>Crude weaker as sell off resumes

London - Crude oil futures traded lower in London Thursday as traders returned their focus to immediate weak demand for energy and burgeoning stockpiles of crude and oil products in both the U.S and Europe.

Some market participants hold a very skeptical short-term outlook for products and therefore crude and refining margins. Refinery runs are still too high for the product market to balance and need to come down, said DnB NOR analyst Torbjorn Kjus. "Even if refiners are reluctant to cut runs, as there has been much new capacity added this year, we believe economic run-cuts will force their way into the market."

At 1114 GMT, the front-month August Brent contract on London's ICE futures exchange was down 87 cents at $62.22 a barrel.

The front-month August contract on the New York Mercantile Exchange was trading 56 cents lower at $60.81 a barrel.

The ICE's gasoil contract for August delivery was up $3.25 at $506 a metric ton, while Nymex gasoline for August delivery was down 172 points at 169.09 cents a gallon.

An overall bearish weekly U.S inventories report, which showed days cover for all light products remains really high, weighed on crude prices Thursday. The climbdown from recent 20-year crude stock highs saw a larger than expected crude stock draw in the data but was counterbalanced by higher imports figures.

In the coming week, crude oil futures are expected to quickly resume the downward trend established in early July, although the ICE Brent front-month contract rolls over from August to September Thursday, which could add some volatility to prices.

Peter Beutel, analyst at Cameron Hanover, expects to see prices return to test their recent lows after a short-lived rally this week. But Beutel pointed out that equities are "back in the picture" and a strong performance from stocks this week could bring the index funds back into "every hard asset available."

Looking ahead over a longer period, analysts at Goldman Sachs are confident improving fundamentals will lead to rising commodity prices and returns over 12 months. "Although we share the market's concerns over recent oil demand deterioration, we believe much of this weakness can be attributed to the continuation of massive destocking in U.S. manufacturing that is weighing on U.S. demand today but is expected to slow and eventually reverse as manufacturers deplete inventories," the analysts said.

VTB Capital analyst Andrey Kryuchenkov remains bullish on the market toward the end of the year, anticipating that more weakness for the dollar, improving macroeconomic data and the approaching hurricane season will all be supportive for crude prices.

Source: COMMODITIESCONTROL

>Weak monsoon rains to choke India's rural gold demand

Mumbai - After high prices and a doubling of import duty choked India's gold imports in the first half of 2009, demand in the world's largest consumer is likely to be further hit by poor rural demand in the second half due to weak monsoons.

Rural consumers, who account for 60%-70% of total gold consumption in the country, rely heavily on June-to-September monsoon rains for the production of summer crops such as rice, oilseeds, cotton, and sugar cane.

Typically, rural gold sales fall whenever there is fear of insufficient rains because that can lead to a squeeze on farm incomes.

According to India's Meteorological Department, monsoon rains are expected to be 93% of the long term average this year. Erratic rains in the past few weeks have already fueled concerns of widespread crop losses and lower output.

Morgan Stanley said in a recent report that there is an increasing risk of India's agriculture growth slowing to 1.5%-2%, from a 3% growth forecast made before the monsoon season.

"As it is, gold imports have fallen this year. Adding to the current weak demand, lower farm realizations will definitely (keep) farmers away from the bullion market," said Harish Galipelli, head of research of Karvy Comtrade.

Upcoming Hindu festivals in the second half of the year, usually the peak time for gold sales, may fail to generate increased buying interest this year amid fears of a drop in rural incomes.

"The Impact of the weak monsoons will be felt strongly on rural demand, unless gold prices fall to INR13,500 levels as Indians are very price sensitive," said Praveen Singh, an analyst with Sharekhan Commodities.

If prices continue to hover around current levels of INR14,500/10 grams, it could be a bad year for gold demand, he said.

In the first half of 2009, India's gold imports plunged to just 61.8 tons, from 139 tons during the first half of last year, according to preliminary data from the Bombay Bullion Association.

"The rest of the year is unlikely to see any surge in demand, despite the peak festival season if prices hover at these levels," said Girish Choksi, a bullion merchant based in Ahmedabad.

"Average sales will continue to be around 30%-40% of last year's sales," he added.

He said weak sales will result in India's gold imports falling below 500 tons this year, compared with an average 700-800 tons in previous years.

Recycled Gold To Dominate Local Sales
"There is increasing amount of recycled gold coming into the market and that is quoting around INR100/10 grams lower than imported gold," said Pravin Mehta, president of the Madras Jewellers and Diamond Merchants Association.

He said with the doubling of import duty on gold bars, the difference in prices will widen, leading to higher preference for recycled gold.

"Right now we are getting 10% more recycled gold than demand in the market," Mehta said.

However, it may still be too early to estimate the extent of demand weakness, said Bhargava Vaidhya, director of Vaidhya & Associates and a leading industry expert.

In addition to agriculture production, overall economic growth in the next few months will be a key indicator of demand, he said.

"Monsoon's failure will affect demand, but it will be limited as the government has a lot of relief measures in place to take care of the rural economy," Vaidhya said.

Source: COMMODITIESCONTROL

>RELIANCE INDUSTRIES LIMITED (MORGAN STANLEY)

Stepping on the Gas

Investment conclusion: We reiterate our Overweight stance on Reliance Industries (RIL) and update our price target to Rs2,371 per share, marking to market our sum-of-the-parts multiples for each division. We expect RIL’s profits to grow at an impressive CAGR of 37% F2009/11, on the back of RIL’s E&P business. Reliance started commercial production from the KG D6 field on April 2, 2009, and is currently producing 30 mmscmd of gas. It has signed up with customers for 40 mmscmd of gas at US$ 4.2/mmbtu. The company should touch 80 mmscmd of gas in the next six months.

RIL’s 80 mmscmd of gas implies an annual US$8 billion saving for the country, or replacement of close to 26mn tons of crude oil; that is as much as ONGC produces domestically. We estimate 20 mmscmd of gas would go to the fertilizer industry and most of the rest to the power industry. This would imply about 13 million tons, or almost 50% of the country’s fertilizer production,
and 12,500 MW of power, or 8-9% of power produced in the country, would run on RIL’s gas.

There is a lot of uncertainty around the RIL-RNRL litigation and we highlight four different possible scenarios. Our base case is based on

US$ 4.2/mmbtu for all the D6 gas to customers other than NTPC and RNRL, who would get the gas at a lower price when their power plants are ready to consume the gas. We believe the green field ventures by both RNRL and NTPC are at least 3 years away, and until then RIL should be able to earn US$ 4.2/mmbtu on its entire gas production.

We estimate RIL to be FCF positive in F2010 with cash earnings increasing from US$4.5bn in F2009 to US$7.4bn in F2010 and US$9.4bn in F2011, and capex hovering around US$3.5-4.5bn per annum. We believe the E&P business should enable the company to grow 17% sequentially in each of the next four quarters despite lower GRMs and petrochemical netbacks.

To see full report: RIL

>TEXMACO (ICICI SECURITIES)

Favoured by firm foundations

Texmaco, the largest wagon manufacturer in India, is in a sweet spot to capitalise on diverse & large-scale opportunities in the Indian railways sector emerging from necessities and logistics advantage. Demand for wagons continues to grow as Indian Railways (IR) and private players strive to meet the burgeoning rail-freight traffic. On the back of its leadership, long-standing experience, low-cost infrastructure and capabilities (skill & capacity), Texmaco is set to benefit from the expanding railways landscape. We value the company at Rs146/share and initiate coverage with BUY recommendation. Further, positive developments on JVs with global partners, the foundry division and real estate would provide upside to our valuations.

■ Railway freight traffic – In fast lane. Rail freight offers logistics advantage and is critical to economic growth. Freight traffic has seen 8.4% CAGR over the past five years; burgeoning demand of bulk commodities, particularly coal & containerisation, would accelerate growth. Demand for wagons is set to grow as IR, Container Corporation of India (CONCOR), and private players increase procurements. Texmaco is the leader in the high-growth, high-margin specialised wagons category.

■ Advantage Texmaco. Texmaco is the largest wagons supplier for IR (~25% market share) and the private sector (~50% market share). It has superior design & manufacturing capabilities, thereby switching rollout to the high-growth, commodity specific & special-design wagons. Texmaco’s infrastructure is low-cost and has the advantage of parallel processing and a hi-tech foundry. Management has ~50 years of experience, renowned for ethical standards & industrial harmony over 5 decades.

■ Potential upside from Foundry, JVs & real estate. Texmaco’s foundry division is technologically advanced, gaining traction in the export market – Foundry’s EBITDA saw 39% CAGR over FY06-09. Texmaco plans JVs with global peers to manufacture electrical multiple units (EMUs), metro coaches, special wagons, locomotives & their underframes, and bogies. Its 178-acre land bank at Delhi and Kolkata could provide minimum upside of Rs2.9bn or Rs26/share.

■ Valuations. Our SOTP-based valuations for Texmaco stand at Rs16.1bn or Rs146/share, including Rs15.4bn or Rs139/share for core business and Rs750mn or Rs7/share for leased property in Gurgaon (NCR). Based on FY10E & FY11E EPS of Rs8 & Rs9.4, the stock trades at P/E of 11.5x & 9.7x respectively. Texmaco is a value play on growing demand of rail freight and Mass Rapid Transport System (MRTS) across Indian cities.

To see full report: TEXMACO