IIFTs Monthly Newsletter on National & International Trade July 2011 Volume II, Issue III

Contents
News Snippets 1

News Snippets
China opens world's longest sea bridge

China has opened the world's longest sea crossing. The Edible Oil Industry in South India 5 eight-lane, 35-metre-wide structure cost 1.4bn. 26-mile Jiaozhou Bay crossing connects Qingdao to Huangdao, Macroeconomic factors took four years to build and uses 5,000 pillars. China, & Gold Price volatility 7 which seems to complete mammoth infrastructure projects on a routine basis, has claimed another Anti-Dumping in the In- world-beater with the opening of the longest sea bridge.
dian Context 9

Chief Editor
Oojwal Manglik

Editorial Team
Ankush Mehta Abhijith Vasudevan Shiv Kumar Gupta

China is constructing an even mo r e ambitious bridge. Work began in December 2009 on a Y-shaped structure linking Guangdong province in southern China to Hong Kong and Macau. Building is expected to be finished in 2015, and the bridge is expected to cover about 31 miles, although only about 22 miles will span the sea.

tradewind.iift@gmail.com blash@iift.ac.in

Goldman, Clive Capital to launch commodities index

Goldman Sachs is to launch a commodities index with Clive Capital, the world's largest commodity hedge fund. The index will aim to minimize the risk of large losses by changing its exposure to individual commodities over time. Goldman has started marketing the index to its

clients. It will track 19 raw materials including crude oil, gold, wheat, sugar and live cattle, using the components of the Dow Jones-UBS benchmark as its starting point. London-based Clive Capital will decide each month how much of each commodity the index should hold.

June exports rise 46.4% to $29.2bn

Indias exports in June rose an annual 46.4% to $29.2 billion, while imports for the month rose 42.4% to $36.9 billion . Trade deficit in June stood at $7.7 billion. The countrys exports grew a record 37.6% in the 2010-11 fiscal year that ended in March, as demand soared for engineering goods, oil products and gems manufactured in Asias third-largest economy. 80 per quintal and those of pulses by Rs 200-Rs 400 per quintal. "The overall strategy of the government was that since there is more than sufficient stock of food grain, there is no need for a big jump in support prices, said Ashok Gulati, chairman, Commission for Agricultural Costs & Prices (CACP). The MSP for oilseeds was increased sharply to incentivize cultivation to reduce dependence on imports amid signs that global food prices will remain high through to 2012. According to a recent FAO recent report, prices for edible oil are likely to be high in the global market all of 2012 due to increased pressure on availability against demand.

MSP for Kharif Crops Hiked by 8-19%

The government has increased the minimum support prices for the kharif season by 8% to 19% to incentivize farmers and compensate for higher input costs, but the higher purchase prices could stoke the already high food inflation.

The Committee on Economic Affairs (CCEA) raised the MSP of paddy by Rs Palm oil prices have gone up by 20% over one year globally. India is among

the world's biggest importers of palm and soybean oil. In line with the goals of reducing import dependence for traditional pulses over time and enthused by record production over the last two years the government also decided to maintain the momentum and announced decent increase. The support prices for Arhar and Moong have been fixed at a level higher by 100 per quintal than that recommended by the CACP. In addition, similar to last year an additional incentive at the rate of Rs 500 per quintal for tur, urad and moong sold to government procurement agencies during the harvest/arrival period of two months shall also be given.

This is attributed to the delay in lifting of export ban by Karnataka. Also the Indian iron ore is turning uncompetitive in the overseas market due to increased export duty and freight rates, thereby losing market share in countries such as China. Curbs on exports by Orissa and Karnataka during different periods last year had resulted in a 19-per cent decline at 95 MT in 2010-11 from 117 MT in previous year. Karnataka is among the top three iron ore producers and accounts for about a third of India's exports. The State, as part of its strategy to curb illegal mining, had imposed a ban on exports in July last year.

DEPB Scheme Extended for 3 Iron ore exports likely to fall Months Till Sept The government has extended the 20 MT
Indian iron ore exports for the current financial year may drop by a fifth to 75 million tonnes (MT), the Federation of Indian Mineral Industries (FIMI) said.

popular exports scheme - DEPB for three more months till September. The scheme was due to end on June 30. we have extended Duty Entitlement Pass Book (DEPB) till September, Finance Secretary Sunil Mitra said. However, he said that the scheme will be phased out and replaced by duty drawback The government spends annually about 8,000 CR reimbursing exporters on the taxes paid on import content of export products. Under the scheme, exporters are given refunds of tax incidence on the import content of their export products.

World Bank in push for food price hedging

The World Bank is taking the rare step of encouraging companies in developing countries to buy insurance in the derivatives markets against sudden changes in food prices with a deal that should allow them to hedge $4bn worth of commodities. The deal, struck with investment bank JPMorgan, comes as countries such as China and India weather a second surge in agricultural commodities prices following the 2007-08 food crisis. But the initiative, timed to coincide with the first G20 meeting of agricultural ministers, could prove controversial as lawmakers in countries from the US to France try to clamp down on what they describe as excessive speculation in commodities derivatives.

China to encourage coal imports

China will encourage coal imports and urge miners to boost output to increase supplies to power plants, China's economic planning agency said on Wednesday, as the world's largest energy consumer tackles its worst power shortages in seven years. Miners at Australia's BHP Billiton Mitsubishi Alliance (BMA), the world's biggest exporter of metallurgical coal, voted in favor of the right to take industrial action but gave no indication that they were preparing to strike. A stoppage would hit BHP Billiton just as Australia's coal mining sector, which supplies nearly two-thirds of the world's traded steel-making coal and more than 10 percent of the country's goods exports, was getting back on its feet after heavy summer rains hobbled operations at dozens of collieries.

Decline in coffee production

India's coffee production may decline by about 10 per cent in 2011-12 season beginning October due to sporadic rains early this year, industry experts have said. According to the latest Coffee Board data, production of the brew in the 2010-11 period is estimated at 2.99 lakh tones.

Edible Oil Industry in South India

Shiv Kumar Gupta MBA(IB), 2nd year, IIFT Delhi The edible oil industry in south India is essentially a palmolein in and sunflower oil market. Majority of the oil refining units are located along the coastline. The number of refining units is more on the eastern side of the coastline as compared to the western side. The reason for this is the fact that India being an oil deficit country, majority of the palm crude palm oil is imported from Malaysia and Indonesia. India consumes over 4.5 million tons Palm Oil and other Palm Oil Products per annum, while domestic production of Crude Palm Oil in India is hardly 60,000 tons per annum and rising

very slowly. The crude palm oil is taken to the refineries where it is refined, bleached and deodorized (RBD) in the refineries. Efforts are being made to grow oil palm in Andhra Pradesh, Karnataka, Tamil Nadu in addition to Kerala and Andaman & Nicobar Islands. The major refinery locations are as shown in the figure. Companies like Cargill, Adani Wilmar, Ruchi Soya, Gemini, Bunge and a large number of local companies have their refineries in south India. With effect from 1st April, 2008, the customs duty on crude and refined forms of Palm Oil, Palmolein, Palm Kernel Oil, Soybean Oil, Rapeseed/Mustard Oil, Sunflower Oil, Safflower Oil, Groundnut Oil, Coconut Oil and some other Vegetable Oils has been reduced to zero percent and 7.5% respectively. Therefore these companies have taken advantages of this policy and have accordingly set up their refineries. These companies expect the

customs duty to remain zero since India is an oil deficit country and its demand has been on a constant rise. The main reasons for the rise in demand are growing population and the rise in the per capita consumption. The changing lifestyle has also contributed significantly to an increase in demand. The monthly consumption of Palmolein and sunflower oil in southern states is as shown in the figure above From the chart we see that the monthly consumption of palm oil is higher in all the states except Tamil Nadu. The gap between the consumption of Palmolein and sunflower oil is going to widen and Palmolein consumption in Tamil Nadu will overtake sunflower oil consumption in the coming years. The reason for this being the fact that Palmolein is relatively cheaper than sunflower oil. Also 100% Foreign Direct Investment is allowed in the India vegetable oils

industry. Many multinational companies like Cargill, Wilmar, Archer Daniels Midland (ADM) and Louis Dreyfus have entered this business to meet the ever increasing oil demand. These MNCs are collaborating with the local refineries and making use of their existing supply chain to reduce their costs. Using the supply chain of the parent company allows the MNCs to understand the market better and retain the existing customers. In some cases, the company is still selling under the brand name of its parent company due to the brands popularity among the locals. There are certain advantages of big multinationals entering the industry. Due to the entrance of MNCs the adulteration levels have come down significantly and also the industry is consolidating with smaller companies being sold out. The edible oil industry which is very cluttered and unorganized is coming up as an organized sector with better working standards.

Macroeconomic factors & Gold Price volatility

Oojwal Manglik MBA(IB), 2nd year, IIFT Delhi Volatility in the price of Gold over the past one month has been a lesson in the indirect impact of macroeconomic cues on the price of this commodity. Since 21 June, Gold has fluctuated between $1483/ ounce (a 60 day low) & $1579/ounce (a lifetime high). This fluctuation has primarily been caused due to developments in the European Sovereign Debt crisis & economic weakness in the US. A brief overview of these developments follows.

serious questions as to the effectiveness of this package.

Impact of Macroeconomic factors on Gold Prices

Gold is presently in the longest bull rally in its history & is generally considered one of the safest investments in times of macroeconomic turbulence. Investors move their assets to Gold in order to safeguard against currency bear rallies. As a result, Gold normally moves against price changes in the greenback. The below chart depicts the movement in the price of Gold since 22 June along with the associated macroeconomic event

Background of Macroeconomic events

The sovereign debt crisis in Europe arose due to fears that major EU economies, such as Portugal, Ireland, Greece & Spain (P.I.G.S), would default on the debts they had undertaken to finance their fiscal deficit during the 2000s. These economies were weak because of high debt (a resultant of excessive borrowing at low interest rates), property price bubbles & the severe impact of the nd 2007-09 global recession on major 1.On June 22 , the government of industries such as tourism & shipping. In Greece passed a vote of confidence for Minister George its aftermath, IMF bailed out Greece & P r i m e Portugal through loans 188 billion @ Papandreous reshuffled government. 5% though recent developments raise Though it was a signal that the

sovereign default was not imminent, adverse news from other P.I.G.S nations dulled sentiments. The Dollar on the other hand strengthened as a result of better than expected numbers of consu me r durabl e s ales . Consequently in the trading sessions, the Dollar gained strength vis-a-vis the Euro & Gold fell 2%. 2.On June 30th, Greek lawmakers passed austerity measures including tax increases & spending cuts in order to meet requirements for the IMF funded bailout. As fears of a debt default subsided, investor interest in the safe haven commodity eroded & Gold fell 1.5% 3.On July 4th, the IMF released a 8.7 billion loan to Greece. This, coupled with speculation of a rise in European interest rates by the ECB gave strength to the Euro vis-a-vis the Dollar. As a result of this, Gold rose for the first time in 8 trading sessions & climbed 1% 4.On July 6th, Moody's gave the markets a painful reminder yesterday that the debt crisis in the peripheral Euro zone countries is far from over when it lowered Portugal's credit rating to Junk Category. Investors abandoned risky assets for Gold & Gold rose 1.14%

debt ceiling will provide the major macroeconomic cues till August. The US public debt ceiling is the limit to which the Congress can borrow on the credit of the United States. Public debt is a principal source for the US government to raise money in order to finance its spending on social security programs, war efforts, salaries of civil servants, etc. This ceiling currently stands at $14.29 trillion & was reached in May. In order to continue financing the government, Congress (comprising of Republicans & Democrats) needs to pass a resolution before August 2nd. Though both parties agree on the need to control the US debt but differ in their views on how. A failure to address this issue may force the US to default raising serious questions on the status of the Dollar as the worlds reserve currency. Moody put Americas credit rating on negative watch on 14th July threatening the US economys prized AAA rating which it has held since 1917. If the rating does downgrade, it would technically bar banks from using US debt as collateral with central banks putting severe pressure on the entire financial system. Though such an outcome may not materialize, the uncertainty is likely to affect investor risk appetite, weaken the Dollar & drive Gold prices up further.

Outlook for the coming days

In addition to the sovereign debt crisis, developments in raising the US public

to rectify the trade distortive effect of dumping and re-establish fair trade. Anti-dumping action generally involves levying extra import duty on the Jayant Rana dumped product in order to bring its MBA(IB), 2nd year, IIFT Kolkata price closer to the normal value or to Protectionism is considered a bad word remove the injury to domestic industry in in trade by many economists, and they the importing country. have their reasons for it. In contrast, free trade, where government barriers to trade To proceed with Anti-dumping, it is and movement of capital are kept to a imperative to establish that that the minimum, is thought and said to promote dumping has caused injury to the equal access to domestic resources for domestic industry. Hence, a detailed domestic participants and foreign investigation needs to be first conducted participants alike. But, like with other according to specified rules. No duty can good things, theres something bad be recommended without the associated with free trade as well. establishment of this causal relationship. Dumping is one such flipside of free Anti-dumping measures assume special trade. significance in the Indian context as India Dumping is an unfair trade practice is currently in the process of phasing out which can have a distortive effect on its quantitative restrictions regime as international trade. It is said to occur regards to imports. Taking advantage of when a product is introduced into the the removal of licensing restrictions on commerce of another country at less than imports, several trading partners of India its normal value, which means that if a have tried to dump different kinds of company exports a product at a price their goods into India, thereby creating a lower than the price it normally charges situation of unfair competition in the on its own home market, it is said to be domestic market. Anti-dumping is dumping the product. Now, this can be important for dealing with such a very harmful to the domestic industry of scenario of unfair trade, and for the importing country, even though the providing the much needed relief to the World Trade Organization keeps advocat- domestic industry from the injury caused by dumping. ing free trade in a big way.

Anti-Dumping in the Indian Context

The primary purpose of Anti-dumping is Anti-dumping is not a protectionist

measure per se, but is only a remedy for removal of injury to the domestic industry. The object behind these measures is to re-establish fair competition and to provide the domestic industry a level playing field. The WTO allows the national authorities to impose duties up to the margin of dumping i.e. the difference between the normal value and the export price. The Indian law too provides that the anti-dumping duty to be levied shall not exceed the dumping margin. In India, the anti-dumping investigations are conducted under the national law as per the Customs Tariff Amendment Act, 1975, as amended in 1995, which is in consonance with the provisions of WTO. These measures are country neutral and theres no question of discrimination against any particular trade partner. To sum up, anti-dumping and the like measures are essentially linked to the notion of fair trade. The aim is to guard against the situation arising out of unfair trade practices. With the removal of quantitative restrictions, India has moved towards the regime of free trade, but at the same time, anti-dumping measures have also assumed greater significance, in the interest of fair trade.

About IIFT
Indian Institute of Foreign Trade (IIFT) is Indias nodal institution of excellence in the field of International Trade and Business. Since its inception in 1963, IIFT has kept pace with the extremely dynamic Global business environment by focusing on International Trade and Logistics-related issues. The rigorous, extremely dynamic and up-to-date course curriculum stands testimony to this fact. Supplementing the classroom, IIFT organizes several events and discussions on currently relevant issues in the field of Trade and Logistics, which are graced by pre-eminent professionals, industry veterans and academicians, alike. Our students have maintained and sustained IIFTs rich legacy by successfully exhibiting their skills time and again in various Live Projects and Competitions. The institution has groomed international business managers for over 40 years and boasts alumni base spread over geographies and business verticals

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