As economic growth around the world falls, commodity prices have been dragged down. Oil prices have slumped to almost $90 (Rs4,200) a barrel. Copper and aluminium prices fell by their 4% limit in Shanghai on Tuesday. The Reuters Jefferies CRB index, an index of global commodity prices, has fallen from a peak of 473 on 2 July to 348 by 15 September. Investors seem to be selling all asset classes with a hint of risk, such as equities, credit derivatives, real estate and now commodities. Unlike in the first half of the year, when equities fell but commodity prices surged, they are now falling together. The gainers have been government bonds. As bear market guru Marc Faber has been repeating ad nauseam, the current environment of deleveraging affects most asset classes.
Different route (Graphic)
On Tuesday, the Asian Development Bank (ADB) released an update to its Asia Economic Outlook that it had prepared last April. The report says that, because of a slowdown in oil demand from industrial countries, an expansion of non-Opec output, an increase in Opec’s production capacity and the addition of capacity in refining, oil prices may fall in the current year and the next. According to ADB, Brent crude prices are forecast to fall to an average of $90 a barrel in the last quarter of calendar 2009. Considering that the price of Brent crude has already dropped to $90 a barrel, those forecasts already need to be pared down. But the Asian lender says that robust demand in developing Asia will keep demand for oil from dropping too much. Oil prices are also forecast to rebound in 2010 to an average of $106.63 a barrel and to $108.25 a barrel in 2011. Notice, however, that even ADB’s relatively bullish call on oil doesn’t envisage it going back to the 2008 average price before 2014.
ADB’s gross domestic product growth forecast for Asia’s developing economies has been trimmed only slightly to 7.5% this year from its earlier estimate, made in April, of 7.6% for 2008. That should help support commodity prices. For 2009, the forecast is of 8% growth, against the earlier forecast of 8.4%.
The 2008 growth forecast for China has been kept unchanged at 10%, while the economy is expected to grow at 9.5% in 2009 against the earlier estimate of 9.8%. For India, however, the cut has been severe: 2008 growth is now estimated to be 7.4% against 8% in April, while that in 2009 has been lowered even further to 7% from the April estimate of 8.5%. Here’s another confirmation that the slowdown in India is going to last longer and 2009 will be worse than 2008.
BASF and Indian minority shareholders
The minority shareholders of BASF India Ltd had a comfortable ride through the downturn in the Indian markets this year, thanks to the parent company’s open offer to minority shareholders. The open offer price was Rs300 per share, just about 13% lower than the firm’s peak of Rs344 in January this year. Considering that shareholders in most other firms have lost at least 30% since January, BASF India’s shareholders have been much better off. Also note that the open offer was announced after the firm’s share price had more than halved to the Rs165 levels in March.
Now, shareholders of another speciality chemicals manufacturer, Ciba India Ltd, can look forward to recoup some of their losses, thanks again to an open offer from Germany-based BASF SE. Ciba India’s parent company, Switzerland-based Ciba Holding AG has agreed to be acquired by BASF this week, and the resultant change in management control in the Indian arm should trigger the Indian takeover code and result in an open offer to minority shareholders. Since Ciba India accounts for an insignificant 2% of the parent company’s consolidated revenues and profit, it would be difficult to determine how much of the multinational company’s total valuation pertains to the Indian arm. In such cases, acquirers can either pay the average price in the past six months or a price based on a valuation by an investment banker. The six-month average should be relatively low, and wouldn’t attract shareholders.
But going by BASF’s track record of wanting to increase shareholding in its Indian subsidiary (through the open offer route), it wouldn’t be surprising if it offers a premium to buyout all minority shareholders. Of course, that may have to wait a while, since the acquisition process has still to be completed overseas. Ciba India’s shares jumped 5.6% soon after the announcement of its parent’s acquisition, but fell 1.5% the day after. The relatively muted rise in the shares could be because of weak markets on one hand, and because of the possibility that the open offer price may be unexciting on the other.
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