Sunday, August 29, 2010

Do we need Vedanta's Aluminium ?

I remember peering through the rain lashed windscreen of a helicopter as we came in for landing at Enron's infamous power generation site at Dabhol. Despite the monsoon winds and accompanying turbulence, the ride was exhilirating, mostly for the amazing scenery just below us, the virgin Konkan coastline that is India's west coast. The year was 1995 I think.

The site was awash with activity, with the usual hubub of construction machinery, excavated earth and helmeted workers. The pace seemed impressive, though litigation would soon bring it to a grinding halt. As I looked around and now think back, one question has kept nagging me, in the air, on the ground, then and now. Why was this power plant here, in the middle of nowhere ?

There were many sound answers provided by the powers that be. One reason was the power plant would run on gas or naptha which could be best procured if the ships came right upto the coast and unloaded the energy source. Or it would come via pipelines from up north. There was no doubt that the state of Maharashtra needed the power and has suffered subsequently on account of the lack of it. But the fact remained that the centers of consumption were far away.

Of Course We Need Aluminium

The same question nags me when I look at the Vedanta Orissa mines controversy. Actually, its the answer which begs the more important questions. Let me tackle the development/growth one first. Do we need aluminium ? Answer, yes. We need aluminium as we need steel and other metals, our per capita consumption numbers (1 kg vs 25 kg in the US) are quite low. We are a growing economy and we have a lot of construction and building to do.

Great. Now, the second question. Do we really need to manufacture aluminium and mine raw material bauxite in India ? Not necessarily. A shortage of aluminium is served through imports too. Even China has turned net alumunium exporter. And fact is, there is global overcapacity. Admittedly, this overcapacity may not last for ever. But there is nothing that says it is India's or Orissa's duty to fill the gap. Particularly when the Middle East is ramping up capacity furiously as we speak. As other country's might later.

Aluminium is a very power hungry process. So, you have to set up power plants. Vedanta has built a 1215 Mega Watt Captive Power Plant (CPP) at Jharsuguda in Orissa for its 0.5 million tonne aluminum plant. Vedanta also (proudly) claims this is the largest captive power plant in India. Sure, to make aluminium, not to solve Orissa's power problems. Not that Orissa's power problem is Vedanta's problem. But it tells you what a energy guzzler this metal is.

India Mines, Others Consume

Give or take, total global aluminium capacity is around 53 mt. Production this year will be around 42 mt and consumption around 41 m. So there is clear overcapacity at this point. But like I said before this will catch up. Back home, India consumes around 1.2 mt but produces around 1.3 mt. So we don't even consume as much as we produce at this point. Yes, this could change in time.

Its the same story in iron ore. I was looking at Sesa Goa's (owned by Vedanta) sales numbers. Sesa Goa, the 13th largest global producer, turned out 20 mt of iron ore last year. Where do you think all this went ? Well, an amazing 17.5 mt went to China and Taiwan. And how much did India consume ? Only 1.14 mt !!! So, all the ecological destruction in Goa and Karnataka only ensures that Chinese steel furnaces are kept burning. By the way, I am not saying its good or bad.

But we must ask nonetheless.Why are we mining so recklessly (and illegally) for natural resources whose final product we don't even consume, or at least manufacture. Well, that is a tough one. Because India is a poor country and needs development, including in the realm of manufacturing. And arguably, if you are a developing nation, then the mining of your natural resources too contributes to your income, as a country. And some folks benefit, somewhere.

Asking The Right Questions

But the question must be asked with greater precision today. Which industries, which regions or the country, what's the net value addition , how ecologically sensitive and so on ? An industrialist who hails from the Konkan region (and I know well) says manufacturing has no place there. "They should go to the hinterland of Maharashtra and take the coal or whatever they need by rail to those places," he told me last week.

What about the Konkan region, I ask. It needs tourism, educational institutes, industries which do not damage the ecology, he says. But like in Orissa, such industries may not come there willingly. Which leads to the next, more tricky set of questions I will pose and then attempt to answer in the next post. Who really benefits from the aluminium, steel and iron ore mines or such industry in our country ? And more importantly, is there a solution to Vedanta like situations ?

To Be Continued..

Tuesday, August 24, 2010

The End of Making Money From Money ?

I had a young visitor from New York the other day. He was exploring openings and opportunities in investment banking. Back there, he told me, everyone was talking about India. And having landed here, he was struck by the exuberance and yet, couldn't help contrast the potholes against Mumbai's property prices. I thought as we spoke, that financial services, often the business of making money from money, depended on such exuberance. And give or take a few blimps, we've had it in abundance. But how long would it would last in the present form ?

In the past I have often pitied banks and their seemingly vulnerable savings accounts. After all, I am bombarded with a continuous stream of messages telling me how to make more money from money. "Take your money out of your bank, DON'T leave it lying there," is the essential text hammered consistently. Invest in stocks, bonds, mutual funds, gold, silver, property and of course, clever insurance schemes.

A Vast, Global Industry

There is a vast, global industry which thrives on this way of life. It includes most of the financial markets, the really smart people (or are they ?) who work in them, financial media, communicators, independent advisors and government regulators who are always trying (I stress the word) to ensure that you, the saver, is not separated unjustly from your hard earned money.

The role of any financial market is to allocate capital and connect those of us craving to multiply our savings with those who want to multiply their wealth. Yes, in the process, keep a small portion aside for you as well. Actually, I do mean that genuinely. And yes, there is nothing stopping you from participating either. You should, if you think you can.

To return to my conversation with my visitor, it was two articles in the New York Times patched with some interesting stastics back home that got me thinking. All bear examination, inasmuch as they could tell you where opportunities could lie, versus not. To be fair, India is unlikely to face the same problems as the US economy, at least now.

"The Turnabout Is Striking"

The first, talks about small investors fleeing stock markets in the United States. Investors withdrew a staggering $33.12 billion it says and even quotes a Credit Suisse analyst (an integral component of that global community) saying "Small investors are losing their appetite for risk." And investors, as this article, will tell you, are selling on the way down as well on the way up again, presumably the smarter ones or with more guts.

Its the long-term trend that the NYT is pointing to.."One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks." "So," says the NYT article, "The turnabout is striking."

Now, lets look at the other article, also in the NYT, which speaks about property. This one argues that it (housing) in the United States will eventually recover from its great swoon. "But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg."

Era Is Gone For Good ?

Moreover, says the NYT, "the wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming. More than likely, that era is gone for good."

Now I can pull quite a few data points which will show you that the Indian investing mania never reached American proportions so the question of the return journey does not arise. On the other hand, did the return journey begin long ago..? An interesting article by Sucheta Dalal suggest as much, at least in equities.

She argues that investor population has plummeted from a high of 20 million in 1992. She quotes figures shared in Parliament that show some 3 million investors traded in the National Stock Exchange's cash market between April-June 2010 but 90% of the investment came from only 192,000 investors !! Moreover, 50% of turnover comes from just 451 investors, of which 156 were proprietary traders.

Sold On Growth

This is not to argue that you can't make money in India. Of course you can. And many do, quite wisely. But as Sucheta's piece says and I infer - statistically, not everyone has much of a chance making money from money. So careful with the hype.

Property is another story. We need roofs over our heads and we buy houses for long term security, unlike stocks and other financial market instruments. But at current values, particularly in the metros, housing is plain unaffordable for most Indians. One reason (galloping real estate FDI) is provided in this Times of India article. There are other reasons as well. So some sort of reversal must happen. Soon.

Im still sold on the India growth story, allowing, of course, for frequent ups and downs. There is very real consumption happening in the country. And people's lives are improving for the better, across strata and across the country. And there is need for capital and capital allocation too. And the market discrepancies ? Well, market forces will take care of them. That's what I told my young visitor as well.

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