94 i chronicle


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Cover Story Base Metal Outlook (CY 2014)
Corporate Credit-Buyer’s Credit
Business Trivia -Bombay Stock Exchange
Visual Facts-Sensex, Gold, Crude, Dollar, MCX Metal & MCX Agri

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94 i chronicle

  1. 1. Volume: 94
  2. 2. Industrial metals markets are very sensitive to movements in the Chinese economy, the tapering plans in the US and fundamental changes. Metal markets with already poor fundamentals (such as aluminium) registered losses, but other metals (such as copper and zinc) also suffered severely. In fact, these two metals saw their prices decline the most. However, slow business activity and weak sentiment holds the global markets back. ALUMINIUM There are not many reasons to be cheerful about 2013. Sentiments and business activity were generally weak, based on the weak economic growth in China and Europe. During 2013, Aluminium prices decreased by 5%, while stocks at LME warehouses increased by 2%. At the end of 2013, total registered stocks represented 11-12 weeks of consumption. Most (40%) of the volume of LME stocks is located at the Vlissingen warehouse. Since the start of 2014, sentiment has continued to be weak, and aluminium prices have continued their path downward to reach a four-year low. However, currently the increased supply of aluminum will be offset by the rising aluminum demand from traditional consuming sectors. The recovering automotive and construction sector in the developed world, especially the US looks positive for aluminum. Also, the rise in production of consumer goods from China will keep the aluminum demand high. Further, the supply surplus will reduce considerably in 2015 as China curtails production at non- performing smelters. Hence, Aluminium prices are likely to remain higher this year as there is an imbalance in demand-supply. A prolonged oversupply situation that had forced the global player to cut down production is cited to be the major reason for the market moving from surplus to deficit. The deficit is expected to widen to 1.4 million tonnes in 2014. Increase in demand, coupled with widening deficit, could limit any fall in aluminium price and push it further higher this year. We predict an average aluminium price of $1,887/mt for the full-year in 2014. COPPER The average London Metal Exchange (LME) cash copper price for 2013 was USD 7,330/t, down by almost 8% compared with 2012. During 2013, copper price was very volatile and moved between a bandwidth of USD 8,267/t (peak level early February) and USD 6,638/t (trough late June). Over the course of 2013, the level of copper LME stocks rose by 14%. After selling off from USD 7,450/t to USD 6,320/t in mid-March 2014, driven by Chinese property sector weakness and ongoing above-trend supply growth, London Metal Exchange copper prices have retraced a third of their losses. Copper is very heavily exposed to the Chinese property market with over 60% of consumption coming from property and property-related sectors. These end markets were soft in Q1 2014, with late cycle copper intensive property completions down 5%, property sales down 5%, and new starts down 25%. We believe copper-intensive construction completions growth is set to remain weak for the rest of 2014, given the already weak new starts data. Without a pick-up in property sales there is some downside risk to Chinese copper demand forecasts of 6% in 2014 and 5% in 2015. Outside of China demand seems to be improving and the outlook continued improvement. On the Supply side, we expect the copper market to move into a wider surplus of 470,000 mt and copper prices to decrease. We remain in a once-in-20 year supply cycle. Though concentrate bottlenecks and temporary smelter issues are present, we believe these are temporary factors that should be looked through as treatment charges will likely resolve these over time. We predict a pattern of price decline then rebound for copper, with prices hitting $6,200/mt by the end of the year, and then bouncing back to $6,600/mt by April 2015. Base Metal Outlook CY 2014
  3. 3. ZINC The price of zinc remained fairly stable during 2013 and showed relative mild volatility. In February 2013, zinc prices reached its peak of USD 2,130/t, and touched a low of USD 1,785/t in early May. The average zinc price in 2013 was USD 1,910/t. Zinc price stabilized on 31 December 2013 compared to where it began the year. This is in contrast to aluminium (-14%), copper (-7%) and nickel (-19%), which all declined. This made zinc the best performing base metal in 2013. Global mine output rose by one percent yoy to 13.20 million tonnes (mt) in 2013. Increases in China, US, Peru and India were offset by fall in output at Canadian mines. Refined production rose 2 per cent to 12.90 mt, where Chinese output grew 4.5 per cent offsetting slowdown elsewhere. However, there was a decline in Chinese percentage output slowdown, which is a worrying factor, as from 12 per cent in 2012 it dropped to a meagre 4.5 % There is a sudden mine closure in the last couple of years, where three of the 10 top zinc mines are going off stream, and the contribution from these mines would be close to 12 per cent of the total output. Ramp up of new projects during the year is expected to increase mine output and offset some fall in output due to scheduled closure of major mines later during the year. China continues to be the largest consumer of the metals accounting to 45 per cent of the total demand. Zinc demand rose 4.7 %y-o-y in 2013 to 12.98 mt, with major consumer being China with a 70 per cent rise in consumption. Demand in China climbed 7.6 per cent in 2013 to 5.748 mt. With Chinese growth rates slowing and credit being restricted, demand for zinc and metals, in general, may well suffer more than is currently expected. But aggressive steps to stimulate the economy may make up for the loss. European demand which was subdued last year may see a recovery particularly from the auto industry. At the moment, things are pretty balanced; but as we move ahead, mine closures and slower pace of addition will start to add to the demand-supply squeeze. Market is now focused on International Lead and Zinc Study Group (ILZSG) data, which shows a deficit of 107,000 tonne in the first four months of 2014 from a surplus earlier in the 2013, driven by higher demand in South Korea and China. Going by the current speed of global growth recovery, zinc demand should remain steady. A spate of mine closures scheduled from the middle of next year looks set to become an increasingly-significant price driver. Global metal consumption looks set to gallop steadily higher; and output from key mines is not likely to be replaced for some time, making it a solid price appreciation story. We see a possibility of zinc outperforming other industrial metals over the next few months. Although the above case puts up a strong case for a rally in zinc prices, but given high stocks and the potential for off market metal to return later in the year, rallies are expected to be under check. Zinc prices are expected break past the consolidation, and can head towards USD 2,200/t and eventually towards USD 2,320/t. This move will not unfold immediately, but gradually as we enter into the next quarter, we might see the story unfolding. Overall in the metals market, increased supply and insufficient demand exerted a downward pricing pressure on commodities and this trend is expected to continue over the short term. Growth in the U.S. and an improving global macroeconomic scenario in tandem will boost demand in the industry. Revival of the Chinese economy will be instrumental in driving growth in the industry.
  4. 4. Buyer’s Credit Amount and Maturity  Maximum Amount Per transaction : $20 Million  Maximum Maturity in case of import of Non capital goods/Raw materials: upto 360 days from the date of shipment  Maximum Maturity in case of import of Capital goods : upto 5 years from the date of shipment (Beyond 3 years banks are not allowed to provide LOU)  The period of trade credit should not exceed operating cycle Cost Involved  Interest cost: This is charged by overseas bank as a financing cost which is - Libor Rate +Spread * Libor rates used are of 3ML, 6ML & 12ML ** Spread varies from bank to bank depending upon the amount of loan, tenure ,credit rating of the importer, LOU issuing bank, negotiation skill (of the consultant) and other factors, it cannot exceed 350 bps  Letter of Comfort / Undertaking: Importer’s Bank charges this cost for issuing letter of comfort / Undertaking  Forward / Hedging Cost: In few banks it is mandatory for importers to book for forwards and few leave the option of deciding on importers.  Arrangement fee: Charged by Buyer’s Credit Agents / Brokers for arranging buyer’s credit for importer.  Withholding Tax (WHT): When funds are arranged from Foreign Bank, Importer has to pay WHT on the interest amount remitted to the Indian tax authorities. Even though the list of charges seem quiet long, the sum total is less than other loan products (in most cases) provided by the Indian Banks for the same. And now, you do not have to think twice before availing commercial loan , ‘cause there are several effective ways of financing( which is way cheaper than you can even think) under External Commercial Borrowings which includes Buyer’s Credit , Suppliers Credit , Bank loans , Securitized instruments etc. Glance over BUYER’S CREDIT to start with! Buyer’s Credit is a loan facility (under ECB) extended to an importer by a financial institution to finance the purchase of capital goods or raw materials. It is a very useful mode of financing in international trade, since buyers seldom pay cash for large purchases, also, only few exporters has the capacity to extend substantial amounts of long-term credit to their buyers. Process-After importing the goods , importer approaches the Buyer’s Credit Consultant for indicative pricing (sometimes directly with the bank), once the pricing is acceptable , the financing bank issues Offer Letter in the name of the Importer, thereafter importer approaches his bank to get Letter of Undertaking/ Comfort (LOU/LOC) issued in favour of overseas bank via swift. On receipt of LOU/LOC; financing bank funds the amount on the value date. Benefits- The importer can deal with exporter on sight basis negotiate a better discount and use the buyer’s credit route to avail financing. Also, the funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer (The importer can also request funding in a major currency that is more stable than the domestic currency). The importer can use this financing for any form of trade viz. open account, collections, or LCs.
  5. 5. It was in 1875 that the Indian Share Market first started functioning. The first share trading association in India was known as the Native Share and Stock Broker's Association, only to become the Bombay Stock Exchange (BSE) later on. This trading association started off its operations with around 318 members. The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to 1855, when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's Town Hall. The location of these meetings changed many times as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as "The Native Share & Stock Brokers Association". Sensex Gold (10 gm) MCX Metal MCX Agri Crude Oil ($/barrel) Dollar/INR
  6. 6. 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 akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Sonali Yadav sonali@investeurs.com Harpreet Kaur harpreet@investeurs.com 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.