Two decoupled energy blocs with India and the Gulf in the middle

Australia’s Strategic Policy Institute opined on the emergence post Russia’s invasion of Ukraine, of two decoupled energy blocs with China and Russia on one side, and Europe, North America, and the Indo-Pacific democracies, on the other side. Prior to Russia’s invasion of Ukraine, in 2020 almost 30% of EU crude oil imports came from Russia and over 40% of natural gas imports came from Russia while more than half of solid fossil fuel (mostly coal) imports originated from Russia (54 %). European nations are now seeking new sources of gas, oil and diesel fuel from the Americas, Africa, the Middle East, and India, as well as an increased focus on local energy production to wean themselves off Russian energy sources.



With Russian oil banned in the United States and Europe, India finds itself in the middle of the two decoupled energy blocs buying Russian crude at substantial discounts, powering its energy-thirsty economy at a lower cost, and refining into products like diesel and jet fuel to sell at better-than-usual margins abroad. Ironically, Europe is eager to buy the same Russian crude after it is refined in India into diesel shipping the fuel to Europe since March 2022, with increased trade flows expected over the coming months. China buys 50% of its oil supplies from the Gulf.

The Strait of Hormuz is the most important chokepoint between the two decoupled energy blocs accounting for about a third of the world’s sea-borne oil (and a fifth of the world’s total oil exports), linking oil and gas Upstream producers in the Middle East with Downstream consumers in Europe, North America, China and Indo-Pacific.

In 2016, according to America’s Energy Information Administration, the waterway carried some 19m barrels of crude and other petroleum products a day. This volume will accelerate through 2030 because of new mega refineries in the Gulf China and India and growing demand in Europe and emerging markets. According to Bloomberg, State-run Qatar Energy’s six new gas-liquefaction plants are set to produce 8 million tons of LNG per year for export to Europe. Morgan Stanley forecasts global LNG consumption to rise by 60% through 2030.

The Downstream dilemma - keep investing, or cash in now on what might be refining’s last golden age

In India, several new refineries, petrochemical projects, as well as expansion projects for existing refineries are projected to double India’s refining capacity from the current 5 million barrels per day to 10 million barrels per day by 2030. In the Gulf, four new mega-facilities totaling almost 1.4 million barrels per day are already operational or shortly going live in Jazan, in south-western Saudi Arabia, Al Zour in Kuwait, Karbala in Iraq, Duqm in Oman. Abu Dhabi’s Adnoc Ruwais refinery and Dubai’s Enoc Jebel Ali refinery have raised refining capacity in 2020. Fujairah, Egypt, Iran, Iraq, and Bahrain have also implemented various other refining expansions and upgrades. In Nigeria, a giant new refinery is expected to begin processing in the third quarter of 2022. Saudi Aramco is making new refining investments in Poland and China.



This endless demand for refining capacity with economies of scale, maximizing the output of high-value products may be close to a peak due to increasing fuel efficiency, competition from biofuels, rise of electric vehicles and pressures from climate action groups. Current fuel shortages caused by Russia’s invasion of Ukraine may ease but with a projected global economic slump in the last two quarters of 2022 the Great 2022 Downstream boom is bound to come to an end.

These new refineries may be harbingers of refining’s last golden age as among global refining mainstays, oil demand in Europe has been in decline since 2006; in Japan, since 1996. Refineries need constant investment to meet tightening safety and environmental standards, a changing demand mix for fuel, the capital cost of the facility, a host of other expenses and liabilities from unionized workforces, pensions, pollution legacies from less stringent eras as well as carbon prices. Oil majors Shell, BP and TotalEnergies have been selling or closing refineries or converting them to biofuels processing or storage terminals to cash in now on refining’s last golden age.

Gold import duties, smuggling and gold seizures

In February 2021, India's Finance Minister announced cut in import duties on gold from 12.5% to 7.5% albeit effective import duty remained 10.75% after imposition of various cesses, surcharges and a 3% GST.. ThePrint’s Editor-in-Chief Shekhar Gupta explains what the small cut in import duty tells us about the Indian political system’s fatal attraction for bad policy.



On 13 August 2013, the Indian government had raised gold import duty from 6% to 10% which was further raised to 12.5% on 5 July 2019. For taxes and gold import duties over 12.5% gold smuggling becomes a lot more profitable than imports creating a very strong incentive for the grey markets to constantly undermine all reforms to make gold liquid and mainstream according to the World Gold Council. India has had a significant history of seizure of smuggled gold which is directly proportional to the amount smuggled rising from 207% from 2016 to 2020. Nearly 70% of total gold seizures made in 2020-21 were of Myanmar origin. Only about 13% came from the United Arab Emirates.

According to Gupta, in the past, gold was smuggled in large quantities as it funded all of India’s underworld and corruption — bureaucratic corruption, customs corruption, judicial corruption as well as terrorism. “Gold is a sink for black money. One way to clean up gold was to open its imports. Second was to reduce or withdraw all duties so that the margin was taken away. And third was to improve India’s foreign exchange rules” Gupta explained.

Improved Gold price discovery may lead to even higher imports into India

Qualified Indian gold jewelers and bullion dealers are now authorized to buy gold bars and coins directly via imports from the India International Bullion Exchange (IIBX). At present, gold imports are allowed only through Reserve Bank of India nominated banks and India's Directorate General of Foreign Trade licensed entities such as the State Trading Corporation (STC) of India to import gold in the form of the more popular 100 gm and 1 Kg bars with 0.995 (67%) and 0.999 (33%) purity, for Indian traders or jewellery manufacturers on consignment basis. Gold officially shipped into India comes via air into 11 cities as well as a Free Trade and Warehousing Zone (FTWZ), located in the town of Satyavedu. Indian gold imports have continued to rise despite high import duties with official imports averaging 760 tonnes per year since the first hike in 2012. In 2016-2020, imports made up 86% of India’s gold supply while recycling accounted for 13% and mining accounted for just over 1%. Since the first duty hike in 2012, India has imported some 6,581 tonnes of gold - rising from $37 billion worth in 2018, 377 tonnes in 2020 reaching a record $55.7 billion in 2021 buying more than double 2020's tonnage, as a price drop favoured retail buyers and pent-up demand emerged for weddings that were delayed when the pandemic first hit.
The ownership of the imported gold vests with the overseas exporter until its agent in the country (e.g. authorized banks) sells it to a domestic buyer. The banks and other agencies get a fee from the exporter for handling and storage and also add a premium to the gold while transacting with the domestic buyers. The buyers pass this premium on to the value chain until it reaches the end customer, who has little knowledge of the gold’s price discovery with price quotes for the gold across the country being opaque. The premium charged was up to $1 an ounce over official domestic prices in January 2022 (inclusive of 10.75% import and 3% sales levies) as opposed to $5 discounts in December 2021, which were the largest in five months.

Gold imports continue to rise (and shine) in the world's second largest gold consumer market

India imported gold worth $34.6 billion in 2020 against $28.2 billion in 2019 with Swiss gold imports accounting for almost half at $16.3 billion. According to Bloomberg, India's gold imports at 900 tons in 2021, up from 350 tons in 2020 are set to be the highest in six years:

India is the world’s second-biggest gold consumer and imports almost all the metal it consumes with the World Gold Council has estimating that sales in the peak October to December period to be the best in at least a decade. The Securities and Exchange Board of India has allowed setting up Gold Exchanges from 2022 where trading in the form of electronic gold receipts (EGRs) at the excahnge is expected to help with a transparent domestic spot price discovery mechanism. The denomination for trading of EGRs and conversion of an EGR into gold is left to the exchanges but EGR trading will be subject to securities transaction tax and goods and services tax.The Directorate General of Foreign Trade issues license to entitities such as the State Trading Corporation (STC) of India to import gold in the form of 100 gm and 1 Kg bars with 0.995 and 0.999 purity, for Indian traders or jewellery manufacturers.

Coal continues to be surprisingly a strongly traded commodity in Asian Markets

Who would have ever thought that Coal, a much hated and maligned commodity would continue to be a strongly traded commodity in 2022? Indonesia, a leading exporter of thermal coal banned the shipments of coal on New Years Day 2022, causing a surge in coal prices. This follows on a record $158 per tonne in October, though it slipped $68 on Dec. 29 according to Refinitiv and Kpler.

A report published in December 2021 by China's State Grid Corporation outlined China's plans to build as much as 150 gigawatts (GW) of new coal-fired power capacity over the 2021-2025 period, bringing the total to 1,230 GW as the first 1,000-megawatt unit of the Coal powered Shanghaimiao plant, the biggest of its kind was completed. The plant will eventually have four generating units adding to more than half of global coal-fired power generation, a 9% year-on-year increase in 2021, according to a report from International Energy Agency published in December 2021, even as US coal powered plans continue to close.
China (US$16.4 billion - 17.3%), Japan - ($15.95 billion - 16.8%) and India ($15.87 billion - 16.7%) were the biggest importers of coal in 2020 compared to China ($19.6 billion - 12.9%), India - $24.6 billion (16.2%) and Japan (US$25.4 billion - 16.7% of total coal imports) in 2019 as reported by Caixin. These three Asian giants will continue to be major Coal commodities players for at least the next decade.

Comparing FDI into India with inward migrant remittances paints a truer picture of where Indian economy is headed

India received a total of US$69 Billion in remittances from NRIs and other overseas Indians in 2012 making India the leading recepient of remittances from overseas. This covered almost 40% of the merchandise trade deficit in 2012. During the April-February period of 2012-13, FDI into India declined 38% to $20.89 billion as compared to $33.49 billion during the same period of the previous fiscal year. Sectors which received large FDI inflows during the 11 months of 2012-13 include services ($4.74 billion), hotel and tourism ($3.21 billion), metallurgical ($1.39 billion), construction ($1.26 billion) and Pharmaceuticals ($1.11 billion). India received maximum FDI from Mauritius ($8.97 billion), followed by Japan ($2.11 billion), Singapore ($1.98 billion), the Netherlands ($1.67 billion) and the UK ($1.06 billion). These figures paint a completely different picture of the Indian economy and where it is headed. Thank God for the migrant remittances, it is essentially helping reduce the Indian current account deficit (CAD).



Also, the fact that Mauritius is the leading FDI investor into India (which is essentially laundered money moving out of India and back into India through the Mauritius channel) tells us that the media hype we usually hear about all the FDI interest in India is essentially bogus. The falling FDI rate into India tells us that investor confidence in India still remains very low. Thus, it is essentially the migrant remittances that is keeping the Indian rupee afloat. If one day the migrant remittances start falling, India's CAD will balloon beyond repair and send the rupee into a free fall. For the next few months leading to Indian general election scheduled for 2014 very strong caution is advised.

Jim Rogers, famous commodities investors cautions on investing in India and points to upcoming war due to water

UR6ZR6UN9U9W Legendary Quantum Fund manager (along with George Soros) and commodities investor Jim Rogers is short Indian equities and has categorically declared that India while an exciting place to visit is not a place for him to invest in. In an interview with Bloomberg last week, Mr. Rogers proceeded to urge the Indian Government to figure out somehow how to run a country pointing to the non-convertibility of the Indian currency, the Rupee on the international markets. He has also blamed the restrictions on foreign investors as another reason why he feels the Indian government does not know how to run an economy.



As posted in an earlier blog post, this view on the Indian macroeconomic environment is reflected in investors moving their capital out of India and I believe it is only a matter of time before the current bubble in Indian equities which has built up again since the last pop in 2007 will burst again in the near future perhaps quite dramatically. Mr. Rogers also pointed out about the possibility of an upcoming war due to shortages of water resources in India and Pakistan. I have previously blogged about this possibility of a war between India and Pakistan in the near future as well.

Inflation is the growth killer - and the RBI stifles it further through monetary policy

Last month, the Governor of the RBI, delivered a lecture at the London School of Economics on India's macroeconomic challenges in which he more or less admitted that RBI's monetary policy was largely to blame for declining growth in India. A large portion of the lecture focused on the huge inflation problem in India which as measured by the wholesale price index(WPI) was 9.6% in 2010/11, 8.9% in 2011/12 and 7.5% 2012/13. According to the RBI the major driver from the supply side has been food inflation, arising from rising incomes, especially in rural areas, which is leading to a shift in dietary habits from cereals to protein foods, the monsoon related spike in prices of food items such as vegetables and global commodity prices, especially the price of crude oil. The price of crude especially affects Indian inflation very badly since India imports 80% of its oil demand.



This commodity inflation is further compounded by the depreciation of the rupee and lack of demand adjustment due to the Indian governments subsidized pricing regime of petroleum products. But the worst growth killer of all has been RBI's response in the form of monetary policy as the Governor himself admits in his speech.

End of the IT Outsourcing era approaching - Indian IT industry risks collapsing

One after another IT outsourcing industry bellwethers like Infosys and today Wipro have posted lower than expected revenues. Cognizant and HCL seem to be battling this downturn by firing employees to contain costs. As the Economic Times has opined, the industry needs to look for a new revenue model or risk dying out (also see graphic from the article). I will add that there is a fundamental shift in technology taking place such as the move towards cloud computing with the evolution of software as a service.



The long term trend for the IT Outsources if they do not change their model (and perhaps its too late now for them) seems to be on a slippery slope downwards towards irrelevance. Shorting these companies are more safely - staying away from them completely in your portfolios is highly recommended over the medium to long term.

Goldman Sachs gets it wrong on their predictions for India growth

Last year Goldman Sachs predicted a 6.5% growth for India in 2013. This seems a bit far fetched considering that India's GDP growth in Q3 of 2012-13, at 4.5 per cent, was the weakest in the last 15 quarters (see graphic). Goldman Sachs was it at the prediction game again citing 5 reasons for gradual pickup in India's GDP growth including the upcoming general elections and expected fiscal stimulus; expected lower interest rates to stimulate economic activity; Policy, reform push to fast-track projects; Global economy acting as a tailwind; supposed green shoots emerging in activity data. Clearly the analysts at Goldman Sachs while certainly highly educated are naively out of touch with ground reality of the Indian political scene.



More recently, ratings agency Crisil on Monday April 15th cut its 2013-14 GDP growth forecast for India to 6% from 6.4% citing weak consumption demand, stubborn lending rates and the impact of policy delays on growth which is much closer to ground reality.

With the arrest of Musharraf, Pakistan may be stumbling towards total anarchy - followed by a war

How the mighty have fallen! The man who took Pakistan very close to a nuclear war with India back in 1999  is now under arrest in his own country, an event which may ironically possibly trigger another nuclear confrontation with India attempting to finish the job he started. The Washington Post reports that Musharraf faces the prospect of prison or death, if convicted of treason and military commanders would certainly not accept the jailing of their former colleague at arms. Pakistan’s former military rulers have long been held responsible for the instability and militancy plaguing the country and for disrupting democratically elected governments and none have ever been held accountable.



This arrest may either be a game changer prompting the Pakistan army to try to broker a deal to send Musharraf packing - or more ominously - may create a diversion by opening an offensive against India in some way shape or form. Escalating response from India may bring inevitable instability in the whole region. The markets would do well to price in this geopolitical risk.

Irrational exuberance continues to send Indian markets climbing

The Economic times reported today that the Indian stock market market has risen higher for the week by 770 points. As I have blogged before there really is no basis for this continued irrational exuberance. The finger of blame for this steadily inflating bubble can be pointed to portfolio investments flowing in though Mauritius which is simply money laundered overseas by tax dodging citizens through hawala channels and returned back as legitimate portfolio investments through Mauritius.



The other channel for laundering this money is right in India in real estate in the major cities of Mumbai & New Delhi where the bubbly property market has reached stratospheric levels long time ago. When these multiple bubbles burst...and burst they will...look for shelter outside India...

Red tape in India is "redder" than ever

The Hindustan Times ran an article last week on the extreme difficulty of doing business in India. According to the World Bank, India is ranked 132 among 185 economies in their "Doing Business 2012" report citing 12 required procedures which can take 27 days and can be expensive. No wonder then at a meeting held last month at the US Treasury Department, convened by the under secretary of treasury, Lael Brainard, a select group of American investors and corporate leaders gave a free and frank assessment of the current investment and business climate in India to visiting top Indian officials as "messy"



The Hindustan Times interviewed six different entrepreneurs who mainly cited extreme governmental interference and unnecessary meddling as the biggest hurdle faced in starting up a business in India (see table below):

After Switzerland, UK and Channel Islands top the list of offshore domiclies

Funds Europe magazine reports that the UK and Channel Islands are at number two on the list of offshore domiciles, with assets under management of US$1,800 billion at the end of 2011. Switzerland still tops the list, with more than 80% of the funds held in Switzerland being for foreign clients.



India's new wealth tax surcharge of 10% on individuals with taxable incomes topping 10 million rupees will not work thanks to a well-established tax dodge wealthy people and corporations use that involves sending money to and from Mauritius. Under a tax treaty between India and Mauritius, companies based in Mauritius are not taxed on their investments in India. The Isle of Man or the Channel Islands may not have a similar tax avoidance agreement as Mauritius but they are certainly far safer havens (see video) to protect assets if return of assets is considered more important than return on assets.

Booming automobile market in India crashes - warning sign of major market in India crash to come?

Over the last few years, the Indian and international financial media has been harping on the growth in the Indian automobile industry (see video from the Financial Times) with frequent proclamations of an everlasting boom. The Economic Times has reported today how this boom has now crashed rather badly: "Last year, car sales grew 2.2 percent and the immediate future looks mostly gloomy for an industry that experts had expected to ring up annual car sales of 9 million by 2020 from less than 2 million this year, but looks set to significantly undershoot that target."

 

This is one of many warning signs of a major market crash to come in Indian markets. The banks will be next harbinger of bad news as loans start going into default in the next quarter or two.

Skype finally freely available in UAE - NRIs and expats can now make free calls home

Skype has now finally been unblocked in the UAE and subscribers to internet suppliers in the UAE can now download skype and make free skype to skype calls as reported by Yahoo!Finance today. This feature will now allow expat families to stay better connected through free skype chat with family members in home countries.


The average UAE expat spends anywhere from US$20 to US$210 in monthly communication charges with family members in home countries and this unblocking of skype will help reduce communication costs to near zero.

Will the obsession with Gold end in losses?

Ian Lyall, a former City News Editor at the Daily Mail has asked if Gold has finally lost its lustre? The article ends by citing a number of analysts who believe that Gold is bound to bounce back. Indians are one of the top buyers of the precious metal and the Indian obsession with the precious metal as a holder of value is legendary. Many investors jumped on the gold bandwagon when it hit the US$1900s in fall of 2011 and now  are regretting the purchase now that the metal has dropped to the US$1500s.



I believe that global economic uncertainty and quantitative easing programs of Central Banks are bound to heat up the demand for Gold in the short to medium term. My take on this correction is: if you have Gold in your portfolio keep it, if you do not have Gold, the current dip offers a buying window to give your portfolio exposure to the precious metal.

Why a war between India and Pakistan is very likely by 2014 or later

Bruce Riedel, a former CIA agent and now a Senior Fellow at the Brookings Institution, a think tank in Washington DC has written a book entitled "Avoiding Armageddon America, India and Pakistan to the brink and back". Mr. Riedel's main argument in the book is that if there is one place in the world where we could have a nuclear war in our lifetime, it's in South Asia. In an interview with rediff.com, Mr. Riedel has suggested that "India and Pakistan have fought four wars, and there's no reason to believe they are finished. If one thinks of what a future war between India and Pakistan would look like, it is Armageddon." Mr. Riedel also hinted that "dark forces in Pakistan who will do anything and were vividly on display in Mumbai in 2008 haven't gone away. If anything, they are stronger today than they have ever been before. Indians need to think clearly about what kind of future they are going to have with a Pakistan that has the fastest growing nuclear arsenal in the world, and more terrorists per square mile than any other place in the world." As Mr. Riedel further elaborates in the video, Pakistan army's obsession with India is not likely to end any time soon and the next war which is only a matter of time will likely result in Armageddon.