biggest consumer of metals may tail off next week on account of Chinese New Year which begins on 14^th February. This is a period when base metal prices typically weaken. If risk aversion continues to set its tone in the financial markets in the next week then international commodity prices could face further downside pressure.

Economic Update

The US Dollar strengthened almost 1% in the last week as investors shunned riskier assets. Economic data from the US indicated that nonfarm payroll employment in January fell 20,000 following a revised 150,000 drop in December. The unemployment rate declined to 9.7% from 10% in December. Though the unemployment rate in the US showed a decline, financial markets could continue to remain risk averse on increased concern about rising government deficits in southern Europe and poor economic data from the US. Doubts over Greece's ability to pay its debts extended to Spain, Portugal and eastern European countries will also continue to remain bearish. In the coming week too, financial markets will continue to remain concerned over the strength and pace of the global economic recovery.

Base Metals

The base metals complex was hit hard by another wave of widespread risk aversion liquidation and selling across the financial spectrum. This resulted in new across the board multi-month lows in the base metals complex. Base metals reverted to the downside after a tentative upside attempt on positive inventory data was more than negated by renewed dollar strength, putting prices, particularly copper, back on course to retest multi-month lows. Copper, the leader of the base metals pack declined almost 7% as strength in the dollar coupled with concerns over economic recovery pushed prices lower. The red metal touched a low of $6225 in the last week despite steady inventories on the LME. Tin prices lost the most as they slumped 11.5% in the LME last week. Inventories of tin on the LME gained 1.7% and this acted as an additional bearish factor other than strength in the dollar and selling pressure across the board.

Bullion

Spot Gold prices lost 1.4% in the last week as strength in the dollar made the yellow metal look unattractive for holders of other currencies. Gold prices take cues from the movement in the dollar. Also, risk aversion in the markets led to a sell-off in commodities across the board. Spot Gold prices have slipped below the crucial $1100/oz mark and touched a low of $1043/oz in the last week. Spot Silver prices on the other hand declined a whopping 6.5% in the last week. Silver prices declined more than gold as the metal not only takes cues from gold and the dollar but also from the base metals as silver is used for industrial purposes. Hence, the white metal slipped sharply in the last week touching a low of $14.63/oz.

Energy

Crude oil prices declined more than 1% in the last week and touched a low of $69.50/bbl as a stronger dollar exerted pressure on prices. Markets remain concerned over the demand situation of crude oil due to global economic progress. Oil prices could continue to face downside pressure as poor fundamentals coupled with concern over global economic recovery could add pressure on the downside. If worries over debt situation in the Eurozone continue to dominate financial markets then demand for riskier investment assets could decrease, leading to downside pressure on crude oil prices.

Fundamental Outlook

The US dollar could continue to trade with a positive bias as risk aversion in the financial markets could lead to increased demand for the low-yielding dollar. Concerns over the economic front could lead to selling pressure in higher-yielding and riskier investment assets. Economic instability has led to concerns over demand for commodities. A stronger dollar could continue to exert pressure on prices of Gold, Base Metals and Crude Oil. Demand concerns in the case of crude oil could be bearish. In the case of base metals, the absence of Chinese players during the New Year period could lead to downside pressure on prices.

Commodity Update: January 30, 2010

Soybean
Market Commentary:
Soybean (NCDEX February contract) futures fell more than 5% in the last week as compared to previous week and it breached 13 weeks low because of weak overseas market and poor export demand of domestic soy meal. The contract recorded weekly high and low of Rs 2193 to 2065 a quintal respectively. As per the Solvent Extractors' Association, India's oil-meal exports in the first nine months of the fiscal year (April-December) declined to 22.86 lakh tonnes from 40.70 lakh tonnes a year earlier (down by 44%). Indian solvent extractors/millers say since oil and meal do not command good prices in the physical market and processing soybean is economically unviable due to negative crush margins. Soy meal prices are currently quoting at Rs 18,000 a tonne against Rs 18,800 during the October-December period. There has been a $40/tonne drop in prices from the peak levels, we witnessed earlier. Stock of soybean is 22844 metric tonnes at NCDEX accredited warehouses as on January 25, 2010. India imported edible oils during the first 2 months of oil marketing year (Nov-Dec 2009) was 14.75 lakh tonnes as compared to 12.38 lakh tones last year during the same period, which is up by 19%. Higher production estimates of South America also added to bearish market sentiments.

International Market:

Talk of further increases in the Brazilian soybean crop also helped to dampen buying enthusiasm. According to traders, Brazil's production figure may hit 67 million tonnes. The USDA had raised its estimate to 65 million tonnes in January from 63 million in December. USDA projected 2009 U.S. soybean production at 3.361 billion bushels. The average yield per acre is estimated at a record high of 44.0 bushels/acre from 43.3 bushels/acre. The USDA's weekly export sales were in line with trade expectations in soybeans and meal. Net sales for soybeans came in at 673,500 tonnes for the current marketing year and 183,600 for next year for 857,100 tonnes. As of January 21, cumulative soybean sales stand at 92.4% of the USDA forecast for 2009/2010 versus a 5-year average of 72.4%. Sales need to average just 90,000 tonnes each week to reach the USDA forecast. Net meal sales were 254,100 tonnes for the current marketing year and 14,100 for next year for 268,200 tonnes. The Indonesian Government has kept the tax on crude palm oil export at 3 per cent for February, as the international CPO is stable at US $ 795.84/tonnes.
Outlook:
In the coming week, prices are expected to trade lower on account of poor export demand of domestic soy meal and higher global oilseeds production estimates for this year as compared to last year. NCDEX February Contract shall find strong support at 2025/1980 levels and resistance at 2155/2240 levels.
Technical Indicators:
Prices closed below its 10 Day EMA (2144.80) and 20 Day EMA (2201). Daily MACD-Histogram is in negative territory and 14-Day RSI is at 16.79, which is in oversold zone.

Commodity Update: 23rd January 2010

Fundamental Outlook
The base metals complex will continue to take cues from the movement in the dollar, economic data and risk sentiment in the financial markets. Though Chinese data has come on the positive side concerns over lower lending in the world's biggest base metal consumer may lead to downside pressure. If the dollar continues to retain strength on the back of risk aversion then base metal prices could witness downside pressure. But sharp losses in the case of Nickel could be capped on the back of supply-related issues.
Copper managed to end in the green last week despite a rise in inventories
Base metal prices ended last week in the negative territory as concerns over the strength of the global economic recovery coupled with monetary policy tightening in China put pressure on prices. The only exception was Copper as the red metal reversed losses by the end of the week as fund buying came in as a support to prices. Base metal prices faced downside pressure in the last week as a stronger US Dollar also exerted pressure on prices. Though China released upbeat economic data financial markets witnessed risk aversion that reduced demand for higher-yielding and riskier investment assets. Economic data from China indicated that the country's GDP growth for the year 2009 was higher than expectations, reaching 8.7%. China's fourth-quarter GDP for 2009 increased 10.7% and the country's industrial output grew 11% for 2009. Though this data is positive, base metal prices may feel pressure on the downside as this sharp growth in GDP could demand further stringent monetary policy tightening by the Chinese government. This could be a bearish factor for base metals as China is the driver for base metals demand and curb in credit could affect demand for the commodities.
Stronger US Dollar puts pressure on prices
The dollar gained 1.4% in the last week and put pressure on dollar-denominated commodities. A stronger dollar makes base metals look unattractive for holders of other currencies. The dollar is gaining strength as risk aversion in the financial markets coupled with poor investor sentiment has led to higher demand for the low-yielding dollar. Overall commodity prices also declined on concern that China will raise interest rates and banking curbs proposed by US President Barack Obama may dent the US economic recovery. If worries over the global economic strength continue to linger then the dollar could strengthen further and add downside pressure on dollar-denominated commodities. Markets still remain concerned that the economic recovery may have been backed by the stimulus support measures by global policymakers and the impact may not be visible in the immediate future. These concerns in the financial markets may reduce risk appetite of investors and lead to selling pressure in higher-yielding and riskier investment assets.
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