Risk aversion, deleveraging and repatriation have largely driven the dollar’s rally in the second half of 2008.

NEGATIVE FACTORS THAT CAN PRESSURIZE US DOLLAR INDEX IN 2009

-Foreign central banks selling US assets

Oil Producing Nations
Crude oil prices have melted drastically which led to reduction of revenue of oil producing nation’s .So Oil producing nations will have support their spending by selling their accumulated dollar assets. Ex Russia has already sold over 20% of its $598.1 billion reserves, and it can be expected to continue doing so this year.

Emerging markets that have been relying on capital flows to fund their trade deficits
Many emerging markets around the world have been running trade deficits in recent years financed by capital flows. India’s strong capital flows from tourism, software services, and remittances not only financed its trade deficit, but also increased its foreign reserves to an all-time high of 316.2 billion in May of 2008. India’s central bank, for example, has been forced to sell off its US holdings to curb its currency’s decline, and its total reserves have decreased by $62.2 billion. The central bank’s dollar sales in October alone exceeded purchases by a record $18.7 billion.

-US Trade deficit is worsening

As imports to the US are falling, exports are falling even faster. Demand for the durable and capital goods produced by “developed” nations is plummeting much faster than demand for cheap consumer imports, causing widening trade deficits with nations like China.

-Rising gold prices

Rising demand for physical gold is a threat to the dollar because it signals a growing loss of confidence in the paper currency. All the gold that has ever been produced would fit in a solid cube of about 19 meters on each side, and this cube is only expanding by about 12 centimeters a year (2%). Since the value and supply of gold it is fairly constant over long periods of time. So by seeing the ever-increasing demand its prices can remain on firm side.

-Hazard of bailouts

While bailouts might have an adverse effect on the future actions of individuals and businesses by encouraging risk taking, the real problem is their effects on future actions of the government. Specifically, each bailout makes it harder to say no to the next bailout.

Each bail out adds increased pressure on the government expenditure plans as all ailing sectors are asking for bailouts packages and it is difficult for the particular government to address issues of all sectors.

-US budget deficits

According to the latest government figures in US, the deficit currently is expected to be $438 billion. For a reliable idea of what our 2009 deficit will look like, to this number we need to:

Add the cost of funding the on-going wars in Iraq and Afghanistan
Add the cost of current and future bailouts for the auto companies
Add the cost of another stimulus package

2009 budget deficits will force the government to sell at least another 2 trillion treasuries this year.

-US economic troubles

Manufacturing sectors problems
The full effect of last year’s big drop in manufacturing orders, including job and production cuts, will only be felt throughout the course of this year. First quarter of 2009 is not going to look pretty for US manufacturing sector. Federal bailout, states will still need to drastically reduce spending and raise taxes. When US states cut spending, they lay off employees, cancel contracts, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. These cuts, like new taxes, drain an enormous amount of money out of circulation. This leaves business and individuals with less cash and thereby removes demand from the economy, causing state and federal GDPs to contract.

China become skeptical about US treasury
Sovereign wealth funds like China have become skeptical of buying more US paper. According to an editorial in the state owned newspaper, China Daily, “China’s increased purchase of U.S. Treasury securities should not be interpreted as an endorsement of the assumption that the U.S. can borrow its way out of the current financial crisis.” If dollar demand continues to wane, it is another factor that could drive the dollar lower in the first half of 2009.

FACTORS FAVORING UPSIDE IN DOLLAR INDEX

-Rescue of US dollar by Arabian countries

Throughout the US-dollar’s 40% slide over the past six-years, the Arab oil kingdoms in the Persian Gulf stayed loyal to their US-dollar pegs. The Arab oil kingdoms rescued the US-dollar from the brink of collapse, by rapidly expanding the supply of Kuwaiti dinars, Saudi riyals, and UAE dirhams, and then recycled about $250billion of Petro-dollars into US Treasuries over the past 12-months.
The recycling of Arabian Petro-dollars into US Treasuries put a floor under the US $ Index at the 70-level last year, and persuaded bearish currency traders to cover massive short positions that had been built-up in the US $ over the past six-years.

-Flight to safety in US dollar

Despite the next to nothing yield offered by dollar denominated investments, a flight safety into US dollars and government bonds has kept the greenback from collapsing against other currencies like the British pound, Canadian and Australian dollars. The concern for safety was so high that investors were willing to take negative yields just to park their money with the US government. A bubble is brewing in the Treasury market and any improvement in risk appetite will take the market’s focus away from safety and back to return on money at which time ultra low interest rates could become a detriment for the US dollar.

-Liquidation by hedge funds

During the second half of 2008, a “flight to quality” began as hedge funds sold foreign assets to meet redemptions requests. These forced repatriations by hedge funds combined with dollar’s outdated reputation as a safe haven produced a record breaking rally in the treasury markets.

-Interest rate cut By ECB

Next to the Bank of Japan, the ECB has been the least aggressive central bank in 2008, having cut interest rates by only 150bp to 2.5 percent (counting the 25bp rate hike, their total easing is 175bp YTD). Compared to the 400bp rate cut from the Federal Reserve and the 350bp rate cut from the Bank of England, the ECB’s nimble move single handedly prevented the Euro from collapsing. BOE is having its meeting on Friday while ECB is having its meeting on 15th of this month in which they can announce the interest rate cut which are at 2% and 2.5% respectively.

-Deflation in US …Good for dollar index

Deflation means most asset prices go down. When asset prices go down, anyone who owns those assets loses money.
From peaks reached just a few months ago to the latest bottoms, the price of oil has plunged 73% … copper has fallen 66% … lead and nickel are down 73% … platinum is down 66% … and wheat is off 64%.
Even the US government’s slow-to-change, lagging index of inflation — the CPI — has caved in to deflation, falling by the most since the government first introduced the index in 1946.

Debt liquidation
That’s the main engine behind the deflation and a major element in vicious cycles that are just beginning to gain momentum. Consider the housing market, for example. The more debts are liquidated, the more prices fall … and the more prices fall, the more people abandon their homes and mortgages, leading to more debt liquidation.

Why deflation is good for Dollar index
When the price of investments or goods and services goes down, the value of each dollar goes UP. When there’s global deflation, the dollar is the prime beneficiary.
Everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world’s reserve currency.
The dollar now buys three times more oil and copper than just a few months ago. Not just 20% more or 50% more, but three times more! So with the falling commodity prices the purchasing power of dollar increases.
Now as we have deflation and global contraction. Despite the Fed’s efforts to lower interest rates, credit — dollar credit — is drying up all over the world because only selective credit is extended due to fear factor. The overall supply of dollars is contracting because of lower dollar credit. So U.S. dollars become scarce and its value is going up.

-Contraction in other economies
A country’s currency is never valued based on how well or how poorly that particular economy is doing in isolation. It’s always measured against another country’s currency. So it is always valued based on how a particular economy is doing relative to another economy.

Meaning thereby US economy is shambles but other economies such as euro zone are also slowly faltering which can lead to further downside in euro currency. Furthermore Europe’s banks have lent more than $2.7 trillion to the high-risk emerging markets, and those emerging markets are being crushed by deflation.

In just the last five months the commodity currencies such as the Australian dollar has lost 31% of its peak value. Other currencies tied to commodities are also getting killed such as New Zealand dollar is down 39% from its peak; the Brazilian real, 35%; the Canadian dollar, 23%.

CONCLUSION

Volatility in the currency market hit a record high in 2008 but in 2009 I expect the volatility to compress as interest rates around the world converge. Much of the volatility this past year has been spurred by speculation about how much various central banks would cut interest rates.

News about Obama’s economic team working on a new Stimulus plan including tax-cuts by approximately $300 billion has fuelled stock markets and dollar index higher. The wave of optimism have sunken the Euro and Yen yesterday while boosting the Dollar.

Aluminium’s contribution to sustainable modern living Aluminium is a young and modern metal. It has only been produced on an industrial scale since 1886 when Hall and Héroult independently discovered how to produce aluminium through electrolysis. In 1900 annual output of aluminium was 1,000 tonnes. By the end of the 20th century the annual production had reached 32 million tonnes comprising 24 million tonnes of primary aluminium and eight million tonnes from recycled metal. This makes aluminium the world’s second most used metal. A world without aluminium has become unimaginable. The business traveller, the tourist and the freight company are dependent on it as the commercial aviation and space industries would never have achieved ‘lift’ off without aluminium. The metal makes a key contribution to fuel efficient engines in cars and trucks, as well as to high speed rail and sea travel. By reducing the vehicle’s weight, it cuts down on fuel consumption and emissions without compromising size or safety. Aluminium facilitates the construction of corrosion resistant and low-maintenance buildings. Around the world, most long distance overhead transmission and distribution lines are made of aluminium. Aluminium in packaging preserves food quality, reduces waste and provides convenience for the users. Aluminium can be rolled into ultra thin foils, which are light, strong and have unique barrier and insulation qualities, it preserves food, cosmetics and pharmaceutical products by protecting them from ultraviolet light, odours and bacteria. Aluminium is also the most cost-effective material to recycle.

Packaging of all types, including aluminium, saves about 30% of the world’s food from wastage. Less than an ounce of aluminium sprayed on a polymer forms a thin heat reflecting sheet that can keep a newborn baby warm or save the life of someone on an exposed mountain top. Aluminium has a particular advantage for use in arctic climates, as it retains all its performance properties at low temperatures. The aluminium industry directly employs over a million people worldwide and indirectly generates four times as many jobs in downstream and service industries. International representation As aluminium is a global commodity, the industry has adopted a global approach to sustainable development issues through its international body the International Aluminium Institute (IAI). IAI currently has 21 member companies representing almost every continent. The split of total primary aluminium production between OECD and non-OECD countries is roughly 50:50.Together the member companies produce around 60% of the world’s primary aluminium and a significant proportion of the world’s recycled metal. IAI is involving the Chinese and Russian producers and aims to bring the Institute’s coverage to around 90% of world production. The compact structure of the industry facilitates the gathering of global performance data and the spreading of good practice through benchmarking. As a result, IAI is already monitoring and reporting on a number of widely used sustainable development indicators such as energy use, greenhouse gas emissions and safety performance.

Since 1997, IAI has collected comprehensive benchmarking data on safety performance in the global aluminium industry and information is shared on accidents, near misses and their causes. Such benchmarking data is a driving force for continuous improvement. Many companies have a policy of zero accidents as their target. IAI’s Health Committee plans to collect global statistics on occupational illness and benchmark performance. These statistics will be regularly updated. The aluminium industry has a number of elements in its current environment, health and safety programmes, which would enable it to become a pioneer in the field of global industrial reporting on sustainable development.

Life cycle

Aluminium stands to benefit from the sustainable development approach, because its real impact on the environment can only be judged in terms of a full cradle-to-grave life cycle analysis. It is a sustainable material, whose recyclability and applications justify the high-energy requirement of primary aluminium production.

During an automobile’s construction a kilogram of aluminium can replace two kilograms of conventional heavier materials, thus contributing to the reduction of the vehicle’s weight and therefore its fuel consumption. This means that, over the vehicle’s lifetime, every kilogram of aluminium used saves the equivalent of 20 kilograms of CO2.
Current estimates show that globally there will be, by the year 2020, a 35% increase in CO2 emissions from all vehicles. An increased use of aluminium would reduce this increase down to 28% thus making the transportation sector more sustainable.

Description

Aluminium is a silver to white coloured, highly elastic, ductile element having atomic number 13 in the periodic table. It is a light metal with only 1/3rd density as compared to that of steel. It is as good a conductor of heat and electricity as the metal copper is. Aluminium is known for its feature of being resistant to outside weather, atmospheric gases and liquids. That’s why it is largely used in the cold conditions where it maintains its toughness unlike other metals and gains advantage over the metals carbon-steel and copper etc. Non-toxicity and non-magnetic are some of the other characteristics of this metal.

Aluminium’s abundance in the earth’s crust stands third among other elements. But it is not found in the free state anywhere in the world but in combined form with other materials in the ore form.

Aluminium is a newly discovered metal as compared to the other metals like copper, silver etc as it was found in the 18th and 19th century only. It is the most eco-friendly metal and is also sound technologically and economically. This fact gives aluminium the second place in the list of the largest consumed metals in the world after steel and it is often termed as a versatile metal. It also has unique and numerous properties such as gas resistant, moisture-vapour resistant, grease and oil resistant, corrosion resistant, reflective, lightweight, recyclable etc that makes it stand out when other metals are compared to it. On behalf of all this, it can be said that this metal is irreplaceable.

Aluminium is extracted from the aluminium ore, most commonly bauxite that is found in the areas lying in the tropical and the sub tropical belt on earth. Aluminium constitutes 8% of the earth’s crust. Large deposits of bauxite are located in the continents like North America, South America, Africa, Australia and Asia and small deposits in Europe.

The world production of aluminium is around 28.9 million tons, China being the largest producer followed by Russia, Canada and United States. As already mentioned that aluminium stands second in the largest consumed metals in the world, it is also true that the world consumption level has also risen significantly in the last few years.

History

The metal aluminium hasn’t got a long historical background behind it, as it is relatively a new discovery but the salt of this metal has been used for a long time. In around 5300BC strong pots and bowls were made from the clay consisting large amount of the metal salt in Persia. In around 2000BC, ancient Greeks and Romans made use of the salts of this metal as a dying agent and for the purpose of dressing wounds. At that time the salt was known by the name ‘Alum’. The name of this base salt was changed to ‘Alumine’ by a French chemist and politician named Guyton de Morveau in 1761.

It was in 1808 when a chemist and physicist named Humphry Davy found out the presence of metal base in this salt and named the element Aluminium though he was unsuccessful in extracting the actual element.

After a few years of experimentation, in 1825, a Danish chemist, Hans Christian Oersted was successful in attaining an impure lump of aluminium metal, which was developed further by Friederick Wohler by mixing aluminium chloride with potassium. With time the process of extraction of aluminium was improved and in 1859, with the help of the emperor Napoleon III, first ever aluminium factory was established.

The statue at Piccadilly Circus, London that is known by the name of Eros was one of the first statues that were made by this metal. Till then the process of extracting aluminium was very expensive and it was a highly prized, considered to be a semi precious metal but in 1886, Hall and Heroult invented a new process of extraction and still the improved version of that process is used commercially throughout the world.

Aluminium Production

Aluminium ore, most commonly bauxite, is plentiful and occurs mainly in tropical and sub-tropical areas: Africa, West Indies, South America and Australia. There are also some deposits in Europe. Bauxite is refined into aluminium oxide trihydrate (alumina) and then electrolytically reduced into metallic aluminium. Primary aluminium production facilities are located all over the world, often in areas where there are abundant supplies of inexpensive energy, such as hydro-electric power.Two to three tonnes of bauxite are required to produce one tonne of alumina and two tonnes of alumina are required to produce one tonne of aluminium metal.

Aluminium producing countries

Aluminium is abundantly present in the earth’s crust. The ore of the metal i.e. bauxite generally occurs in the tropical and sub tropical areas of earth and is present in almost all continents except Antarctica with the estimated deposits of 65 billion tons. Production of aluminium from bauxite ore requires three stages i.e. mining of the ore, refining of the ore to produce alumina and finally smelting of alumina into aluminium. To obtain 1 ton of metal, 2 tons of alumina is required and for producing 1 ton of alumina, 2-3 tons of bauxite is required. The only ore other than bauxite that is used for extracting aluminium in some areas is nepheline.

The major bauxite exporting countries are:

C Guinea
C Jamaica
C Surinam
C Australia

LOCATION OF ALUMINIUM SMELTERS

THE MAJOR PRODUCERS OF PRIMARY ALUMINIUM IN THE WORLD

United States of America
C Russia
C Canada
C European Union
C China
C Australia
C Brazil
C Norway
C South Africa
C Venezuela
C Bahrain
C United Arab Emirates
C India
C New Zealand

The global production of aluminium figures around 29 million tons and the above-mentioned countries share more than 90% of the aluminium production. China topped the chart in 2004 producing around 6.1 million tons of metal. Russia with 3.6 million tons, Canada with 2.64 million tons and USA with 2.5 million tons of production followed China. The import – export situation of this metal is dependent upon the demand supply mismatch in the world.

Consumption in the African continent is much lower than the production level and that states that countries in the African continent have a high exporting ability.

Demand

The consumption pattern of aluminium in India is different from the global consumption pattern. The demand for the aluminium industry has been predominantly from the electrical sector. This sector is the largest end user of aluminium in India accounting for 36 % of the total aluminium demand. The transport sector contributes to another 22 % of the total demand while the consumer durable and packaging sectors consume 12 % each. The construction sector consumes 7% of the total aluminium demand. Total domestic consumption was about 0.55mn ton in FY98.

In the power sector aluminium is used in conductors, extrusions, foil wraps and even conductors for overhead transmission. Conductivity of aluminium being greater than that of copper it is preferred to the latter. In terms of price aluminium again comes out as the winner.
Another sector, which consumes aluminium to a great extent. is the automobiles sector. This sector accounts for 22 % of total consumption of aluminium in India.

Aluminium has an advantage over steel due to its higher strength to weight ratio, which helps reduce fuel cost. The metal also has a higher thermal efficiency, which leads to better engine performance.

In India, the use of aluminium in passenger car stands on an average at 20 kg in comparison to 30-35 kg witnessed in other developing countries and 80–100 kg in the US. In India, Maruti Zen has the highest aluminium content amongst all the vehicles. Many more Indian cars could start having aluminium engines. Audi the German car completely made from aluminium.

In the construction sector, aluminium could replace wood with the government discouraging the use of the same. In the packaging sector aluminium foils could replace plastics since they are more convenient apart from being very effective.

The packaging sector accounts for 12 % of the total aluminium consumption. The sector approximately consumes 50,000 ton of aluminium per annum. Packaging sector uses aluminium for manufacture of cans, containers collapsible tube foils and closures. Foils are increasingly being used for packaging food products, tobacco pouches, pharmaceutical strips and inner lining of tetra packs.

Packaging is growing at a faster rate as a result of rising consumerism and growing brand awareness in India. Aluminium is also a substitute for tinplate glass paper and jute. The concept of soft drink in cans has not caught on in the Indian market because of the markets being highly price sensitive. While in urban area’s aluminium cans do find some takers, consumption of cans in rural and semi urban areas is absolutely miniscule. Producers in India are therefore reluctant in setting up a aluminium beverage can unit Aluminium to a large extent is also used in consumer durable. The high thermal efficiency, conductivity, corrosion resistance and low weight of aluminium makes it ideal in the consumer durable sector especially in the manufacture of electric fans air conditioners and coolers where it is used in the form of extruded flat products. Aluminium is also increasingly being used in gas cylinders, cycles, rigid food and non food containers, mines prop and beer and beverage cans

Supply

Production of primary aluminium is done in three stages. It starts with the mining of bauxite, a reddish-brown aluminous earth found in tropical latitudes in Australia, South America, India, the Caribbean and Africa. Bauxite is then refined to produce alumina, which is then smelted to produce aluminium.

To produce one tonne of primary aluminium takes two tonnes of alumina, which in turn takes four tonnes of bauxite. The reduction of aluminium from its oxide, alumina, is very power-intensive, hence why significant parts of world primary aluminium production are located near cheap energy sources, whether it be hydro-electric power in Canada or near the oil and gas fields in the Middle East. Interestingly, when OPEC limited oil exports in the Middle East in the 1970’s, oil producing countries found themselves with surplus oil production capacity which they were not allowed to export. Instead they converted the oil and gas to electricity and produced aluminium which could then be exported. A very clever way to get around the OPEC restrictions.

It is important to understand the huge energy requirement need to make primary aluminium. The Hillside smelter in South Africa produces around 460,000 tpy of aluminium, but to do so takes the of equivalent to about 5% of all the electricity consumed in South Africa. Recycled aluminium plays an important part of the supply chain as aluminium’s use in packaging often has a short life span. To produce aluminium from scrap aluminium costs a fraction of the cost of producing primary aluminium. To produce one tonne of aluminium from scrap consumes only 5% of the amount of electricity that it takes to produce one tonne of primary aluminium.

RECYCLING ALUMINIUM

i. By recycling aluminium cans, it takes only 4% of the energy to recycle them than to produce them from raw materials. Recycling aluminium can saves up to 95% of the energy needed to make a new one.

ii. Recycling 120 aluminium cans saves enough energy to run a 3-bedroom house for one day.

iii. If all of the aluminium cans recycled in the UK were laid end to end they would stretch from Lands End to John O’Groats 160 times!

iv. There would be 12 million fewer dustbins per annum in the UK if all aluminium drinks cans were recycled.

Centuries before zinc was discovered in the metallic form, its ores were used for making brass and zinc compounds were used for healing wounds and sore eyes. The Romans produced brass in the time of Augustus (20 B.C. – 14 A.D.). By 1374, zinc was recognized in India as a new metal and at Zawar, India, both zinc metal and zinc oxide were produced from the 12th to the 16th century. From India, zinc manufacture moved to China in the 17the century. Zinc was recognized as a separate metal in Europe in 1546. In 1743, the first European zinc smelter was established at Bristol in the United Kingdom.
Zinc was named by the Swiss alchemist Theophrastus Bombastus von Hohenheim (Paracelsus, 1493-1541), who coined the new Latin word zincum from antecedents.

Proprieties of Zinc

o Zinc is a bluish-grey metal covered by a protective transparent layer of basic carbonate in air.

o A sheet of zinc looks very much like a sheet of aluminium, but it is more than twice as heavy, and does not bend easily.

o Zinc is not very ductile or malleable, especially when pure.

o Its density is 7.14 g/cc, electrical resistivity 6.16 ??-cm, heat capacity 0.0925 cal/g-K, and heat conductivity 0.268 cal/cm-s-K. Its coefficient of linear expansion is 40.0 x 10-6 per K.

o Zinc melts at 419.5°C and boils at 907°C. The heat of fusion is 24.09 cal/g. In the cast form, its tensile strength is only 4-12 ksi, but the cold work of rolling gives 28-36 ksi. Hard-drawn zinc has strength of about 10 ksi. The Young’s modulus is 12.4 x 106 psi. Zinc, at Mohs 2.5, is harder than tin or cadmium. Its crystal form is hexagonal close packed, with a = 0.266 nm, c = 0.494 nm. The ionic radius of Zn++ is 0.074 nm. The ionization potentials of zinc are 9.36V and 17.89V.

Production Process of Zinc

The raw material used for the production of zinc is zinc concentrate, which is the result of a flotation process after the ore has been mined and milled. The zinc ore contains 1-15% zinc whereas the concentrate typically contains approx. 55% zinc, 6.5% iron and 32% sulphur together with other elements at much lower levels. The process begins with the roasting of the concentrate. At a temperature of around 950°C, oxidisation of the zinc, iron and sulphur occurs. The sulphur is collected as SO2 and is used to make sulphuric acid (H2SO4) – a commercial by-product.

Zinc Mining

80% of zinc mines are underground, 8% are of the open pit type and the remainder is a combination of both. However, in terms of production volume open pit mines account for as much as 15%, underground mines produce 64% and 21% of mine production comes from the combined underground and open pit mining. Rarely is the ore, as mined, rich enough to be used directly by smelters; it needs to be concentrated. Zinc ores contain 5 -15% zinc. To concentrate the ore it is first crushed and then ground to enable optimal separation from the other minerals. Typically, a zinc concentrate contains about 55% of zinc with some copper, lead and iron. Zinc concentration is usually done at the mine site to keep transport costs to smelters as low as possible.

Roasting & Sintering

Over 95% of the world’s zinc is produced from zinc blende (ZnS). Apart from zinc the concentrate contains some 25-30% or more sulphur as well as different amounts of iron, lead and silver and other minerals. Before metallic zinc can be recovered, by using either hydrometallurgical or pyrometallurgical techniques, sulphur in the concentrate must be removed. This is done by roasting or sintering. The concentrate is brought to a temperature of more than 900°C where zinc sulphide (ZnS) converts into the more active zinc oxide (ZnO). At the same time sulphur reacts with oxygen giving out sulphur dioxide which subsequently is converted to sulphuric acid – an important commercial by-product.

The Hydrometallurgical Process

In a leaching stage the zinc oxide is separated from the other calcines. Sulphuric acid is used to do this. The zinc content dissolves whereas iron precipitates and lead and silver remain undissolved. However, the dissolved solution contains some impurities, which need to be eliminated in order to obtain a high-purity zinc product at the end of the production process. Purification is mainly done by adding zinc dust to the solution. As all the elements to be removed lie below zinc in the electrochemical series they can be precipitated by cementation. The thus obtained purified solution passes an electrolytic process where the purified solution is electrolyzed between lead alloy anodes and aluminium cathodes. An electrical current is circulating through the electrolte by applying an electrical difference of 3.3 – 3.5 volts between the anode and cathode causing the zinc to deposit on the aluminium cathodes in high purity. The deposited zinc is stripped off, dried, melted and cast into ingots. The zinc ingots may have different grades: High Grade (HG) 99.95 % and Special High Grade (SHG) 99.99% of zinc. Today over 90% zinc is produced hydrometallurgically in electrolytic plants.

The Pyrometallurgical Process

The Imperial Smelting Process has been the most important pyrometallurgical process. It allows simultaneous production of zinc and lead metals – roughly 1 ton of lead for every 2 tons of zinc. It is particularly indicated for treating concentrates with a significant amount of lead. The Imperial Smelting process is based on the reduction of zinc and lead into metal with carbon in a specially designed Imperial Smelting furnace. Pre-heated air is blown from below in the shaft furnace. The sinter is charged together with the pre-heated coke at the top of the furnace. Temperatures range from 1000°C at the top to 1500°C or more in the center of the furnace. The coke is converted into carbon monoxide, which provides the means to reduce zinc and lead oxides to metallic zinc and lead. The lead, which is below its boiling point, flows from the bottom of the blast furnace, carrying copper, silver and gold with it. Zinc evaporates and passes out of the furnace near the top along with other gases. To avoid that it oxidizes back to zinc oxide the zinc vapor is rapidly quenched and dissolved in a spay of molten lead in a condenser (lead splash condenser). By cooling the lead, crude zinc is released and is separated. The lead returns to the condensing process for another cycle of dissolving and then releasing more zinc.
The IS process is an energy-intensive process and thus became very expensive following the rise of energy prices in recent years. This and the lower production of bulk concentrates containing significant amounts of lead led to abandoning more and more the Imperial Smelting process. Today, Imperial Smelting furnaces are only in operation in Japan, China and Poland. The major difference of the hydrometallurgical process and the Imperial Smelting process is that the first produce very pure zinc directly whereas the latter produces lower grade zinc that still contains significant impurities that have to be removed by thermal refining in the zinc refinery.

ii. Zinc is essential for maintaining normal cell-mediated immune function.

iii. Zinc is key in connective tissue vision and reproduction. As well, zinc has been recognized in research to help promote a healthy and normal immune system.

iv. One of the most amazing zinc facts is that oysters tend to be the best natural resource for zinc.

v. Zinc is necessary for a healthy immune system and production of DNA.

vi. Other zinc facts include its ability to support the body’s sense of taste and smell as well as heal wounds.

vii. Zinc protects iron and steel from corrosion, very important when you think that almost all our buildings, railways, lighting pylons, cars, and bridges (to name but a few things) contain steel.

viii. Zinc has never been found naturally in its pure form.

We recently concluded the annual ENAM Investor Conference at Mumbai and it seldom gets bigger than this ! Promoters/ directors of 66 companies (~$210bn= ~1/3 of India’s market cap) had 1×1 meets with ~450 investors representing 165 funds over two days. The distinctive feature of the 2nd Annual Enam conference was executive participation from the topmost levels of India Inc. A thematic summary of the group presentations follows along with corporate insights acquired during the 1×1s in the enclosure.

- Infrastructure: Mr Anil Ambani of ADAG & Mr Navin Agarwal of Sterlite both stressed how with the global slowdown, construction costs & execution timelines would get massively telescoped. And this would offset even the adverse exchange rate. Even some of the largest EPC contractors are now bending forward. At their least cost operations, Mr Agarwal said he would be the last man standing !!! Both emphasised their having cash and thus their massive advantage over others who will have difficulties in financial closures. Mr Satnam Singh of PFC confirmed, that based on actual project execution that they monitor, the 11th plan for Power would have a shortfall of only 10% vs the earlier expected 45% !!! Mr Ameet Desai of Mundra stressed that cargo capacity is at >90% utilisation at the 12 major ports, & even at 7% GDP growth rate, the handling capacity shortage would remain. The current crisis would exacerbate the investment shortfall in new port facilities.

- Consumption: Mr Kishore Biyani of Pantaloon, who has revolutionalized retail in India exuded confidence over India’s consumption story driven by demographics, rising incomes & more importantly rising aspirations. While he accepted that there were signs of down trading, he also pointed out to robust retail sales during Diwali as reflected in Pantaloon sales and also that of other players such as Titan, LG & Samsung. At least 2-3% of the population is joining the $400bn p.a consumption pie every year. And only a negligible portion of the population is affected by the stock markets as far as their consumption is concerned. Not only that, this year will see a huge slosh of money in people’s hands, with the 6th pay commission, rural debt waivers, employment guarantees, increase in farmer support prices & tax benefits. Mr Jalaj Dani of Asian Paints also confirmed this view of growth in discretionary spend of late, with 20%+ growth in demand last 2 quarters. In direct contrast to the above, Mr Amit Kalyani of Bharat Forge pointed out the inventory build up in the auto industry.

- Competitiveness: Mr Alok Agarwal of RIL comforted that refining margins could not sustain at the currently near-marginal cost of production & unviable global smaller units would cut production. He also slapped down analyst views that the advantage of complex refineries would reduce over time. Mr Keki Mistry of HDFC stressed on their ability to consistently match asset-liability profiles by appropriate shifting between bulk & retail deposits. He expected overall property prices to fall by 15%+. Unlike the West, home borrowers have low loan/ value ratios, are debt-averse to the extent of pre-paying loans. Mr Mallya of Bank of Baroda stressed that incremental risks were more from Realty exposures vs Retail.

- Realty: Mr Neel Raheja of K Raheja Corp and Mr Sushanto Roy of Sahara both emphasised that a slowdown is inevitable in the immediate term, but this will lead to a beneficial weeding out of weaker players

- Managing Businesses: Mr Alan Rosling of the Tata group shared his insights on managing a hugely diversified conglomerate in a challenging global environment. Mr Analjit Singh of Max explained his philosophy in how he focusses on diverse businesses and takes them to the highest levels of competence.

- Strategy & Leadership: The conference was signed off with a fitting finale where Mr Vallabh Bhanshali, chairman of Enam engaged Mr Narayan Murthy of, …. well, of Narayan Murthy, on such a wide range of issues .. that You just had to be there … any attempt to summarize would be an injustice to them.

The Federal Reserve is often referred as the “Fed”. It is the central banking system of the U.S. The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under U.S. law with overseeing open market operations in the United States, It is the principal tool of US national monetary policy. The FOMC meets eight times a year, mainly in Jan, Mar, May, June, Aug, Sep, Oct and Dec. Minutes of regularly scheduled meetings are released to the public, three weeks after the date of the policy decision. The Fed funds rate, was at a forty-six year low of 1% ,when rate hike campaign started in June 2004, since than the interest rate has been increased seventeen times and reached 5.25%.But on Sep 18, 2007 Fed paused rate hike campaign by reducing the rate by 50 basis point to 4.75%.

Effect of Fed rate cut on Precious Metals: -If we look back to the historical highs of Gold in 1980,we can notice that at Crude Oil prices were hovering at $21 a barrel because Iran was invaded by Iraq. Precious metals tend to boom in time of geopolitical tensions. Higher Crude prices spurred inflation in U.S to 13.58 per cent. While Fed interest rates zoomed up more than 15 percent. It hovered in the $500 vicinity on that same April 2nd 1979, after setting the current $850/oz record on January 21, 1980 (thereby smashing the $500, $600, $700 and $800 barriers in one go). So both Gold and Fed interest rates peaked at same time. When the Fed announced the interest rate cut to 4.75 % from earlier 5.25% on Sep 18, 2007 Gold sky rocked and hit a 27-year high because the decision exerted more pressure on Greenback. Generally, investors invest in Gold to Hedge against currencies and inflation.

Effect of Fed rate cut on Base metals: -Base metals welcomed the recent rate cut by Fed gracefully with full enthusiasm. U.S economic health plays a key role in the global economy. The recent Fed move, gave an added boost to the metals market, the rate cut by the Fed will increase the liquidity in the market, thereby the overall economy will get boost as people will start spending more as a result the manufacturing sector will get boost thereby inducing more demand for base metals. Already industrial metal consumption is ever increasing and is expected to remain stronger in near future. Copper and other base metals witnessed upward movement , which relieved fears that faltering US economy could cut demand for the metals. The rate cut decision weakened the ailing US currency, making dollar-denominated metals cheaper for the holders of other currencies.Demand for Copper in cable industries, power grid and construction material is gaining sharply in Asian markets where the economy is growing at a faster pace. Also to note that Commodities and equities have been surging for years on rising demand from emerging markets in places like China and India. Demand for industrial metals are closely linked to global growth prospects.

Effect of Fed interest rates cut on Crude oil: – The recent decision taken by the Fed to reduce the interest rates by a larger than expected half percentage point, have positive impact on the economy because it will accelerate economic growth and thereby lift the demand of Crude oil. It will have bullish impact on the prices as Crude oil and Gasoline in which inventories are already running tight ahead of winter season in U.S.due to the recent disruptions by Hurricane.

Effect of Fed interest rate cut on Currencies: -The aftermath of Fed interest rate cut is that US dollar dropped against most of the major currencies, and we have seen a new record level for the Euro. The Euro has reached lifetime high level of 1.4120, and has kept the door open to test higher levels. The Canadian dollar has bursted through parity with the US dollar for the first time in 31 years. The Swiss franc has reached a two-year high of 1.1676, while the Japanese yen range traded between the 114–115 levels. Indian Rupee also breached its 40 level on back of weak Dollar, as a result importer will make merry while exporters will suffer.

Effect of Fed rate cut on Indian Economy: -A rate cut in the US in current environment holds significant implications for emerging markets such as India. We are witnessing a fresh flood of capital inflows, which resulted in massive bull run in the Indian stock markets as Sensex surged to lifetime high levels of 17000.But on the other side it will also complicate monetary and inflation management for the Reserve Bank of India.

Bankers expect the Reserve Bank of India to soften its view on interest rates in the light of the US Federal rate cut. As a result domestic loans and overseas borrowing may become cheaper. It is to note that Indian financial system is driven more by the domestic factors; But Fed rate cut might be one of the triggers to review rates. There may not be direct correlation between the US Federal Reserve action and the RBI’s moves. But, currently, India is witnessing huge capital flows in the capital market, which has implications on exchange rate or the value of Rupee and relative difference in interest rates. Thus RBI has to go for a tightrope walk to avert sudden appreciation in value of the Rupee versus Dollar. Another factor that weighing on the RBI’s mind is the fact that the elevated domestic interest rate may attract funds further to take benefit of rate arbitrage thereby increasing more inflows .RBI may not follow Fed Reserves footsteps immediately but eventually will take cue and change monetary policy stance.

Effect of Fed rate Cut on Credit Crunch: -Recent Fed move is begining to ease tightness in the credit markets and bringing greater stability to financial markets, which have been periodically slowed down by rising defaults on sub prime mortgages and housing market weakness. The recent rate has infused liquidity into the market. As a result consumers purchasing power got boost by seeing lower interest rates on debt such as credit card.While the boost to investor confidence was quite immediate after Fed cut as a result the NASDAQ and Dow jones in U.S along with Asian stockmarkets scaled higher. As far as slowdown in the housing sector is concerned, weakness in the housing sector isl likely to remain at present because Fed interest rate moves often take six months or more to fully percolate them in the economy. The major benefit of the Fed rate cut is that it will avoid wave of foreclosure because nearly 2 million homeowners in U.S face sharply higher mortgage payments when their current loans reset over the next year. The ripple effect of the Fed action is that interest rates will drop on a variety of loans, which will effect the borrowers.

Effect of Fed rate cut on Global stock markets: -Major global stock markets surged after the Fed interest rate cut decision. Here, we have a glimpse of the movement of major indices worldwide.Dow Jones ,the blue chip index surged to 13,079.1 only about 1.9 percent below its record close of 14,000.41 reached in mid-July. Hang Sang Index in Hong Kong rose 4 per cent to a record close of 25,554.64, Japan’s Nikkei closed up 3.7 per cent – its biggest one-day percentage gain in more than five years. Indian BSE Sensex also witnessed biggest ever-single day gain of 654 points as it closed up by 4.17 per cent at 16322.75.Now the Indian BSE Sensex has also breached 17000 levels.

Recent launch of Rupee futures on the NSE is a matter of great jubilation for the all participant in the derivative market. MCX and BSE also got the approval to launch the Rupee futures from the RBI. By seeing the warm response of the Rupee futures launched by NSE, it seems that it will witness huge response and going to prove yet another milestone in the Indian derivative market illustrious golden period. The volatility that has been characterized the FX markets in recent months is also one of its key attractions to investors, coupled with its high liquidity and low costs per transaction.

Recent movement in Rupee has been very volatile as it gained more than 12 percent against the dollar in 2007 but later on shed 10 percent till now in this year. As this volatility in rupee is giving sleepless nights to the exporters and importers but the launch of rupee futures gave another platform to hedge their currency risks thereby giving sigh of relief to them.

It is quite remarkable to notice that the foreign exchange market is known to be the largest financial market in the world, as measured by daily turnover. Trading volumes in the Indian rupee have risen close to four times between 2004 and 2007, and its share of world currency transactions has more than doubled from about 1.5% to 3.5% during the period. At present, the average daily turnover of the global forex market is estimated at around $3 trillion. Of this, spot forex trading volume is $932 billion or 31 percent, and the remaining is contributed by derivatives such as forwards, exchange traded futures, Over-The-Counter (OTC) options and swaps. In India, currently the inter-bank forex market (spot, swap and forwards) has an average daily turnover of $40 billion, of which spot forex trading volume is $20 billion or 50 percent of the forex market volume. The balance 50 percent is accounted by derivatives such as swaps and currency forwards. Thus, unlike the global forex market where market share is split in the ratio of 30 to 70 between spot and derivative market, the market share between spot and derivative market is split 50:50 in India.

Before the launch of the Indian Rupee futures contract in Dubai earlier this year, the NDF provided foreign players with the only offshore hedging tool to manage Indian Rupee risks. It is quite remarkable to notice that non deliverable forward market is the key platform where the trade is carried out in Rupee NDF since 1990 and in 2007-08 so far, transaction volumes in the NDF market for the Rupee has reportedly soared to over $750 million a day from about $100 million a day in 2003-04. The NDF market is typically an offshore market, free from regulatory control of the currency’s home monetary authority. New York, Singapore, Hong Kong and London are major centers. For the Indian Rupee, NDF are traded primarily in Singapore and Hong Kong along with Dubai and Bahrain.

RBI rules now allow importers and exporters to buy forward contracts up to their previous year’s turnover or previous 3 years’ average import or export, whichever is higher, but at least 80% of their forward cover should be in the form of deliverables. FIIs are allowed to hedge their equity and debt exposures. FDI investors can have forward cover not exceeding six months.

Now lets have a glance at the key features, which make currency market unique:
Its trading volume, extreme liquidity of the market, large number of, and variety of, traders in the market, geographical dispersion, long trading hours: 24 hours a day (except on weekends), variety of factors that affect exchange rates, low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes).

Main factors, which influence the value of currency, are: -
Government budget deficits or surpluses: Widening government budget deficits have negative  imapct on currencies and vice versa.
Balance of trade levels and trends:Trade deficits may have a negative impact on a nation’s currency and viceversa.
Inflation levels and trends: Rising nflation levels are perceived negative for the currency becase it erodes purchasing power. However, a currency may sometimes strengthen when inflation rises due to expectations that rise in short-term interest rates to combat rising inflation by central bank.
Economic growth and health: GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country’s economic growth and health. The more healthy and robust a country’s economy, the better its currency will perform, and the more demand for it there will be.
Political conditions:Internal, regional, and international political conditions and events can have a profound effect on currency markets.Political turmoil and instability can have a negative impact on a nation’s economy.
Market psychology: Market psychology and trader perceptions also effect the foreign exchange market .
Stock market: Stock market indices also affect currency rates.
Economic data: Economic data such as labor reports (payrolls, unemployment rate and average hourly earnings), CPI, PPI,GDP, international trade, productivity, industrial production, consumer confidence etc., also affect fluctuations in currency exchange rates.

Following are the features of Rupee futures launched by NSE
Only ‘persons resident in India’ may purchase or sell currency futures to hedge an exposure to foreign exchange rate risk or otherwise, contract size is $1000,the maturity shall not exceed 12months,the contract will be quoted in Indian rupees and the settlement price shall be the Reserve Bank’s Reference Rate on the last trading day.

Advantages of Rupee futures
· Dollar-rupee MTM obligations are settled on a daily basis, unlike a forward contract, which is an agreement to transact at a forward price on a future date and no money changes hands except on the maturity date.
· Lot size of dollar-rupee futures contract in NSE is $1,000, which is much smaller compared to OTC forward and swap contract.
· Dollar-rupee futures contract eliminates counter-party risk as the clearing corporation guarantees the trades.
· Transactions are executed on a price time priority, ensuring that the best price is available to all categories of market participants.
· Ensures greater transparency, efficiency, speed and accessibility. Exchange-traded futures provide transparency when compared to the prevailing OTC market for foreign currency derivatives. In an OTC market, deals are done over the telephone and the transactions lack the transparency of an exchange-traded contract whose value is reflected in the price at which it trades on the exchange.
· Small investors will also benefit because now they have to pay only a margin of about two percent to brokers for derivative deals, but banks charge a margin of 10 percent or more.

Limitations of Rupee dollar futures in NSE
The trading limit for individuals is $5 million and for trading members $25 million which will keep serious forex users like importers and exporters of reasonable size out of the markets for now.

Participants of forex market
Banks: -Banks do perform major role in the currency market. The inter bank market caters for both the majority of commercial turnover as well as enormous amounts of speculative trading every day. It is not uncommon for a large bank to trade billions of dollars on a daily basis.
Central Banks: -Central banks seek to control money supply and often have official or unofficial target rates for their currencies.
Hedge Funds: -Hedge funds also invest huge chunk of money in currencies.
Commercial Companies: -Commercial companies also play major role in the currency market.
Investors and Speculators: -Investors take advantage due to excessive leverage and 24 hour market in forex markets and speculators also provide depth.

Conclusion
The Indian forex derivatives market is still in a nascent stage of development but it offers huge growth potential. The development of a vibrant forex derivatives market in India would depend on the growth in the underlying spot/forward markets, growth in the rupee derivative markets along with the evolution of a supporting regulatory structure. Thus the launch of rupee futures is the key significant step, which make Indian derivative market more dynamic but still it has long way to go.

Earlier Tin was considered unworthy of notice because its market is a smaller compared to its peers like Copper, Zinc and Aluminum. Kuala Lumpur Tin Market and LME are the key benchmarks for the Tin prices worldwide.

Now lets have a glance at the remarkable journey of Tin, which has witnessed breathtaking bull run in the past. This massive bull run which has started since the end of 2005 where prices were hovering around $6000 per tonnes went shooting up to more than $25000 per tonnes in 2008. That is astonishing jump of 400% in merely 2.5 years .In this year itself it has climbed from $16000 per tonnes to $25000 tonnes, which is amazing rally of 53%. The key reason behind the bull run is the uneven production from Indonesia and erratic exports from China.

Hedge funds played a key role in pushing the price of Tin to all time levels. Following the U.S. subprime loan crisis and a series of rate cuts by the Federal Reserve, the flow of funds to the commodity market sharply rose as commodities were considered a safe haven against the weakening dollar. So Tin is among the commodities that has gained from the flow of the new money.

This lesser known metal has many key uses like Tinplate, Tin alloy coatings, Solder, pewter and chemical compounds. But in the current scenario the significant use of Tin is in soldering. Growth in the Asian electronics industry and replacement of lead-based solders are the key triggers for Tin consumption in the world.

Current Scenario of Tin worldwide
The record surge in the prices of Tin is attributed to disruptions in Tin supply coming out of Indonesia which is having pronounced effect on world Tin supply, decline in Chinese supply and increasing use of Tin in soldering worldwide.

Indonesia being the world’s largest producers of Tin produced nearly 85,000 tonnes of Tin in 2006, surpassed only by China who produced 100,000 tonnes in the same year.
It is interesting to note that marginal costs the level at which production becomes unprofitable is only $US10, 000 a tonnes.

Demand concerns have made the market more watchful of stock movements and prices are reacting heavily to inventory builds.30% reduction in Indonesian Tin exports has caused the world demand forecast to outweigh predictions for supply by 30,000 tonnes.

Recently Indonesian Government cracked down on illegal Tin miners and smelters and instituted more stringent export regulations. China and Indonesia are confirming supply limitations for Tin, triggering a LME price above $25,000/metric ton ($11.34/lb) for the first time

Currently apart from the supply demand fundamentals its price are also being affected by the investment demand. Despite the fall in production, tightness in the Chinese refined Tin market has eased considerably since March as this price elevation will curb demand by the packaging and electronic industries and discourage the use of the silvery metal in new areas.

Indonesia is the world’s largest exporter of it and the world’s second-largest producer of it after China. The mining boom has created windfall profits for mining companies around the world.

Lets have a look at Major Tin belts in the world
Major deposits of Tin are in South America and it runs from Bolivia over to Peru and right up into the Western Amazon area of Brazil. The bigger one though is over in Asia. It starts on the island of Tasmania off Australia and runs up through Indonesia and Malaysia, Singapore and on up through Burma and Vietnam on up to the outer reaches of China and Russia.

China factor… Thirsty dragon for Tin
The surge in the global Tin prices is also due to decline in Tin production in China, which was partly due to extreme bad weather in January-February coupled with continuing shortage of concentrates and scrap for smelters.

Recently the April production of refined Tin stood at 11,703 tonnes, 10.5% lower than in the same month of 2007, while cumulative production in the first four months of this year, at 42,183 tonnes, was 11.9% down. However the recent earthquake in Sichuan has not had any impact on Tin operations.

It is worth noticeable that China remained a net importer of refined Tin. Since last September China has only been a net exporter in one month, December 2007, when a small burst of export shipments preceded the imposition of a 10% export duty from 1 January. China is also stepping up its imports of Tin concentrates, which rose 16% YoY to 590 tonnes in April 2008.

Tin market will also be supported by the fact that the China has imposed export duty in order to cutrail exports because it being the net importer of this metal. China introduced a 10% tax on refined tin exports from January 1, 2008 in an apparent push to keep more for its own rampant demand. This tax is likely to dent exports, and in turn reduce global supply.
Recently Yunnan Tin Co., the world’s biggest producer and based in China’s southwestern province, has halted shipments because of a lack of buyers willing to absorb China’s new and higher export duty.

Indonesia factor…
Indonesia is the world’s second largest producer of refined Tin, behind China. Indonesian supply issues continued to dominate supply-side fundamentals in 2007, as the government continued its efforts to consolidate refined and concentrate Tin production. As a result global refined Tin production fell 2% in 2007.

Recently Indonesian government in order to limit exports strictly implemented its existing export licensing system in place of earlier supply quotas. Meanwhile PT Timah of Indonesia reported sharp drop in Tin production in the Ist quarter 2008. Indonesian supply uncertainty is expected to persist in 2008.

Outlook
The recent exponential rise in Tin prices which have crossed over $25,000/tonne has been fuelled by news about actual and potential supply problems in China and Indonesia, but some caution is advised at current levels for short term but long term scenario looks promising.

The rises reflect global factors such as strong economic growth, low interest rates, boom in China and increasing investor interest in commodities.

According to CRU estimates, consumption was flat in 2007. Coupled with falling supply, this led to an annual supply deficit of approximately 8,000tonnes.The electronic solder business, the primary source of demand, continues to increase demand for Tin as the growing trend for lead-free solder persists. Consumption is expected to be strong in the first half of 2008, causing further surge in its prices.
There are so may factors indicating the strong uptrend in the prices but there are some factors, which could soften the prices. These are US recession or a slowdown in global growth could undercut Tin demand. At the same time, if Indonesia loosens its grip on its Tin production, a surge in Tin supply could enter the global market. Also, the current price of Tin relative to current stock levels is unprecedented in the last two decades, suggesting that a price correction might be in order. However, the most likely scenario is that worldwide supply will likely remain depressed in 2008 with continued Indonesian regulatory uncertainty and the newly introduced Chinese Tin export tax.

Tin is looking attractive for long term for investors due to its strong fundamentals .The demand is strong, while the supply is decreasing. Supplies from Indonesia have been declining since the government cracked down on illegal miners in Bangka Belitung in the last quarter of 2006, while China has curbed exports by imposing export taxes on the metal, and Congo, Africa’s largest Tin producer, has banned the export of the metal from a big producing area of the country that is controlled by rebels.

It is expected that Tin price will further surge in long term and surpass the price of Nickel, making it the most expensive metal by tonnes in LME.

What an amazing rally is going in the energy prices! No body has ever thought that the crude oil prices will surge past $100 per barrel just few years back. But now it has become realty and it is forecasted that in the times ahead it can even cross $200 per barrel. The six-year old bull run in crude oil futures that has taken prices from $25 per barrel to more than $100 per barrel shows no sign of coming to an end. The most remarkable aspect is about the current bull run is that over the past one year it has surged by more than $50 per barrel.

Voracious appetite for crude oil is evident by the fact that “The entire world is consuming oil at a rate of more than 1,000 barrels per second” including all kinds of crude oil products. According to the International Energy Agency, global oil demand would increase to an average of 87.8 million barrels per day though out 2008.

The world uses about 87 million barrels of oil a day. Current decline in production is   4%. That means we need to find about 3.5 million barrels/day worth of supply.

With the rapid globalisation and industrialization the usage of crude oil is increasing day by day. And that has taken it toll on the scarce non-renewable resource like Crude oil.

Some amazing facts about crude oil
· America is the world’s largest consumer of oil, guzzling more than 7.5 billion barrels per year.
· India import more than half the oil it consumes, and that is still rising.
· More than 81% of the world’s discovered and useable oil reserves come from just 10 countries. Iraq, Kuwait and Saudi Arabia produce 30 percent of the world oil.
· The world consumes an astonishing 173 billion barrels of oil every 2.4 years.

Let’s have a glance at the main reasons behind the current surge in the crude oil price:

Relentless global demand: -Oil demand in the past 10 years grew 1.5 million barrels per day, and the cost of finding new oil keep on rising. The problem for many oil producers is that they fail to replace reserves.The demand from China, India and other emerging economies continue to surge at a rapid pace . Considering the decline rate in existing oil fields, the world needs some 37 million barrels of new capacity to keep pace.

Increasing demand from OPEC countries: -The economies of OPEC countries are growing so fast that their domestic need for energy is sucking up their exports. This sharp growth by world’s most important suppliers can lead them to start importing oil within a decade. OPEC member Indonesia has already started importing more oil than it exports. Mexico could be doing the same within five years. And domestic consumption in Kuwait, Saudi Arabia and Iran is soaring. According to a report from CIBC World Markets, Russia, Mexico, and OPEC members will cut crude exports by as much as 2.5 million barrels a day by the end of the decade

Geopolitical Tensions: -Geopolitical tensions worldwide affect the supply of the Crude oil. Recently world supplies have been trimmed by substantial cutbacks in production in Iraq and Nigeria. Nigeria alone has lost about 10 percent of its daily production since guerrillas stepped up their sabotage and kidnapping of oil workers in the Niger Delta at the end of last year.

Tumbling Greenback:- Another factor causing the rise in oil prices is the falling value of the dollar. A depreciating dollar depresses investment by oil companies in developing fields because their salaries and other costs go up in local currencies as their earnings from dollar-denominated oil go down. This will impact new oil exploration and thereby supply crunch. Canadian dollar reaped most benefit from the rocketing Crude oil prices as it appreciated to record against the US dollar .The Canadian dollar appreciated, as it is the major exporter of crude oil to U.S. It also encourages continued global consumption by shielding foreign buyers, whose currencies have been rising in relation to the dollar, from the full effect of price increases.

Natural Calamities: -Natural calamity such as Hurricanes, Earthquake etc is the major threat in the supply disruptions across the world.

Accidental Stoppage:- Due to some accidental damage supply gets disrupted. Like blast at the West Texas refinery last week halted processing of about 70,000 barrels a day for 3 days.

OPEC Cartel:- OPEC is the pivotal organisation acorss the world from which most of the Crude demand is fulfilled. The OPEC members decide on the any increase or decrease in its output. In its recent meeting in Vienna on 5th March 2008 it refused to increase the output because of the following reasons.
Ø Need of Cash: Saudi Arabian demographics are shifting such that there’s less oil revenue per person (72% less than in 1980) so it has to cash in while the getting is good. That means keeping oil prices as high as possible without triggering a recession that would cut into profits.
Ø Iran:Saudi Arabia is scared of fellow OPEC member Iran, and doesn’t want to annoy Iran’s leadership, which opposes any supply increase.
Ø Peak Oil: Saudi Arabia want to encash as much as it can from the current oil boom as the time goes on its profit margin will get reduced because whatever new oil it could pump would be extracted at a greater price.  Saudi Arabian oil output to reduce by 22%in 2010.
Next OPEC meeting is scheduled on 9 th September this year in Vienna.

Supply Demand Scenario of Crude Oil      
 

                                                                                                            Source EIA

From the above graph one can  notice that the world demand growth is going to increase at steady pace but the OPEC capacity growth will slowly diminish in the next couple of years.  While the  biofuel growth may also decline in 2011-12.

The Other side:
But among all the theories of peak oil, one should not forget that still there is ray of hope at the end of the tunnel. These facts given below will help this cause:
Approximately six to eight trillion barrels each for conventional and unconventional oil resources (shale oil, tar sands, extra heavy oil) inclusive of future discoveries is still present on the earth. The industry recovers an average of only one out of three barrels of conventional resources underground and considerably less for the unconventional. This benchmark, established over the past century, is poised to change upward. Modern science and unfolding technologies will, in all likelihood, double recovery efficiencies. Even a 10% gain in extraction efficiency on a global scale will unlock 1.2 to 1.6 trillion barrels of extra resources – an additional 50-year supply at current consumption rates.

Conclusion:
Lastly I would like to stress on the fact that world must find alternatives for all hydrocarbons, beginning with oil.  And we have procrastinated until the eleventh hour. The questions still remains that will we just accept the devastating efffects of the coming oil shortage, or will we actively work to solve the problem while we still may have time?

And even if new energy products like bio ethanol, wind energy, solar and others take over, as an alternate it will take at least 15-20 years to fully rely on those sources .

As we all know that Crude oil is a non-renewable resource and one day it will extinguish from earth. We have limited stock of crude oil on earth and it depends on us that how judiciously and economically we use it.

Benefits of Dollar as reserve currency to U.S. Ø Reserve currency status allows the U.S. government to borrow in its own currency
Ø Helps U.S to run trade deficits because borrowing is much easier.
Ø Helps the U.S government and American companies to fund themselves at low interest rates. It makes it easier for U.S. companies to do business and increases the international demand for U.S. assets.
Ø US benefits from the increased demand for the Dollar that the reserve currency status creates.
Ø It allows the Federal Reserve to control the global economic system by creating credit out of “thin air”. Creating credit out of thin air means when we deposit our money into bank, it goes into a pool of money available for the bank to make loans. When the bank creates a loan, it creates an asset. This asset is new money and using it in the purchase of valuable manufactured goods and resources.

Tumbling Dollar raise Gold use as Reserve currency: –
The weakening of US Dollar has led to an increase in the demand for gold. Gold, which is also known as anti-Dollar, is the ultimate reserve currency. When confidence in the Dollar is shaken, more financial institutions and people buy gold and the price tends to go up. Following are some countries percentage of forex reserve in Gold: -United States 77.4%, Germany 66.4%, France 56.7%, Italy 66.1,while India is only 3.3% of the forex reserve in terms of Gold.

Drawback of Diversification of Dollar:-There are costs involved in switching to another currency unless a critical mass of countries switches. The decline as well as reduction in Dollar use has therefore been gradual rather than sudden, and this may continue. When we use Euro it has some limitations because its charter prevents the European Commercial Bank from giving the kind of support to markets that the US Fed can.

Following are some examples of countries, which have taken steps for diversification:

Ø Chinese textile exporters have finalised contracts in Euros or British pounds to avoid foreign exchange losses.
Ø Russia, the world’s second-largest oil-exporting nation, has been preparing to switch trading in Russian Ural Blend oil, the country’s primary export, from the Dollar to the Rouble.
Ø Iran’s decision to cease pricing its oil exports in Dollar is political. But given Saudi Arabia’s staunch support for the US, OPEC is unlikely to follow.
Ø Change in Developing countries’ pattern of their foreign exchange holdings.

Decline in Dollar holdings in Forex reserves of developing countries
Developing countries are slowly inching away from Dollar. Their foreign-exchange reserves surged to $4.9 trillion in 2007 from $1.2 trillion in 2000. Emerging-market countries accounted for 76 percent of total global reserves in 2007, up from 56 percent in 1997, according to the International Monetary Fund and it is worth noticeable that during that period, their Dollar holdings shrank to 61 percent from 73 percent.

In the graph above one can easily notice that Euro has been the beneficiary, rising to 28 percent of developing countries’ reserves in the fourth quarter from 19 percent when the decade began.

What the Asian countries and Gulf countries are doing presently ?
Although emerging markets have reduced the share of US Dollars in their reserve assets (to 60% in end 2006 compared to 70% in end 2000), absolute Dollar demand remains high. Countries with large Dollar holdings are vulnerable because their reserves will lose value if Dollar depreciates.

Central banks of Asian and Gulf countries are seeking to diversify their portfolios away from Dollar. Countries like China, Russia, Kuwait, Singapore and Norway are slowly transferring their Dollars holding to sovereign wealth funds.
In the past 10 years, the exports from Asian economies to the US – except the Japanese – has increased by 50 percent from Hong Kong, Taiwan and Singapore, by 200 percent from Korea, India, Malaysia, and Thailand, and finally by a 300 percent increase from China and the Philippines. So due to the higher exports to the U.S any devaluation in the Dollar directly affects the export income of these countries.
Gulf Cooperation Council (GCC) countries should end their currency pegs to Dollar to give themselves more flexibility to combat against rising inflation. So these countries can peg their currencies to a basket of currencies, including Euro, British Pound and Japanese Yen, or shift to a managed float. Certain Oil producing countries such as Iran and probably, Venezuela have already started invoicing Oil in Euros and to some extent in Yen.

In 1971, almost all Japanese exports were priced in Dollars. About 40 percent of Japan’s total exports are invoiced in yen, up from 34 percent in 2001.

Idea of single currency like Euro
Euro land has almost caught up with US in economic size, and gains from the strength of the Euro, and relative stability of the financial system. The best long-term solution for stable money is the “Single Global Currency”. Other regions are exploring the creation and expansion of monetary unions in Latin America, West, South and East Africa, the Arabian Gulf and South and East Asia. A key value of a monetary union is that the value of its money does not depend upon any particular national government, but upon the management of a central bank, the primary goal of which is stable money.

Methods of diversification away from U.S Dollar:-

Ø Dialogue of G-7, Asian central banks and Governments can help coordinate to such an outcome rather than to one of panic Dollar selling.
Ø A new exchange-traded fund holding Europe’s single currency gives investors a convenient way to hedge fluctuations in the U.S. Dollar.
Ø Gradual strengthening of other currencies and more diversification in trade baskets.
Ø De pegging away from Dollar or pegging of the currencies to a basket of currencies, including the Euro, the British pound and the Japanese yen, or shift to a managed float.
Ø Invest in Gold, which is mainly anti Dollar
Ø Transfer Dollars holding to sovereign wealth funds.

Aftermath of Diversification to Dollar:
With the introduction of Euro as global reserve currency the limitless ability to borrow of U.S will end. Then it will become more difficult for the US to obtain loans in Dollars, as more countries convert their reserves to euros. And while no one can say exactly what the limits are, a run will occur if the United States’ creditors decide that it is not such a good risk anymore.

Conclusion: -In the end it can be concluded that slowly Dollar dominance in the current global scenario will diminish in near future and developing countries are likely to stress more on making regional blocs thereby sharing both economic and political power on the global stage. And in order to protect itself from the downside risk of Greenback they must take necessary measures by evaluating each option.