98 i chronicle

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Volume: 98

description

Cover Story Outlook Of Non- Ferrous Metal Corporate Credit FCNR(B) Loans Business Trivia First self-made female millionaire Visual Facts Sensex, Gold, Crude, Dollar, MCX Metal & MCX Agri

Transcript of 98 i chronicle

Page 1: 98 i chronicle

Volume: 98

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The rise in global population, growth in the Chinese economy, urbanization of the Asian countries and increasing requirements of the developed

countries have created an unprecedented demand for minerals and metals. The metals & mining industry caters to this ever-rising demand

through extraction (mining) and primary and secondary processing of these metals. However, of late, the tepid global economic growth has emerged

as a major headwind for the global metal industry.

IRON ORE PRICE OUTLOOK

Iron ore prices had a bullish run in 2013, in contrast to other base metals, helped by heightened demand from steel end consumers, particularly

the Chinese construction sector. The scenario changed dramatically in the first quarter of 2014, with iron ore prices recording its sharpest one-day

drop in four years in March tumbling by 8.3% to close at $104.7 per ton. This represented an 18-month low for iron ore prices.

Overall, prices have been impacted by myriad reasons: rising production and abundant supply of iron, tight credit in China and persistent fears

regarding China's economy. Global steel production rose by a meager 2.5%, mainly dragged down by a slowdown in China's output and affecting

demand for iron ore, its main ingredient.

Iron ore prices continued to slump in the second quarter, reaching a low of $89 per tonne in June after a low of $105 per tonne in the first quarter;

they have, however, held above the spike low of $86.70 per tonne in 2012. This suggests that there is a floor in the market just below $90 per

tonne. As of early July, prices had started to recover - they were last seen at $97 per tonne after buyers took advantage of the dip to levels that are

likely to be unsustainable.

Although there has been a surge in iron ore supply as expansions are ramped up, the market will still need some high-cost Chinese iron ore to

balance the market, which should provide a floor price. An estimated 200 million tonnes of Chinese ore will be required. While higher-cost Chinese

capacity is closed, the marginal costs for the industry as a whole will shift lower. Although marginal costs are seen around $110 per tonne for

China, lower cost producers would have costs closer to $80-90 per tonne if the higher-cost producers close. This means iron ore prices may well

stay in a lower range around $90-$115 per tonne for longer. There is a risk that buyers may continue to destock into this price weakness but we

also feel bargain hunting will encourage restocking by those that have already destocked.

STEEL PRICE OUTLOOK

Steel prices are generally volatile owing to the highly cyclical nature of the global steel industry. Rising raw material prices have a direct impact on

steel prices. Furthermore, overcapacity, a glut in cheaper Chinese steel imports, unfavorable economic conditions and shifts toward other

substitutes significantly impact steel prices. The unstable situation in Europe and tempering growth in Asia kept prices in check in 2013.

World steel production expanded at a rate of around 4.4 percent in 2013, while steel demand is estimated to have grown around 3.1 percent last

year, according to the World Steel Association (WSA). The recovery in steel prices in the second half of last year continued into January with prices

rising to $726 per tonne, from a low of $679 in July last year.

OUTLOOK OF NON- FERROUS METAL

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Steel demand should continue to recover in 2014, with developed markets – including Europe – all seeing positive growth. The main area of

uncertainty lies with China and the emerging markets as we expect high stocks of steel, tight credit conditions and government clampdowns on

surplus capacity in China, will go some way to restriction production growth and a slower economy in China is likely to impact its demand for

exports from emerging markets.

Production remains in oversupply and capacity utilization rates are generally low, which means producers should be able to respond quickly to any

increase in demand, which in turn is likely to cap steel prices.

With iron ore prices also trading at lower levels this year, we feel there will be little upside cost pressure on steel prices apart from during bouts of

restocking.

Although global supply is growing, the picture at the regional level remains mixed – output in the first two months of 2014 climbed in Europe, the

Middle East and Asia, while it fell in the CIS, North and South America, Africa and Oceania.

Indeed with China accounting for 49 percent of global steel production, what happens in China can distort the global picture. In 2013, Chinese

steel production climbed 10 percent, while global steel production climbed 4.4 percent, but output in the world ex-China dropped three percent.

Overall global steel capacity utilization trended lower in 2013; it ended December at 72.8 percent, but has picked up again in the first quarter and

is last around the 77.6 percent level.

For 2014, we expect production to grow at a slightly lower pace of 4.0 percent after 4.2 percent in 2013.

The steel market remains well supplied – indeed, it is oversupplied – so any pick-up in demand can initially be satisfied by drawing down

inventories and then by boosting capacity utilization rates. But producers are taking measures to reduce this overcapacity and China’s new

government could make significant inroads in this area in the years ahead.

We expect demand to pick-up in 2014, on balance global PMI data shows continued expansion and a recovery in Europe could be all important.

That said, the extent to which China’s economy slows is likely to be the key factor.

We are more bullish for US demand but it alone is unlikely to produce a strong global steel market. Stronger US demand is also likely to attract

imports, which in turn will keep prices in check. As well, we feel lower iron ore prices in 2014 will be passed onto customers in the form of lower

steel prices because steelmakers continue to face considerable competition. For 2014, we would look for HRC prices to average around $660 per

tonne.

A sustained downside in steel prices will materially affect the margins of steel companies. We believe that the recovery in pricing momentum will

only be driven by a reviving economy, stabilization in the Euro-zone, and a rebound in construction activity in the U.S. and developing countries,

in particular China and India.

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FCNR(B) Loans

Further, Fund Angle Clearance (FAC) given by IBD will lapse if the disbursement is not availed within 3 months from the date of FAC. After availing the

loan, if the borrower wants to prepay the same, is it permitted subject to the penalty normally in the range of 1-1.5% of the amount prepaid for the un

expired period of the loan.

FCNR (B) loans are beneficial to the corporates on account of following:

Corporate gets the loan at a cheaper cost as the interest is linked to LIBOR / EURIBOR.

The borrower is not required to go to the International market for raising the funds as foreign currency funds are made available in India reducing

the cost of raising such funds.

The disadvantage is that Corporates have to bear the exchange fluctuation risk. This scheme will be attractive to those who have regular forex earnings.

Those who do not have any forex earnings should understand this risk and arrange for hedging the exchange risk.

Corporates are allowed to obtain foreign currency denominated loans in India under the

above scheme for the purpose of meeting working capital requirements in Indian Rupees, By

way of pre-shipment advances/ post shipment advances to the exporters, Import of raw

materials/ capital goods, Repayment of the existing Rupee Term Loan and Repayment of any

existing ECB's with the permission from RBI, Govt. of India. End-use of funds may need to

be restricted for productive purposes with high priority to be given to exporters,

manufacturers and infrastructure projects.

This facility for working capital is given by way of FCNRB (Demand Loan). FCNR(B) Demand

Loans can be extended for a maximum period of 11 months. The loan can be disbursed up

to 90% of the MPBF limit.

The base rate for FCNRB (DL) in USD, GBP and YEN is LIBOR. The base rate for FCNRB (DL)

in EURO is EURIBOR. The base rate for FCNRB (TL) is 6 month LIBOR/EURIBOR.

The differential over the base rate will be as per the credit rating of the borrower.

In addition to interest, there are some other costs involved like, Processing fee, as applicable

for rupee loans, Transaction fee, and Commitment fee.

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The first self-made female millionaire was Madam C.J. Walker. In the early

1900s, She made her fortune by developing and marketing a successful line of

beauty and hair products for black women under the company she founded,

Madam C. J. Walker Manufacturing Company.

Sensex Gold (10 gm)

MCX Metal MCX Agri

Crude Oil ($/barrel) Dollar/INR

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About Investeurs Consulting Private Limited

For a good business, finance is as crucial as vision, management and

product. Intuitively then Business Finance plays a vital role in the business

prosperity. We, at Investeurs Consulting Pvt. Ltd understand and

appreciate the vitality of this discipline and the responsibility that comes

with it.

As Business Finance Consultants we realize that finance is an enabler that

contributes significantly towards realizing your business goals. We bring to

the table 20 years of vast and vivid exposure to different businesses, a

profound understanding of business and financial dynamics and excellent

relationship with banks/ financial institutions.

Team Chronicle

Akanksha Srivastava [email protected]

Nidhi Gogia [email protected]

Sonali Yadav [email protected]

Harpreet Kaur [email protected]

Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The

information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided.