MD's Message

Commodity price trends in last couple of years have seen fundamental changes not only in its correlation within the basket of like commodities but also across the cross-section of commodity segments.

In recent years we have been witnessing greater independence of the commodity price trends with the currency market, with the fundamentals of each commodity holding the key to current price behavior. Modern day analysts and economist have coined a terminology of "de-coupling" of such independent trends between currency and commodity indicators with later showing lesser and lesser logical correlation or greater independence with Dollar or Euro rates.

In reality many of the commodity prices are rising impressively in non-$ terms, especially those of precious metal commodities like gold and even in energy commodities like crude oil. Freed from the correlation with hard currencies like dollar, I believe that commodities with strong fundamentals will see the actual rises in the current bull phase of commodity cycle.

In recent times, we have seen global crude oil prices unprecedented levels of $ 70 per barrel. Efforts to draw down on US stocks, or even maneuver dollar with doses of short increases in Fed rates did not play much to check the rising crude prices. Natural calamities in US also added to the fundamentals of energy indices and crude oil is now again set to soar to new historic highs. Predictions of crude prices for 2006 range anywhere between $ 80 to 100 a barrel, unless some drastic measures increased production OPEC coupled with significant release of stocks from US stockpile comes to the rescue.

Back home, Indian refining and upstream producers of companies have been complaining of sharing the burden of the subsidies. Government on its part is thinking twice on foregoing revenue on account of taxes and duties and taking the hit on its revenue account leading to further stress on fiscal deficit.

Ultimately, consumers will have to bear the major brunt of the oil and gas price increases and global economies are likely to be more prone to inflationary effects. With currency hedge against oil and gas price spurt increasingly proving to be distant realities, major oil consuming industry should devise alternatives to save cost, reduce consumption and look for cheaper alternatives

Even though India's energy security in terms of crude has been increasing in recent years with new finds in oil and gas reserves, we need to still look at bridging gap between the crude oil and gas production and our refining capacities at a much faster rate than what we are currently experiencing.

For a steel company like Ispat, commodity cycle and its dependence on a bull run on energy commodities plays a vital role in defining our future course of action. If projections of crude prices turn out to be true in reality, next few years may a major crisis brewing over in other alternative energy commodities, especially that in coal sector. Time is now ripe to look at more security of raw material in terms of our energy need, especially those on coal - be it for power generation or for making vital steel making inputs like coke.

Vinod Mittal
Managing Director, Ispat Industries Limited