Slowdown still looms

GDP data show manufacturing and services doing well

Although first-quarter GDP growth at 7.4 per cent beat most analysts' expectations, there's little doubt that a slowdown looms ahead.

GDP growth in Q1 last year was at a low 5.3 per cent, so the base effect alone has led to higher growth in Q1 this year. Going forward, it's not going to b so easy, as GDP growth in Q2, Q3 and Q4 last year was 8.6 per cent, 10.5 per cent and 8.2 per cent.

Growth in "agriculture, forestry and fishing" was at 3.4 per cent, thanks to a low growth of a mere 0.1 per cent in Q1 last year. Manufacturing and services have done much better than expected.

While the impact of the less-than-normal monsoon will be felt in agricultural growth in Q2 (but more strongly in Q3 and Q4) the impact of lower agricultural production on manufacturing, via the link of rural demand, is felt with a lag.

Assuming no change in the industrial and services growth rates, and assuming agricultural growth to be 1.5 per cent this year against last year's 9.1 per cent, then GDP growth will be lower by 1.9 percentage points since agriculture accounts for a quarter of GDP. GDP growth for the year in that case will be 8.2 per cent minus 1.9 per cent, or 6.3 per cent.

Moreover, this year the effect of lower agricultural growth should be partially offset by higher capital expenditure as the capex cycle turns. Export growth too has so far been robust, and will help mitigate the effect of lower domestic demand on account of the poor monsoons.

Shipping "" freight hikes

Shipping company stocks are surging ahead once again with Mercator Lines rising approximately 29 per cent over the last 2 weeks, while Great Eastern Shipping gained around 13.5 per cent and Shipping Corporation of India (SCI) has moved up around 12 per cent.

The principal reason for investors aggressively buying shipping stocks could be attributed to an improvement in freight rates in the spot tanker segment over the last 4 weeks, largely due to surging demand for transporting petroleum products especially from East Asian countries and North America.

For instance, in the VLCC segment, spot freight rates have improved by approximately 79 per cent to $76, 614 per day over the last 4 weeks, while Suezmax rates have improved by around 34 per cent and in the case of Aframax there has been an increase of around 47 per cent. Meanwhile, over the last 4 weeks, the Baltic Dry Index has been more or less steady at around 4,123.

Most large Indian shipping companies like GE Shipping, SCI and Mercator Lines are utilising a significantly large proportion of their tonnage capacity for transporting petroleum products.

Hence, the current upsurge in this segment's freight rates is expected to help them report significantly better earnings for Q2 FY05. In the case of GE Shipping, analysts expect a growth of 50-60 per cent in quarterly profits year-on-year, while a growth of 40-50 per cent is anticipated for SCI.

Guar gum prices "" historically volatile

The spotlight has strangely fallen on the innocuous guar seed and guar gum markets this year. It's the first time trading has become available on these commodities nation-wide, through the launch of futures trading on commodity exchanges. Earlier, guar seed was largely traded in Jodhpur, Rajasthan, as the state was the largest producer.

What's caught the attention of everyone is the spike in volumes and price in guar seed and guar gum (guar seed is converted into guar gum) in the recent past. It's largely accepted that the spike in volumes is the result of heightened speculator activity.

But whether this has led to an artificial increase in prices is debatable. This is simply based on the fact that guar seed prices have been very volatile before. Especially so in the months of August and September, as guar seeds are reaped in October and November.

This year, the average price of guar seed between the beginning of August and mid-September was 57 per cent higher compared to last year's average, thanks to the poor rains in Rajasthan.

In the previous three years, the year-on-year difference in price was -40 per cent, 104 per cent and -42 per cent. The point is, guar seed prices have been volatile historically.

If anything, the current system may be better than the previous one. In the futures market, these commodities are now traded from 150 different centres.

Moreover, each exchange member has an outstanding position which is less than 8 per cent of the total market outstanding and each client has an outstanding of less than 4 per cent (based on Wednesday's data).

With contributions from Amriteshwar Mathur and Mobis Philipose