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Analysis: India's cash woes trigger rush for fuels, take shine out of gold


Demonetization triggers rush for transport fuels

Gold imports may fall sharply as cash users stay away

Mining takes a backseat as producers postpone production

The scramble for cash following India's move to demonetize more than 80% of its currency has dampened the country's love affair with gold that could slash imports, but the impact on oil, petrochemicals, metals and agriculture is expected to be relatively small and strong fundamentals would eventually help to stabilize demand after a bumpy ride in the fourth quarter.

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CEOs, head of industry associations, analysts and traders who spoke to S&P Global Platts pointed to a common theme -- the surprise move had triggered panic buying of essential commodities, such as gasoline and diesel, while prompting consumers to defer spending on non-essential goods, creating a temporary slowdown in demand for products such as petrochemicals.

"India's oil demand growth this month could outpace earlier expectations as people rushed to use the scrapped currency notes to fill up their tanks," said Sri Paravaikkarasu, Head of Oil, East of Suez, at Facts Global Energy. "Since the scrapped Rupees 500 and Rupees 1,000 notes were allowed to be used until November 24 for fuel, a lot of people rushed in to buy and store up."

While India announced scrapping of the notes on November 8 with immediate effect, it allowed them to be used for a slightly longer period at hospitals and fuel stations.

This led to a rush in filling up of fuel tanks at petrol pumps and as a result gasoline and gasoil sales in November are likely to rise sharply, even though actual consumption may not have gone up, analysts said.

"I expect gasoline to show a demand growth of 18%-20% year on year in November," said Tushar Bansal, director at Ivy Global Energy, an independent oil and gas research consultancy. "As the situation is expected to stabilize by end of December, gasoline demand growth should return to its normal trajectory and show a slower increase structurally due to weaker rural purchasing power."

"Diesel, on the other hand, is expected to show a demand increase of 8%-10% in November," Bansal added.

India's oil products demand rose 6.8% year on year to 16.5 million mt, or 4.18 million b/d, in October, according to data from the Petroleum Planning and Analysis Cell.

A rise in demand for transport fuels was the main reason for the increase in October, with diesel consumption rising 5.1% year on year to 6.67 million mt and gasoline up 13.8% to 2.1 million mt.


The cash crisis could not have come at a worse time for the domestic gold market in India, which was gearing for the peak year-end marriage season when demand for gold rises sharply.

India consumes about 800 mt of gold annually, with the bulk of it imported and more than 50% of it going into jewellery demand.

"I will not be surprised if India's overall gold imports in 2016 is only about 70% of 2015 levels, or much lower," Ashok Minawala, director at All India Gems and Jewellery Trade Federation, told Platts.

Minawala said that while gold purchases using credit cards had picked up in the past decade in the country, it was still only about 30%-40% of overall sales. Cash transactions still accounted for more than 50% of gold purchases.

"Demand for jewellery from people who normally use cash has completely dried up. We are seeing very few customers at shops," Minawala added. "Even credit card users have slowed gold buying as they want to use their credit limits for purchases of more essential commodities and meeting their daily needs. "Many marriages have been postponed because of the cash bottleneck."

India's annual gold demand for jewellery reached 654.3 mt in 2015, its highest level since 2010, and the third highest year on record, according to the World Gold Council.

Spot domestic gold prices in India was around Rupees 30,024 ($437) per 10 grams on November 8, the day of the announcement and implementation of the demonetization move.

Since then, prices have fallen to about Rupees 28,598 per 10 grams in the retail market, a drop of nearly 5%.


In the petrochemicals sector, traders and analysts said that India's domestic demand for polymers had taken a backseat since the government's demonetization move sparked a drop in sales of retail goods, impacting polymer converters and the traders who supply them.

"There is a sharp rise in inventories at petrochemical producers because of the cash crunch," said Mahinder Singh, secretary general of India's Chemicals and Petrochemicals Manufacturers Association.

"Normally, a part of the transactions between end-users and wholesale distributors are done with the help of cash. Now, because of the cash shortage, distributors are not lifting goods from the manufacturers as end-users are postponing purchases. Therefore, some producers are looking for avenues to export petrochemical products," he added.

But Singh noted that the current situation was a temporary blip and demand would bounce back as fundamentals for growth in the petrochemical sector remained robust.

Market participants expect India's petrochemicals sector to grow at double digit rates over the next few years and is expected to surpass the country's GDP growth rate because of buoyant demand from major consuming segments, such as packaging, automobiles, irrigation, construction and consumer durables.


While the effect of demonetization on agricultural imports was muted, physical trading of goods in India's domestic agricultural markets slowed down.

"Demonetization has had a pretty big impact on the agriculture sector and supply chain," said Samir Shah, Managing Director and Chief Executive Officer of India's National Commodity and Derivatives Exchange Ltd.

"Market arrivals have dropped significantly, although they are now slowly limping back to normalcy. Supply chains have been affected due to the disruption of transportation. Some states are pushing for cashless payments to farmers. It's picking up, but is slow. Traders are refraining from physical trade as they used to depend significantly on cash for their business," Shah added.

Industry sources said that the impact on agricultural crops won't be substantial.

"Sowing operations are on, and by the time the winter harvest kicks in, the cash issue would have been sorted," said Satish Chander, director general of the Fertilizer Association of India. "The government is trying to put things in place. I don't see a major impact on agriculture."

But mining industry officials said that cash shortage had forced a lot of mine owners and contractors to defer mining activity as they needed to pay daily workers in cash.

"Production at mines have gone down," said R K Sharma, secretary general at the Federation of Indian Mineral Industries. "It's difficult to engage workers who look for payments on a daily basis. This is expected to delay feedstock supply to plants, which might in turn delay production of finished products."

--Sambit Mohanty,
--Edited by Haripriya Banerjee,