02 April 2013

Copper faces supply glut:: Business Line


Copper prices have dropped sharply from $8300/tonne to $7500/tonne. This massive correction in the prices is mainly due to the supply glut in the market. Quite often copper is considered as a good economic indicator but while demand growth has moderated, surge in supply has remained a major concern for the red metal.
A rally in copper prices during the start of the year had more to do with increased risk appetite after the aggressive steps by the US and Japanese central bankers and cyclical upturn in the Chinese economy. But rising home prices in China and wounded state investment vehicles are not likely to lead to any exponential rise in investment demand of copper.
China has reiterated its rhetoric to curb inflation. Since last one-and-a-half year, the Chinese economy has cooled off and global markets have been struggling to find another market like China, which consumes more than 40 per cent of the global copper production. While on the one hand, the demand growth has moderated, on the other, the supply side of the red metal has been the strongest in the last decade.

DECLINING IMPORTS

Imports of refined copper in China have been declining since the start of 2012 and still remain well below record imports that were seen in December 2011. In February 2013, China’s imports of copper refined metal, alloy and products were 2.98 lakh tonnes which is the lowest level in 20 months.
Against this refined copper production in China has been quite strong. In December 2012, China produced 5.8 lakh tonnes which is the highest refined metal output. Also, in the first two months of 2013 refined copper production in China has been 11.90 per cent higher from the 2012 levels.
Copper inventory at the London Metal Exchange (LME) monitored warehouses stood at 5.47 lakh tonnes (as on March 19) which is about 70 per cent higher than the start of 2013. Also, copper inventory at SHFE (Shanghai Futures Exchange) monitored warehouses are 40 per cent higher since the start of 2013.
Apart from the inventories held at SHFE warehouses, inventories held at bonded warehouses in China are believed to have increased manyfold. Copper stocks in China's bonded warehouses hit a record high of over one million tonnes ending 2012 due to weak domestic demand. Traders estimate that still about 9 lakh tonnes of copper is being stored in bonded Chinese warehouses.

FALLING PHYSICAL PREMIUMS

With rising stockpiles at SHFE-monitored warehouses and reducing imports, we have seen a decline in the spot copper premiums in China. Plentiful bonded stocks and reduced buying have kept premiums low, around $40 to $65 a tonne over the cash LME copper prices.
Apart from China, in Europe too physical copper premiums are seen under pressure. In January, the median copper premium in Europe seem to have fallen to $60 a tonne from $80 a tonne in December 2012.
Premiums are an indicator of the physical activity of the underlying at concerned markets. Hence, falling premiums does signify that the demand situation is bleak.

FINANCING DEALS

Some banks in China have tightened credit for imports of refined copper. As domestic prices in China stay below LME rates, stockpiles rise in bonded warehouses and physical premium squeezes. Hence, local banks are finding it more risky to lend for copper stocks.
Chinese banks suffered a huge setback after falling into similar trades in steel as they failed to recover billions of Yuan in loans. Hence, to avoid similar kind of losses in copper they have tightened some measures for the same.
The US Securities and Exchanges Commission approved two copper ETF’s. Prices have remained weak despite this. Copper prices have cooled off recently and we feel any upside of 2 per cent to 4 per cent can be a good selling opportunity. We do not expect any meaningful recovery in the prices of copper. Copper prices are likely to remain weak, going forward.

Are warranties worth it?:: Business Line


Most of you typically buy an extended warranty on your new computer and mobile phone or on your recently upgraded high definition TV. You are more likely to buy an extended warranty at the store during the purchase of the product than later. Why do you buy extended warranty, even when you know that it is expensive?
Your purchase decision is a battle between pain and pleasure. That is, if you believe that the pleasure you derive from using a product is more than the pain of paying for it, you will most likely buy the product.
You know that an extended warranty is expensive. In most cases, it costs approximately 10 per cent of the product price. But you have bought the TV. That means your brain has already fielded the battle between pain and pleasure. Now, adding the extended warranty to the total cost does not significantly increase this pain. You rationalise that a 10 per cent additional cost is a small price to pay to “protect” your new possession. The fact that the price of the extended warranty is typically higher if purchased later makes your decision to buy it now easier.
Of course, your willingness to buy the warranty also depends on your level of happiness. If you get an unexpected discount on the HD TV, you may want to use the money “saved” to acquire an extended warranty. Moreover, studies in behavioural psychology show that you are more likely to buy an extended warranty for pleasurable goods than for utilities. In other words, you are more likely to buy an extended warranty on your HD TV than on your washing machine, though your washing machine is more likely to fail. Why? One reason is that you may be feeling guilty about splurging on an HD TV. This guilt will turn into regret if your TV breaks down and you have to incur large costs to fix it. An extended warranty helps you moderate this feeling of regret.
Finally, cold logic tells you should purchase a warranty only if you believe that the cost of repairing your electronic device is likely to be higher than the warranty cost. Will it? Now, it is not practically possible for you to measure the probability of your computer crashing or your HD TV breaking down just when you are watching your favourite show. But if you have had such previous experiences, you are more likely to believe that the event will happen again. Forget the cost-benefit analysis, buying the extended warranty would then be logical, an emotional insurance, really!

Investors shun emerging market equity funds: EPFR:: Business Line



Emerging market equity funds witnessed their biggest weekly redemption since early September, primarily due to Italy’s inconclusive election and the Cyprus bank bailout, a report says.
According to the data complied by the international fund tracking firm EPFR, the outflow from emerging market equity funds during the week ended March 28, jumped to a 29 week high heading into the final days of March.
Fund flows largely reflected the uncertainty created by the latest crises - Italy’s inconclusive election and the Cyprus bank bailout - to rattle the Eurozone.
“With the messy end-game of the Cyprus bailout dealing a blow to the notion that the worst may be over for the Eurozone and fuelling fears of similar events in Slovenia or Hungary, redemption from EPFR Global-tracked Emerging Markets Equity Funds jumped to a 29 week high,” EPFR said.
These funds (emerging market equity funds) are also under pressure from the spectre of a currency war triggered by Japan’s latest policies, uncertainty about China’s new leadership, softer commodity prices and concerns that rising inflation in key markets will limit options for easing monetary policy, it added.
Funds dedicated to Russia, which is exposed to declining commodity prices and the Eurozone crisis and is facing high inflation, had their worst week since the third quarter of 2011, while Emerging Europe Equity Funds saw over $100 million pulled out for the second week running.
In contrast, events in Europe during the fourth week of March did nothing to diminish the attractions of the US economy and Japan’s bold policy shift, with flows into US, Global and Japan Equity Funds.
The EPFR Global-tracked Developed Markets Equity Funds collectively posted inflows for the 16th time in the past 18 weeks.
US Equity Funds took in fresh money for the fourth consecutive week, their longest inflow streak since the fourth quarter of 2011.
The diversified Global Equity Funds also extended their winning run as YTD (year to date) inflows crossed the $38 billion mark, the report added.

Reap tax benefits on education loans:: Business Line


Only if you take the loan from an approved financial institution or an approved charitable institution, can you claim this benefit.
An education loan can not only help you fund higher studies but can also help you save tax. The entire interest you pay on the education loan can be claimed as deduction while calculating your taxable income.
This benefit allowed under Section 80E of the Income Tax Act can translate into tidy savings. For instance, if your taxable income during a year is Rs 10 lakh and the interest you pay on the education loan that year is Rs 1 lakh, then you need to pay tax on Rs 9 lakh. This means Rs 20,600 paid less as tax for the year. You can claim the interest deduction on loans taken to fund studies in India and also abroad. But take note of the restrictions.

CLAIMING BENEFIT

Not all education loans qualify for deduction. Only if you take the loan from an approved financial institution or an approved charitable institution, can you claim this benefit.
Financial institutions include banks and some non-banking financial companies. So, if you borrow money from your friends, relatives or employer, you get no deduction on interest paid. Check with the lender whether a loan taken from it qualifies for the tax benefit.
Only the person taking the loan can claim the deduction. For instance, if your relative takes a loan for funding your higher education, the relative and not you will be eligible for the tax benefit. The tax law states that relative who can claim the benefit mean the spouse, parent or legal guardian of the student. So, if your brother or sister takes a loan to fund your education, they will not be eligible to claim tax deduction unless he or she is your legal guardian.
You need to take a loan for funding higher education. This means a Government recognised course of study pursued after passing the Senior Secondary Examination or its equivalent. So, if you take a loan to pay the fee for your child’s primary school, you get no deduction on the interest paid.
The tax benefit can be claimed for a maximum of eight years – beginning from the year in which you start paying the interest on the loan and for seven consecutive years after that. So, if you service the loan over a 10-year period, the interest paid in the last two years cannot be claimed as deduction. Hence, it may make sense to restrict the tenure of the education loan to a period in you can claim tax deduction.
Of course, if you repay the loan within a shorter time-frame, say six years, you can claim deduction on the interest paid only till such period.
Most education loan lenders provide a moratorium period during which you opt not to service the loan. This period is usually until one year after the completion of the course or six months after the student gets a job, whichever is earlier.
If you choose to pay interest during the moratorium period, it will be taken into account while calculating the time limit of eight years.