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Fundamentals April 26, 2013

Nik's Diary
The Indian markets opened flat mirroring flat opening trades in the SGX Nifty and mixed opening across major Asian bourses. The US markets moved mostly higher during trading on Thursday after ending the previous session roughly flat. The markets benefited from a positive reaction to the latest earnings news as well as some upbeat employment data. The Labor Department report showed that initial jobless claims fell to 339,000, a decrease of 16,000 from the previous week's revised figure of 355,000. Meanwhile, the European markets extended their recent upward trend to a fifth consecutive session on Thursday on expectations of rate cut by the ECB at their upcoming meeting next week. The better than expected British GDP result and the bigger than expected decline in U.S. jobless claims also contributed to the positive mood. Meanwhile, Indian markets edged sharply higher to a six-week high on Thursday, primarily lifted by aggressive buying in rate-sensitive stocks on continued hopes that the Reserve Bank of India will cut interest rates next week for a third time this year.

Ministries reject proposals of Rangarajan Committee report
Ahead of a meeting of the empowered group of ministers for deciding the pricing formula of natural gas, three ministries have expressed reservations over the pricing mechanism proposed by the Rangarajan Committee. In its letter to the Ministry of Petroleum and Natural Gas, the Ministry of Finance has said that the committee’s simplistic formula of taking averages of two methodologies is not implementable. In its report, the committee has used an average of the prices of imports into India of different suppliers, weighted by the total production of those international suppliers and the average of the price prevailing of Henry Hub in the US, National Balancing Point in the UK and the netback wellhead of price of suppliers into Japan. “There does not appear to be any said justification for the said determination of prices, particularly in the context of the specific provision in the Production Sharing Contract,” said the Ministry of Finance.  “The proposal to include spot contracts while computing PIAV (average producer net back for Indian imports for trailing 12 months) and PJAV (yearly weighted average producers net back price of gas in Japan for the relevant year) does not appear reasonable. Nowhere in the world have wellhead prices of natural gas been linked to spot LNG contract prices, which are highly volatile and tend to be on the higher side,” it said. The Ministry of Power, too, has expressed fear that an increase in gas prices due to the formula of netback LNG prices proposed by the Committee would make power projects unviable. “Netback LNG prices as proposed by Rangarajan Committee may not be a true reflection of well-head prices realised to gas producers in the exporting countries. Rather, these have an element of opportunity cost or a built-in ‘premium’ over and above the costs,”said the Ministry of Power. According to experts, if the recommendations of the Rangarajan Committee are accepted by the EGoM, the price of Natural Gas will go up to around $8 per million metric British thermal unit (mmBtu) as against the $4.2 per mmBtu price prevailing in the country. The government is set to revise the price of natural gas by March 2014 and any increase in the gas price would lead to increase in the fuel cost for power, urea and chemicals industry. In its note to Ministry of Petroleum and Natural Gas, the Ministry of Fertilizers has said: “While adopting any formulation of uniform pricing for domestic gas, impact of change in price of gas on urea subsidy must be taken into account”. Source: DNA

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