Gold's fate linked to dollar movement - The Hindu

Courtsey: G.Chandrasekhar, The Hindu

Mumbai, Dec 21 Even 2008 draws to a close, it is becoming increasingly clear that all commodities market participants - traders, investors and others – will remember the year for the extraordinary price performance, gyrations and volatility.

Commodity prices - be they of energy, metals or agriculture - not only hit multi-year record highs at one time, but they also plunged to great depths in a matter of weeks, if not days, precipitating a crisis.

Quite contrary to the first two quarters, in the last quarter, producers, consumers, traders and investors faced daunting challenges in the wake of sharply declining demand, rising inventory and collapsing prices.

Speculators exited the market in a hurry, removing a considerable amount of speculative froth that had developed in many commodities during the bull-run.

What started as global slowdown degenerated into a recession, at least in industrial economies such as the US and the Eurozone. Financial and economic conditions have turned grim. Currency fluctuations, especially that of the dollar, impacted market prices.

There is a widespread expectation that notwithstanding continuing recessionary conditions, commodity prices may largely be bottoming out. From the current levels, further downside risk to prices - crude, base metals, agriculture - seems to be limited. The crisis of confidence continues and may stay for some time.

However, when the process of economic recovery begins, hopefully in the third quarter of 2009 as a result of a series of bailout and stimulus packages, investor confidence may return to the market. Until then of course one must reckon with volatility.

There is also the strong possibility that sizeable output cuts that have been made in crude, steel, copper, aluminium and others will store problems for the future and begin to create a supply bottleneck when demand returns.

However, for the time being cash is still king and poor demand outlook remains the top of market concerns.

Gold
With the dollar rapidly weakening against the euro last week, gold prices got a boost and decisively moved above $800 an ounce. Physical demand at lower levels amid less volatile conditions generated support.

On Friday, in the London spot market gold PM Fix was at $835.75/oz, down from the previous days $855.25/oz. Silver declined too to $10.61/oz (AM Fix) from $11.29/oz the previous days.

Going forward, the yellow metal will be clearly influenced by the strength or weakness of the greenback. If the dollar should weaken further, it should provide a strong base for the metal to move higher. However, foreign exchange experts are of the opinion that currency movements in the next few weeks may cushion gold’s upside.

Interestingly, as the prices ruled above $800/oz, many investors exited their long positions on the Comex. No wonder, net fund length is near the lows of June 2007.

According to technical analysts, gold’s uptrend is erratic. It may be tough for the metal to breach $880 levels. The market is holding above short-term support of $829.

Below $829 would warn of a deeper pullback towards $782, though even in this scenario the choppy uptrend from October lows is likely to remain dominant force. The medium term view is largely neutral within $700-930.

Base metals
After sliding to fresh lows, base metals prices rallied on news that the US government will give an emergency loan of $17 billion to the US car manufacturers. Other wise, it was terrible week for base metals, with the exception of aluminium and zinc which ended the week higher. Lead prices fell by over 16 per cent week-on-week and tin fell by over 10 per cent.

Outlook for the base metals complex over 2-3 quarters into next year is grim with recessionary conditions and lack of demand growth the main theme. Construction sector and automobile sector, two important metals consuming sectors are facing serious downturn in demand. Inventories are rising. Many producers have responded quickly with output cuts.

Copper is the metal with the largest downside potential from current levels. Copper prices are is still above production costs and miners are still making money. So, there could be further cost-related cutbacks, experts assert.

On the other hand, aluminium, nickel and zinc prices have all fallen very close to weighted average production costs, experts point out, adding copper could dip near to this level at $2,100 a tonne.

Notwithstanding short-term weakness, the longer term outlook for base metals appears positive. This is because not only is output being cut, new investments are being put on hold. This will squeeze supplies when demand returns to the market. There will be supply constraints with concomitant impact on market prices.

Crude
Despite announcement of OPEC production cut and drastic decisions in the US monetary policy, crude prices dipped below the psychological $40 a barrel. Demand side concerns have been top of the markets mind. There are as yet no signs of demand revival. The financial crisis and growth concerns may continue for longer time than imagined earlier.

Experts, however, believe, from the current levels, the downside risk to crude prices is limited. Indeed, they are talking about the possibility of over-tightening of the market in the medium term. The supply performance of non-OPEC sources is being closely watched.

Oil @ 30 BBL by March 2009 - Goldman Sachs!!

The continued deterioration in global oil demand has compelled us to again lower our oil price outlook for 2009 to an average of $45/bbl from $75/bbl previously, though we see a growing number of signs that oil markets have entered the bottoming phase of the cycle.

Despite our lowered oil price deck, this is not a call that we are incrementally more bearish on Energy equities. Our global energy team is, however, continuing to stick to a defensive posture within the Energy sector in terms of our top picks, though we have gained comfort in recommending select higher-beta stocks that we might call “offensive defensive” ideas (primarily hedged E&Ps with transformational growth opportunities).

We think a move back to high-beta names that would benefit from a future rally in oil prices is still several months away, pending greater confidence that demand is no longer deteriorating and supply is on-track to decline sharply. The latter we think requires a longer period of oil around $40/bbl (or lower) than we have currently seen; demand globally also shows no signs of improving.

We think that the sharp and sudden collapse in global oil demand exceeds OPEC’s ability to, on its own, balance markets, and necessitates sharply lower non-OPEC crude oil supply.

Unlike OPEC, we believe non-OPEC producers will reduce production and sharply cut capital spending only if cash flow is sufficiently weak, which we believe is the case at oil prices in the $40-$50/bbl range.

However, because there is a lag between capital spending cuts and evidence of lower production—and demand is incredibly weak right now—oil prices may need to fall further to levels that stimulate non-OPEC producers to accelerate activity declines and possibly even shut in production, which we think will occur at oil prices around $30/bbl.

While global oil demand is very weak and the duration of demand weakness is unclear at this time, we believe oil supply will collapse if prices remain below $40/bbl for an extended period of time (6-12 months or longer) suggesting we are likely to have entered the bottoming phase of the cycle.

• Oil prices are now meaningfully below the $60/bbl level at which the average company earns a cost-of-capital return on longterm investments based on current costs; capital spending reductions have begun.

Oil prices have traded near the $40/bbl level below which we think short-cycle activity will be sharply curtailed, which should accelerate near-term declines in supply.

• Industry returns on capital are near historic trough levels at a $45/bbl WTI oil price.

• The WTI forward curve is in “super contango” that historically has coincided with the weakest portion of the cycle.

What is not clear yet is how long the bottoming phase will last. Global economic conditions are the weakest the world has seen since at least the early 1980s and global oil demand is declining at an accelerating rate. In our view, the duration and depth of the downturn will be decided by the interplay of global oil demand weakness and non-OPEC supply declines.

Global oil demand has weakened to the point that OPEC cuts alone are unlikely to return the market to balance, with greater declines in non- OPEC supply now required.

In terms of gaining confidence that a bottom is at hand and a recovery possible, we would need to see the following:

• Demand: A deceleration in the rate of global oil demand declines is critical (no signs yet).

• Non-OPEC supply: A sharp reduction in short- and long-term capital projects is required (early signs emerging).

• OPEC supply: It will be important for OPEC to announce additional cuts at its December 17, 2008 meeting in Oran, Algeria in order to gain confidence that OPEC’s “Big 3” of Saudi Arabia, Kuwait, and UAE are on-track to reduce production by the 2 mn bbls per day.

Gold as an Investment alternative!!

Gold has got lot of emotional value than monetary value in India. India is the largest consumer of gold in the world. In western countries, you can find most of their gold in their central banks. But in India, we use gold mainly as jewels. If you look at gold in a business sense, you will understand that gold is one of the all time best investment tool. My dear readers, today I would like to discuss on investments in gold and its potential.

I don،¦t think that I need to give you the definition of gold, because everyone is familiar with gold and in India almost everyone use gold in their daily life. Gold is one of the safest and low risk investment tools in the world and obviously in India also. Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most other investments, including stocks of the world،¦s largest corporations. Gold proved to be the most effective means of raising cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls or other needs.

Recent independent studies have revealed that traditional diversifiers often fall during times of market stress or instability. On these occasions, most asset classes (including traditional diversifiers such as bonds and alternative assets) all move together in the same direction. There is no ،§cushioning،¨ effect of a diversified portfolio ،X leaving investors disappointed. However, a small allocation of gold has been proven to significantly improve the consistency of portfolio performance, during both stable and unstable financial periods. Greater consistency of performance leads to a desirable outcome ،X an investor whose expectations are met.

Indian Gold Market Current Scenario:
Size of the Gold Economy: more than Rs. 30,000 crores
Number of gold jewelry manufacturing units: 1,00,000
Number of people employed: 5,00,000
Gems & Jewellery constitute 25% of India،¦s exports about 10% of our import bill constitute gold import.
Number of banks allowed importing gold: 15 (While recently this has been liberalized, detailed notification is awaited)
Official estimates of the stock of gold in India: 9,000 tons
Unofficial estimates of the stock of gold in India: 12,000 ،V 14,000 tons
Gold held by the Reserve Bank of India: 358 tons
Gold production in India: 2 tons per annum.

Demand for gold in the Indian Market:
India has the highest demand for gold in the world and more than 90% of this gold is acquired in the form of jewellery. Following are the factors influencing the demand for gold.

„« The movement of gold prices is one of the important variables determining demand for gold.
„« The increase in the irrigation, technological change in agriculture (through mechanization and high yielding varieties), have generated large marketable surplus and a highly skewed rural income distribution is another factors contributing to additional demand for gold.
„« Black money originating in the services sector, like real estate and public sector, has contributed to gold as store of value. Hence income generated in these service sectors can be treated as a determining variable
„« Since bank deposits, unit trust of India, Mutual funds, small savings, etc are alternative avenues for investing savings, the weighted return on these alternative assets can be considered as another influencing factors.
„« Demand for gold also depends upon prices of other commodities. When there is an increase in general price level, it has two effects: first it reduces the purchasing power available for acquisition of jewellery and secondly, it reduces the real return on gold. It has depressing effect on the component of demand in both ways.

Inflation redistributes incomes in favour of non-wage income earners, leading to more skewed income distribution. With incremental income of non-wage earners, the demand for gold as a store of value can be expected to rise.

Supply of Gold
The main economic effects that arise from the changes in the supply of gold can be seen against the quantum of gold that is already in existence in the economy. The supply of gold is not up to the requirements as the production of gold is also coming down and demand for gold is going up very sharply.

Gold as an Investment Option:
Gold as an investment tool always gives good returns, flexibility, safety and liquidity to the investors. Therefore as a financial consultant my advice to you all is, kindly allocate a portion of your portfolio for gold investments. Practice the habit of buying at least one gram of gold every month.

Removal of Subvention for Sugar Industry!!

Under Mulayam Singh's tenure a new Sugar expansion package was announced by the State Government, which was availaed of by Bajaj Hindustan, Balrampur, Dhampur, Oudh and Upper Ganges. No one thought about the supply of Sugarcane, so even as global Sugar prices rise why is the industry crying now? I think they will cry much more in 2009, when there will be no cane to crush.

Sugar exporters have expressed their dissension over the Finance Minister, Mr P. Chidambaram's suggestion to discontinue the subvention (grant of money) given to sugar exports before its deadline of September 30.

Speaking to reporters on the sidelines of a function to inaugurate currency futures at the National Stock Exchange, Mr Chidambaram said: "In my view, the subvention given for sugar exports must now come to an end. Much sugar has been exported now. I have spoken to the Ministry of Agriculture regarding this."

Of the export target of 45 lakh tonnes till end-September, sugar companies have exported 43.7 lakh tonnes till date. Last year, 18 lakh tonnes were exported.

Mr Naik Navre, Managing Director, Federation of Cooperative Sugar Industry in Maharashtra, said the move, if implemented, will be highly detrimental for the industry. "It will lead to exporters defaulting on their commitments and earn a bad name for the country," he added.

The Government announced a subvention of Rs 1,350 a tonne on sugar exports last year on the back of a bumper production. Last few months sugar prices have been rising in the domestic markets raising Government's concern.

"The removal of subvention will not have any impact on the domestic prices as they are driven by other factors," said an exporters

Overseas scenario

Expectation of lower sugarcane output in India and Brazil next year has pushed up global prices by over 17 per cent in last three months. In fact, sugar was the only commodity that has withstood the sharp correction in commodity prices, said an analyst.

According to International Sugar Organisation, global sugar output is expected to fall 4 per cent to 161.6 million tonnes (mt) in sugar season ending September, 2009. In India, output is estimated to drop by 17 per cent to 22 mt next season, said Indian Sugar Mills Association.

The area under sugarcane cultivation in Maharashtra is also expected to go down by 26 per cent to 8 lakh hectares in 2008-09 against 10.88 lakh hectares last year. Consequently, the cane output is expected to drop 21 per cent to 702 lt (855 lt), while cane available for crushing is estimated lower by 35 per cent at 500 lt (761 lt).

Sugar production will be down 37 per cent to 57 lt (90.96 lt).

The sugar production in 2008-09 is estimated to fall 20 per cent to 217 lakh tonnes (lt), against 273 lt. It may slip further by 14 per cent to 187 lt in 2009-10 sugar season.

Avoid Dollar at "All Costs":Jim Rogers

Courtsey:Bloomberg

Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said investors should steer clear of the dollar as the U.S. economy slows and favor commodities this year.

The dollar has slipped 7.7 percent against the euro and 5.9 percent versus the yen in 2008 as the Federal Reserve cut interest rates to stave off a U.S. recession. Oil prices have doubled in the past 12 months, while gold is up 44 percent.

Avoid the dollar ``at all costs,'' Rogers, chairman of Rogers Holdings, said in a speech in Shanghai today. ``The best investments in 2008 are commodities and natural resources. Agricultural prices have much higher to go over the next decade. We have a shortage of everything, including seeds.''

Oil and metal prices in New York have surged as a slumping U.S. currency made them cheaper for non-dollar investors to buy as a hedge against inflation in a slowing global economy. The dollar has stabilized in recent weeks, with currency volatility falling by the most since 1999 this quarter.

The comments from Rogers, 65, come two days after he told investors at a conference in Nanjing not to ``give up'' on Chinese shares, which have made China the world's second worst performers this year. Rogers, who first started buying Chinese stocks in 1999, said he hadn't sold any of his holdings.

Commodity Bull
Investors failed to take heed today, as the benchmark CSI 300 Index extended an eight-month slump amid expectation government measures to slow inflation will hurt corporate profits. The gauge is down 53 percent from its Oct. 16 record and has dropped 23 percent in June. That would be the index's worst month since it was introduced in April 2005.

Rising food and fuel costs have helped to drive China's consumer prices to their highest in almost 12 years, prompting the central bank to lift interest rates six times last year and order banks to set aside a record amount in reserve to curb loan growth.

Speculation that the People's Bank of China would raise borrowing costs for the first time this year dragged the CSI 300 down by 5.5 percent on June 27.

Rogers, who now lives in Singapore, is best known for being a commodity bull since 1999, before the market started to rally in 2002. His Rogers International Commodity Index has more than quadrupled since it started in 1998.

The price of wheat, rice and soybeans reached records this year after adverse weather curbed global output and reduced stockpiles amid rising demand.

`Not High Enough'

Rogers is anticipating further gains in crude oil, which reached an all-time high of $142.99 a barrel on June 27. Futures were recently at $142.74.

``Crude oil prices are not high enough to stop people from consuming more energy,'' the investor said. ``The bull market will not go to an end until supply and demand come to a balance.''

His comments today echo the themes in his latest book ``A Bull in China: Investing Profitably in the World's Greatest Market,'' in which he tells investors to get out of the dollar, teach their children Chinese and buy commodities.

Rogers said last October he planned to shift all his assets out of the dollar, which fell to a three-week low against the yen on June 27. He predicted last month that the U.S. currency's decline would pause in the second quarter because it was overdone.

The real reason why oil prices are rising - Interesting Read!!

The real reason why oil prices are rising

By now it is becoming too obvious that the United States is playing the oil game all over again. And this is the desperate gamble of a country whose economy is neck deep in trouble.

Given this scenario, managing prices of oil is central to the US economic architecture. Expectedly, this gamble has been played in a great alliance between the US government, US financial sector and the media.

The impending collapse of the US dollar on account of the inherent weakness in the US economy caused by its structural weakness as reflected in the sub-prime crisis;

The repeated softening of the interest rates in the US that has the potency to kill the US dollar; and how the fall in the US dollar suits the US corporate sector, especially its omnipotent financial sector.

Naturally, since the past few years, the US financial sector has begun to turn its attention from currency and stock markets to commodity markets. According to The Economist, about $260 billion has been invested into the commodity market -- up nearly 20 times from what it was in 2003.

Coinciding with a weak dollar and this speculative interest of the US financial sector, prices of commodities have soared globally.

And most of these investments are bets placed by hedge and pension funds, always on the lookout for risky but high-yielding investments. What is indeed interesting to note here is that unlike margin requirements for stocks which are as high as 50 per cent in many markets, the margin requirements for commodities is a mere 5-7 per
cent.

This implies that with an outlay of a mere $260 billion these speculators would be able to take positions of approximately $5 trillion -- yes, $5 trillion! -- in the futures markets. It is estimated that half of these are bets placed on oil.

Oil price hike: Govt can't save you: PM
Readers may note that oil is internationally traded in New York and London and denominated in US dollar only. Naturally, it has been opined by experts that since the advent of oil futures, oil prices are no longer controlled by OPEC (Organization of Petroleum Exporting Countries). Rather, it is now done by Wall Street.

This tectonic shift in the determination of international oil prices from the hands of producers to the hands of speculators is crucial to understanding the oil price rise.

Today's oil prices are believed to be determined by the four Anglo- American financial companies-turned-oil traders, viz., Goldman Sachs, Citigroup, J P Morgan Chase, and Morgan Stanley. It is only they who have any idea about who is entering into oil futures or derivative contracts. It is also they who are placing bets on oil prices and in the process ensuring that the prices of oil futures go up by the day.

But how does the increase in the price of this oil in the futures market determine the prices of oil in the spot markets? Crucially, does speculation in oil influence and determine the prices of oil in the spot markets?

Answering these questions as to whether speculation has supercharged the demand for oil The Economist, in its recent issue, states: 'But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of 'paper barrels,' but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.'

On both counts -- that speculation in oil is not pushing up oil prices, as well as on the issue of the build-up of inventories -- the venerable Economist is wrong.

The finding of US Senate Committee in 2006
In June 2006, when the oil price in the futures markets was about $60 a barrel, a Senate Committee in the US probed the role of market speculation in oil and gas prices. The report points out that large purchase of crude oil futures contracts by speculators has, in effect, created additional demand for oil and in the process driven up the future prices of oil.

The report further stated that it was 'difficult to quantify the effect of speculation on prices,' but concluded that 'there is substantial evidence that the large amount of speculation in the current market has significantly increased prices.'

The report further estimated that speculative purchases of oil futures had added as much as $20-25 per barrel to the then prevailing price of $60 per barrel. In today's prices of approximately $130 per barrel, this means that approximately $100 per barrel could be attributed to speculation!

But the report found a serious loophole in the US regulation of oil derivatives trading, which according to experts could allow even a 'herd of elephants to walk to through it.' The report pointed out that US energy futures were traded on regulated exchanges within the US and subjected to extensive oversight by the Commodities Future Trading Commission (CFTC) -- the US regulator for commodity futures market.

In recent years, the report however pointed out to the tremendous growth in the trading of contracts which were traded on unregulated OTC (over-the-counter) electronic markets. Interestingly, the report pointed out that the trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron into the Commodity Futures Modernization Act in 2000.

The report concludes that consequential impact on account of lack of market oversight has been 'substantial.'

NYMEX (New York Mercantile Exchange) traders are required to keep records of all trades and report large trades to the CFTC enabling it to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. In contrast, however, traders on unregulated OTC electronic exchanges are not required to keep records or file any information with the CFTC as these trades are
exempt from its oversight.

Consequently, as there is no monitoring of such trading by the oversight body, the committee believes that it allows speculators to indulge in price manipulation.

Finally, the report concludes that to a certain extent, whether or not any level of speculation is 'excessive' lies entirely in the eye of the beholder. In the absence of data, however, it is impossible to begin the analysis or engage in an informed debate over whether our energy markets are functioning properly or are in the midst of a speculative bubble.

That was two years back. And much water has flown in the Mississippi since then.


Now to answer the second leg of the question: how speculators are able to translate the future prices into spot prices.

The answer to this question is fairly simple. After all, oil price is highly inelastic -- i.e. even a substantial increase in price does not alter the consumption pattern. No wonder, a mere 3-4 per cent annual global growth has translated into more than a 40 per cent annual increase in prices for the past three or four years.

But there is more to it. One may note that the world supply and demand is evenly matched at about 85 million barrels every day. Only if supplies exceed demand by a substantial margin can any downward pressure on oil prices be created. In contrast, if someone with deep pockets picks up even a small quantity of oil, it dramatically alters the delicate global demand-supply gap, creating enormous upward pressure on prices.

What is interesting to note is that the US strategic oil reserves were at approximately 350 million barrels for a decade till 2006. However, for the past year and a half these reserves have doubled to more than 700 million barrels. Naturally, this build-up of strategic oil reserves by the US (of 350 million barrels) is adding enormous pressure on the oil demand and consequently its prices.

Do the oil speculators know of this reserves build-up by the US and are indulging in rampant speculation? Are they acting in tandem with the US government? Worse still, are they bordering on recklessness knowing fully well that if the oil prices fall the US government will be forced to a 'Bears Stearns' on them and bail them out? One is not sure.

But who foots bill at such high prices? At an average price of even $100 per barrel, the entire cost for the purchase of this additional 350 million barrels by the US works out to a mere $35 billion. Needless to emphasise, this can be funded by the US by allowing it currency printing presses to work overtime. After all, it has a currency that is acceptable globally and people worldwide are willing to exchange it for precious oil.

No wonder Goldman Sachs predicts that oil will touch $200 to a barrel shortly, knowing fully well that the US government will back its prediction.

And, in the past three years alone the world has paid an estimated additional $3 trillion for its oil purchases. Oil speculators (and not oil producers) are the biggest beneficiaries of this price increase.

In the process, the US has been able to keep the value of the US dollar afloat -- perhaps at an extra cost of a mere $35 billion to its exchequer!

The global crude oil price rise is complex, sinister and beyond innocent economic theories of demand and supply. It is speculation, geopolitics and much more. Obviously, there is a symbiotic link between the US, the US dollar and the oil prices. And unless this truth is understood and the link broken, oil prices cannot be
controlled.

Ban of Commodity Futures: Is it justified? KARVY

Futures trade in agriculture commodities had another bad day on 7 May 2008 with FMC announcing suspension of futures trade in four commodities namely chana, soy oil, potato and rubber for four months that is till 6th September. Government has already de-listed four major commodities like wheat, rice, urad and tur in January – February 2007. Government was under pressure from various political parties for last few weeks to impose ban on futures trade in essential commodities, alleging futures trading is responsible for sharp rise in prices. Inflation remained above 7% for four consecutive weeks from March onwards.

Commodity futures provide platform for farmers, traders, exporters and other corporates to hedge their positions. Speculators provide liquidity in the market with active participation. Prices of any commodity follow its own fundamentals and price manipulation by few traders is not possible if it is perfect market.

Supply-Demand mismatch
Prices of agriculture commodities especially edible oils, chana and rubber rose sharply in the past six months. Soy oil prices gained by about 35% with in short span of in five months (October 2007 and February 2008) and touched Rs.740 per quintal in domestic markets. Domestic prices moved up sharply tracking global prices especially CBOT and MDEX. At CBOT, prices gained by about 47% during same period. Global Soy bean output has declined by 7 percent to 220 million tonnes in 2007-08 against 237 million tonnes in previous year. Edible oil seeds production has also declined to 390 million tonnes compared to 408 million tonnes in last year. Major fall in soy bean output was in US with decline of around 20% in this season. Short fall in global output of soy bean and shifting large chunk of agriculture produce for bio-fuels led to sharp gain in prices of all the edible oils.

Chana prices also have gained by more than 30% in the last six months due to lower output concerns. Production of rabi chana 2007-08 estimated below 50 lakh tonnes compared to 58 lakh tonnes in previous year. Carry forward stocks are almost nil. Prices were trading at one year low of Rs.2000 per quintal during end of 2008 and lower estimates led to sharp rise in prices towards Rs.3000 per quintal in last 4-5 months. India imported more than 1.2 million tonnes of pulses in 2007-08 and failed to keep prices low as import prices ruled high. India annually produces about 13-14 million tonnes of pulses and this output almost stagnant for last 15 years. Consumption is rising every year with increasing population. India is largest importer of pulses and import about 2-3 million tonnes.

Rubber prices have gained by 23 percent in the last four months in domestic markets. Rubber global production is 9.89 million tonnes in 2007 compare to 9.68 million tonnes in 2006, while, consumption has increased to 9.73 million tonnes in 2007 from 9.21 million tonnes in 2006. India has produced about 8.25 lakh tonnes in 2007-08 compare to 8.53 lakh tonnes in previous year. Increasing demand for rubber in global markets and strong crude oil prices led to sharp rise in prices in recent past.

Potato prices fell from recent high of Rs.650 levels to Rs.450 with in span of one month with increasing arrivals. Output estimated at 28-29 million tonnes in 2007-08 higher from 25 million tonnes in previous season. Higher arrivals and lack of demand pulled down the prices of potato. Few state governments including West Bengal provided intervened in spot markets to support the prices.

Government measures
Government took various measures to control the rising prices of food commodities. It reduced import duty on refined edible oil from 40-45% to zero percent in March 2008 to control the rising prices of edible oils. India import about 50% of total domestic requirement and is price taker in global markets.

Price movement especially in Malaysia and US has direct impact on domestic markets. Edible oil prices have marginally come down in the past one month after Government reduced import duty on edible oils. Soy oil prices fell by Rs.150 per quintal with in span of one month. Apart from reducing import duties on edible oils, Government also directed states to strictly impose the stock limits on food grains and pulses.

Various states including Maharashtra, Andhra Pradesh and Delhi conducted raids on stock hoarders to bring out the excess stocks. This led to panic selling of pulses in spot markets and led to sharp fall in prices of most of pulses. Chana prices fell from recent high of Rs.3000 levels towards Rs.2300 with in one month period.

Impact of recent Government measures
In spite of taking these many measures, inflation remained high and touched 42 month high of 7.61% for week ending 26th April. Prices of most of agriculture commodities fell in the past few weeks as a result of Government intervention and also declining demand at higher levels apart from fall in prices of edible oils in global markets. However, higher prices of non-agriculture commodities like steel and cement remained high boosting inflation further.

Outcome of Abhijit sen committee report
Abhijit sen committee was constituted in March 2007 to study the impact of futures trade on agriculture commodity prices. it submitted report on 29th April 2008 to Government. It found no evidence of futures trade affecting the spot prices of agriculture commodities. His statements was, "I don't think one can say anything conclusively whether futures impacted prices," after submitting the report to Agriculture department. It recommended continuation of futures ban on wheat, rice, urad and tur, but not recommended any fresh ban on any commodities.

Is suspension justified?
Now big question arises as to what was the need for suspension of futures trade in four agriculture commodities when prices of edible oils have already eased and they are largely influenced by global factors rather than domestic factors.

It is strange that soy bean is left out from this list and Soy oil, a biproduct of soy bean has been suspended.

Chana prices have already fallen by 20% in last one month and what was the need to suspend futures rather than improving supply.

Potato prices are already trading at one year low and farmers are affected due to lower prices. Those who are demanding imposition of ban on futures trade in agriculture commodities are themselves providing support price to potato in West Bengal. Now it is very difficult to understand in what way Potato prices caused the inflation.

Volumes in rubber futures are almost nil in exchanges and there is no question of speculation increasing the prices with such low volumes. Also one should understand that Rubber and Soy oil are internationally traded commodities and domestic prices move in tandem with the international prices. Now it is important to watch for how long the disparity is maintained given the supply- demand mismatch across the world.

Various sections of people have criticized this decision of Government and real market players have lost confidence in futures trade. This includes representatives of various organizations of exporters, importers, processers etc. All these participants were using exchanges to hedge their positions. Now that in most of the rural areas NCDEX prices have become the bench mark, the farmer and small trader community will be deprived of better price discovery mechanism. Since Chana and Soy oil future contribute almost 35% of total Agri futures volumes, the future of Commodity derivatives market will be under threat.

Time and again suspension of future commodities trade to tame the domestic inflation will dilute the basic objective of introducing futures trade in India. As this is just a suspension and not a complete ban, the reintroduction may not result in good volumes since the participants have already lost their trust in Government. To conclude the government should focus more on ensuring enough supplies in the market with measures such as enhancing productivity, better cultivation practices etc.

CRUDE OIL BUBBLE: IS IT A CASE OF " IRRATIONAL EXUBERANCE"?

The recent gravity defying surge in Crude Oil has attracted much attention and generated heated debate across the globe. A 99% annual appreciation in prices of world's principal source of fuel is bound to affect all countries and their inhabitants in a big way. The situation is even worse at MCX, India, where a depreciating rupee (against dollar) has further added momentum to the rally as a stronger dollar directly translates to costlier imports (read Crude Oil). In my previous posts in the same blog and numerous articles, presentations, lectures and private discussions, I had reiterated that the era of "Easy/Cheap" oil is over. However, the way the Crude Oil is scaling newer highs each day has put analysts across the world in a fix. It is not the $130 or $135 level which is alarming us but the speed with which these milestones are being achieved.

Market is equally divided between those who are seeing further upside and between those who are expecting a substantial correction in near term.

The reasons for a deeper correction/profit booking in Crude Oil are numerous.

There are many reasons to assume that market is overreacting to Oil bullish factors. What is being ignored is the fact that Commodity business is a cyclical one. Higher Crude Oil prices (or any other commodity) are self defeating as it directly translates into a reduction in demand as the consumers start cutting down on consumption or switches to cheaper alternative. Arjun Murti of Goldman Sachs who has to his credit many doomsday prophecies (including the recent Crude at $ 200 one) himself drives in a Hybrid car.

Many banks and investment firms have come out to defend the rise in oil prices, saying that it is based on fundamentals and that prices could rise much further. Analysts like Arjun Murti, Pickens, Guppy etc. and market movers like Goldman Sachs, UBS are constantly raising the projection levels in prices, thus sending the prices over the roof. While they go on saying this and prices continues to move upward, open interest in crude futures contracts has been moving steadily downward since a high of 1.58 million last July to 1.36 million now.

But aren't there fundamental reasons for this rise in oil prices? In some ways yes, demand from China and India is increasing, but at a slower pace than oil has gone up. The chief market strategist for one of the world's leading oil industry banks, David Kelly, of J.P. Morgan Funds, recently admitted something telling to the Washington Post, "One of the things I think is very important to realize is that the growth in the world oil consumption is not that strong." One of the stories used to support the oil futures speculators is the allegation that China 's oil import thirst is exploding out of control, driving shortages in the supply-demand equilibrium. The facts do not support the China demand thesis however. The US Government's Energy Information Administration (EIA) in its most recent monthly Short Term Energy Outlook report, concluded that US oil demand is expected to decline by 190,000 b/d in 2008. That is mainly owing to the deepening economic recession. Chinese consumption, the EIA says, far from exploding, is expected to rise this year by only 400,000 barrels a day. That is hardly the "surging oil demand" blamed on China in the media. Last year China imported 3.2 million barrels per day, and its estimated usage was around 7 million b/d total. The US , by contrast, consumes around 20.7 million b/d. That means the key oil consuming nation, the USA, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of a percent of the total demand. The Organization of the Petroleum Exporting Countries (OPEC) has its 2008 global oil demand growth forecast unchanged at 1.2 mm bpd, as slowing economic growth in the industrialised world is offset by slightly growing consumption in developing nations. OPEC predicts global oil demand in 2008 will average 87 million bpd -- largely unchanged from its previous estimate. Demand from China , the Middle East , India , and Latin America -- is forecast to be stronger but the EU and North American demand will be lower.

Not only is there no supply crisis to justify such a price bubble. There are several giant new oil fields due to begin production over the course of 2008 to further add to supply.


The world's single largest oil producer, Saudi Arabia is finalizing plans to boost drilling activity by a third and increase investments by 40 %. Saudi Aramco's plan, which runs from 2009 to 2013, is expected to be approved by the company's board and the Oil Ministry this month. The Kingdom is in the midst of a $ 50 billion oil production expansion plan to meet growing demand in Asia and other emerging markets. The Kingdom is expected to boost its pumping capacity to a total of 12.5 mm bpd by next year, up about 11 % from current capacity of 11.3 mm bpd. In April this year Saudi Arabia 's Khursaniyah oilfield began pumping and will soon add another 500,000 bpd to world oil supply of high grade Arabian Light crude. As well, another Saudi expansion project, the Khurais oilfield development, is the largest of Saudi Aramco projects that will boost the production capacity of Saudi oilfields from 11.3 million bpd to 12.5 million bpd by 2009. Khurais is planned to add another 1.2 million bpd of high-quality Arabian light crude to Saudi Arabia 's export capacity.

Brazil 's Petrobras is in the early phase of exploiting what it estimates are newly confirmed oil reserves offshore in its Tupi field that could be as great or greater than the North Sea . Petrobras, says the new ultra-deep Tupi field could hold as much as 8 billion barrels of recoverable light crude. When online in a few years it is expected to put Brazil among the world's "top 10" oil producers, between those of Nigeria and those of Venezuela .


In the United States, aside from rumors that the big oil companies have been deliberately sitting on vast new reserves in Alaska for fear that the prices of recent years would plunge on over-supply, the US Geological Survey (USGS) recently issued a report that confirmed major new oil reserves in an area called the Bakken, which stretches across North Dakota, Montana and south-eastern Saskatchewan. The USGS estimates up to 3.65 billion barrels of oil in the Bakken. These are just several confirmations of large new oil reserves to be exploited. Iraq , where the Anglo-American Big Four oil majors are salivating to get their hands on the unexplored fields, is believed to hold oil reserves second only to Saudi Arabia . Much of the world has yet to be explored for oil. At prices above $60 a barrel huge new potentials become economic. The major problem faced by Big Oil is not finding replacement oil but keeping the lid on world oil finds in order to maintain present exorbitant prices. Here they have some help from Wall Street banks and the two major oil trade exchanges—NYMEX and London-Atlanta's ICE and ICE Futures.

Moreover, the argument that Crude Oil is tracking a weaker dollar doesn't hold true anymore. Euro has corrected sharply from its high of 1.6018 against the dollar. Signs of slowdown are being identified in Eurozone as well and ECB's Trichet has come under pressure to review his tight monetary policy. On the other hand recently released US economic indicators and have been largely mixed and point towards relative stabilization of Housing and labor market. Moreover with commodity prices going over the roof, US Federal Reserve may soon return to the policy of Inflation targeting. Interest-rate futures show the Federal Reserve may start to raise U.S. borrowing costs by the end of the year as the economy recovers and inflation accelerates. Earlier, seven interest-rate cuts by the Fed since September sent the dollar to an all-time low against the euro in April, boosting gold and other commodities.

Moreover, Crude Oil being a political (and strategic) commodity, we may very well see intervention from US on the issue of high prices. Entire global economy, especially that of US is under strong pressure due to Crude Oil induced inflation. Recently, the US House of Representatives overwhelmingly approved legislation allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude price. Already, President Bush in his recent trip to Gulf has pressurised Saudi Arabia, the most influential OPEC member to increase the Crude Oil production by 300,000 million barrels per day. Also, if recent indications are to be believed, U.S. Government is soon expected to force regulators to raise margin requirements under current market conditions, specifically with respect to the oil markets. This could have a dramatic downward effect on prices. (Remember silver and the Hunt Brothers in 1980.) In April 2008, U.S. Sen. Byron Dorgan, a North Dakota Democrat, told Congress, "There is an orgy of speculation in futures markets. This is a 24-hour casino with unbelievable speculation." He and others in Congress have been raising the idea of changing margin requirements that traders must pay up front in order to engage in oil speculation. Dorgan said stock speculation requires a 50% margin, but commodities like oil demand a much lower threshold, just 5% or 7%.

No doubt, Crude Oil, being in limited supply, is fundamentally strongest commodity around. But the way the recent spike has pushed the prices of the liquid gold has raised many an eyebrow and in coming days we may expect a substantial correction. Though a break below $100 is certainly not anticipated and too far fetched, a correction to the tune of $ 20 from current levels cannot be ruled out. However, traders should refrain from taking a short position arbitrarily and should wait for the confirming trend. Like any other market analysts, I too have faith in the old adage "Market is always right" and "Trend is your friend".

Courtsey:salmanspeaks.co.nr

Is there a Commodities Bubble - Lehman Brothers

With due apologies to Commodity Bulls like Jim Rogers, we might have just created a monstrous bubble that will blow away off its own weight, says a study by Lehman.

The reasons are simple, 40 feet containers carrying Bulk Loads from Chinese ports to Eastern North American ports, now cost $ 8000, up from $ 3000 last year. If Crude were to go to $ 200 per barrels as most analysts now agree, this fare will rise to $ 20,000.

The result; increased domestic production in the US, reduction in trans China-US bulk trade and possible stress on pan Asian Commodity trade.

Simply speaking, the Commodities bubble is unsustainable and will collapse under its own stress. If not, there cannot be a one-sided move in Commodity prices without that being reflected in the fundamentals of Commodity producers.

-Commodity index investors bypass speculator position limits set by the CFTC
-About $90 billion has flowed into commodity indices since 2006
-Commodity markets are much smaller and illiquid compared with equities & bonds
-Dollar weakness and inflation expectations are behind fund inflows and this causes a substantial price effect for some commodities.
-Fundamental loosening can be disguised by Saudi Arabia and China.
-Equities go up long-term with human progress; not always true for commodities

Past performance, dollar weakness, and inflation expectations have driven substantial financial inflows to commodity indices, potentially feeding into higher prices.

~Financial Inflows to Commodities

Oil prices this week reached all-time highs above $125/bbl, topping off a $50+ run-up since September 2007, perhaps the most visible increase of the across-the-board rise in commodity prices.

A fierce debate has erupted over the permanence of this bull run: some analysts argue that the massive price increases are the rational market response to tight supply-demand fundamentals, while others point to speculator activity as proof of its bubble-esque nature.

The debate also carries a political dimension, as OPEC has resisted calls to increase production by blaming speculators for rising prices.

Undoubtedly, financial investors have made huge commodity investments in the past five years. One channel for this flow has been commodity indices such as the GSCI and the DJ-AIG Commodity Index. These indices bypass traditional speculative position limits imposed by CFTC regulations, allowing pension funds and other investors to assume massive long positions in hitherto untouchable markets.

It is difficult to ascertain the exact size and effect of these indices, but based on their known positions in certain commodities and their reported cross-commodity weightings, one can estimate their overall size.

We estimate that total assets under management (AUM) in commodity indices ballooned from about $70 billion at the beginning of 2006 to $235 billion by mid-April this year (Figure 1). Of this $165 billion increase, about $90 billion is accounted for by financial inflows into these indices, with the other $75 billion stemming from price appreciation of the original underlying investment.

These figures may seem miniscule compared with the trillions of dollars sloshing around in global bond and equity markets, but commodity markets are comparatively small and illiquid. Even a $1 million inflow, as we shall see, can have a major effect in certain commodities.

Inflows have seen a major spike since December last year, with the lion's share of the contribution coming from the energy-heavy GSCI index.

What Causes Index Inflows?
Financial investment in commodities is commonly considered a hedge against two concerns: dollar weakness and inflation. Another reason might be a general flight away from the underperformance of more traditional asset classes such as equities.

Regressing our estimates of financial inflow against past 1-week returns on the dollar and breakeven inflation on 5-year T-notes, we find that dollar weakness and breakeven inflation indeed predict inflows for both GSCI and DJ-AIG, both at high levels of significance.

We also find that underperformance of the S&P also predicts inflow, although at weak significance levels (Figure 3). But perhaps most interesting, we find that the performance of the GSCI and the DJ-AIG over the past month also strongly predict inflows to the indices, suggesting a significant amount of momentum-chasing.

Do Index Inflows Affect Prices?
Given these substantial financial inflows to commodity indices, can we measure their effect on prices? Unfortunately, this analysis presents considerably higher obstacles. Ideally, we would want to measure the true liquidity-adjusted inflow to capture the true market impact, but outside noise from fundamentals, the annual reweighting of the indices, and unobserved over-the-counter activity cloud the picture.

There seems to be substantial variation in the market impact of index inflows across commodities, likely because of differences in liquidity. For WTI, a relatively large and liquid market, a $100 million inflow appears to cause a +1.6% rise in price at the 0.1% level ofsignificance, whereas a $1 million inflow alone into cocoa appears to cause a 3.2% price jump.

Furthermore, inflows to the GSCI seem to have a substantially higher effect on commodity prices than similar inflows to the DJ-AIG index, possibly reflecting the higher share of GSCI-mimicking lookalikes in the index universe.

Ingredients of a Bubble
Given the aforementioned causes and effects of financial inflows, we see many of the essential ingredients for a classic asset bubble. Performance-chasing financial inflows to commodities cause prices to rise, thus delivering good performance and, in turn, attracting even more inflows. This phenomenon can be self-fulfilling, especially in an environment in which lack of information about the true state of inventories in China or spare production capacity in Saudi Arabia delays any fundamental market correction.

But in the buzz around commodities, investors may have forgotten the obvious:
Commodities are inherently cyclical assets whose prices fluctuate around some longterm (but potentially changing) equilibrium level, while equities are shares in the future cash flow of dynamic firms providing long-term returns from technological progress.

For commodities, technological progress increases both demand and supply, making long-term price appreciation, even for non-renewable commodities, uncertain at best. Adjustment to a higher equilibrium price may mimic superior returns in the short term, but they are unlikely to last forever.

The Glittering Run For Gold Is Over!!! UBS

Gold has benefited from dollar strength and investor and speculator buying due to fears of stagflation and the impact of the credit crunch. We forecast that gold will fall over the next two years to levels better supported by jewellery demand.

We forecast that gold will average $851/oz in 2008, higher than our previous forecast due to the better than expected Q1-08 outcome. Our forecast of $750/oz for 2009 is unchanged.

The consensus forecast is for gold to average $862.30/oz according to the LBMA forecast 2008 publication.

Performance
Speculative and investment buying resulted in gold trading sharply higher in January and February, breaking the previous all-time high of $850/oz in the first real trading day of 2008 and then going on to set records, culminating in a new all-time high of $1030/oz.

But gold could not hold onto these lofty levels and slipped back to trade down to $874/oz. After a bounce to just above $950/oz in

April, the metal has succumbed to more widespread profit taking and is trading around $880/oz at the time of writing.

In the absence of the unusually strong safe-haven buying of gold we believe gold would be trading near $700/oz and the metal is vulnerable to a further correction.

Demand environment
The first three months of 2008 saw very poor jewellery demand as gold moved sharply higher with our sales desks report jewellery demand of 5-15% of the levels we consider strong. The sell-off in gold in late March has seen some recovery but demand remains much lighter than normal for the time of the year and this leaves the metal vulnerable to further profit taking.

ETF investors bought only 2.0 million ounces of gold in the first quarter of 2008, disappointing considering the very strong performance of gold. Net redemptions have occurred since then and as at 24 April, total ETF positions stood only 600koz higher than on December 31st with 1.6moz of redemptions between 22 and 24 April.

US futures market gold investors held large spec long positions through the first ten weeks of 2008 before liquidating some of their holdings in late March and April.

Supply environment
GFMS report that gold production fell by 0.4% in 2007 to 2,476t as mining companies struggle to maintain existing production and are failing to find new mines to expand. We expect gold supply will remain under pressure in 2008, not least because of the power and other production problems faced by the South African mining industry, discussed in more detail in the introduction to the precious metals section.

Our refinery contacts and physical sales desks in Switzerland report a surge in the sale of scrap gold coming back to the market with the gold price at such elevated levels. This is reducing the jewellery industry¡¯s net demand for gold.

Gold mining de-hedging continued at a rapid pace in 2007 according to GFMS, which estimates the net hedgebook declined by a record 446t. The remnant of the global hedgebook is now small to GFMS and increasingly concentrated in a only a few mining companies. We expect the rate of producer de-hedging to slow in 2008, but we have said that every year for the past few years and have been surprised by aggressive buy-backs each year.

Central banks remain net sellers of gold, disposing of a total of 481t in 2007, more than the 370t sold in 2006. The vast majority of the sales in both years came from the signatories of the Central Bank Gold Agreement (CBGA) with Spain and Switzerland the most interesting sellers. Spanish sales increased sharply in 2007 while Switzerland, a large seller under the first CBGA, restarted sales due to the high gold price, which had increased gold¡¯s proportion of its total reserves.

Some small central bank buying was noted in 2007 including Qatar and Russia, although most large central banks that have small gold holdings remained sidelined.

News-flow to watch for
The quarterly results of the gold miners with hedgebooks ¨C including AngloGoldAshanti, Barrick and Newcrest ¨C for signs of further de-hedging.

Weekly COTR data from the CFTC and daily open interest figures from
TOCOM are useful measures of visible speculative positioning.

Quarterly supply and demand reports from the World Gold Council.

Captilizaing on Commodities Bubble-Michael Shluman

There's a black cloud looming over the commodities market. However, behind that cloud, those of us who are situated on the short side (that is, buying put options and profiting when stocks are going down) can expect to find a rainbow with a pot of gold at the end.

I know, I know: Wheat is up 600% a bushel. Oil touched an inflation-adjusted, all-time high and seems as though it's setting up permanent residence above $100 a barrel. Gold prices were a straight tear up (although a recovery in the U.S. dollar has helped capped them).

I can hear you now: "There's no way to play the short side of the commodities sector, Shulman."

Longer term, there's every reason to believe that commodity prices will be high and perhaps go even higher. You might have heard a lot about growing infrastructure and demand in areas like "Chindia" (i.e., China and India) and other developing nations.

With this boom will come increased need for food, building materials and energy sources. As emerging countries become more industrial, it is only natural that more jobs will be generated, leading to a higher standard of living and even more commodity consumption.

That's the big-picture outlook. But with a slowing U.S. economy and its carryover into the global community, not to mention the fact that the big-money players (i.e., institutions, hedge funds) are piling into commodities and inflating the prices with their speculative buying, what does it mean for us in the short term and, more specifically, on the short side?

Even as the economy seems to be taking a rest, commodities are likely going to pull back before they keep going up, up and away. This bubble is building.

In some commodities, there's a classic parabolic bubble, which is a short-side investor's dream.

Perhaps gold can run to $1,600, as "Mad" man Jim Cramer thinks -- but will wheat remain near their high of $25?

Will a fertilizer and feed producer -- which is on my "short" list of companies that are going to get hit when the commodities bubble starts deflating -- manage to stay in the stratosphere? Will platinum keep shooting skyward?

Smart short-side investors need to identify the commodities that are driven by economic reality and look for places to establish short-side plays for the commodities or companies on a free ride with the run-up in prices. There are plenty, but there are also some rules to follow:

Rule 1: Don't get ahead of the bubble bursting. It's better to miss the beginning than get run over by being too early.

Rule 2: Focus on those commodities most tied to economic reality.

Rule 3: Avoid commodities that are potentially driven by geopolitical events.

Rule 4: See rule No. 1.

So, how do you profit while commodities are poised for a pullback? There are two main areas I'm investigating right now.

The first is agricultural commodities. There's no way that wheat will stay at $25 (up from $4 last year), or that a company we're riding on will remain around $160 (up from $60 just one year ago!).

There are several exchange-traded funds (ETFs) and several overbought companies in this sector, so I am looking at them carefully right now. I also have a close eye on precious metals other than gold -- namely, platinum and silver. This segment can also be played by a mixture of ETFs and individual companies.

But for every opportunity, there is a sinkhole, and I can tell you what I will not be shorting.

Gold. Avoid playing the short side of gold at all costs. It is tied to the U.S. dollar and geopolitical issues -- and just possibly to the people who built bomb shelters in the '60s and their offspring who created hideaways in preparation for Y2K.

Oil. The fundamentals show that oil prices will rise because they are also tied to the dollar and geopolitical events. Stay far, far away.

In general, I'm keeping anything that is tied to the U.S. dollar -- or other factors beyond the segment that can change on a dime and decimate a play -- far from my "short" list.

But remember, you can play the short-side of individual stocks, sectors and, soon, commodities -- and you should.

Where are Aluminium Prices Heading?

Courtsey:According to Karen Norton from Reuters.

Analysts feel Supply problems will support the aluminium market in the near term, but high inventories will act as a brake on any attempt to move sharply higher. The LME three-months price reached a six-month high of $2,738 a tonne last week, driven up by severe winter weather in China and its worst-ever power cuts. Traders last estimated that around 1.5 million tonnes of annual aluminium smelting capacity had been shut. Producers in southern Africa cut their power usage to help ease a power shortage there. Adams of Basemetals.com feels prices could get up to $2900 in next month but can't be sustained due to high stock levels. Another consultant Angus MacMillan said the supply woes would make some difference to the market balance this year, but also thought the worsening economic outlook would counter that to some extent by having a negative impact on demand.Most analysts had been predicting a modest supply surplus this year.

(Thus the outlook could be threatened if analysts have undermined the extent of the current problems.) Stephen Briggs, economist at SG Corporate and Investment Banking thought aluminium had the least downside potential of all the LME-traded metals as recession loomed, due in part to the fact that it had made the least gains in recent years.

Some recent developments in production, stocks and prices that may influence the direction of the aluminium market in 2008 has been listed in the report.

PRODUCTION:

Jan. 31 - Rio Tinto Ltd/Plc said it reached a new power supply pact with the local utilities authority for its Kitimat aluminium smelter in British Columbia, Canada, allowing it to proceed with a 125,000 tpy expansion to 400,000 tpy.

Jan. 31 - BHP Billiton said it would cut power usage at its three aluminium smelters in southern Africa by 10 percent to help ease a power shortage. The reduction would gradually take place at the Hillside and Bayside smelters in South Africa and the Mozal operation in Mozambique and be completed in around five days.

Jan. 30 - China's worst-ever power shortage and severe winter: As of Feb. 5, traders estimated up to 1.5 million tonnes of aluminium smelting capacity was shut in order to conserve power to residences.

Jan. 30 - Rio Tinto said its planned Coega aluminium smelter in South Africa is progressing despite the country's power crisis. The project, due to produce 720,000 tpy of aluminium, will go the Rio Tinto board around mid-2008 for final approval.

Jan. 29 - Netherlands-based aluminium company Vimetco said it would focus on adding bauxite mine assets to its portfolio in a bid to become a fully integrated producer of the metal. On Feb. 5, the company said the Ministry of Mines in Guinea granted it a reconnaissance permit for the prospecting of bauxite in the Kindia Prefecture in Guinea. Vimetco also said its Tulcea alumina refinery in Romania, now closed for rehabilitation work, would probably restart in the second half of next year, subject to overall market conditions. The refinery has the capacity to produce around half a million tpy of alumina.

Jan. 25 - China's Bosai Minerals Group Co said it would invest $694 million to build a 1 million tpy alumina refinery in Guyana. Construction would start in the first half of 2009 and begin production two years later. Bosai expects its alumina production capacity in China to jump to 500,000 tpy from last year's 200,000 after a 300,000 tpy plant near Chongqing launches production by the end of 2008. Bosai expects to increase its aluminium smelting capacity to 200,000 tonnes in 2008 from last year's 130,000 tonnes.

Jan. 25 - China produced 12,283,600 tonnes of primary aluminium in 2007, up 33.8 percent from a year earlier, the National Bureau of Statistics said. Production of alumina rose by 47.7 percent over the same period to total 19,507,900 tonnes.

Jan. 25 - Power shortages could slow aluminium output growth this year to 22 percent to an estimated 15.0-15.5 million tonnes, from 12.3 million tonnes in 2007, out of a capacity of 16 million, industry officials said.

Jan. 21 - Daily average primary aluminium output in December rose to 69,700 tonnes compared with an upwardly revised 69,300 in November, provisional figures from the International Aluminium Institute (IAI) showed. In December 2006, daily average output was 66,400 tonnes.

Jan. 18 - Ormet Corp. said its Hannibal aluminium smelter in Ohio was completely up and running. At full capacity the plant produces 260,000 tpy of aluminium. The company restarted the last of its smelter's six potlines on Nov. 28.

Jan. 17 - An official of South African power utility Eskom said Alcan's Coega aluminium smelter plant could be delayed as it reviews its power supply for the project.

Jan. 11 - The annual rate of primary U.S. aluminium production surged 17.7 percent to 2,712,197 tonnes in December from 2,303,998 tonnes in December 2006, the Aluminum Association said. December's output rate was the highest since April 2003. For the year, 2007 production increased 12.2 percent to 2,559,673 tonnes from 2,280,916 tonnes a year earlier.

PRICES

Having ended 2007 just above $2,400 a tonne, aluminium prices trended higher in early January, albeit within their well-established trading range.

Worries about a recession in the United States took the whole LME complex lower later in the month, with aluminium trading down to $2,377 on Jan. 22.

But prices recovered and then shot higher at the end of last month as it emerged that Chinese smelters had been hit by power shortages and severe weather conditions. This came on top of power supply woes in South Africa.

On Feb. 1, the three-months price reached a six-month high of $2,738 a tonne and, despite easing since then, further gains have been mooted.

In January, the twice-yearly Reuters base metals price poll of 42 analysts put the 2008 median average for the LME cash aluminium price at $2,506 a tonne in 2008 and $2,540 in 2009. In 2007 the price averaged over $2,665 a tonne.

STOCKS

Total exchange stocks were 1,065,183 tonnes at the end of January, little changed from 1,046,002 tonnes. Of that total, some 956,475 tonnes were held in LME warehouses, compared with 929,450 tonnes a month earlier. Total visible stocks, including latest International Aluminium Institute (IAI) unwrought stocks (0#STOCKS-IAI) were 2,618,183 tonnes, equating to about 26 days of consumption.

Estimated aluminium stocks at the Japanese ports of Yokohama, Nagoya and Osaka totalled 198,600 tonnes in December, up 12 percent from a record low of 178,100 tonnes a month earlier, an official at Marubeni Corp said. Inventories may have risen due to the arrival during the month of delayed shipments from Venezuela, the official said. Inventories were about 15 percent below the year-earlier level of 233,900 tonnes.

Credit Suisse-Sub Prime Crisis and Commodities!!

The worst of the banking crisis resulting from the subprime meltdown is likely to be over in months rather than quarters, Credit Suisse (CSGN.VX) Chief Executive Brady Dougan was quoted as saying on Saturday.

Dougan said in an interview in the Neue Zuercher Zeitung he was an optimist and it could take three, four, five months before the crisis bottomed out.

"I believe I can already detect a certain easing of tension in liquidity and credit provision, but the big problems that set off the crisis have not yet been dealt with," he said.

"There would undoubtedly be much greater confidence if prices in the U.S. real estate market, where the crisis originated, finally stabilized. That could happen as soon as the middle of this year. But we are preparing for the possibility that the crisis continues for some time," he said.

The crisis has set off write-downs running to more than $100 billion by banks globally. Experts say final losses may reach as high as $400 billion.

Dougan forecast it would remain hard to find buyers for securitized and structured products. Buyers will only appear when the underlying assets have a market price.

At that point there would be a lot interest because of current low valuations, and there would be a prospect of considerable price rises.

"As soon as confidence returns, things will probably go up quickly again," he said.

In rare cases, Dougan expected securitized claims to be restructured, but many people holding them will be forced to wait for a better market climate, he said.

Meanwhile the mistrust between banks that has led money and credit markets to seize up was dissipating.

"Liquidity has generally improved somewhat. That's an important sign," he said. "Although markets are still far from normal, a modest recovery can be detected. The trend is now in the right direction."

Credit Suisse has suffered only limited fall-out from the subprime mortgage crisis, trimming full-year 2007 write-downs linked to the debacle to 2.0 billion Swiss francs ($1.83 billion) and pulling in billions in new investments from wealthy clients.

Its Swiss rival UBS (UBSN.VX) on the other hand has been one of the worst hit, taking $18 billion of charges in 2007 and warning of more to come that could tip it into a second year of losses.

Dougan said he expected banks damaged by the crisis to lose wealth management customers, while better positioned institutions would pick them up.

Unlike other banks, Credit Suisse is not shedding investment banking staff, but is reallocating resources.

Thus it is expanding its commodities business and involvement in emerging markets while scaling back areas hit by the crisis such as mortgage securitization, structured products and high-yield financing for takeovers and buyouts, he said. Dougan acknowledged there was a risk of a commodities bubble.

"But we think that it has great potential. Even if prices contract after the long rally, increased earnings are possible in commodities," he said.

Gold Rising: Forbes

The Allure Of Gold Is Rising

Once consigned to monetary oblivion, gold is re-emerging as an asset class. Restoration of its monetary use, though still a distant possibility, has moved a step closer to reality.

Gold for immediate delivery in London reached $929 per ounce in Asian trading on Jan. 29, an all-time nominal high. A main impetus to gold's current price ascendance is inflation fears: Gold is seen as a hedge against loss of currency purchasing power. Demand for the metal is also strong in Asia, for jewelery and as a store of value.

Despite gold's recent climb, it remains off its 1980 peak in real terms. In today's dollars, gold hit $1,766 in January 1980.

Understanding gold's monetary context is key: At that time, memories of gold's use in the international monetary system were fresh, and gold's place anchoring the system seemed natural. As economic and geopolitical difficulties beset the system, gold appeared a safer store of value.

Since then, no similar instability has driven gold prices as high. Shortly after 1980, expectations of an eventual restoration of a monetary role for gold were resolutely dashed:

--U.S. Congressional commission. Congress on Oct. 7, 1980, established the U.S. Gold Commission, whose aim was to make policy recommendations "concerning the role of gold in domestic and international monetary systems." Yet the commission's March 1982 report did not recommend restoring a monetary role for gold.

--Academic report. In the 1982 Brookings Papers on Economic Activity (Volume 1), economist Richard Cooper published a lengthy history of the gold standard and its future prospects. Cooper concluded that "both history and logic" refute the contention that stabilizing the gold price in dollar terms would stabilize the price level.

As these sentiments became policy orthodoxy, central banks rushed to offload gold holdings, putting further downward pressure on the metal.

Perceptions of transition in the international monetary system are now heightening gold's allure. Uncertainty over current world system longevity has three foundations:

1. Credit crunch. The current credit market crisis has led to a striking loosening of U.S. monetary policy, pushing yet more dollars onto an already over-supplied foreign-exchange market. Additionally, it has highlighted troubling aspects of recent innovations in the international financial system, particularly increasing systemic risk due to poorly understood synthetic securities and credit underwriting.

2. Bulging reserves. The current system undeniably is characterized partly by pegs to the center currency--the dollar. As in the 1971 death throes of the Bretton Woods system, dollar abundance is testing these pegs. Under Bretton Woods, commitments to peg demanded heroic reserve accumulation by U.S. trade partners. Inability to contain associated inflationary pressures led to the demise of pegs--and the system.

3. Center solvency. Typical concerns over the U.S. external position focus on U.S. national savings, or lack thereof. In fact, there are valid reasons for supposing that U.S. savings, and hence the strength of U.S. external accounts, are undercounted. A more pressing concern is solvency: Without reform, U.S. fiscal accounts might not be solvent on a long-term basis.

Gold's role as value store in uncertain times underpins its current high price. The shakier the international system appears, the greater the strength of gold. However, to recapture its 1980 peak, gold needs to be seen as standing a greater chance of reclaiming its historic role as a monetary asset. Yet:

--The business cycle is an unremarkable phenomenon; the greater likelihood is that the credit crunch will prove transitory, as will associated monetary easing and financial innovation worries.

--Compared to the 1970-73 cycle, today's reserve accumulation has been unspectacular. German and Japanese reserves rose nearly six-fold then, compared to less than a tripling of Chinese reserves in the 36 months to October 2007.

--More pressing is U.S. solvency: While the international monetary system cannot be based on the currency of an insolvent state, this issue has yet to permeate bond market expectations.

Towards Greener Tomorrow - Understanding Carbon Credit

Amidst growing concern and increasing awareness about the need for pollution control, the concept of carbon credit came in vogue as part of international Kyoto Protocol. India is largest beneficiary of carbon trading, claiming about 31% of the total world carbon trade through the Clean Development Mechanism (CDM), which is expected to rake in at least $5-10bn over a period of time. India is being heralded as the next carbon credit destination of the world. This article delves into the concept.

The Concept of Carbon credit came into existence as a result of increasing awareness about the need for pollution control. It took the formal form after the international agreement between 141 countries, popularly known as Kyoto Protocol. Carbon Credits are certificates awarded to countries that are successful in reducing the green house gases(CHG) emissions that cause global warming.

It is estimated that 60-70% of GHG emission is through fuel combustion in industries like cement, steel, textiles and fertilisers. Some green house gases like hydro fluorocarbons, methane and nitrous oxide are released as by-products of certain industrial process, which adversely affect the ozone layer, leading to global warming.

Kyoto protocol
The Kyoto Protocol is an international treaty to reduce GHG emissions blamed for global warming. The Protocol, in force as of 16 February, 2005 following its ratification in late 2004 by Russia, provides the means to monetise the environmental benefits of reducing GHGs.

Kyoto Protocol is a voluntary treaty signed by 141 countries, including the European Union, Japan and Canada for reducing GHG emission by 5.2% below 1990 levels by 2012. However, the US, which accounts for one-third of the total GHG emission, is yet to sign this treaty. The US agreed to reduce emissions from 1990 levels by 7 % during the period 2008 to 2012, says www.eia.doe.gov. But others would hasten to point out that the protocol is non-binding over the US until ratified.

The preliminary phase of the Kyoto Protocol is to start in 2007 while the second phase starts from 2008. The penalty for non-compliance in the first phase is E40 per tonne of carbon dioxide equivalent. In the second phase, the penalty will be hiked to E100 per tonne of carbon dioxide.

The Protocol and new European Union emissions rules have created a market in which companies and governments that reduce GHG gas levels can sell the ensuing emissions ‘credits’. These are purchased by businesses and governments in developed countries – such as the Netherlands – that are close to exceeding their GHG emission quotas.

For trading purposes, one credit is considered equivalent to one tonne of carbon dioxide emission reduced. Such a credit can be sold in the international market at a prevailing market rate. The trading can take place in open market. However there are two exchanges for carbon credit viz Chicago Climate Exchange and the European Climate Exchange.

The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET). Under JI, a developed country with relatively higher costs of domestic greenhouse reduction would set up a project in another developed country, which has a relatively low cost.

Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of GHG reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project. Under IET mechanism, countries can trade in the international carbon credit market. Countries with surplus credits can sell the same to countries with quantified emission limitation and reduction commitments under the Kyoto Protocol.

The EBRD region – former centrally planned economies of central and Eastern Europe, Russia, the Caucasus and central Asia – is rich in possibilities for using the Protocol to reduce emissions and energy waste and costs. Such economies are highly energy inefficient: it takes twice as much energy to produce a unit of GDP in Hungary and Czech Republic as it does in Western Europe and 10 times as much in Russia and Ukraine.

Understanding Carbon Credits
Carbon credits are measured in units of certified emission reductions (CERs). Each CER is equivalent to one ton of carbon dioxide reduction. India has emerged as a world leader in reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the past two years. Developed countries that have exceeded the levels can either cut down emissions, or borrow or buy carbon credits from developing countries.

But how is carbon credit defined? It is action that helps reduce the atmospheric concentration of CO2, such as fossil-fuel conservation and planting trees, defines Canadian Environmental Literacy Project (www.celp.ca). Carbon credits as defined by Kyoto Protocol are one metric tonne of carbon emitted by the burning of fossil fuels.

However, the text of Kyoto Protocol to the United Nations Framework Convention on Climate Change on http://unfccc.int shows no `credit’ in a simple search. “Tradable credits issued according to the amount of absorption of carbon and then sold to emission sources to offset their emissions,” is how www.watercorporation.com. au defines the phrase. “What polluting companies might use to pay for the maintenance of forests,” is the definition in the ecological glossary on projects.powerhousemuseum.com.

There are different types of carbon credit, you’d learn from an educative brochure titled `A Climate Change Projects Office Guide’ on www. dti.gov.uk. “Various types of carbon credits exist, each with different characteristics and potential value,” it begins, and classifies the credits under three heads.

First, `credits defined in the Kyoto protocol’include Assigned Amount Units (AAUs), Certified Emissions Reductions (CERs), Emission Reduction Units (ERUs) and Removal units (RMUs).

Second, `credits for specific emission trading markets to assist in achieving Kyoto targets’ including UK Allowances, and European Emission Trading Allowances (EAU).

Third, non Kyoto compliant credits’ under which are listed Emission Reductions (ERs) and Verified/ Voluntary Emission Reductions (VERs).

Trading In Carbon Credits (CC)
The concept of carbon credit trading seeks to encourage countries to reduce their GHG emissions, as it rewards those countries which meet their targets and provides financial incentives to others to do so as quickly as possible. Surplus credits (collected by overshooting the emission reduction target) can be sold in the global market. One credit is equivalent to one tonne of carbon dioxide emission reduced. CC is available for companies engaged in developing renewable energy projects that offset the use of fossil fuels.

Developed countries have to spend nearly $300-500 for every tonne reduction in carbon dioxide, against $10-$25 to be spent by developing countries. In countries like India, GHG emission is much below the target fixed by Kyoto Protocol and so, they are excluded from reduction of GHG emission. On the contrary, they are entitled to sell surplus credits to developed countries.

It is here that trading takes place. Foreign companies which cannot fulfill the protocol norms can buy the surplus credit from companies in other countries through trading.

Thus, the stage is set for Credit Emission Reduction (CER) trade to flourish. India is considered as the largest beneficiary of carbon trading, claiming about 31% of the total world carbon trade through the Clean Development Mechanism (CDM), which is expected to rake in at least $5-10bn over a period of time.

To implement the Kyoto Protocol, the EU and other countries have set up ‘cap and trade’ systems. Under these systems, companies are obliged to match their GHG emissions with equal volumes of emission allowances.

The Government initially allocates a number of allowances to each company. Any company that exceeds its emissions beyond its allocated allowances will either have to buy allowances or pay penalties. A company that emits less than expected can sell its surplus allowances to those with shortfalls.

Companies or countries will buy these allowances as long as the price is lower than the cost of achieving emission reductions by themselves.

Carbon Finance
‘Carbon finance’ is the term used for carbon credits to help finance GHG reduction projects such as the recent biomass conversion at Bulgaria’s PFS paper mill. The switch from hydrocarbon to biomass will reduce the mill’s GHG emissions, generating carbon credits being purchased for the account of the Netherlands government.

There are two categories of countries involved in carbon credit trading and finance:

(1) Developing countries which do not have to meet any targets for GHG reductions. However, they may develop such projects because they can sell the ensuing credits to countries that do have Kyoto targets. In the EBRD region these include Armenia, Azerbaijan, Georgia, Kyrgyz Republic, FYR Macedonia, Moldova, Turkmenistan and Uzbekistan. These countries are covered by the Protocol’s Clean Development Mechanism (CDM).

Industrialised countries which include OECD countries (the richest nations of the world) and countries in transition from centrally planned to open market economies. The latter include 13 of the EBRD’s countries of operation where the industrial base and other infrastructure are highly energy inefficient: Russia, Ukraine, Bulgaria, Czech Republic, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. They are part of the Protocol’s Joint Implementation (JI) mechanism.

Will Carbon Credit be Next Black Bubble?
GLENEAGLES Plan of Action on `Climate Change, Clean Energy and Sustainable Development’ has a section titled `Financing the transition to cleaner energy’. Paragraph 22 (c) in that section speaks of promotion of dialogue on market-based instruments, fiscal or other incentives, and also “tradable certificates and trading of credits for reductions of emissions of greenhouse gases or pollutants,” as one learns at www.number-10.gov.uk.

It seems, therefore, appropriate that the Finance Minister, during his recent trip to the US, was responding to the World Bank’s call to join hands in climate change mitigation, though with a diplomatic line: “We would be happy to remain engaged in the dialogue for exchange of ideas,” rather than easily shrugging off saying that India was not a party to the Plan adopted by the G8 in July.

But Indian companies are more than engaged in emission trading and booking carbon credit.

A recent report informs that SRF Ltd and Shell Trading International have entered into a deal “for sale and purchase of 500,000 CERs (Certified Emission Reductions) to be delivered on or before April 1, 2007”. The move made a strong impact on the charts. Another report, commenting on Suzlon, the country’s leading manufacturer of wind turbine generators, has an analyst writing that wind energy is eligible for carbon credit benefits under the Kyoto Protocol for a decade from 2002.

After Chicago Climate Exchange and the European Climate Exchange, MCX (Multi- Commodity Exchange of India) is likely to be the third exchange in the world with a license to trade in carbon credits, informs yet another news report.

British Energy is the latest international energy producer to overhaul its in-house and external legal set-ups as rising carbon credit prices force the industry to review costs, notes a posting on www.thelawyer.com.

Emissions trading are not elaborately dealt with in the protocol. Article 17 in it gives the job of defining “the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountability for emissions trading” to the CoP or Conference of the Parties.

“The Parties included in Annex B may participate in emissions trading for the purposes of fulfilling their commitments under Article 3.” Annex B shows a list of countries and `Quantified emission limitation or reduction commitment’, as a percentage of base year or period. Among the countries are those with limits that are above their current production; and the buffer or the `extra’ is what can be sold to other countries on the open market, as tradable credit. “So, for instance, Russia currently easily meets its targets, and can sell off its credits for millions of dollars to countries that don’t yet meet their targets, to Canada for instance. This rewards countries that meet their targets, and provides financial incentives to others to do so as soon as possible,”

That apart, carbon dioxide sinks such as forests earn credits. Please note that buying credits is no substitute to domestic action to reduce emissions. Of current bearing would be `Summary of the Seminar on Linking the Kyoto Project-based Mechanisms with the European Union Emissions Trading Scheme’ on www.iisd.ca; it traces the history of the protocol and ETS.The Saskatchewan Soil Conservation Association (http://ssca.usask.ca) has an interesting article by John Bennett to help “farmers understand the benefits and the risks of being short-changed” by carbon markets. He offers a `30-second science lesson’: “A plant takes solar energy and by the process of photosynthesis, transfers the carbon dioxide gas into carbon (organic matter) and then returns the oxygen to the atmosphere. The removed carbon, which is stored in the soil and measured as organic matter is the RMU (emission removal).”

How is price determined for carbon credit? How big is the market? These are questions you may like to probe further. It may be a clue to know that a recent alert spoke of India standing to gain $5 billion from carbon credit in seven years. Another estimate, from the UK angle, cited on www.dti.gov.uk pegs the size of the market “at between euro 4.6 to euro 200 billion by 2010, with the former estimate based on purchases of carbon credits limited to compliance only, and the latter estimate subject to international political developments.” A `truly liquid market’, it notes. What is however for sure is that nobody can assure you that carbon won’t become the next big black bubble.

Carbon Credit: Rs. 15,000-crore Investments Likely
The unfolding opportunity of carbon credits has caught the imagination of Indian entrepreneurs. The number of Indian projects, in the fields of biomass, cogeneration, hydropower and wind power, eligible for getting carbon credits, now stands at 225 with a potential of 225 million CERs (certified emission reductions.

Each CER stands for one tonne of carbon dioxide reduction.) “This is just the tip of the iceberg. If there is no uncertainty as to what will happen beyond 2012, the number could easily cross the 2,000-mark,” according to Mr. S.K. Joshi, Joint Secretary in the Union Ministry of Environment and Forests.

The Kyoto Protocol required the developed nations to reduce greenhouse-gas emissions of at least five per cent from 1990 levels during the commitment period of 2008-2012. On the sidelines of the 93rd Indian Science Congress, he told Business Line that it was estimated that the new opportunity could trigger flow of investments to the tune of Rs.15,000 crore. Projects approved by designated CDM (Clean Development Mechanism) in the developing countries could earn carbon credits and sell them to the countries that required reducing the greenhouse gas emissions under the international agreement. “We are not at all under any pressure. Going for cleaner production was good for our own interest. In that process our companies can benefit by selling the credits,” he said adding that any project that was set up after January 1, 2000, was eligible for CDM recognition.

In a bid to throw light on the subject, public sector energy utilities such as NTPC, ONGC and Power Grid and the Ministry of Environment and Forests recently held a national level seminar. The Ministry had already started a project to sensitise and encourage States to take a lead in this regard. Initially five States — Andhra Pradesh, Rajasthan, Karnataka, Punjab and Maharashtra were given seed funding to set up their own CDM facilities and spread the word. Now it has been extended to 15 States while the ultimate aim is to cover the whole country by the year-end.

Demand for Carbon Credits Will Grow
The demand for carbon credits is expected to grow for the following reasons:

Because of projected shortfalls and higher relative carbon abatement costs, it is anticipated that OECD countries will fail to meet their Kyoto target by 2012. The higher relative emissions abatement costs in these countries mean that they will find it attractive to buy carbon credits generated elsewhere.

Private companies in industrialised countries will increasingly be subject to ‘cap and trade’ mechanisms, such as the EU Emission Trading Scheme which started on 1st January 2005 (although this will initially cover only 50% of emissions). The EU scheme is separate from the Kyoto Protocol but the ‘Linking Directive’ of 2004 allows a European company to buy Kyoto Protocol Carbon Credits to comply with their obligations under the EU Emission Trading Scheme.

Governments will also have to buy Carbon Credits because the ‘cap and trade’ mechanisms will initially only apply to a fraction of each state’s economy and Governments are responsible under the Kyoto Protocol for meeting their country targets. OECD Governments and European companies subject to the EU Emission Trading Scheme will therefore be the main buyers of Carbon Credits.

Low-Cost Carbon Credits Available in EBRD’s Countries of Operations
The reference year used by the Kyoto Protocol for targets in emission reductions is 1990. Since then, emissions have dropped sharply in countries such as Russia and Ukraine, as a result of substantial real contraction of GDP. It is expected that the targets of 13 countries of operation with Kyoto Protocol will remain below their agreed maximum greenhouse emissions. These countries will therefore be likely sellers of carbon credits. High carbon and energy intensities mean high potential for low-cost emissions reductions (low relative investment cost per tonne of GHGs avoided).

Role Of EBRD
The main role of the Bank in the field of carbon finance is to act as financier of emission reduction projects. However, in keeping with its principle of ‘additionality’ - supporting and complementing the private sector rather than competing with it - the Bank can play a number of additional roles:

Carbon Funds: The EBRD is well positioned to purchase, for the account of third parties, carbon credits from GHG emission reduction projects. The Bank’s added value in this area stems from:

l The size and quality of emission and reduction projects. The Bank is the largest financier of private sector deals in the region, with preferred creditor status, a rigorous appraisal process, and integrity and ‘good governance’ requirements. It also has lengthy experience in energy efficiency and renewable energy projects.

l The importance of closely coordinating the project financing and carbon buying process
l Strong relationships with host country governments, and its ability to engage in policy dialogue to remove or alleviate obstacles to carbon trading and mitigate the ‘political’ risks inherent to the JI and CDM project cycles
l Its experience in managing funds from its shareholders for a variety of purposes (e.g. nuclear safety).
l Its ability to access donor funds to help develop and implement projects.
l In October 2003, the EBRD established its first carbon fund, the Netherlands Emissions Reductions Co-operation Fund, with the Dutch Government. The fund buys Joint Implementation Carbon Credits from its 13 countries of operations eligible for this mechanism. Its first transaction was the PFS biomass conversion.
l The Multilateral Carbon Credit Fund will become operational in 2006. The fund will buy carbon credits from investments under the European Union scheme as well as the Protocol’s Joint Implementation and Clean Development Mechanism. It will also aim to facilitate the direct trading of carbon credits between some of its shareholders (so-called Green Investment Schemes).

Donor Funding: The Bank can help Governments and companies in its region of operations overcome obstacles in emission trading by providing technical advice funded by donor governments. For example, as part of the Bank’s Early Transition Countries Initiative for its poorest countries of operation, donors have approved funding to help in development of complex CDM projects.

Business Opportunities For Private Sector
EBRD’s carbon finance activities create new business opportunities for the private sector in this emerging market as:
l Selling carbon credits increases the feasibility of emission reduction projects, which helps to attract new private investors
l By being the buyer of carbon credits in a transaction, the EBRD can provide comfort to private sector buyers that would not otherwise consider these projects

At last count in March 2006, India had 310 ‘eco-friendly’ projects awaiting approval by the UN. Once cleared, these projects can fetch about Rs. 29,000 crore in the next seven years. India’s carbon credit market is growing, as many players (industries) are adopting the Clean Development Mechanism (CDM).

US accounts for 30% of global emissions, while India makes for three per cent. Now, India can transfer part of its allowed emissions to developed countries. For this, India must first adopt CDM and accrue carbon credits. One carbon credit or Certified Emission Reductions (CERs) is equivalent to one tonne of emission reduced.

In India so far, 242 projects have been identified for generating CERs while a total of 318 projects have received clearance by the Ministry of Forestry and Environment. For the Indian carbon market — this has the potential to supply 30-50% of the projected global market of 700 million CERs by 2012.

Conclusion
Even as India is being heralded as the next carbon credit destination of the world, with maximum growth on this front happening in Maharashtra, Chhattisgarh and Andhra Pradesh, Gujarat is slowly emerging as the dark horse of the country on the back of rapid industrialisation through its recent oil refineries and power projects.

Between the end of 2005 and December 2006, 450 clean development mechanism (CDM)
projects had been submitted to the ministry of environment and forests, of which around 420 CDM projects have received government approval, which make up a total of 350 million carbon credits, said a source from the ministry. Of the 420 projects, around 20 are from Gujarat.

Corporate biggies like Reliance and Essar are already present in the state. And now, most carbon credit consultants, including a few international environment players planning to set up shop in the country, are eyeing the Gujarat market.

Of the approved companies from Gujarat, Torrent Power has the maximum number of credits to its name with 11 million credits followed by ONGC’s Hazira refinery with approximately two million credits, Indian Farmers Fertiliser Cooperative Ltd (Iffco) with 1.5 million credits, Essar Power with 0.5 million credits, Reliance Industries’ approval for its base in Gujarat close to 2,40,000 credits, and Apollo Tyres with 1,00,000 credits.

Others include United Phosphorus, Gadhia Solar, Tata Chemicals, Rolex Rings, Alembic and Fairdeal Suppliers, said the source.

“Going by the current rates, where carbon credits are measured in units of certified emission reductions (CERs) and each CER is equivalent to one tonne of carbon dioxide reduction, the value of one carbon credit could be anywhere between three Euros and six Euros, and with bank guarantee can go up to eight or nine Euros,” said Pranav Nahar, managing director of Eco-securities, which boasts of being the only international developer and trader of carbon credits to have a liaison office in India.

Carbon credit analysts confirm that at least two leading international players have already begun dialogue with the government to acquire permission to set up liaison offices in India.

However, in spite of the global interest in India for the CERs market, there is still some way to go before it catches up with the market leaders in the field. While China leads the pack with a market share of 60% in the carbon credit trading, India lags behind with around 15% market share, said a leading environment analyst.

Compounding to its woes is its high rejection rates from United Nations Framework Convention on Climate Change (UNFCCC)’s Kyoto protocol.

“In spite of being preferred by most companies in the UK, Germany, Japan and Denmark, the reason India is still not counted among the top three carbon credit nations is because of its project rejection rate, which is as high as 50%,” said Nahar.

He also added that just because the government approves projects does not mean that validators or the CDM executive board will do so.

“The projects do not get approval mostly due to the consultants hired by Indian companies who if not well versed with the Kyoto protocol will not be able to comply with the strict UNFCCC norms,” he added.