Arbitrage opportunities

How will you react if someone says that there are arbitrage opportunities in a particular commodity?

If you are not familiar with the market, it could sound Greek or Latin to you. But if you are familiar with the market, you will immediately react, saying you are already tapping them.

Market behaves differently from one place to another or even one exchange to another. One reason why arbitrage is available is because no market is perfectly efficient.

When the inefficiency shows up in one market or the other, traders get an arbitrage opportunity.

Basically, arbitrage is buying a commodity in one market and simultaneously selling it in another, profiting from a temporary difference. This is considered a riskless profit for an investor or a trader.

For example, let us take the arbitrage opportunity in gold contracts that was available a couple of weeks ago on the National Commodities and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange of India (MCX).

On January 24, gold contracts maturing for delivery in April ruled at ₹28,815 for 10 gm on NCDEX. On MCX, they were quoted at ₹28,623.

On both these exchanges, gold is traded in a unit of 1 kg with prices being quoted at ₹/10 gm.

The arbitrage opportunity here is that a trader can buy one unit on MCX and sell one unit on NCDEX.

But things are not as simple as they seem to be. This is because you cannot interchange commodities from MCX to NCDEX or vice-versa.

Therefore, you will have to look for opportunity to square off the positions on both the exchanges. It will depend on how prices behave subsequently.

Arbitrage opportunities are available in spot markets too but you will have to take into account factors such as local taxes and transportation charges.

Russian giant Rusal sees Aluminum output to decline further in 2014

Russian giant Rusal expects its aluminum output to decline further to 3.5 million metric tons this year.

Company's aluminum production declined by 8% year-on-year 3.86 million metric tons last year, the lowest output since its 2007 merger with Sual.

“Last year witnessed the supply side adopting a disciplined approach to production, with Rusal successfully completing its production cut program which resulted in cuts of 316,000 mt, or 8%, compared to 2012. Reduced operational levels are expected to be sustained throughout 2014 as Rusal remains at the forefront of creating an efficient supply side dynamic,” said Rusal CEO Oleg Deripaska, in a statement on Tuesday.

The full impact of the production cuts, backed by growing consumption demand, have begun to be take effect, with the aluminum market – ex - China – moving into deficit at the end of 2013. This deficit is estimated to expand further in 2014.

Looking ahead, RUSAL expects global demand to remain healthy, with 6% growth forecast in 2014, supported by positive signals of returning confidence across all key sectors and markets. While demand fundamentals remain robust, it is vital that the supply side continues its disciplined approach to production. This will take time but there is no doubt that the industry is on the right path towards environmentally friendly and economically efficient production.

The company's aluminum production was the highest in 2008 at 4.42 million metric tons.

India's 2014/15 Interim Budget Highlights.

Finance Minister P. Chidambaram presented the interim budget for the fiscal year 2014/15 on Monday to cover expenditure until the government's term ends in May.

His speech was repeatedly disrupted by protests over the proposed division of Andhra Pradesh.

GROWTH

* GDP expansion in 2013/14 third and fourth quarters will be at least 5.2 percent

FISCAL DEFICIT

* Fiscal deficit projected at 4.1 percent of GDP in 2014/15

* Fiscal deficit seen at 4.6 percent of GDP in 2013/14

* Says need to bring down fiscal deficit to 3 percent of GDP by 2016/17

CURRENT ACCOUNT DEFICIT

* Current account deficit for 2013/14 projected at $45 billion

* Forex reserves to rise by $15 billion by end of 2013/14

BORROWING

* Gross market borrowing seen at 5.97 trillion rupees in 2014/15

* Net market borrowing at 4.07 trillion rupees

* Debt repayment in 2014/15 seen at 1.897 trillion rupees

* Ways and Means advances for 2014/15 estimated at 100 billion rupees

PRIVATISATION

* Target from stake sale in state run firms for 2013/14 revised to 258.41 billion rupees

* Target for 2014/15 at 569.25 billion rupees

SPENDING

* Plan expenditure for 2014/15 seen at 5.55 trillion rupees, the same level as the previous fiscal year

* Non plan spending estimated at about 12.08 trillion rupees in 2014/15

SUBSIDIES

* Total spending on food, fertilisers and fuel at 2.5 trillion rupees in 2014/15

* Food subsidy estimated at 1.15 trillion rupees, fertiliser subsidy at 679.71 billion rupees. Petroleum subsidy seen at 634.27 billion rupees versus revised figure of 854.8 billion rupees for 2013/14.

DEFENCE

* Spending raised to 2.24 trillion rupees in 2014/15, up 10 percent year on year

EXPORTS

* Merchandise exports seen at $326 billion in 2013/14, up 6.3 percent year on year.

* Agriculture exports expected to touch $45 billion in 2013/14, up from $41 billion in 2012/13

TAX PROPOSALS

* No major change in tax rates

* Factory gate tax to be reduced to 10 percent from 12 percent on some capital goods, consumer durables

* Cut excise duty on small cars, two wheelers, commercial vehicles to 8 percent from 12 percent

* Recommends excise duty reductions on larger vehicles

* Restructure of factory gate tax rates for manufacturing of mobile handsets

BANKS RESTRUCTURING

* Govt to provide 112 billion rupees capital infusion in state run banks in 2014/15

* Propose to set up public debt management office to start5 work from 2014/15

FINANCE MINISTER COMMENTS

Resurgence in exports, global economic revival and moderation in inflation point to better outlook for Indian economy in 2014/15.

Our objectives were fiscal consolidation, reviving growth cycle, and enhancing manufacturing, said Chidambaram. Manufacturing needed an immediate boost, he said.

I can confidently assert that the fiscal deficit is declining, the current account deficit is constrained, inflation is moderated; exchange rate is stable, he said.

India's economy now the 11th largest in the world, he said.

Weekly Economic Data for the week 15-Feb-14 to 21-Feb-14

Exp.:	Expected or Anticipated value calculated from the recent survey conducted.
Prior:	Represents the last actual for each indicator. In case there is a revision to the last actual, the prior column reflects the prior figure as revised.
Exp. change today:	Exp. - Prior
Avg. change of last 1 year:	Average Change in Actual data calculated for last 1 year.
Expected impact on price:	This indicator shows the effect of the anticipation of data on the prices of related country’s major indices. We have categorized it as below: Very Good Good Neutral Bad Very Bad
Actual:	Refers to the actual/latest figures after its release.

Data for the week 15-Feb-14 to 21-Feb-14

Date	Time (IST)	Country	Data	Exp.	Prior	Exp. chg today	Avg. chg of last 1 year	Exp. Impact on Price
14-15 Feb-2014	--	China	Money Supply M2 YoY	13.3%	13.6%	-0.30	0.71	Neutral
17-Feb-2014	07-30 PM	European Monetary Union	Euro-Area Finance Ministers Meet in Brussels
18-Feb-2014	-	Japan	BOJ 2014 Monetary Base Target	-	¥270T	-270.00T	0.00
18-Feb-2014	12-00 PM	Japan	BoJ Governor Kuroda Press Conference After Rate Decision
18-Feb-2014	01-30 PM	European Monetary Union	EU Finance Ministers Meet in Brussels
18-Feb-2014	03-00 PM	United Kingdom	Consumer Price Index (MoM)	-0.50%	0.40%	-0.90%	0.45	Bad
18-Feb-2014	03-30 PM	Germany	ZEW Survey - Current Situation	44	41.2	2.80	5.46	Neutral
18-Feb-2014	03-30 PM	Germany	ZEW Survey - Economic Sentiment	61.5	61.7	-0.20	12.25	Neutral
19-Feb-2014	03-00 PM	United Kingdom	ILO Unemployment Rate (3M)	7.1%	7.1%	0.00%	0.07	Neutral
19-Feb-2014	03-00 PM	United Kingdom	Bank of England Releases Minutes from Feb 5-6 Meeting
20-Feb-2014	00-30 AM	United States	Fed Releases Minutes from Jan 28-29 FOMC Meeting
20-Feb-2014	02-30 PM	European Monetary Union	Markit Manufacturing PMI	54	54	0.00	0.97	Neutral
20-Feb-2014	07-00 PM	United States	Consumer Price Index (YoY)	1.6%	1.5%	0.10%	0.25	Neutral
20-Feb-2014	20-30 PM	European Monetary Union	Consumer Confidence	-11	-11.7	0.70	1.04	Neutral
20-Feb-2014	09-00 PM	United States	EIA Natural Gas Storage change	-	-237	237.00	33.60
20-Feb-2014	09-30 PM	United States	EIA Crude Oil Stocks change	-	3.267M	-3.27	3.45
21-Feb-2014	08-30 PM	United States	Existing Home Sales (MoM)	4.67M	4.87M	-0.20M	0.16	Bad

Aluminium swings from surplus to deficit.

With production trailing consumption, stocks are depleting and market balances are tightening

After seven-eight years of acute oversupply, the world aluminium market is now undergoing a structural change from surplus to deficit. An extended period of overcapacity has been a feature of the world aluminium market for some time now.

No doubt, producers in the western world have cut back output but their efforts have been largely neutralised by new capacity additions in China and West Asia. The result has been sustained downward pressure on aluminium prices.

No wonder, LME prices have continued to remain in a narrow range of $1,700-1,900 a tonne.

With long waiting time or queue at LME warehouses, producers were compensated, albeit partially, by the rise in aluminium premiums; but that too is beginning to decline with the LME proposing new rules of warehousing and delivery scheduled to take effect from April 1, 2014.

With production trailing consumption, stocks are beginning to be drawn down, and market balances are tightening.

There is a swing in ex-China balance to deficit this year (estimated at 1.3 million tonnes). Yet, excess capacity in China continues to weigh on the market.

The world aluminium market is struggling to come to terms with, on the one hand, a structural shift from surplus to deficit exceeding one million tonnes expected this year and the next; and on the other, freeing up of up to 1.4 million tonnes of the metal over the next two years following changes to LME warehouse rules.

Even as the Chinese continue to combat overcapacity, the key question is whether the western world will cut output any further without which output growth may increase.

According to industry experts, planned aluminium production cuts have soared since the announcement of the new LME warehousing policy which will eventually reduce smelter profits via lower physical premiums.

Production cuts ex-China have totalled close to 2.4 million tonnes a year of capacity since the beginning of 2012, leading to a sharp change in the market balance from surplus to deficit.

Potential for price rise

From the demand side, global demand growth is expected to be strong in the next two years (4-5 per cent) thanks to continued growth in BRIC countries and a rebound in G3 demand.

Leading indicators and improvement in global manufacturing confidence support the expectation.

The US is expected to see demand growth of about 3 per cent per annum, while Europe could be something of a wild card because with fiscal austerity less of an issue now, it is possible that European demand may bounce if households and corporates begin to replace durable goods, such as vehicles, and plant and machinery. The US Fed tapering and anticipated dollar firmness is likely to pressure metal prices.

Yet, for aluminium, from here on, if there is a directional change in prices, it is to the upside.

From the recent levels of around $1,660/tonne, aluminium prices have the potential to rise about 5 per cent in H1 and another 5 per cent in H2 this year.

For 2014, the average price of LME aluminium is projected at $1,800 per tonne and for 2015 at $2,100/tonne. Buying on price dips is recommended.

For these prices to sustain, of course, steady flow of positive macro-economic data would help. From an Indian perspective, demand for aluminium has the potential to grow 10 per cent per annum over the coming years even as the country is likely to remain a net importer for two-three years more.

With higher domestic supplies of raw materials, there is scope for stronger Indian demand.At the same time, a weakening rupee will benefit exporters of raw material alumina.

Codelco’s challenges escalate as workers reject contract offer

Workers at Chile’s copper producer Codelco, the world’s largest copper miner, have rejected the company's wage proposal presented during early collective contract negotiations, deferring union labour talks to October.

About 4,300 miners (or 51.2%) of El Teniente division turned down the contract offer, which in addition to base salary, included a bonus and soft loans (those offered at very low or zero interest rates) worth around $30,700. The union is asking for better long-term benefits and equal access for all workers to the company’s benefits regardless of when they joined.

Rough patch

El Teniente was the company's most productive deposit between January and September last year, mining 327,000 tonnes of red metal in the period. But Codelco is currently  facing tough times due to sinking copper prices, lack of cash and escalating costs.

The copper giant gives all its profits to the state and had been severely disappointed by the original amount of money it was returned.

As a result, Codelco decided last year to seek outside financing to implement its $27 billion investment plan for 2012-2016, and placed a $750 million bond in August.

Chile expects mining investment to reach $112 billion by 2021, figure that includes $27bn in projects planned by Codelco. By the same year, the country’s total copper production is projected to reach an annual 8.1 million metric tons.

As a back-up plan, the Chilean copper giant is exploring a more aggressive incursion in the silver market. Last November, CEO Thomas Keller said Codelco aims to become one of the world’s ten largest producer of the precious metal as soon as its touted Ministro Hales mine begins production later this year.

The nearly $3 billion copper-silver mine is expected to add 300 tons of the precious grey material to the existing silver output from the rest of Codelco’s operations in the country.

The firm owns about 11% of the world's copper reserves. The red metal accounts for 60% of the Chile's exports and 15% of its gross domestic product (GDP).

RBI tightens gold import norms under 80:20 scheme.

Seeking to restrict gold imports, the Reserve Bank today said nominated banks and agencies will not be allowed to import the precious metal in excess of their entitlements in first or second lot under the 80:20 scheme.

"Import of gold in the third lot onwards will be lesser of the two-- five times the export for which proof has been submitted or quantity of gold permitted to a nominated agency in the first or second lot," RBI said in a notification.

The government under the 80:20 scheme had in August 14, 2013, allowed nominated agencies to import gold on the condition that 20 per cent of the inward shipment will be exported. The permission to import the next lot would be given on fulfilment of export obligation.

In view of the representation being received by the RBI and the Finance Ministry, the central bank has said that the quantum of the third lot import would be five times the export from the previous lot subject to the condition that it would not exceed previous entitlements.

In case of advance authorisation (AA) and duty free authorisation (DFIA) for gold import issued before August 14, 2013, RBI said the 80:20 rule will not apply for units in Special Economic Zones (SEZs), Export Oriented Units (EoUs), Premier and Star Trading Houses.

"The imports made as part of the AA/DFIA scheme will be outside the purview of the 80:20 scheme. Such Imports will be accounted for separately and will not entitle the nominated agency/banks/entities for any further import," RBI said.

To contain rising gold import, which was 162 tonnes in May, the government had hiked import duty on gold thrice in 2013 taking it 10 per cent. Besides, the RBI also came out with certain restrictions, including the 80:20 scheme for imports. The gold imports came down to 19 tonnes in November.