Potash, graphite, gold, oil – all affected by India’s problems; A crude awakening as China becomes more OPEC-reliant
How about losing the US dollar equivalent of $5.6 billion in just under four months? That’s is what has happened to Mukesh Ambani. chairman of India’s oil refinery giant Reliance Industries. That’s “lost” in terms of convertibility: Ambani still has roughly the same number of rupees (probably more) as he did on May 1, but the plunge of the Indian currency has wiped a third off his fortune if he wants to change those rupees into greenbacks (or euros or pounds, too).
Why are you reading about this? Because India is in economic trouble and — remember — India is meant to be, with China, the new growth engine of the world economy, growth (or lack of) which affects everything we cover here on Investor Intel (particularly potash). And the jury is far from in on the subject of China; yes, things are looking a little better there but it seems sure to be a lesser growth engine for the world than it has been in recent years, but back to India.
Just this week the rupee lost 4.4%, its worst weekly performance since 1993, another stage in an ongoing plunge that is not at its end. Western funds have been pulling money out of India in recent months and the country is stuck with a record current account deficit. Hence the recent attempts to limit gold imports into India (another InvestorIntel preoccupation).
If Indian industry falters then that will have an affect on the country’s graphite imports: not only would the graphite cost more in U.S. dollars as the rupee slides, but also if Indian industry slows down. And India’s use of graphite has increased dramatically — its imports were around 6,000 tonnes annually 10 years ago, but in 2012 they totalled 20,000 tonnes.
The equation for oil is self-explanatory, especially at a time of high oil prices.
The rupee, which had an exchange rate of 40 to US$1 in 2008, is now at Rs64.5 to the greenback and there’s analyst talk of its going to 70. Indian growth is now less than 5% a year, compared with close to 10% up to 2008, and inflation is running at 10%. For all the Asian boom, Chinese income per capita is more than double that of India’s.
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But there is another, possibly more worrying factor.
A study by the Commonwealth Bank of Australia (CBA) shows that India is being held back by shortages of electricity. Then there are the inefficient institutions, government bureaucracy, corruption — all hindering India’s effort to build commodity-intensive infrastructure and industry.
As for electricity, both China and India were in 1970 roughly on level pegging in terms of per capital electricity generation. By 2010, however, China was generating almost 3,000 kilowatt hours per capita to India’s 500.
OIL: There is a big differential with development of road transport, too. In 2010, China had over 120 km of road for every 100 sq. km of land area; India had about 40km — a third that of China’s. The CBA report shows that China is using about 105kg of oil per capita but India’s figure is just 40kg.
Now the London-based commodity analysts Wood Mackenzie say that, by 2020, China will be spending more — $500 billion a year — on oil imports than will America, which will be spending $160 billion a year by 2020. By that time, 70% of China’s oil will have to be imported.
Wood Mackenzie makes a very interesting point: because the U.S. (thanks to shale) will be less important as an oil importer than China, the OPEC countries will shift their focus to China as their primary market. China will overtake America in terms of oil imports in 2017; from 2.5 million barrels a day in 2005, the Chinese will in 2020 be buying 9.2 million barrels a day. That’s a 360% increase, compared with an expected 32% decrease over the same period for the U.S.
The reason why China will have to cosy up to OPEC? Chinese refineries are focused on processing medium-sour crude, and it is this type of crude which will become a greater share of OPEC’s future output.
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