Bonds, Currencies & Commodities
Iron ore prices set to go up

Strong Chinese import demand overcomes fears of global steel oversupply

Iron ore prices have begun soaring since September 2009 from a bottom of $80-$84 per tonne and are now nearing their recent peak of $110-$112 per tonne of early August 2009. The cash prices for Indian iron ore exported to China have been hovering above $100 per metric tonne on higher freight costs, increased Chinese demand and disruption in Indian supply.

Even the China International Capital Corporation (CICC) comments that steel demand in China may consume 12% of iron ore next year thanks to booming property and auto demand. CICC expects China’s domestic crude steel consumption to increase to 606 million metric tonnes in 2010. India-China freight charges have shot up to $24 per tonne from about $16 per tonne. 
 
In India, the Orissa government has ordered to halt work in 50 mines because they did not have proper documentation and did not meet environmental norms. This has severely affected Indian supply. If the Indian bottleneck continues, iron ore prices are expected to hit higher levels. As per market sources, the cash price for Indian iron ore exported to China is expected to rise by about 4% by the end of November 2009.
 
In the first 10 months of 2009, total iron imports by China rose 37% from a year earlier despite a lull in October 2009. According to China customs data, year to end-October 2009 iron ore imports were 514.8 million tonnes (MT), compared to 469.3MT between January 2009 and September 2009. China’s iron ore imports fell by almost 30% in October 2009 from September 2009. It imported 45.5MT of iron ore in October 2009, 19MT less than the record 64.5MT imported in September 2009. Meanwhile, imported iron ore inventory at China’s major ports fell to 65.74MT as of 16 November 2009 from 66.96MT as of 9 November 2009, indicating strong demand.
 
But the major concern has been the steel oversupply scenario. China Iron and Steel Association (CISA) has warned that oversupply in the Chinese steel sector could worsen in the fourth quarter and in early 2010. China’s crude steel output was 420.40MT, up 7.5% year-on-year in the first nine months of this year. In October 2009 alone, Chinese crude steel production growth has sharply grown by 42% year-on-year to 51.75MT.
 
Meanwhile, the entire year’s output is estimated at 550MT, up 50MT or 10% from 2008. China’s apparent steel demand rose 20% year-on-year in the first nine months, to 421.80MT, mainly driven by the government’s expansion of fixed asset investment, and the growth is predicted to sustain into the fourth quarter and early next year. Surprisingly, in October 2009, the investment in China’s fixed assets and real estate has been below expectations. Investments increased by 33.2% in the first 10 months, but were down by 13.2% monthly, which is the largest monthly reduction over the past decade.

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Bond markets not taking talks of PSU divestment at face value

Apprehensive of high government borrowings and widening fiscal deficit, bond markets are looking for some respite from PSU divestment funds but see no chance of yields falling significantly

Talks of the government’s burgeoning fiscal deficit have now reached a high pitch, giving vent to speculation on the direction of interest rates and bond yields. The government’s dose of fiscal and monetary stimulus measures, to revive an economy caught in the clutches of a global slowdown, have come somewhat at a cost. Now, with economic recovery slowly taking a more visible shape, the government has already given indications of withdrawing its supportive monetary stance in favour of a tighter, more aggressive interest rate regime.

In the midst of all this, the bond market has been waging a losing battle versus a euphoric equity market; it fears piling government borrowings and fears of monetary tightening. Bond markets have come under pressure because of the government’s borrowing habits. Yields on 10-year government securities (G-Secs) had almost touched 7.5%. The government’s talk of PSU divestment had come as a respite. However, there is still a degree of uncertainty regarding the government’s action in this regard. In an earlier interview with Moneylife, K V Kamath, chairman, ICICI Bank Ltd, had said, “The government is not articulating the wealth we have mainly in the form of public sector investments. Once the government hints that even a small part of this wealth can be monetised, nobody will then talk of deficit.”
 
Now that the government has articulated precisely that by sending equities higher, why are bond traders not at ease? Speaking exclusively to Moneylife, RVS Sridhar, senior vice president, treasury head, markets of Axis Bank, said, “In the first place, there was no target worth mentioning in the divestment space. A paltry Rs1,000 crore was budgeted and they have already achieved much more than that. This particular intention of selling these PSUs in smaller or larger tranches has been there for many years. I think today the government is coming out with a more comprehensive strategy, saying they will amass several tens of thousands of crores. I think they can deliver at least to some extent. So it could definitely lead to infusion of funds into the system, and thereby help to reduce the pressure on the bond market.” However, the bond market was being cautious on this front. He added, “Even in the case of 3G spectrum auction, it is not something which is taken seriously by the markets. We have seen that it has been postponed twice.

Now hopefully it will happen within the financial year. Some of these issues are not entirely easy to follow through. Making a statement of intent to sell some shares of a PSU is one thing. Pulling it off in large numbers is another matter, because these are under public scrutiny. There is a process of arriving at a consensus and then coming to a decision. It is a long process. What the bond market does not have today is 100% confidence that this money will come within the financial year. Yes, on the equity side we have seen better numbers than what was estimated. On the 3G side we are feeling more confident that the money will come at least before March. But again, how much will come is still an uncertainty.”
 
Mr Sridhar said that the RBI’s stance in the past four-five months signalled a call to reality. He explained, “We have realised that so much of liquidity in the system may not prove beneficial to the asset markets, like real estate, commodities and equity. The surplus liquidity lying around may get into these markets and we might have a sort of asset price inflation. Central banks of economies who have escaped the worst effects of the aftermath, are now considering whether to continue with stimulus measures, monetary or fiscal, or whether to correct it, so that we don’t get such a situation. In that sense, clearly signals have been given to the market. Along with that, the fear that inflation is rising has become a reality. Concerns have been expressed that we should not lower our guard, but actually bring back our guard. RBI’s statements convey to the debt markets in no uncertain terms that they should be on their guard, and hence the first reaction would come from the G-Sec market. Central banks may not always act through measures; they can act through statements and indicators. So the impact on G-Sec yields can only be negative as we go along.”
 
According to him, yields are going up because one is not investing for the sake of selling tomorrow. “We are forced to hold these papers because these are part of statutory liquidity reserve (SLR) requirement. The government does not issue papers of short duration; it issues papers of 10, 15, 20 or 30-year duration. So when interest rates go up, we demand a price for the future as well. And as inflation expectations have gone up, RBI cannot stay away from hiking rates. If it hikes rates, what would happen to our cost of funding and G-Sec yields at that time? So markets make estimations. I think there is no chance of G-Sec yields falling significantly,”  added Mr Sridhar.
Sanket Dhanorkar [email protected]

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Corporate bond yields slump on surplus liquidity

Falling yields on government bonds are being mirrored by the corporate bond segment, as sluggish credit growth and low interest rates lead to oversupply of money

The Reserve Bank of India (RBI) has shied away from hiking interest rates, largely because credit growth has failed to match up to its expectations. During November, the resulting surplus cash lying with the banking system has contributed to the decline in corporate bond yields which have slumped by 30-50 basis points to their lowest in nearly 3.5 months. The yield on the Reuters benchmark five-year corporate bond ended at 8.07% on Friday, the lowest since 30th July.

RVS Sridhar, senior vice president for treasury at Axis Bank explained, “Bond yields are falling as a result of the relief rally, post the RBI's monetary policy review, as no rate hikes have been carried out. The hike in statutory liquidity reserve (SLR) led to a bullish rally on potential increase in demand which has fed into the bond segment too. Availability of sufficient liquidity amid lack of credit growth has led to a rally and credit spreads have shrunk.”
 
“Indian banks are waiting for disbursement to happen but actual disbursement is not picking up. RBI has not tightened the money supply and has not increased the rate to ensure good economic growth; all these factors resulted in excess liquidity in the market,” said Gautam Jain, senior analyst, RBS Equities.
 
“When current interest rate is lower than coupon rate of corporate bonds, the value of bond goes up more than the face value (as there would be more demand for higher coupon rate bond) and when the bond value is more than the face value, yield goes down as the holder of a corporate bond will be getting same coupon rate of interest on higher value of bond,” Mr Jain added.
 
According to RBI data, total bank credit since January increased a mere 9.8% over the corresponding period last year. In comparison, credit off-take registered a robust 27.7% growth during the same period last year. This has caused RBI to revise its credit growth target to 18% from 20% earlier this year.
 
Speaking on future movements in bond yields, Mr Sridhar said, “In the short term I believe the rally would be sustained until we see any concerns from RBI or inflation concerns. The rally may end in December as markets prepare for the January monetary policy review.”

Mr Jain opined, “I think, till December 2009 end, it is likely to remain at this level and from January 2010 onwards, it should move up. RBI may increase the interest rate to tackle inflation in their 10th January policy meet. There would be a pick-up in credit growth as normally credit grows well in the last quarter. Hence, I think from January-February onwards the bond yield should start moving up marginally.” – Sanket Dhanorkar [email protected]

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