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Vandana Bharti
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A competent professional with nearly 7 years of experience in Market Research, Analytics and data mining in Online Trading in Energy, forex, metals and agro. The main roles involve Conceiving / implementing short and long term plans for attainment of process objectives. Supervising... More
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  • Upheaval in Japan… “Giving More Breathe To Commodity Boom”

    There is no respite for the world economy since the beginning of 2011. One after another political and natural disaster has been trembling the world economy. World has just finished bearing the heat from the disturbances in Egypt, Libya and Bahrain, just then a massive earthquake hit Japan, which was considered as a world costliest catastrophe. Since Japan is the world third largest economy…entire world felt the wrench of earthquake and financial market was no exception to avoid toppling. Global economy has been hurt by this strongest earthquake in Japan. Short term weakness injected nervousness in the financial market; nevertheless in long run, markets are expected to behave on their own fundamentals.

    Spillover Effects On “Commodities”

    Initially, halt in economic activities at Japan’s ports, infrastructure inhibit importation and in-land movement of raw materials from factories, industries, power plants may create a glut in supply side in commodities. However, in long run reconstruction will re-create huge demand for commodities and thus expected to revert pressure on supply side. According to World Bank, it will take 5 years to rebuild Japan and real GDP will be negatively affected in 2011.

    Before moving ahead, just have a snapshot of the Japanese economy…

    Japan… “A Vibrant Economy”: If we talk about the major industries about the Japan, these are majorly… manufacturing, construction, distribution, real estate, services, and communication. Agriculture and mining contributes little. Major import items of Japan is oil, food stuffs wood while major supplier for these items are China, USA, Australia, Saudi Arabia, South Korea, Indonesia and the United Arab Emirates. Major export items of Japan are cars, electronic devices and computers. Major trade partners are China, US, South Korea, Taiwan, Hong Kong, Singapore, Thailand and Germany.

    Recovery… “Costly Affair”: Total cost of the damage caused by the tsunami could reach 25 trillion yen -- or US $309 billion. Reconstruction costs are estimated at around 20-25 trillion yen, which is 5% of Japan’s GDP. Government is planning to bring in money into banks for lending supports to companies which will be engaged in rebuilding. Farms, factories, roads, railways and electricity lines have been destroyed whereas half a million people have become homeless. This devastating scenario has made Japan more dependent on other nations if we talk about both food and energy. To settle everything on the same pace, it will result in huge demand of commodities viz; industrial metals, energy, farm commodities etc. Furthermore, Japan is facing the world's most dangerous atomic crisis in 25 years.

    Activities will improve as rebuilding of infrastructure, residences, and various sorts of economic facilities—factories, stores, service centers, banks, etc will create job opportunities for skilled, semi-skilled, and unskilled workers, as well as create orders for manufacturers, both inside and outside the country. Earthquake has compelled commodity market participants to rethink over the impact of earthquake on commodities.

    Energy, “Paving The Path For Bulls”: It is the major contributor in manufacturing activities anywhere in the world. Japan is the third largest oil importer after US and China. It is buyer of LNG and thermal coal as well. According to an estimate, Japan consumed 4.40 million barrels per day in 2010. We should consider the fact that this figure was of the time when the situation was normal. In future, reconstruction activities will create an additional demand pressure on oil in addition to other energy components. We have seen a rally in energy pack, especially in natural gas in recent days. Replacement of natural gas instead of nuclear power supply has fuelled energy prices. Closed reactors affected 9,700 megawatts of nuclear capacity, approximately one-fifth the nation’s total. As per IEA estimates 38.8 barrels of crude is needed to replace one mega watt of nuclear power. Hence crude, LNG and thermal coal should be an easy target for the investors to earn profit whereas uranium prices may see some downside after the closure of key nuclear plants in Japan.

    Industrial Metals, “May Trade High With Confidence”: Industrial metals offer a mix of demand dynamics and Japan is primary importers of most of the metals. Presently, activities in many industries viz, auto, aviation, shipping, manufacturing etc are on halt, which may put a cap on upside. Once the reconstruction activities set in motion, demand for base metals will augment by a long way. Moving in tandem with demand, the metals prices may see a sizable improvement in the prices. It would be important to note that, Japan consumes around 11% of total uses of copper worldwide. It is also a major consumer of other metals like aluminum, steel, iron ore etc.

    Agri Commodities, “May Increase The Home As Well As Nation’s Budget”: Being non agrarian economy, Japan is heavily dependent on other nations to feed its people and to fulfill other need. Agri prices reacted negatively, as after the earthquake all the ways to import for grains and other commodities were closed. However, in future agro prices are expected to augment further.  It’s really not easy to clean the farm land which is full of debris now. On the top of that radiation is mounting the risk of contaminated water, not only in Japan but also in other countries, which is the alarming situation for the world. Reducing farmland will exert an extra upside pressure on prices. Prior to the earthquake, Japan was projected to import 19.18 million metric tonnes of course grains in the ‘10/11 seasons and 16.10 mmt of corn (USDA).

                                                                       At last I would like conclude that Japan earthquake will give more life to the current commodity business cycle and most of the commodities will trade with confidence. Apart from other fundamental factors, pulse rate of commodities will also be dependent on the swiftness of recovery and we are expecting a very prompt recovery in Japan. Japan is the nation, which is well known for its self esteem and hard work. It survived many human and natural attacks like phoenix rises from its ashes. Wishing them a speedy & swift recovery!!!




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Apr 11 2:56 AM | Link | Comment!
  • Commodity versus Dollar Index: The Myths and Facts
    Again there is a hue and cry in the market that dollar index has noticed terrific movements, for this reason this is the perfect time to sell commodities. We take it as a thumb rule, if USDX is moving up then go short in commodities. Does this thumb rule work always??? 
    Let’s find out the myths and facts …
    The USDX is a trade-weighted basket of the US dollar versus other major currencies. Sometimes the volatility in dollar index can be attributed to the major movements in other currencies or what is happening in the other currencies economy apart from other factors. For example; USDX has seen around 23% rise in just over 4 months. It was the biggest move the USDX has ever made over such a short span in this index’s entire history! This mindboggling progress was not due to the strength of USD but simply because of the weakness of other major currencies amid some improvement in US data’s. At the same time, commodities could not see steep fall in the prices due to seasonality. It happens many times. Yes, I agree that dollar index give impact on the prices, sooner or later, but as a secondary driver not as primary.
    Return Of Various Commodities And Dollar Index From 2000-2010(In %age)

    Above chart is revealing the secondary nature of the dollar’s role in commodities prices. During the secular bull run between 2000 to 2010, commodities gave mindboggling performance. It gained between the wide ranges of 64% to 410%. On the contrary, dollar index lost around 23%. It is showing that supply and demand far outweighed the dollar…
    Why the entire world track dollar index while trading in commodities or have physiological impact of dollar index on commodity???
    What I believe that it is in fact very complicated to synthesize fundamentals into tradable whole as in many commodities credibility of data is questionable and come on wide intervals. Various other factors which give impact on the prices are not easily reachable to all traders. Moreover, we are familiar with the fact that commodities fundamentals develop gradually and cannot change overnight and thus it is unable to give massive moves in a short span of time. Many times it is sentiment over and above news driven.
    Here dollar index gain importance, as transaction of many commodities are done in terms of USD worldwide, hence any fluctuation in USD give significant impact on the commodity prices. Moreover, the dollar’s levels are always available in real-time and consequently it is uncomplicated watching the movements of USD to game commodities rather than exploring into their fundamentals. However, we cannot deny that in a particular time period dollar index becomes the primary driver of commodity.
    Movements Of Dollar Index And CRB (2000-2010)

    Source: SMC
    Above graph is showing negative correlation between USDX and CRB but percentage of volatility is more in CRB. Even in 2009, CRB recovered by whopping 20% whereas dollar index only fell by 5%.
    As on whole USDX has proportionately negative correlation with commodities but it is not the main driver. Nevertheless, sometime relationship between dollar index and commodities are positive. For example; in the time period of December 1998 to September 2000 relationship between crude oil and USDX was positive for such a long period. Many times commodities and USDX move in similar direction in perception of the health of the global economy. Fear and uncertainty surrounding the global economy stimulate safe haven buying in both.
    Concluding with the view that each commodity has its own fundamentals, demand and supply profile, which drive its prices. Though, the secondary driver, dollar index often give impact on the commodity prices significantly. Hence, it is advisable that take it as a significant indicator, but rely on seasonality and own fundamentals of commodity before the investment of your money.

    Disclosure: No Position
    Tags: GOLD, CRB
    Apr 22 6:11 AM | Link | Comment!
    It is an alarming situation when the entire world is fighting with this historical economic crisis; inflation is adding additional pressure on government as well as consumers. Major contributor of this whopping hike in inflation is food inflation at present context. Mismatch between demand and supply worldwide created chaos and sent prices of many commodities at multi year highs.
    According to the latest data, food inflation rose to 17.47 % for the week ended November 21, 2009 against 15.58 % in the previous week owing to spiraling prices of vegetables, pulses and sugar. If we talk about overall WPI inflation, it got doubled to 1.34 % in October compared to 0.50 % in the previous month. On year on year basis, food prices jumped by 13.32% in October only. Rice, pulses, sugar and potatoes, onions was up by 13.22%, 22.81%, 45.70%, 96.43% and 37.60% respectively.
    Reasons for inflation and its impact on economy:
    ·         Bleak monsoon coupled with worst drought in nearly four decades in the countrysituation is haunting the entire economy. According to an estimate, India may see a drop of 18% in Khariff crop. It will create further demand and supply mismatch. People will spend less, if prices will move in the same way and ultimately it will affect most of the sector of economy.
    ·         To encourage farmers to produce more, government has recently increased the MSP (Minimum support Price) of rice, oilseeds, cotton, sugar and many more. Higher MSP immediately pushed up the prices. Though the long term impact of this step will be positive, as more farmers will produce more to get good remuneration.
    ·         Hoarding by stockiest, farmers in anticipation of further hike in prices is also creating a demand supply mismatch, resulting in higher food inflation.
    ·         Government has to compete high with the large scale entry of private players, which procure grains aggressively for biscuits, millers and manufacturers of processed foods.
    ·         Declining trend of public investment in agriculture is another concern for government at present.
    Measures to check inflation:
    ·         To give immediate relief from inflationary pressure, government is planning to check the supply deficiency. It has allowed importing sugar. It will import rice, as rice production is expected to drop in 2010. Import duties on oil seeds have been slashed.
    ·         Money supply should be checked, otherwise in the time of scarcity excess liquidity will accelerate inflation further.
    ·         Distribution process should be very fast and transparent. Currently we need a well managed and coordinated distribution of stocks through PDS (Public Distribution System), open market sales of public stocks etc. Hoarding should be avoided here and government should keep an eye on this.
    ·         This rising inflation has become a major threat for economy. The only key way to contain the inflation is to bridge the gap between demand and supply, which may check the price rise.
    ·         Unfortunately, Indian agriculture is characterized by low input and low output systems. Hence we have to increase the productivity. For example: Yield of paddy in India is only 2.9 tonne/hectare, as compare to 7.5 tonne/hectare in US.
    ·         Check the rising cost of cultivation. Increasing land, labour, fertilizers and other inputs is discouraging farmers to produce more in absence of sufficient liquidity.
    ·         Apart from grain, government should also create buffer stocks or strategic reserve of oil seeds and other crop, so that it can release it at the time of crisis.
    Apart from reasons and measures to check inflation, other concern in Indian economy is the parameters to check inflation. It is well known that India is the only country which considered WPI (Wholesale Price Index) while rest of the countries measured CPI (Consumer Price Index). WPI consists of 435 goods over 1993-94, as base year in which the weightage of food items is only 16%%, which has large weightage of consumer spending in India. Though WPI in India is still in single digit, if we consider CPI it is already in double digit due to dearer farm articles and their higher weightage in measures. In CPI, food articles have 50% weightage. Hence there is a wide gap between the weightage of food articles of WPI and CPI, which are unable to give the clear pictures. Furthermore, 2/3rd of the price quotations used to calculate the WPI are sourced from only four metros. Hence to get the real picture, area should be widened.
    Comparison Between Food Article Inflation And WPI (2008-2009)

    Source: MOSPI & SMC
    In the above chart, it is a comparison between food inflation and WPI from January, 2008 to October, 2009. Line chart is representing food article inflation and bar chart is indicating WPI monthly inflation. It appears that food article inflation is more volatile and rising more. It has started its northward journey in the month of April and it is still continued. Arrival of khariff crop is less likely to cool it as we are expecting 18% decline in khariff crop. Hence downside will be limited, rather it may move in a range with upside bias.
    The words of future
    RBI (Reserve Bank of India) has revised its outlook for inflation and expecting that it should be between the range of 5% to 6-6.5% for the year ending March 2010. There is fear in the economy is that the real impact of almost 18% drop in kharif rice production is to reflect in inflation. It would occur when khariff produce; rice, pulses, oilseeds and cereals would start coming in the market. With witnessing favourable weather conditions, economy is expecting strong rabi produce, which may cool off inflation of food articles to some extent, however, we cannot rule out the possibility adverse weather. Ultimately what matters is final produce and yield. Government has to take care of everything like, demand –supply equilibrium, money supply, distribution etc, otherwise it will become nightmare for “aam admi” and hamper the economic growth.

    Disclosure: no position
    Dec 23 3:41 AM | Link | Comment!
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