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Global rubber prices under pressure over glut scare – Positive in short to medium term for all tyre manufacturers like Ceat, Apollo Tyres, JK Tyres, MRF, Balkrishna etc

Serious concerns are being raised over prices on the natural rubber market, as a glut is expected this year too, owing to weak demand from China and other major consuming nations. This has triggered scare in the local market, resulting in prices for the benchmark grade RSS-4 going down to Rs 145 a kg on Tuesday. However, Indian counters still remained in the upper level compared to the global markets. Bangkok market on Tuesday quoted Rs 119 a kg. This is for the first time since 2004, the price fell below the Rs 120-mark in Bangkok trading.

According to Malaysian experts who had visited Kerala recently, the prices might go down further both in the local and international markets as there is a huge gap between demand and supply. This might definitely reflect on the price line of the commodity.The prices in the local market might nosedive to below Rs 130 a kg, as there is a serious dearth in demand. Import is advantageous to the tyre companies, as rubber is cheaper in the overseas markets. They get crumb rubber at Rs 98, which is much cheaper than the graded sheet rubber.

Global supply is forecast to exceed demand by 241,000 tonnes in 2014, a fourth straight year of glut, according to the International Rubber Study Group (IRSG). Rubber prices have sunk roughly 30% this year and hit 5-year lows on persistent worries about slower economic growth in the main consumer, China, and oversupply. We believe this development augurs well for all rubber consumers like Tyres manufacturers. Positive in short to medium term for all tyre manufacturers like Ceat, Apollo Tyres, JK Tyres, MRF, Balkrishna etc

Finance ministry mulls agency to take over NPAs, revive sick units – Positive for Banking Sector, especially PSU banks
The finance ministry is considering a proposal to set up a National Asset Management Company that may act as a nodal agency to take over bad loans of banks and help revive sick units. There is a proposal to form such an entity, for which public sector banks can jointly put in capital. As per the proposal, it can act as an aggregator of NPAs and clear such assets quickly. Presently, there are 14 asset reconstruction companies — of which four are very active — which can take over part of a stressed account.

Once set up, the proposed National Asset Management Company can pick up large stressed assets entirely from a consortium instead of the normal practice of a partial takeover. Stressed assets have been on the rise due to the economic slowdown and the delay in infrastructure projects. The gross NPAs of banks increased to 4.4% of advances at the end of December from 3.84% at the end of March 2013. Bad loans of PSU banks rose 28.5% to Rs 1.83 lakh crore in March 2013 over the preceding September. The top 30 NPAs of state-owned banks account for 40.2% of their gross bad loans. We believe this development to be positive for whole Banking sector, especially PSU Banks

National Economic News

Eight core sector industries grow by 4.2% in April

Output of the eight core sectors grew 4.2% in April, compared with 2.5% in March. The rise was primarily aided by electricity generation and the fertilizer and cement segments. For 2013-14, production in these sectors rose 2.6%, the lowest in at least nine years. For 2012-13, core sector growth stood at 6.5%.

RBI kept key rates unchanged, cuts SLR by 50 bps

The Reserve Bank left the key policy repo rate unchanged at 8% as inflation concerns were showing signs of abating and said a progrowth stance could be adopted if prices rose at a slower rate than expected. The central bank reduced the statutory liquidity ratio (SLR), by 50 bps to 22.5% and promised a further reduction with fiscal consolidation. The cut will free up about Rs. 400bn with banks which they can now lend.

The RBI reduced the liquidity provided under the export credit refinance (ECR) facility from 50% of eligible export credit outstanding to 32% with immediate effect. With this, the quantum of cheap funds available for arbitrage when liquidity is tight has been reduced. The RBI also allowed foreign portfolio investors (FPIs) to participate in the domestic exchange-traded currency derivatives market. The arrangement has been made to the extent of their underlying exposures and an additional $10 million.

World Economic News

Japan Manufacturing PMI Continues To Fall In May

Japan’s manufacturing output declined for the second consecutive month in May, though at a slower rate. The manufacturing PMI came in at 49.9 in May, following the 49.4 figure in April. A broad stabilization in business conditions in the manufacturing sector was seen in May. The decline in manufacturing output was attributed to a decline in demand due to an increase in sales tax. New orders continued to fall in
May, though at a slower rate, moving closer to the no-change mark and new export orders declined marginally.

China Final Manufacturing PMI 49.4 In May – HSBC

China’s manufacturing sector deteriorated only slightly in May, which came in with a score of 49.4. That was down from last month’s preliminary reading that suggested a score of 49.7, although it was still up dramatically from 48.1 in April. Among the individual components of the survey, total new orders stabilized as new export order growth touched a 49-month high.

ECB Delivers Refi Cut, Embraces Negative Deposit Rate

The European Central Bank cut its interest rates and dared to explore the uncharted territory of negative rates, as low inflation threatens to derail the euro area’s fragile economic recovery. The Bank has cut the refinancing rate to a record low at 0.15% from 0.25% and the deposit rate to -0.10% from 0%. ECB thus became the first leading central bank to adopt negative interest rates. The marginal lending rate was lowered to 0.40%. ECB also announced EUR 400 billion targeted longer-term refinancing operations that will mature in September 2018.

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