Hike in global oil price drives Pakistan stock market

Despite recent political flares up the benchmark of Pakistan Stock Exchange PSX‐100 index closed at 40,542 levels for the week ended 30^th September 2016. The rally was primarily driven by index heavy-weight energy companies due to upward move in international oil prices and decision of the central bank to leave interest rate unchanged. Average daily volume for the week came down to 528.3 million shares as compared to 727.8 million shares a week ago. The volume leaders were: BOP, PACE, WTL, KEL and TRG. Performance leaders during the week were: INDU, SHEL, PSMC and LOTCHEM; while laggards included: MEBL, NBP, KAPCO and HASCOL.

Key news flows during the week included: 1) ICL launches new caustic soda IEM plant‐2 (Phase‐II) having capacity of 25,000 tons with a total project cost of Rs750 million, 2) ICI revealed its plan to set up a facility in Pakistan to manufacture Morinaga infant formula products in partnership with Morinaga and Unibrands, 3) public announcement of offer to acquire 49.8 million ordinary shares of EFOODS by FrieslandCampina at Rs151.85/share, 4) Executive Board of the IMF on 28^th September completed the 12^th review of Pakistan's 3-year economic reform program enabling the disbursement of the final tranche of about US$102 million, 5) China‐led Asian Infrastructure Investment Bank (AIIB) approved US$300 million loan to fund the expansion of a hydropower project in Pakistan, and 6) GoP expressed plan to raise US$1.00 billion from the international debt market through issuance of Sukuk in October this year.

Selling by foreigners also eased out during the week under review with net outflows declining to US$8.6 million from considerably high net outflows of US$16.04 million a week earlier. With result season nearing its end, a few market triggers are expected in the near term. However, political risk remains in place with PTI’s protest to continue in the days to come and recent tension between Pakistan and India may keep investors cautious. Following the OPEC’s hint to cut production for the first time in eight years, sent crude prices higher by more than 6%, which is likely to keep interest intact in index heavy weight energy companies.

Oil producers’ cartel, OPEC has hinted towards capping/cutting production in its informal meeting in Algiers. While details are expected to be finalized in the group's formal meet in November this year, the mere indication to cap/cut output raised oil prices by 6%. With expectations now tilting towards higher oil prices, analysts try to work out possible implications of the decision on the market AKD Securities report indicates that its E&P universe is likely to benefit the most with 4.2% higher FY17 anticipated earnings for every US$5/bbl increase in oil prices. OMCs on the other hand can lose out on retail fuel demand moving towards cheaper alternatives. Additionally, in the backdrop of higher oil prices, macro stability remains at risk with concerns emerging on: Balance of payment and exchange rate, good for export-oriented Textiles and IPPs with dollar-denominated revenues and fear of sharp escalation in inflation and its subsequent impact on interest rates.

Despite a challenging operating environment (super tax imposition, spreads at decade low), fundamental improvements by National bank of Pakistan (NBP) in areas is encouraging. The most prominent in this regard are: 1) growth in net interest income (NII) up 9%YoY and 31%QoQ and visible improvement in asset quality due to provisions down by 78%yoy and 48%QoQ in 1HCY16. With regards to the former, the bank has effectively brought down its domestic cost of deposit to 3.8% from 5.3% in 1HCY15 by building on its CASA. While credit quality concerns have not abated completely, these have been continually improving with NPL ratio coming down to 17.8% in June'16 as compared to 18.4% in December'15. Consequently, profitability in 1HCY16 has remained strong registering growth of 28%YoY/51%QoQ.

Oil producers trying to create a storm in teacup

The much-talked about meeting of members of OPEC began in Algeria on Monday, 26^th September 2016. The western media is trying to create hype that the meeting may remain inconclusive due to ever prevalent rift between Saudi Arabia and Iran. They are partly right because of the recent hostilities on the occasion of Hajj. However, one can hardly deny that this hostility is not new but spread over centuries.

As I have posted in one of my blogs that western media often lies, the present hype is also a tactical move to malign two of Muslim oil producing countries. Over the months the western media dominated by Zionists have been busy in proving that the world is losing because of low oil price. The fact is that non-oil producing countries are benefiting due to the substantial reduction in energy cost.

Another lie of the western media is that due to low oil prices economies of most of the developed countries are in the shamble. The media is also propagating that since the rich countries are the biggest buyers of goods produced in developing and under-developed countries; poor performance of developed economies is also impacting economies of countries exporting their products to developed countries.

I tend to disagree with this rationalization because developing and under-developed countries are the major producers of commodities. With the decline in the price of oil, commodity prices have also plunged to historic low levels. Therefore, if these countries are benefiting from low oil prices, their exports are also fetching dismal prices.

I also fail to understand the logic of Saudi Arabia that it would cut production, only if Iran cuts production, which is imprudent approach. It is Saudi Arabia which has increased its output and market share of the global market after economic sanctions were made further stringent. Therefore, it is right to say that Saudi Arabia should allow Iran to gain its pre-sanctions output and also bring its production to pre-sanctions level. In other words, Saudi Arabia has thrived by snatching Iranian share.

Moral of the story is that people are hoping against hope, while market manipulators are still minting money by keeping oil prices volatile.

Pakistan market witnesses 18 percent increase in daily trading volume

At Pakistan Stock Exchange, volatility on concerns regarding domestic politics and jitters from global monetary policies failed in deterring investor, if  a few chose to take an exit others were more than willing to enter. This is evident from the fact that that the benchmark index posted a marginal decline of 1.44%WoW and the market closed the week ended on 23^rd September 2016 at 39,782, not too far from coveted 40,000 level.

Volumes remained robust with daily average for the week rising close to 728 million shares (up 18%WoW), though concentrated in sideboard scrips with leaders for the week included: WTL, PACE, BOP, DSFL and TRG. Foreign selling persisted with outflows for the week exceeding US$16 million as compared to US$4.5 million in the previous five sessions. Leaders at the bourse were: HCAR, MTL, ASTL, EPCL and FATIMA; laggards were LOTCHEM, DAWH, SNGP, AKBL and FFC.

Key news flows of the week included: 1) PIB auction yields remained largely stable with GoP raising Rs219 billion, 2) World Bank approved US$390 million loan for Tarbela fifth extension project, 3) current account deficit for 2MFY17 touched US$1.3 billion, an increase of 92%YoY, 4) news reports indicated that Shanghai Electric Power has qualified as final bidder for an estimated US$1.6 billion stake in KEL while the latter announced its intention to acquire 40.25% stake in KAPCO and 5) Ministry of Industries and Production decided to seek approval of the ECC for further reduction in urea prices in order to offload 1.5 million tons of stock. Pakistan’s central bank is scheduled to release its monetary policy statement later on Saturday; with wider expectations no change in interest rate. It is likely to remain a non‐event for the market. Political risks remain in place with PTI’s protest set for next week likely keeping investors cautious. On the global front, following no reduction in interest rate by the US Fed, the focus will now remain on oil producers’ meeting next week, which is also likely to fail in arriving at any consensus at containing output.

Rising sharply, Pakistan posted current account deficit for August'16 at US$721 million compared to US$595 million a month ago. Consequently, 2MFY17 deficit accumulated to US$1.32 billion rising 92%YoY due to 1) rising trade deficit as imports growth accelerated, 2) remittances were still 3%YoY lower in 2MFY17 despite recovery during the month under review and 3) absence of US$337 million CSF payments received in first two months of the current financial year. According to details, imports grew at 13.9%YoY on the back of higher machinery imports (up 85%YoY) while exports continued to slump (down 9.35% YoY) keeping trade deficit at US$2.67, 35.5%YoY higher. Remittance flows normalized to US$1.76 billion for the month, up 15.3%YoY/32.5%MoM. Going forward, analysts expect trade deficit weakness to persist, which accompanied by the deceleration in remittances growth is likely to keep current account deficit higher during the ongoing fiscal year, if no remedial steps are taken to boost exports and remittances.

Pakistan and its antagonized neighbors

In the recent past, I have posted a few blogs highlighting that Pakistan’s tweaked foreign policy is pushing it towards isolation. This morning I sat down once again to look at the map that is attached with this post. It looked like a crystal ball telling me the following:

• Pakistan’s relationships with three of its neighbors having common border are highly strangulated.
• The incumbent government claims enjoying the most cordial relationship with distant friends.
• United States, China and Saudi Arabia have an immense influence on Pakistan’s foreign policy.
• Russia is also entering Pakistan by offering expertise in oil and gas exploration.

A question arises is being subservient to the global and regional super powers yielding any benefit to Pakistan? My immediate and honest reply is a big NO. The reasons are:

• Pakistan has been fighting proxy US war in Afghanistan but also being the worst victim of terrorism.
• Sunni-Shia breach being extended by clerics receiving financial support from outside.  
• The US, despite being one of the largest investors in China, does not approve Pak-China relationship.
• Afghanistan is being used for cross-border infiltration by India and its supported rebel groups.
• CPEC is being made a controversy by the nationalist, more appropriately rebel groups supported by outsiders.
• Pakistan has not been able to establish banking links with Iran over last nine-month after withdrawal of sanctions due to external pressure.
• Pakistan has not been able to accept the Iranian offer to buy electricity and gas officially, despite getting small supplies in areas adjoining border cities.
• Iran-Pakistan broader remaining closed for days in the aftermath of border conflicts.

There has been an uneven distribution of wealth in the country. Rich are getting richer and poor getting poorer. While elites are busy in minting money the poor are busy in making both ends meet. The nation is being fragmented and hate is being spread to push the country into anarchy.

  

World 15 years after 9/11

In the aftermath of 9/11, the United States with the help of other developed countries launched counter-terrorism by attacking Afghanistan and Iraq. Apparently, the two countries had nothing to do with those who attacked twin towers and Pentagon.

Afghanistan was attacked for providing shelter to OBL and Iraq was attacked for having WMD. The irony of the fate is that both the pre-texts proved wrong. Now most parts of the world are inferno due to proxy wars. However, the super power will never admit that it breeds and supports terrorists to engage in proxy wars.

Readers are invited to explore the following narratives and arrive at any conclusion at their own:

1. The attacks on twin towers and Pentagon were either the biggest security lapse or the worst melodrama.
2. The attacks on Afghanistan and Iraq had ‘other motives’ but hardly any link with attacks on the US.
3. The key motive was to break out wars to keep the arsenal factories working at full capacity.
4. The US initiated ‘regime change’ movements mainly to destabilize and fragment many countries.
5. To achieve its motives the US created first phantom AQ and later on the second one ISIL.
6. If one watches ‘science fiction movies’ creation of phantoms those go out of control is common.
7. The real world phantoms that operate internationally are Taliban, AQ, ISIL and many others operating locally or in particular regions, most obvious being MENA and South Asia.

If one tries to find reasons for the above-stated narratives then arriving at the following conclusion will be much easy. After having learnt from the experiences of two World Wars, the biggest super power is sponsoring many proxy wars to maintain its number one position.

Time to revamp oil refineries in Pakistan

I can recall the day the combustion system of my car stopped working. I towed it to the nearest workshop and came to know that the fuel filter, fuel pump and carburetor have been chocked due to accumulation of wax. The mechanic also told me that this has happened because you don’t drive car daily and the excessive wax present in petrol choked the lines etc. He also advised me to use HOBC instead of regular petrol. When I shared by experience with my other friends, they also confirmed facing similar problem. One of the findings was common that often HOBC is not available at all the outlets, even those located in the most posh areas.

This prompted me to talk to the owners of petrol pumps being run by different oil marketing companies OMCs. All of them gave me a copybook reply, “We don’t get enough supply of HOBC from OMCs”. When I probed further the finding was most surprising that only one refinery in Pakistan, Pak Arab Refinery (PARCO) produces HOBC. I also discovered that with the induction of cars based on latest technology consumption of HOBC has increased manifold but there has not been corresponding increase in its production in the country.

I continued my search and met two more surprises: 1) the other refineries operating in Pakistan are incapable of producing HOBC and the government owned largest OMC, Pakistan State Oil Company is not keen in importing HOBC and 2) the second refinery of PARCO to be constructed at Khalifa Point, having a capacity to refine 250,000 barrel oil per day has been delayed. This should have commenced production by 2010. I also found out that even if the construction is done on ‘war footings’ at Khalifa Point refinery, it will not be possible to commence production by 2020.

The prevailing situation prompts following questions:

1. What were the factors that didn’t allow PARCO to expand its ‘Mid Country’ capacity?
2. Why the sponsors deferred construction of ‘Khalifa Point’ refinery?
3. Why other refineries continue to produce lower distillate?
4. Why refineries (other than PARCO) are operating below optimum capacity utilization?
5. Why huge quantities of POL products are being imported despite local refineries operating below optimum capacity utilization?

Finding replies of the above stated questions is the responsibility of the incumbent government.

However, prevailing situation offers golden opportunity to foreign investors to examine investment potential of constructing new refineries as well as expanding prevailing capacities in Pakistan.