Wednesday, November 4, 2009

>Asian sugar prices rise, reduces buying; millers slow sales

Singapore - Sugar prices in Asia rose in the week to Tuesday, reducing buying interest, while millers slowed sales after having contracted as much as 80% of output from a new crop.

Cash premiums for J-spec raw sugar for January-March shipment were around 10 points to the ICE March contract, while those for March-May shipment were around 25 points, both little changed from a week earlier. The benchmark March ICE sugar contract settled at 23.44 cents a pound Monday, up from 22.93 cents a week earlier.

Millers slowed down sales because they have signed contracts for most of the expected output even before crushing of the new crop had begun, and are being cautious amid an uncertain outlook on the harvest due to persistent rains in some key growing areas, traders said. The crop is expected to be harvested in mid-November this year if the weather is favorable.

"There are rains still in some growing areas," said a sugar trader at a commodities trading house. "Crushers hope the rains will stop in mid-November, so that they can start (crushing) before the end of this month."

Officials in Indonesia and China expect production this season to fall compared with a year earlier due to erratic weather and lower acreage, likely adding further pressure on regional supply.

Sugar prices also rose in India. In Mumbai's Vashi market, S-30 grade sugar was quoted at INR32,000-INR33,000/ton, up from INR29,000-INR29,600/ton a week earlier.

"The delay in crushing in Uttar Pradesh is pushing up the price," said Mukesh Kuvadia, secretary of the Bombay Sugar Merchants' Association.

Crushing in Uttar Pradesh, India's second-largest sugar producing state, will likely be delayed to mid-November with farmers demanding higher cane prices.

Lower open market sale quota for November is also supporting prices, he said.

The government has fixed the open market sugar sale quota for November at 1.5 million tons compared with 1.85 million tons in October.

Still, local prices aren't likely to rise much beyond INR35,000/ton as output from a new season is expected to arrive in the market by early next month, Kuvadia said.


>Gulf states' USD40 bln port plans face econ head minds

Dubai - Plans to invest almost $40 billion to triple port capacity across the oil-rich Persian Gulf region are sailing against stiff global economic head winds, according to industry experts.

Before the global financial crisis weighed heavily on international trade, developers in the Arab states of the Gulf had plans to add 62 million 20-foot equivalent units, or TEUs, of capacity by 2028, at a cost of almost $40 billion, according to Zawya Projects Monitor data.

But a sharp downturn in container traffic has forced a rethink by some of the region's maritime planners.

Global container shipping is expected to fall 7% this year, according to industry experts. Volumes to the Gulf and Middle East are down around 20% or more on main Far East, European and transpacific routes. By August, 580 ships--1.5 million TEUs of capacity--10% of the global fleet, were laid up. In the next four years, half of the 200 container ships of 10,000 TEU-plus on order are likely to be deferred or canceled.

"Our anecdotal experience is that pretty much all port expansion projects, both in the Middle East and elsewhere, are on hold or under review, so severe is the global downturn," said Neil Davidson, head of research at Drewry Shipping Consultants in London.

Data from Drewry shows that 24.4 million TEU of cargo was shipped through the Gulf Cooperation Council, or GCC, in 2008, compared with a total capacity of 30.4 million TEUs. Over half GCC port throughput is transshipment and according to Drewry throughput at Gulf ports will fall 7% this year.

Still, regional port operators are being encouraged to move ahead with expansion plans to keep pace with rapid economic growth in the Gulf.

"Developers need to take things phase-by-phase," said Hans-Ole Madsen, vice president for business development for South Asia, Middle East and Africa at APM Terminals. "It's good to have a masterplan to create a 10 million TEU facility, but maybe try half a million first."


A drive to increase long-term capacity in the region will see two projects alone bring on at least 20 million TEUs each. Abu Dhabi Ports Co., or ADPC, is building Khalifa Port & Industrial Zone, or KPIZ, at Taweelah in the United Arab Emirates. In Saudi Arabia a new port at King Abdullah Economic City, or KAEC, is a central plank of a total of over $50 billion worth of projects at Saudi Arabia's largest new city at Rabigh.

Other expansion projects include the 6 million TEU New Doha Port at Al Wakrah in Qatar and Kuwait Gulf Link Port International's 3 million TEU Mina Saqr container terminal expansion at Ras Al Khaimah in the U.A.E.. But in each case there are signs that the global downturn could hit development.

Saudi Arabia's economy, the region's largest, has the most to lose from delays. According to the Saudi Ports Authority, some 12,000 ships visit Saudi ports annually, more than one ship an hour.

"The Saudi market is extremely interesting, reasonably strong and growing," said Iain Rawlinson, APM Terminal's commercial manager in Bahrain. "We don't see ourselves as a competitor to Saudi, so much as helping to improve the network, especially at Jubail, which has lacked investment."

King Abdullah Economic City in Saudi will add 20 million TEUs of capacity over five phases to 2020. Analysts say the Saudi government may have to fund the project, despite a decision to sell the assets.

Other projects in the kingdom that will cater to dry and liquid-bulk cargoes include the industrial terminals at Ras Al Zour, which will handle 70,000 dead-weight-ton vessels, and Jubail, where the Royal Commission for Jubail and Yanbu completed three new petrochemical berths this year.

In Dammam, in the kingdom's eastern province, a joint venture between the Saudi and Singapore ports authorities for a 30-year, 3 million TEU expansion is to go ahead, financed by the Saudi Investment Fund.

"The Jubail export market is very substantial and forecast to grow 60% in next 12 months," said Rawlinson, who sees the terminal as ideally placed for upper Gulf feeder runs.


Further south in Abu Dhabi the government is investing heavily on developing Khalifa port as part of a $100 billion program of infrastructure works. The terminal will eventually have a capacity of 22 million TEUs, scheduled for completion in 2028. The target for initial port operations was pushed back to 2012 earlier this year, when Abu Dhabi Ports Co. said it would award 17 contracts worth $2.7 billion for the offshore port and onshore free zone.

Jebel Ali, the largest container port in the Middle East, opened Terminal 2 in February to increase total capacity to 14 million TEUs. However, it reported an 8% fall in volume in the first nine months of the year.

On the East coast of the U.A.E., Khor Fakkan's capacity increased by a third to 4 million TEUs this year, and quay wall and gantries both increased 25%.

International consultants are optimistic work will finally go ahead on the Bubiyan Island project in Kuwait, where the schedule calls for creation of 2.5 million TEUs of capacity by 2013.

"All things take time in Kuwait, but there is certainly political will at the moment," said Bryan Willey, general manager of U.K. engineers Atkins in Kuwait. "It's going to happen."

Middle East container growth data 2007-11

2007a 15.7%
2008a 11.7%
2009e -6.9%
2010e 3.1%
2011e 6.7%

GCC ports throughput and capacity (TEU) 2008

Throughput Capacity Utilization

Bahrain 300,000 400,000 75.0%
Kuwait 880,000 1,150,000 76.5%
Oman 3,392,000 5,000,000 67.8%
Qatar 403,930 300,000 134.6%
Saudi Arabia 4,648,409 5,900,000 78.8%
U.A.E. 14,755,292 17,635,000 83.7%
TOTAL 24,379,631 30,385,000 80.2%


>Gold up on IMF sale to India; Asia Ctrl Bks diversify

Sydney - News of India's central bank buying nearly half of the 403.3 metric tons of gold earmarked by the International Monetary Fund for sale boosted spot gold in Asia, reminding investors that central bank diversification away from the dollar will continue to prompt demand for gold in the open market.

The off-market deal also reinforces the view that little or none of the IMF gold may eventually reach the open market, limiting any bearish impact such a big sale may have had otherwise.

At 0700 GMT, spot gold was trading around $1,062.50 a troy ounce, up $2.90 on the New York close, and moving closer to last month's record high of $1,070.50/oz.

The Reserve Bank of India, or RBI, bought 200 tons of gold over a two-week period between Oct.19 and Oct.30, an IMF statement said Tuesday. Proceeds from the sale - $6.7 billion - indicate an average estimated price of $1,045 a troy ounce, far higher than IMF's projection of $850/oz a few months ago, when its executive board approved the sale.

IMF declined to comment on potential buyers for the remaining amount, but said it is still in "an initial period to sell gold directly to central banks and other official holders that may be interested in such sales."

"It makes sense to buy gold as it will appreciate more than the U.S. dollar," said a senior official at India's finance ministry. The move was to diversify reserves held by the central bank and RBI may buy more gold from the IMF, said the official who declined to be named.

There has been speculation that Chinese and Russian central banks may also be interested in buying gold directly from the Fund.

Open market sales will be conducted only if any gold is left after the "initial period" and "the Fund will inform markets before any on-market sales commence," the statement said.

Sue Trinh, currency strategist at RBC Capital in Sydney said the announcement supported the view that central banks are actively looking for ways to diversify their reserves away from the dollar.

Based on September quarterly data from the World Gold Council, the RBI held 357.7 tons of gold and with the current purchase taking the total to at least 557.7 tons, RBI has become the 11th largest gold holder among central banks, placing it after Russia, but before the European Central Bank.

The euro nudged higher against the dollar following the news, to rise through $1.4800 to an intra-day high of $1.4811 in a thinly traded market with Japan closed for a public holiday.

Broadening Demand Base As Central Banks, ETFs Buy Gold

"Central banks have switched from net sellers to net buyers. Over the last few years, gold ETFs (exchange traded funds) have become a major presence in the market. Gold's investor base is broadening, which is positive for gold price," said Janet Kong, managing director at Goldman Sachs' global investment research commodities division in Hong Kong.

Gold holdings in the SPDR Gold Trust, the world's largest gold ETF, have now reached 1,103.52 tons, making SPDR the 7th-largest gold holder, placing it ahead of Switzerland.

Kong said this growing interest in gold had fostered a gradual price rise in a market that is seeing increasing liquidity.

"Diversification has been an ongoing story for Asian central banks, and gold is one of the possible diversifiers. Gold holdings in comparison to dollar holdings are low," said Westpac Senior Commodity Analyst Justin Smirk.

While gold as a diversifier has limited potential since mine supply is capped, gold, unlike industrial metals, "never disappears, so there's potential for enough supply to build up for central banks to hold 1%-5% of their reserves in gold," said Kong.

RBI's gold holdings worth $10.32 billion, was only 3.6% of the country's total forex reserves of $285.52 billion at the end of last week.

"But it's not possible for (central banks) to change rapidly out of the dollar. This story is one of evolution, not revolution," said Smirk.

However, with the general view on the dollar rapidly changing, even European central banks that were net sellers in recent years could change their strategy going forward.

Speaking at the annual London Bullion Market Association Monday, European Central Bank's Deputy General Director for market operations, Paul Mercier said gold would remain an important asset for European central banks as risk diversification becomes a more significant issue.

In 1999, 15 European central banks agreed to limit gold sales to 2,000 tons, spread out over a five-year period. The signatories have twice renewed the Central Bank Gold Agreement, expanding the total quota for the 2004 agreement to 2,500 tons, but reducing it again to 2,000 tons this year after lower-than-expected sales in the previous sale periods.


>Is the crisis over? (ECONOMIC RESEARCH)

As the economies are improving and the financial markets are rising, this question is often asked: is the crisis over? Our answer is clearly negative, with arguments depending on the horizons:
in the near term (2010), we cannot see how OECD countries could avoid a significant slump in consumption - which will no longer be bolstered by any of the factors that have accounted for its resilience in 2009;

in the longer term, several serious threats appear:

  • the irreversible job losses linked to the crisis can no longer be offset by stimulation of demand via credit, and we cannot see how an equivalent number of jobs can be created;
  • "de-globalisation" seems to be emerging, due to the substitution of domestic output for imports in emerging countries, which means that growth in emerging countries will no longer drive growth in OECD countries. De-globalisation is, moreover, likely to lead to increased transfer of capital and production capacity to emerging countries;
  • it will not be easy to eliminate the huge fiscal deficits run up during the crisis, and they may monopolise savings in OECD countries, especially as prudential rules make it difficult to use savings to provide companies with long term funding; they may also lead to a sharp rise in interest rates if they are no longer financed by central banks in emerging countries;
  • the monetary and foreign exchange policies implemented in emerging and OECD countries are leading to massive growth in global liquidity and circulation of global savings that are paving the way for bubbles. These bubbles are already appearing, heralding future crises, due to the inability to control global money supply.

In a medium term prospect, our analysis would be mistaken if:
• new sectors massively created new jobs in OECD countries;
• global trade stopped contracting;
• governments implemented policies of reduction in government expenditure to have any hope of reducing deficits without a significant cost in terms of growth, thanks to Ricardian neutrality;central banks disciplined themselves and stopped the limitless growth in the size of their balance sheet.

However, over the next few quarters, the consumers will be faced with:
• a stabilisation of fiscal deficits (see charts in report ), which will therefore no longer underpin growth in consumption. We can in particular mention the end of the car purchase incentives;

• a rise in inflation (Chart 3) due to the rise in commodity prices (Chart 4);

• continued job losses (Chart 5A), as productivity has still not returned to its normal level (Chart 5B), especially in Europe, and therefore an ongoing rise in unemployment (Chart 5C);

• a slowdown or even a decline in wages in the United States (Chart 6A), due to the high unemployment and companies’ determination to restore their profitability (Charts 6B and C).

To read the full report: IS THE CRISIS OVER?


Reiterate Buy with PO of Rs1050; Delivering on strategy
ICICI Bank’s 2QFY10 results help reinforce our views that the bank is on a path of a strong recovery by focusing on 4C’s (CASA, Costs, Capital, and Credit quality). We believe the “return to growth” from 2HFY10 (pick up infrastructure, auto and mortgage loans), improvement in asset quality (unwinding of credit costs) and focus on profitability could see RoA expanding from greater than 1% in FY09 to 1.5% by FY12. Core RoE of the bank could rise to ~17% by FY12 v/s greater than 11% in FY09. We reiterate our Buy and PO on the stock. Our PO of Rs1050 factors Rs212/shr. for our SOTP for its insurance (losses were Rs0.7bn), AMC, general ins. and broking.

Broad based momentum; Reiterate Buy

2QFY10: Margins, CASA, and asset quality surprise
While ICICI Bank’s 2QFY10 earnings grew only 2.5% yoy (2% below BofAMLe), the bank’s delivered ahead / in line of expectations on CASA (37% v/s 33% in 1Q); NPL formation down at Rs11bn (v/s 14bn); margins at 2.5% (2.4%). Topline was weaker at 5% yoy (2-3% below) owing to 14% yoy loan contraction (4% qoq). Operating costs down 8% yoy (6% below est.). Operating earnings up 18% qoq.

Better positioned for growth; est. +30% in FY11-12
We tweak our FY10-12 earnings by greater than 1% as we still factor in high credit costs (owing to RBI’s new norms); but believe asset quality could surprise positively. Earnings still est. to grow at +30% CAGR through FY11-12. Moreover, risks to the earnings growth easing as NPL formation trends down and loan growth likely to pick up. Moreover, expanding branch distribution (+400 in next 6 months) to help support fees and sustain CASA at +34-35%, helping offset likely rise in opex. Also amongst the best capitalized banks with Tier I at +13%.

To read the full report: ICICI BANK


Slips into red; Outlook deteriorating; Fixing debt challenge
Suzlon had a disastrous 2QFY10 with Rec. Loss of Rs3.4bn vs Rec. PAT of Rs2.6bn in 2QFY09 and 3x BofAMLe. This was led by uneconomical operations resulting from dwindling backlog -41%, client driven push back in sales - 61%YoY fall in WTG volume (ex-REpower) and 1.4x rise in interest cost. With no recovery in-sight, Suzlon is trying to fix its debt repayment obligation by refinancing US$2.4bn (68%) debt with 2 year moratorium. We are cutting our PO to Rs61 (from Rs87) to factor in EPS cut by 10-58% over FY10E-12E led by delay in delivery and longer order conclusion cycle. Maintain U/P rating. Upside risk to our rating is de-leveraging by asset sale & pick-up in US market. 2QFY10 hit by push-back of US projects & weak India

One More Disastrous Q; Recovery Illusive Yet

Suzlon (ex-REpower) had weak execution in 2QFY10 with -61%YoY volume.
International volume down by 70%YoY on push-back of projects in US while
domestic volume hit due to poor corporate profitability. Gear box subs. also had a disappointing 2Q. However REpower’s Rs1.2bn of profit (vs Rs200mn loss in 2Q09) was the only positive. Reported Loss was Rs3.6bn on loss on CB (Fx loss of Rs207mn and Rs4.4mn gain on restructuring of CB).

Mgt see weak 3Q; Cut EPS 10-58% on weak 2Q & backlog
Business continuity remains our key concern for Suzlon and 41%YoY fall in 2QFY10 order book This coupled with weak market commentary by Vestas at its 2Q call and over-supply in global WTG markets, drive us to cut our Suzlon earnings by 10-58% over FY10E-12E

Order not enough; Debt repayment risk being post-poned
Completion of retrofitting the cracked blades in 2QFY10, should reassure clients and it could pave way for new orders. SUEL expects orders of ~1GW in FY10 to improve visibility of FY10/11E. However, we think this may not be enough to address business continuity concern as company may have to begin FY11E with order backlog of ~800MW v/s BofAMLe volumes of 2516MW in FY11E (ex-REpower). Realizing this, Suzlon is proactively aiming to fix the debt repayment challenge by asking for a 2 year moratorium in its new US$2.4bn debt refinancing plan being funded by Barclays
Capital, ICICI Bank and SBI, which is likely signed by Dec’2009, per banking sources.

To read the full report: SUZLON ENERGY


• The consolidated earnings of Unitech Ltd. for Q2FY10 was boosted by lower interest costs; although lower than our estimates due to lower than expected revenue recognized.

• Net sales for the quarter declined by 48%yoy and 5%qoq to Rs5.09bn, was lower than our estimates of Rs6.4bn, primarily due to lower revenue recognized from asset sale (Rs700mn in Q2FY10 against Rs1.2bn in Q1FY10). However revenue recognized based on PoCM increased sequentially by 5% to Rs4.39bn in Q2FY10 from Rs4.19bn in Q1FY10.

• Operating profit for the quarter stood at Rs2.97bn (our estimates at Rs3.8bn). Operating margins for the quarter at 58.5% (against our estimate of 59.3%) was lower by 350bps yoy.

• Interest expense declined by 55%yoy and 54%qoq to Rs603m in Q2FY10 as proceeds from QIP issuance was utilized to repay debt.

• Unitech’s consolidated earnings for Q2FY10 grew by 13%qoq to Rs1.77bn (down 51%yoy), was lower than our estimate of Rs2.21bn.

Other Key Highlights
• Since 1st April 2009, Unitech has launched ~21msf of properties and successfully sold ~10.1msf of launched properties.

• Unitech has repaid debt of ~Rs25bn from the receipt of funds of ~Rs43bn raised through QIP route in two tranches as on Jul’09. Resultant, total debt has reduced to ~Rs65bn from Rs90bn at the end of FY09.

• Cash and bank balance at the end of Q2FY10 was Rs7.4bn (Rs6.4bn in FY09).

To read the full report: UNITECH


Topline down 30%YoY, broadly in line with expectations: IOC reported a 29.5% YoY decline in revenues to Rs 609.7bn in Q2FY10, which was marginally below our estimate of Rs 632.4bn as the non-issuance of government bonds pushed up the subsidy burden during the quarter. The YoY decline in topline stemmed from a 68% drop in crude prices, which was partially offset by higher crude throughput and product sales. The company’s crude throughput increased 3.4% YoY to 12.4mmt, whereas product sales rose 7.7% to 16.7mmt. GRMs (combining its seven refineries) came in at US$ 3.5/bbl versus US$ 6.4/bbl in Q2FY09.

Margin up YoY but down sequentially in absence of government aid: In Q2FY10, IOC had to bear a subsidy burden of Rs 41.7bn (the entire cooking fuel underrecovery) as against our estimate of Rs 4.5bn (25% of auto fuel subsidy). Thus, despite being reimbursed fully for the auto fuel under-recovery of Rs 18bn, the company’s EBITDA margin suffered, clocking in at just 1% as against our estimate of 5%. However, the EBITDA margin improved significantly YoY from -6.8% in Q2FY09 on the sharp fall in crude prices and better refinery utilisation.

Skids on non-issuance of oil bonds

PAT below expectations: IOC reported a net profit of Rs 2.8bn in Q2FY10 as against a net loss of Rs 70.5bn in Q2FY09, primarily because of lower crude prices, higher other income and lower interest cost. The company witnessed a 62.7% YoY growth in other income and a 65% fall in interest costs in Q2FY10. However, net profit was significantly below our expectation of Rs 20.1bn due to non-issuance of oil bonds during the quarter. Adjusting for the impact of above-expected subsidy sharing, IOC’s PAT for Q2 would have been Rs 27.4bn.

Estimates pared: We have revised our crude price assumptions for FY10 and FY11 upwards to US$ 69/bbl and US$ 85/bbl from US$ 65/bbl and US$ 75/bbl respectively. We are also revising our rupee-dollar exchange rate assumption from Rs 48.5 and Rs 46 to Rs 47.5 and Rs 45 for FY10 and FY11 respectively. Consequently, we have increased our estimates for IOC’s under-recoveries to Rs 245bn in FY10 and Rs 424bn in FY11 from Rs 179bn and Rs 303bn respectively. Further, due to rising crude prices and the absence of oil bonds, we assume that upstream companies will bear 33% of the under-recoveries, government 47% through bond issuance, and OMCs 20%.

Rolling forward target price, maintain Hold: We are rolling forward our target price from FY10 to FY11, assigning a P/BV multiple of 1.1x on FY11E. This gives us a revised price target of Rs 335 from Rs 287 earlier (includes Rs 68 as value of IOC’s investments in ONGC, GAIL and Petronet: 30% holding discount). We feel that uncertainty in the subsidy sharing mechanism and rising crude oil prices would continue to depress valuations. We maintain a Hold rating on the stock.

To read the full report: INDIA OIL CORPORATION