Saturday, November 29, 2014

Rural sales cool as food prices drop

Lower food prices, a patchy monsoon and lower rural wages are taking their toll on demand for everything from tractors to toothpaste in rural India, analysts say. Sales of tractors, a barometer of sentiment in rural India, declined by 12% to 77,983 units in October over the previous year, according to ICRA Research, the research arm of the rating agency. Executives at packaged consumer goods companies Marico Ltd, Dabur India Ltd and Godrej Consumer Products Ltd confirmed that demand is flagging in rural markets. Sanjiv Mehta, the managing director of Hindustan Unilever Ltd, said in late October, while announcing the company’s results for the three months ended 30 September, that it was too early to talk about the impact of the monsoon on the rural market. “It has been a bad year for the farm producers, who have been hit both by inadequate rainfall—10% below the long term average—and moderation in the growth rate of minimum support prices,” said Ashok Gulati, an agricultural economist. Gulati expects the Wholesale Price Index to turn negative as food prices in India adjust to international food prices. Food inflation in India came down to 2.7% in October from 4.03% in March. Global food prices fell to a six-month low in July as costs of grain tumbled on prospects for ample harvests, the United Nations said. An index of 55 food items dropped 2.1% to 203.9 points from 208.3 points in June, the UN’s Rome-based Food and Agriculture Organization (FAO) said in a report on 6 August. “International prices have yet to percolate in India,” said Gulati. He added that the fall in global food prices has left no room for the government to increase the minimum support price (MSP). This will put a stress on rural incomes, he said. MSP is the price at which the government procures staple crops from farmers. For tractor makers as well as companies in the packaged consumer products business, this is bad news. The latter derive 30-40% of their sales from rural markets. “Even as the degree of impact might be region-specific, depending on irrigation infrastructure in a state, it’s safe to say, the monsoons this year have dampened the overall sentiments in rural India,” said Shishir Kumar, associate vice-president at Icra. He expects the kharif (or winter crop) output this year to be weak owing to a delayed and insufficient rainfall. This has weighed on sentiment in rural India and led farmers to defer purchases of tractors and other consumer goods, said Kumar. Icra Research has downgraded the outlook for tractor volumes twice in the last six months. It now expects the domestic tractor market to end the year with flat sales. Earlier this year, in June, it pared its growth outlook down to 4-6% from 8%. Meanwhile, consumer goods firms, which have also seen slower growth from rural markets, are now sharpening their focus on urban markets. They are also adopting measures to boost demand in rural markets. “Since there is a pressure on demand we have initiated the low unit packs,” said Lalit Malik, chief financial officer at Dabur India. The maker of household brands like Babool toothpaste, Sani Fresh, Hajmola and Glucose–D has increased its penetration from 14,000 villages to 40,000 now, as part of its so-called “project double” programme launched in fiscal 2013. At the time, the idea was to counter a slowdown in urban areas by improving the company’s rural reach. Since then, however, the company has seen growth in rural markets taper off “from high teens during the peak, to low teens now”, said Malik. For consumer packaged goods, he said, referring to reports, growth in urban markets has outpaced growth in rural markets in recent quarters. Rural growth was pegged at 12-13% for the September quarter, compared with the 14-15% growth seen in urban markets, he said. Malik sees a continuation of the trend in the second half of the year. “Rural growth should pick up by next year once the benefits of the urban growth trickle down to reach the rural markets,” he said. That’s a belief shared by others in the packaged goods business. “We are cautiously optimistic about the growth picking in the future. As the economic growth revival happens, it will be led by the urban market recovery,” said Samardeep Subandh, chief sales officer at Marico. Marico, he said, is preparing for a market recovery and focusing on urban India. In the last six months, it has increased its reach by 60% in urban India, adding 50,000 new stores, he added. Vivek Gambhir, managing director, Godrej Consumer Products, attributes the slowdown in rural India to tighter spending on the rural job guarantee programme, the Mahatma Gandhi National Rural Employment Guarantee Scheme, lower inflation that has reduced crop realization (in the open market), and the weak monsoon, which hurt the kharif crop. These factors will keep rural demand under pressure in the near term, said Gambhir, adding that in the medium to long term, growth in rural markets will revive. Like them, tractor makers, too, strike an optimistic note “We believe most of the factors that are impacting rural demand are temporary in nature. The fundamentals continue to be strong,” said Rajesh Jejurikar, chief executive of the farm and two-wheeler division at Mahindra and Mahindra Ltd, the tractor market leader. Mallika Srinivasan, chairperson at Tafe Ltd, India’s second-largest tractor maker, did not respond to an e-mail and text message seeking comment S. Sridhar, chief executive at Escorts Agri Machinery, expects the year to end with flat to negative sales. “There are pockets which continue to do well,” said Sridhar, adding that the northern states that have better irrigation infrastructure continue to do well. Analysts are less optimistic. “Wages in rural India are shrinking, the delayed monsoon has impacted yield and prices of crops have softened. All these will reflect on demand,” said Dharmakirti Joshi, chief economist at Crisil Ltd, adding that weakness in the broader economy will also hurt rural consumption. Growth in the average daily wage rate for rural labourers moderated to below 10% year-on-year in June, compared with 16.3% in 2013, 17.6% in 2012 and 20.9% in 2011, according to a Nomura report released in October. Interestingly, motorcycle and car makers say they are yet to see any cooling in rural demand. Hero MotoCorp Ltd’s rural sales continue to grow, a senior official at the company said, speaking on condition of anonymity. He added that many of the customers, though, are people for whom agriculture is not the primary source of income. Maruti Suzuki India Ltd’s head of domestic sales, R.K. Kalsi, too, said contribution from rural markets had inched up by a percentage point to 34% in the three months ended 30 September.


Tata loses some ground on domestic front as it focuses abroad

With Adani Power acquiring the 600-Mw Korba West plant from Avantha Group, will soon become a distant second in terms of the largest private power producers in India. The Gautam Adani-promoted Adani Power is set to become the country’s largest private power producer, with an installed capacity of 11,040 Mw.

Currently, Adani Power has of 8,580 Mw, against Tata Power’s 8,613 Mw. But the Ahmedabad-based Adani Power’s capacity will soon be enhanced, with an expected announcement of the commissioning of the fifth 660-Mw unit at Tiroda in Maharashtra. Besides, it had acquired the 1,200-Mw Udupi plant from Lanco Infratech in August. Once the Udupi and Korba acquisitions are completed, Adani Power’s total installed capacity will stand at 11,040 Mw. It further has the ambition to take it to 20,000 Mw by 2020.

Power is Tata Group’s second core business in which it has lost its leadership position in the domestic market. Earlier, it had lost the position of India’s largest private steel producer to JSW Steel, when the Sajjan Jindal-promoted company raised its domestic production capacity to 14.3 million tonnes (mt) with the acquisition of Ispat Industries in 2011. JSW Steel plans to raise its total capacity to 40 mt by 2025, with six mt brownfield expansion in Bellary, Karnataka, and greenfield plants in Jharkhand and West Bengal.

Currently, has a capacity of 9.7 mt in Jamshedpur; it is developing a six-mt plant in Kalinganagar in Odisha. In 2007, it had acquired Anglo-Dutch Corus for $12.1 billion to become the world’s fifth-largest steel maker, with a capacity of 25 mt. However, this became a drag on the company’s financials, as demand slumped in Europe after the economic crisis of 2008.

“It is possible in its effort to become a global powerhouse, the lost some ground to domestic rivals,” says Dhananjay Sinha, economist and strategist at Emkay Global Financial Services. Tata Steel could not be as aggressive in bidding for Ispat Industries, as its hands were tied due to Corus’s strained financials.

In the domestic market, the group has also lost ground in the passenger car business, with slipping from the third to the fifth position in the past two years; Mahindra & Mahindra and Honda Motors surged past it. However, Tata Motors’ 2008 acquisition of Jaguar and Land Rover for Rs 9,200 crore has proved to be a money spinner.

“Despite their foreign forays, the Tata group essentially remains an Indian group and the fact that it has lost ground in the domestic market is more by accident than design,” says Jacob Mathew, managing director investment banking firm Mape Advisory Group. “Also, some of its domestic rivals have been able to manage the business environment better.”

In India, Tata Power is struggling, with capacity of 7,000-8,000 Mw in the pipeline. But it is progressing smoothly in terms of setting up capacity of 2,600 Mw abroad, including 1,200 Mw in Vietnam, 600 Mw in Myanmar and 400 Mw in Georgia.

“India projects may remain at 7,000-8,000 Mw even after five years. And, there is a likelihood that our foreign expansion will overtake,” Anil Sardana, managing director of Tata Power, had said in a recent interview with Business Standard. The company has set a target of adding 10,000 Mw of capacity by 2022 in India and abroad, against Adani Power’s target of achieving 20,000-Mw capacity by 2020. Besides, it has business in all the segments of the power sector, including transmission network and power distribution, with consumer base of more than 1.9 million in Mumbai and New Delhi. Hence, it still claims to be the largest integrated power company.

In the domestic market, the Tata group remains a dominant player in sectors such as hospitality (Indian Hotels), commercial vehicles (Tata Motors), tea (Tata Tea) and watch and retail jewellery (Titan Industries).

(Source: Business Standard)

India looks to private sector for $250bn injection in power infrastructure

In late July 2012, more than 600m people across northern and eastern India abruptly found themselves without fans, air conditioners or light in sweltering, humid heat, as the national power grid suffered a series of catastrophic late night failures.
The outage started at 2.30am, triggered by northern states drawing more than their allocated electricity quota, as drought-hit farmers ran water pumps to irrigate parched fields and Muslims rose before dawn to prepare food for the Ramadan festival.

The blackout, which also hit the national capital, New Delhi, lasted more than 12 hours in many areas, crippling trains and disrupting traffic. A second major grid collapse followed just 36 hours later. It was a painful reminder to an aspiring superpower of the fragility of its basic power infrastructure.
Two years on, Indian officials and industry executives say aggressive steps have been taken to prevent a repeat of such a widespread failure. But with Indian power demand surging – and both generating capacity and transmission and distribution infrastructure struggling to keep up, the situation remains precarious.
“Unless more is built, we are going to remain vulnerable,” says Anish De, a partner and infrastructure expert at KPMG, the consultancy.
“We are seeing better controls, so we should expect fewer failures. But since network augmentation is not enough, better controls can only work to a point, leaving us vulnerable.”
Nearly 25 years after it began liberalising its state-controlled economy, India still suffers an acute shortage of power. Nearly 53m Indian households are not connected to the grid, but even areas that are electrified suffer routine, protracted power cuts.
Per capita, electricity use in India is a quarter of the global average, but demand grew 6 per cent last year, as rising incomes fuelled growing use of power-consuming appliances such as fans, TVs and air conditioners.
Demand for electricity is expected to rise even higher as the economy recovers from its present slowdown, with a new administration focused on reviving growth.
In this climate of relative power scarcity, Indian states all have quotas for how much power they can draw from the national grid. But in the past, states faced few penalties for overdrawing, as the northern state of Uttar Pradesh was believed to be doing when the grid collapsed. Since that calamitous blackout, however, the government-controlled Power Grid Corporation of India has got tougher with states that breach “grid discipline”.
“The controls are getting better and better,” says Mr De. “They are equipping substations so that, if there is indiscipline, they can cut users off much faster.”
The policy of getting tough with states has been aided by significant investments in high-tech sensors to monitor power flows to predict requirements more accurately.
But while such policies and technologies are helping alleviate pressure on the grid in difficult circumstances, India still faces fundamental challenges that leave the grid vulnerable.
The power distribution system was traditionally organised in regional grids, creating large demand-and-supply imbalances. Generating capacity is concentrated in coal-rich eastern India, while demand was strong in the heavily industrialised areas of the south and west, but links between the regions were limited.
The country is now trying to integrate its regional grids to create a robust national network, but it remains a work in progress.
Piyush Goyal, minister for power, coal and new and renewable energy, says: “There are states such as Chhattisgarh with power they are desperate to sell, and then states like Delhi that are desperate for power but don’t have enough lines to bring it in.”
Under prime minister Narendra Modi, India’s new government has also pledged to ensure all Indians have access to power 24 hours a day, seven days a week by the next parliamentary election in 2019, a pledge that implies a significant expansion of both power generation, and transmission and distribution.
Overall, Mr Goyal estimates that more than $250bn in investment will be needed in the next few years to meet these goals, including about $50bn in transmission and distribution.
It remains unclear whether the funds are to come from the cash-strapped government or private companies, which have shown little interest in investing in transmission infrastructure.
Even if financial constraints are overcome, India will face a tough time securing land on which to erect transmission pylons, unless the new administration is willing to tweak a recent law that lays down onerous procedures for acquiring farmland for infrastructure.

EU energy costs turn up heat on aluminium sector

Aluminium workers at the Alunorf plant in the German city of Neuss aptly call one of their production lines “the grill”. Nearby, smelters in what is one of Europe’s leading industrial clusters are fired up to 960C. To keep all this running, the aluminium industry needs to be a voracious power consumer.
But across Europe, energy costs are threatening the survival of the industry: 11 out of 24 smelters in the EU have shut since 2007. And industry chiefs have no doubt about what is strangling their business, complaining that the EU’s environmental regulations are making electricity prices prohibitive.

The plant closures pose a fundamental question about whether the EU can continue to act as a global leader in the fight against climate change while simultaneously preserving competitiveness in heavy industry.
The EU also faces an ethical challenge about whether its green rules are counterproductive, pushing industries such as chemicals and metallurgy to developing nations where it is easier to pollute.
Europe’s aluminium output has slumped nearly 40 per cent since 2007, with Alcoa and Rio Tinto Alcan among the companies shutting large plants.
“We need to meet the environmental targets but we need to do it in a way that does not destroy the industry in Europe,” says Roeland Baan, European chief executive of Aleris, which operates in Germany and Belgium.
The European Commission has acknowledged that regulation increased aluminium production costs by 8 per cent in the decade to 2012. Power companies have passed the costs incurred in the EU’s cap-and-trade carbon market to customers and imposed surcharges because of a requirement to use renewables. Electricity represents 30 per cent of aluminium’s production cost.
With European smelters facing extra costs, Asia and the Middle East are marketing themselves as alternative destinations for investment by offering attractive power deals. This raises the prospect that aluminium producers will relocate to areas with weaker environmental rules.
“As Europe, we are behaving like ostriches, throwing the garbage over the fence and pretending it does not exist any more,” Mr Baan said.
EU aluminium producers argue that far from being an environmental problem, the industry helps curb greenhouse gas emissions. Demand for aluminium is surging as it becomes the metal of choice for manufacturing lightweight cars and ships to reduce fuel consumption. It is also favoured by environmentalists because it is easy to recycle. This month, Ford sought to lead the field in the car industry by building the F-150 pick-up truck – the best selling vehicle in North America for the past 32 years – entirely from aluminium.
Oliver Bell, executive vice-president at Norsk Hydro, Europe’s biggest aluminium smelter, warned the Gulf could lure away not only the EU’s aluminium smelters but also their customers.
Aluminium data
Saudi Arabia’s smelting facilities, for example, were an important reason why Jaguar Land Rover was considering starting production there, he said.
More broadly, the EU industry was based around logistically efficient production clusters, such as the one around Neuss, which share knowhow in sectors ranging from aerospace to packaging. If the primary smelters left the EU, the downstream companies and expertise would follow. “We have to defend the base industry . . . to keep the end products in Europe too,” he said.
In Europe, the aluminium industry employs 80,000 people. For Greece, recovering from the eurozone crisis, it is a strategic national heavyweight.

In a report last year, the European Commission called pressure on aluminium companies’ margins “unsustainable”. But there is, as yet, no plan to counterbalance the regulatory costs.
Aluminium data
According to the Centre for European Policy Studies, the EU’s aluminium industry is efficient, with production costs of $1,600 per tonne when companies are shielded from regulatory costs by long-term electricity contracts or by generating their own power. But long-term contracts are becoming rarer and EU smelters face costs on the open power market as high as $2,230. This compares with about $1,940 in the US and $1,400 in the Middle East. One of the aluminium producers’ biggest problems is that traders set the metal’s price – currently about $2,000 – on the London Metal Exchange, so factories cannot pass their power costs on to customers.
To date, the EU’s response has been to waive objections to countries subsidising affected producers. But aluminium companies say that a broader pan-EU compensation strategy is needed to combat the costs passed on from the carbon market.
This burden is set to increase. Producers are already squeezed by carbon prices of €6 per tonne but the commission is planning measures to pump this up to about €30 in the coming years.
“We are trying to defend our raw material base in Europe . . . at €30, you can forget about that,” said Mr Bell.

South Korea targets 5G global supremacy

Smartphone users in the western world might still be getting used to the rapid connections offered by 4G mobile networks, but South Korea first rolled out the technology in 2006.
Now, the country’s government, telecoms networks and technology groups are racing to take the lead in developing a new 5G standard that they claim will be 1,000 times faster than the best connections available.

Seoul hopes to cement the country’s leading position in internet speed and hardware exports, while accelerating global progress towards telecoms standards that could enable dramatic advances in communications technology.
There is strong competition: three Beijing ministries have joined forces to drive Chinese efforts in this field, while the European Union last December established a 5G Infrastructure Partnership with private-sector groups including Alcatel-Lucent and Nokia.
But South Korea is “leading the issue”, claims Lee Sang-kug, deputy director of ICT policy at Seoul’s future planning ministry. This year the ministry announced plans to invest an initial $1.5bn in developing 5G mobile standards, with a goal of trialling the technology by 2017 and a commercial rollout by 2020.
The close interplay between the government and leading commercial groups such as SamsungLG and SK Telecom is reminiscent of the industrial policy through which the state drove South Korea’s rapid growth from the 1960s onwards.
However, Mr Lee says the driving force in South Korea’s 5G programme must come from the companies themselves, not state funding and targets. “The government is a trigger for the private sector,” he explains. “The private sector is doing very well on the R&D, and the government needs to encourage them to build advanced infrastructure.”
Government support was instrumental in building the world’s fastest wired internet network, and in making South Korea the first country to launch 4G services.
Nevertheless, the experience of rolling out new telecoms technologies in South Korea tells a story about the need for careful planning.
Consumers’ enthusiastic embrace of first 3G and then 4G technology prompted operators to slash charges, leaving them short on capital to invest in upgrading infrastructure.
For example, when the three major telecoms providers – Korea TelecomSK Telecom and LG U Plus – began offering customers a flat-rate unlimited 3G tariff four years ago, average revenue per user fell sharply. Data from Digieco, the research unit of Korea Telecom, show that Arpu stood at nearly Won33,000 ($30) in the second quarter of 2010, but declined to less than Won29,000 ($26) by the first quarter of 2012. Fierce competition between them also drove multi-billion dollar marketing programmes, further depressing margins.

Industry figures also show the companies’ capital expenditure went up when they when they were installing national 4G networks, but fell back once they had introduced it. Mr Kim points out that, for the three Korean operators, 3G capex was cut from Won 6,159bn ($5.5bn) in 2012 to Won 4,580bn ($4.1bn) in the following year.Kim Jang-won, an analyst at IBK Securities, says the fierce competition to attract customers by reducing charges was one of the reasons Arpu fell during the 3G era.

The sharp cut to capex has hurt South Korea’s international competitiveness in mobile internet speed. As a result, while South Korea’s wired network is by far the fastest in the world – 60 per cent faster than second placed Japan, and six times the global average, according to the software company Akamai – its 4G speed has fallen behind nations such as Australia and Denmark.
SK Telecom, the country’s biggest mobile operator, is committed to paving the way for the next generation of mobile technology despite the large expected costs of upgrading its infrastructure, says Alex Choi, head of its ICT research division. “The technology is there – the issue is how to implement it,” he says, voicing plans to roll out a trial of the system at South Korea’s 2018 Winter Olympics.
SK last month signed a partnership with Samsung Electronics, aimed at developing 5G technologies and identifying suitable radio frequencies for data transmission.
Oh Min-seok, head of wireless technology research at LG Electronics, can reel off a list of innovations that might be possible with 5G connections, from holographic phone calls to telerobotic systems for highly complex surgery.
5G technology could also give a large boost to Samsung’s and LG’s sales of more familiar products such as televisions and refrigerators, as rapid connections and low-cost data transmission drive growth in the number of wirelessly connected devices. “All of our current products can be considered,” Mr Oh says.
That will help drive demand for semiconductors – a boon for Samsung Electronics and SK Hynix, the world’s two biggest producers of memory chips.
Even so, Korea’s technology companies are aware that such first-mover advantage is unlikely to be decisive. “It’s clear that we won’t be the only ones manufacturing 5G phones,” says Cheun Kyung-whoon, head of the communications research team at Samsung Electronics. “But we hope to stay at the leading edge. By 2020, we might be a totally different company.”

South Korea’s 5G ambitions will also be reliant on technological developments by foreign companies in areas where it lacks expertise – notably in the baseband chips that process radio information, where the US company Qualcomm dominates. So far, Qualcomm has been restrained in its investment in 5G technology.
“It’s the result of logical thinking,” Mr Choi admits. “They are making huge money out of the current 4G technology.”

India’s gym generation

In a basement gym in the south of Mumbai, music channels blare on flat screen televisions, as four young men work out late on a Saturday night – part of a new rising middle-class in India that is committed to staying in shape.
“A lot of people are getting more health conscious,” says Dinesh Bhandari, 47, a trainer at the Rs13,500 ($218) per year club. “Socially, everyone wants to look good.”
Be it an obsession with the lithe actresses and burly actors of Bollywood, or a combination of rising disposable incomes and growing awareness of health issues, demand for gyms is growing in Asia’s third-largest economy.
India’s fitness and slimming industry is expected to rise from Rs60bn in 2012 to at least Rs100bn in 2015, according to research from consultants PwC and the Federation of Indian Chambers of Commerce and Industry (Ficci), with global gym operators looking to capture a larger chunk of the market.
This week Fitness First, the UK-based chain, announced ambitious plans to invest Rs1.6bn over the next five years adding 30 new clubs to its existing network of seven gyms. “There is probably an inflection point,” says Andy Cosslett, chief executive. “The time is right now to move faster.”
Global groups, including gym operators such as Gold’s Gym and hotel chains such as Sofitel, which open their fitness centres to members, compete with a number of more traditional fitness services in India – from private yoga instructors to old world gymkhanas, private members’ clubs with extensive sports facilities.
However, Fitness First has found that its users in India are drawn to the social aspect of exercise. About one-third of visits involve group training – far more than in the UK and other developed markets – a figure that is rising as the group tailors its menu of classes to Indian tastes.Global gym brands have not adapted their services much for local audiences. Consumers want much the same thing as peers abroad, they say, while many local competitors offer dingy facilities with basic equipment.
“We have indoor cycling classes that have their own specific music that links to beats per minute,” says Vikram Aditya Bhatia, managing director of Fitness First in India. “But here very clearly they want the latest Bollywood music . . . they just want to scream and shout.”
As international gym operators muscle into the Indian industry, offering premium clubs in a handful of major cities, local rivals have ambitious plans of their own, often opening smaller, low-cost gyms on a model that can be rolled out further afield.
Prashant Talwalkar, whose grandfather founded Talwalkars Better Value Fitness, the listed chain of health centres, is using a franchise model to expand the group’s network of 150 branches to 500 within three years.
“The international players came in and opened these huge sizes [of club], their capital expenditure was brilliantly high,” he says. “There are not many people to fill that.”
Talwalkars’ range of 17 new HiFi gyms can be as small as 3,000 square feet and operate in cities with a population as low as 300,000.
Growing beyond India’s big cities raises fresh challenges, however, as gyms struggle to attract thriftier Indian consumers while battling to find convenient locations amid the country’s expensive real estate market.
“The Indian mindset is that I want it long-term and I want a good deal,” says G Ramachandran, director of Gold’s Gym in India, explaining that annual memberships are more common than monthly payments.
The chain adjusts fees from some Rs30,000 per year in large cities such as Mumbai to between Rs15,000 and Rs18,000 in smaller towns. And Gold’s Gym tackles India’s unaffordable rents using flexible structures, negotiating with landlords to pay a fixed baseline rent plus a share of its revenues.
“In India if there’s a drawback in the metros it’s the real estate,” Mr Ramachandran adds. “It’s a wrong notion to say the costs are very low.”
A shortage of standardised training courses for fitness instructors means labour is another major concern. Local groups are often forced to hire inexperienced staff and open training academies, spending time and money educating new hires.
Fitness First, for example, must expand its team of 170 personal trainers to 320 in order to meet its ambitious expansion plans, and began training a month and a half ago for a club due to open in February.
“We are very worried because this industry is coming up and growing and we don’t think this should go beyond control,” says Rajpal Singh, director at Ficci. “If there are no trained instructors they may harm more than they train.”
Female fitness
Given the backdrop of strained gender relations in India, it is surprising that women make up almost half the market for many gym operators today.
Women’s beauty and fitness services took off in the early 1990s in India, following the rise of the beauty pageants and icons such as Miss World, Aishwarya Rai.
With men dominating the public gym and a paucity of female personal trainers, fitness centres were forced to offer specialised services for women.
Talwalkars Better Value Fitness, the popular Indian chain of health clubs, had set times of day when the club was closed to male members and other facilities exclusively for women.
Today, however, few gyms have gender specific facilities, as India’s rising middle-class is drawn by the social aspect of working out.
“The women who are now coming to the gym are the younger generation and they love to mingle with the men,” says G Ramachandran, director of Gold’s Gym in India.
In premium clubs such as Fitness First, there is almost an even split of male and female members, while 40 per cent of members are female at Talwalkars, a more affordable local chain.
Gyms are attracting young women eager to get in shape much like their peers overseas. But it is among the older generation that gym membership is skewed as India’s aunties (an affectionate term for middle-aged women) remain reluctant to sign up.
“The over-forties are slightly hesitant because they’ve put on a lot of weight and they feel shy,” Mr Ramachandran adds.

The Geopolitical Impact of Cheap Oil: Martin Feldstein

The price of oil has fallen more than 25% in the past five months, to less than $80 a barrel. If the price remains at this level, it will have important implications – some good, some bad – for many countries around the world. If it falls further, as seems likely, the geopolitical consequences on some oil-producing countries could be dramatic.
The price of oil at any time depends on market participants’ expectations about future supply and demand. The role of expectations makes the oil market very different from most others. In the market for fresh vegetables, for example, prices must balance the supply and demand for the current harvest. By contrast, oil producers and others in the industry can keep supply off the market if they think that its price will rise later, or they can put extra supply on the market if they think the price will fall.
Oil companies around the world keep supply off the market by reducing the amount of oil that they take out of the ground. Oil producers can also restrict supply by holding oil inventory in tankers at sea or in other storage facilities. Conversely, producers can put more oil on the market by increasing production or by running down their inventories.
The market expectations reflected in today’s price reflect lower future demand and increased future supply. Lower demand reflects both the current weakness of economic activity, particularly in Europe and China, and, more important, the longer-term changes in technology, which will increase cars’ fuel efficiency and induce the use of solar power and other non-oil energy sources. The increase in the future potential supply of oil reflects new output produced by fracking, the development of Canada’s tar sands, and Mexico’s recent decision to allow foreign oil companies to develop the country’s energy sources.
These changes in demand and supply suggest that the future price of oil will be lower than industry participants expected until just a few months ago. Some of the recent changes in expected future demand and supply could have been anticipated earlier. But there is no way to know when attitudes and expectations will change. The historic volatility of oil prices reflects these psychological shifts as well as changes in objective reality.
Today’s oil price is also linked to anticipated future interest rates. More specifically, oil producers have an investment choice: They can increase production now, selling the additional oil at today’s price and investing the proceeds at the existing long-term interest rate, or they can leave the oil in the ground as an investment.
A low rate of interest encourages producers to leave oil in the ground. When the current abnormally low interest rates on long-term bonds rise over the next few years, it will become more attractive for producers to increase the supply of oil and invest the resulting income at the higher rate. Unless expectations about the fundamentals of future supply and demand change, the rise in the interest rate will cause oil prices to fall further.
The low price of oil is good news for the United States economy, because it implies higher real incomes for American consumers. Within the US, the lower price is transferring real income from oil producers to households, which raises short-term demand because households spend a higher proportion of their incomes than oil firms do. For the same reason, the lower price also gives a boost to aggregate demand in Europe, Asia, and other oil-importing regions.
The big losers from falling oil prices include several countries that are not friends of the US and its allies, such as Venezuela, Iran, and Russia. These countries are heavily dependent on their oil revenue to support their governments’ spending – especially massive transfer programs. Even at $75 or $80 a barrel, these governments will have a difficult time financing the populist programs that they need to maintain public support.
Although Saudi Arabia and several of the Gulf states are also major oil exporters, they differ from other producers in two important ways. First, their cost of extracting oil is extremely low, which means that they will be able to produce profitably at the current price – or even at a much lower price. Second, their enormous financial reserves allow them to finance their domestic and international activities for an extended period of time, as they seek to transform their economies to reduce their dependence on oil revenue.
A further decline in the price of oil could have major geopolitical repercussions. A price of $60 a barrel would create severe problems for Russia in particular. President Vladimir Putin would no longer be able to maintain the transfer programs that currently sustain his popular support. There would be similar consequences in Iran and Venezuela.
It is not clear whether these countries’ current regimes could survive a substantial and sustained future decline in oil prices. By contrast, it is obvious that oil-importing countries would benefit greatly – as they already are.

(Source: Project Syndicate)

Friday, November 28, 2014

Industrial metals beat wider slump

Miners have watched iron ore sink precipitously this year to a five-year low. That has been repeated for oil and coal, as expectations of global demand have weakened.
Yet despite slower growth in China, the world’s largest consumer of commodities, analysts say demand remains robust for some industrial metals, which are set to benefit from any long-term shift towards more private investment and consumption.
The benchmark Standard & Poor’s GSCI Commodity Index has fallen 23 per cent from a peak in June, making the past five months the weakest period for commodity prices since the onset of the financial crisis, according to Barclays Capital. However, the industrial metals in the index – which is used to reflect overall commodities markets – are up just under 0.7 per cent.

That reflects, in part, expectations for continued demand from China. Analysts point to growth from the car and railway sectors as well as the rollout of a 4G telecoms network across the country.
China Mobile, the world’s largest cellular company, will have built the world’s biggest 4G network, with 500,000 base stations and 50m subscribers, by the end of the year.
While the days of double-digit growth are over, the greater size of the economy means lower growth still translates into strong absolute demand. Julian Kettle from consultancy Wood Mackenzie calls it “slower not lower”.
Five per cent growth in copper demand today is equivalent to 13 per cent during the boom years of 2002-2012 in terms of the additional tonnes, according to JPMorgan.
George Cheveley, a fund manager at Investec Asset Management, says Chinese buyers of commodities have run down stocks this year because of tight credit at home. Nevertheless overall demand remains strong.
“It’s not a whole-scale collapse in end-use demand,” he says. “What we have seen this year is iron ore prices collapse and oil come down due largely to worries over supply, whereas nickel, aluminium and zinc prices are up because demand is good and supply has not met that.”
For example, galvanised steel, which contains zinc, is benefiting from increased use by Chinese carmakers because it does not rust. Car sales in China rose 7 per cent year on year to 17m units from January to September, driven by sales of the more zinc-intensive sports utility vehicles and so-called multipurpose vehicles, according to Société Générale.
Underlying zinc demand will rise during 2015 in all the major economies, the bank forecasts.
Another industrial metal that is set to benefit is aluminium, which is increasingly used as a lighter replacement for copper as well as a substitute for steel in some vehicles.
Lead is also expected to get a boost from China’s attempts to lift consumption. While sales of electric bicycles have slowed, the lead-acid batteries they use are also used in hybrid cars. China’s lead-acid battery output is expected to grow about 6.6 per cent in 2015, according to consultancy Shanghai Metals Market.
Tin has the advantage of being a commodity that has little connection to China’s slowing residential property market. “Tin should actually be a beneficiary of any rebalancing of the Chinese economy towards more consumption-driven growth, given that its primary use is in consumer electronics,” said Capital Economics in a report this month.
Still, growth in demand from industries brings with it the unpredictable risk of substitution of one metal for another. For example, increased use of aluminium by the car sector could lead to less demand for zinc, which is used to galvanise steel.
“There are different curves of consumption as development happens,” says Mr Cheveley. “There are classic cycles looking from American and European data, but there are wrinkles around substitutions of materials.”
Industries also become more efficient in using raw materials. For example, smaller electronic devices are using ever less tin in solder, which is used in circuit boards.
While the commodities supercyle is over, the market is unduly pessimistic on commodities, according to Capital Economics. Slower growth in emerging economies has been priced into the market already, and the lower oil price should also help a recovery in the global economy, boosting demand for various metals.
“Instead of investors buying commodities we are going to see more differentiation between commodities, and which ones are in short supply,” Caroline Bain, an analyst at Capital Economics, says.

Oil producer currencies sink after Opec decision

The Opec cartel’s decision to leave production unchanged played havoc with the currencies of oil producers on Thursday, forcing Nigeria’s central bank to defend its new level for the naira and sending Russia’s rouble to record lows against the dollar.
In the past month, both countries have been forced to abandon exchange rate policies that were proving an unsustainable drain on reserves.
The rouble has swung wildly in line with oil prices since the central bank accelerated a free float of the currency, with an average daily move against the dollar of more than 2 per cent in the past week.

It fell a further 2.5 per cent to trade at R48.61 to the dollar after Opec’s decision.
Traders said Nigeria’s central bank had sold dollars earlier in the day to keep the naira within a new trading band set in Tuesday’s 8 per cent devaluation.
Even the rock solid currency pegs of the biggest Gulf oil producers – whose vast reserves make them well able to withstand a period of lower oil prices – are coming under scrutiny.
Forward prices on the Saudi rial imply that investors expect the currency to weaken over the next 12 months – and while the change implied is a mere 0.1 per cent, it is still the biggest movement since the extremes of the global financial crisis last provoked debate over the peg.
The United Arab Emirates dirham also fell to its lowest level against the dollar in forwards markets on Thursday, thanks to a suggestion from an advisory body to the government that the central bank might want to keep the merits of the peg under periodic review.
The plunge in oil prices also took its toll on developed country currencies with the Canadian dollar falling 0.9 per cent to C$1.1341 against its US counterpart, and Norway’s krone – which has already shed around 12 per cent of its value against the dollar this year – down around 1.5 per cent to NKr6.9340.
Norway’s economy does not depend directly on oil revenues but oil investment has come to account for a much bigger share of GDP over the last decade, while the non-oil sector has become less competitive.
Analysts at Morgan Stanley say that, while the krone does not always trade in line with oil, “we are approaching levels where oil prices could start to affect the economy more significantly”.

Opec members flounder in a flood of cheap oil

Sheikh Ahmed Zaki Yamani, Saudi Arabia’s oil minister and the most prominent figure in Opec from 1962-86, was reported to have said in the 1970s that he had “the world on a string”. Today, it is the oil cartel that is dangling.

If Opec were still the global force that it once was, the oil ministers meeting in Vienna this week would have agreed a cut in production to stabilise the market. US production is soaring, global demand is flagging, and crude prices have fallen by more than 30 per cent since June. Representatives of member countries including Venezuela and Angola, have said they wanted to see oil back at $100 per barrel, compared to about $75 today.

The meeting ended yesterday, however, with a decision to leave the cartel’s output limit unchanged, setting the stage for growing oversupply and a continued decline in prices next year.
The lack of cohesion in a group that has so often struck dread into the hearts of oil consumers round the world will be widely welcomed, with good reason. Weaker oil prices are a restorative that the flagging world economy needs.
The reasons why Opec has failed to reach agreement, however, are less cheering. While the world may not need a strong oil cartel, it does need strong oil-producing countries, and Opec’s lack of discipline reflects the weakness of many of its members.
The strongest Opec countries – Saudi Arabia, the United Arab Emirates, Qatar and Kuwait – could see that if they cut production not many of their fellow cartel members were likely to follow suit.
Iran and Libya have already suffered steep falls in their output: Iran as a result of western sanctions, which are set to persist for at least another seven months with the latest extension of Tehran’s nuclear talks with the west. Libya is suffering from the continuing conflict between warring factions, which has this week shown signs of escalating. In Venezuela and Nigeria, meanwhile, elected governments are facing financial crises. Iraq, which is not covered by Opec’s quota system, had talked about rejoining when production hit 4m-5m barrels per day, and hoped that might be this year. But it is still producing only about 3.1m b/d, according to Platts.
With so many Opec members in difficulties, the US has been able to meet the world’s growing demand for oil, thanks to the shale revolution. Eventually, though, the US shale boom will subside, perhaps as soon as the end of this decade. Demand in emerging economies, meanwhile, is only going to grow as industrialisation advances.
About one-third of the global increase in oil demand over the next 25 years will go to fuel trucks in Asia, according to the International Energy Agency, and it will be very difficult to curb or substitute for that demand. Opec members control four-fifths of the world’s proved oil reserves, and, if as many of them remain in unstable positions as there are today, it will be very difficult to develop those reserves to their full potential. Both oil consuming and producing countries need to do more to support future oil production, which means investing now in additional capacity. The whole world has an interest in avoiding supply shortages that can cause price shocks and tip the global economy back into recession.
The gravest, and most common, failing in commodity markets is to act as though any contingent set of circumstances will last for ever. Consumers can enjoy oil abundance while it lasts, but they should also be planning for a future where the producers are once again pulling the strings.

Deere warns of falling demand for agricultural machinery in 2015

Deere & Co, the world’s largest maker of agricultural equipment, reported stronger than expected results on Wednesday but joined rivals in warning that demand for machinery is likely to fall as lower crop prices take their toll.
The company, best known for its John Deere tractors, generated full-year net profit of $3.2bn for the year to October 31, its second-highest total ever, but predicted earnings would fall to $1.9bn in 2015

Shares in Deere, which have fallen about 5 per cent this year, declined about 1 per cent to $86.99 by close of in New York trading.
Worldwide sales were down 5 per cent for both the fourth quarter, to almost $9bn, and for the full year, to $36.1bn. Analysts had been expecting sales of $7.7bn in the fourth quarter. Last year’s sales were almost $39bn.
The Illinois-based company said it would reduce production in response to the weaker sales. In August it announced 1,000 lay-offs, along with seasonal plant shutdowns and temporary job cuts.
Samuel Allen, chairman and chief executive, said the slowdown “has been most pronounced in the sale of large farm machinery, including many of our most profitable models”.
He added that the relatively healthy results were due to Deere’s “broad-based business line-up”. Profit in the company’s construction, forestry and financial services divisions was all up.
“The company’s earnings forecast reflects the impact of our efforts to establish a more resilient business model and it represents a level of performance much better than we’ve seen in prior downturns,” said Mr Allen.
Equipment sales are projected to decrease about 15 per cent in Deere’s 2015 financial year, and to be down about 21 per cent in the first quarter compared with one year ago. For the fourth quarter, the equipment operations reported an operating profit of $910m, down from $1.1bn one year ago.
Earnings per share came to $8.63 in 2014, down from $9.09 in 2013. Deere predicted earnings per share of between $5.40 and $5.50 in 2015.
Lawrence De Maria, an analyst at William Blair, said earnings per share could fall to less than $5 in 2016.
“The debate will shift to the longevity and magnitude of the downturn, which we expect will be severe given that the market is coming off a bubble,” he added. “Deere is flexing its manufacturing costs, but there are still significant fixed costs as well and emissions-related spending to contend with.”
Deere’s rivals have all reported similar struggles as crop prices tumble from their 2012 highs. CNH Industrial, the UK-based conglomerate that is the sister company of Fiat Chrysler Automobiles and whose leading brands include Case and New Holland tractors, last month reported a near 12 per cent drop in agricultural equipment sales in the third quarter of this year.
Last month Agco, the US company that owns Massey Ferguson and derives about half of its revenues from Europe, reduced its earnings outlook for the second quarter in a row and announced aggressive cuts in production schedules and expense

Saturday, November 22, 2014

Paper manufacturers’ inventory builds up as sales slow

Large paper mills are seeing an unprecedented inventory build up on slow sales, competition from imports — particularly in the printing and writing paper segment — and a tight-fisted approach to Government procurement.
Senior industry executives acknowledge that over 2 lakh tonnes of paper is in stock with mills.
Each mill under the Indian Paper Mills Association—commonly referred to as A-grade mills—stock anywhere between 20,000 and 40,000 tonnes.
The total paper consumption in the domestic market is estimated at 13 million tonnes with printing and writing paper making up about 40 per cent of this.
Also, leading paper mills such as JK Paper and International Paper APPM have reported losses in the second quarter.
Demand from the educational segment has dropped because of various reasons and demand from State Government-run text book societies is yet to pick up. Normally, a dozen tenders would have been floated by now for a total of about 3 lakh tonnes. But this is yet to happen.
For instance, Maharashtra which procures about 60,000 tonnes has bought only about 10,000 tonnes so far, according to a senior executive. Similarly, print orders are also down.
The publishers have been most affected in the higher education segment where the shift to e-books is most pronounced. But the exact numbers for this segment are not currently available.
Cheap imports
Another major challenge for paper mills is the cheap imports from Indonesia, which takes advantage of the FTA, with India and from China which is looking to dump surpluses caused because of slow off take in the US and Europe, said a manufacturer.
According to industry estimates, large brands supply about 75,000 tonnes of A4 sized copier paper a month.
But imports of about 5,000-8,000 tonnes a month and competition from smaller mills which supply about 12,000 tonnes a month are eating into the market.
(Source: Business Line)