IIFTs Monthly Newsletter on National & International Trade March 2011 Volume II, Issue II

Abhijith Vasudevan, MBA(IB), 1st year

Contents
News Snippets Oil Prices: Peaking Out? 1

News Snippets

Snapshot of Indias exports in January

-on-year, whereas the imports were $28.6 billion, up 13.1 per cent from the same month last year, Commerce Secretary Rahul Khullar International Trade & Logistic: Overview 5 said. During the period Apr-Jan 2011 exports touched $184.6 billion, an increase of 29.4 percent, while imports were $273.60 WTO vs Regional Trade billion with a growth of 17.6 percent.

4 India's export in January grew by 32.5 percent to $20.6 billion year

Blocks

Company Profile: Olam International

Chinas increasing Iron Ore imports

the month of December

10 Chinas iron ore imports in

Implications of Budget rose by 1.2 percent (MoM) 2011 on Trade 12 to 58.08 million tonnes.

Chief Editor
Oojwal Manglik

Editorial Team
Ankush Mehta Abhijith Vasudevan Shiv Kumar Gupta

This is the highest level in nine months. Furthermore, Orissa, Indias top iron ore producing state stopped 23 iron ore mines from operating as they did not submit the proof of clearances. Supplies from India have already been tight due to ban on shipments from Karnataka. Railways hiking the freight rate by 50 percent to 1500/tonne is only adding to the cost. Overall, price or iron ore is expected to continue to move higher given the positive drivers from both supply and demand side. On the supply side, challenging weather conditions in top producing nations like Australia and Brazil is leading to decline in output while demand continues to remain in China. The risk factor for higher price however remains that if the higher price of steel deters demand then it might even impact the iron ore prices.

tradewind.iift@gmail.com blash@iift.ac.in

India Malaysia CECA

India and Malaysia have signed an economic partnership agreement that is expected to raise bilateral trade to $15 billion by 2015, just two days after New Delhi inked a similar pact with Tokyo, consolidating India's burgeoning economic ties with east and southeast Asia. The comprehensive economic cooperation agreement (CECA) will come into force July 1. Under the pact, the two countries will allow up to 100 percent foreign shareholding in more than 80 areas, including health care, telecommunications, retail, environmental services and other areas. Service sectors like accounting and auditing, architecture, urban planning, engineering services, medical and dental, IT and IT-enabled services, and management consulting services will get access to the Malaysian market. India will get access in the Malaysian market for goods including fruits such as mangoes, banana and guava, basmati rice, two-wheelers and cotton garments.

of talks by July this year. The Indian position has been tough and they have been skillful negotiators. But they agree now that they will have to give a bit more to get a bit more. The real question right now is what the rate of exchange is, he said. Differences in opinion among WTO member nations on farm subsidies and sectorals, have been the main stumbling blocks in the Doha round, launched in 2001. Under sectorals, negotiating countries have to agree to cut import duties in some sectors at a faster pace than other sectors. Rockwell said there had been a substantial convergence in agriculture-related issues among nations, but talks in other sectors like trade environment and intellectual property rights were at a lesser advanced stage. In 2008, at the WTO Mini-Ministerial in Geneva, the talks collapsed on issues like sharp differences on agricultural Special Safeguard Mechanism (SSM) and subsidies. The picture has changed. The negotiations have been accelerating at a pace not seen since 2008. For the first time, everyone is saying that they know what needs to be done. All are saying that we know we need to give more, he said.

Consensus on import duty key to Doha round success

Zeroing in on an agreeable rate of exchange on import duties among member nations was key to concluding the talks on a global free trade agreement or the Doha round at the World Trade Organization (WTO), a top WTO spokesperson said on February 19. However, after the Davos summit, the sluggish pace of negotiations had finally set moving at a pace not seen in almost past three years, said Keith Rockwell, official spokesperson, WTO at a press meet. Last month, at the World Economic Forum (WEF) at Davos, leading trading nations agreed to conclude Doha round

Commodities Traders May Face Curbs under EU Proposal

Commodity traders in the European Union may face restrictions including position limits under proposals from the European Commission aimed at curbing excessive price volatility. Price fluctuations hurt farmers, food-makers and consumers, including in the poorest countries, the commission said. This will help ease pressure on world food prices that stem out of speculation in commodity markets. World food

costs rose to a record in December on higher iron ore accumulated at ports in Karnataka, costs for sugar, grain and oilseeds. pending its verdict on a ban on exports of the steelmaking raw material from the nations Rare Earths second-largest producing state. The European Commission also said it plans to identify priority actions to ensure access to 14 The regional government must enact by the next critical raw materials. This list includes so- hearing on April 4 rules covering transport and called rare earths -- a group of 17 chemically storage of metals in the states new mining law, similar materials used in renewable energy, the Supreme Court said today in an interim magnets, electric cars and weapons. Position order. About 400,000 metric tons of iron ore are limits restrict the relative share of the market lying at the ports, David Pichamuthu, director at occupied by one investor. Such limits should the Federation of Indian Mineral Industries, said take account of the specificities of the different today in an interview. types of derivative products, and the evolution of the physical market of the relevant Olam-Louis Dreyfus merger a commodity, the commission said. Restrictions could be applied to derivatives both no-go traded on exchanges and over the counter, the commission said. Barnier said the EU executive Olam International Ltd. said talks have ceased is examining whether to apply them to real with French group Louis Dreyfus Commodities about a possible business collaboration, putting markets as well as derivatives. an end to speculation that the two companies might merge.

DGFT allows exports of varieties of rice

In a notification, Indias Directorate General of Foreign Trade (DGFT) said the government has permitted exports of 'Ponni Samba' and 'Matta' varieties of basmati, subject to a cap of 25,000 tonnes each, while shipments of 'Sona Masuri' have been permitted with a cap of 1,00,000 tonnes.

SIAM strikes protectionist note with India-EU trade agreement

The proposed India-EU trade agreement has divided car makers with Pawan Goenka, the president of industry body Society of Indian Automobile Manufacturers (Siam), opposing any move to cut duty on imported cars. g foreign luxury car makers such as Audi, Mercedes and BMW, batting for lower tariffs.

India Top Court Allows Iron Ore Shipments From Karnataka Ports
Indias top court today allowed shipments of

Oil Prices - Peaking Out?

MBA(IB), 1st year, IIFT Delhi Recently with the Egypt protests dying down, there was some relief for the energy traders around the world regarding the crude prices , but with the recent turmoil in Bahrain and Libya , North Sea Brent Crude goes past $119.79 a barrel last week and touching its 30 month highs. The crude for March delivery in the New York Mercantile Exchange was up to an intraday high of $99.96 before coming down to $97.43 on Monday. It again raised the concerns regarding the stability of the crude prices globally. The race for the scarce energy supplies because of the tension in the Gulf and the rising crude prices are becoming a threat to the developing countries of the world especially to China and India. The Bahrain and Saudi Arabia CDS also rose to their 19 month highs indicating fears of a domino effect to the neighboring effect to the oil rich countries. The five year credit default swaps for Bahrain closed at 285 bps on Friday. Bahrain itself is not a oil rich nation but the real problem is that it is next to Saudi Arabia , the worlds largest crude exporter arising the chances of a spillover effect. The MENA (Middle East and North Africa) region has huge reserves of petroleum and natural gas. Around 8 out of the 12 OPEC countries are in the MENA region. According to the Oil and Gas Journal (2009 report) this region has 61% of proved worlds reserves and is responsible for 36% of global oil production. Libya also pumped 1.59 million barrels of crude a day in January, making it the eighth biggest oil producing OPEC nation with quotas. Traders are worrying that the protests which have already removed two leaders in power can lead to a

disruption in crude supplies. The rising crude prices can bring about a serious halt in growth for the emerging economies of Asia, which are already suffering from high inflation and can result in breaking the foundations like it did in 2008 with crude prices spiking up to $150 a barrel. These countries have a higher dependence on energy than the West. They rely on the cheap shipping costs to transport their exports with paper thin profit margins. Analysts predict that once the Middle East tension goes away , prices should severely correct downwards as current prices are way high fundamentally. Though the OPEC nations are bound by quotas , but according to the latest Reuters survey , the members of the OPEC are producing 2 million barrels per day above their joint goal of 28.4 million bpd. The oil producing nations are taking advantage of a strong market to virtually pump all they can but it is not yet clear whether that will be enough to meet the increasing energy demand in Asia. Though according to recent data , oil inventories in USA have fallen , but still it is well supplied and according to some experts it is oversupplied in the Midwest. Again at the same the demand is

Tirthakrit Mukherjee

forecasted to hit a all time high of 90 million bpd. The rate of growth is lower in West as it is still under stagnation. As the Chinese government is planning to increase the interest rates to control the inflation , this should curb the consumer demand and that of fuel. Any Wikileaks follower will know by now that it was recently released in one of its cables that a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300 billion barrels nearly 40%. This brings back the fear of Peak Oil theory. It is said that the oil reserves will reach a maximum rate of global petroleum production by 2010-2020 , after which production will decline resulting in huge rise in oil prices. Recently Russia surpassed Saudi Arabia last year making it the biggest producer of black gold . The Saudi explanation given for not increasing its production is that there is no demand. But it is indeed surprising that Russia found customers for it 10 million bpd of production but Saudi Arabia could not find any one for more than their present production. As oil prices are rallying only in one direction because of the shortfall in Libya , Saudi Aramco , the worlds largest state oil company is ready to compensate for any shortfall in crude supply. More than half of Libyas crude output of 1.6 million has been halted. For all the short term traders out there the outlook for crude remains bearish as long as it is under its Resistance of $92 and Longs can be initiated above the Support of $85.

International trade logistics and shipping: An overview

Abhijeet Pethkar, Paramjeet Singh
NITIE, Mumbai Logistic is the lifeblood of supply chain. No one can think of successful supply chain without successful logistics. Globalization indulge more and more companies to hunt international markets, demanding logistics services to be more sophisticated, pushing for integration and diversification of services to help operate uninterrupted supply chains. Freight transportation uses one or more than one of these major modes: rail, road, air and water carriers, while pipelines currently contribute a very little in transportation. Logistic solutions also include warehousing, insurance, distribution, brokerages, inventory management, information system, packaging services. Various players providing logistic support can be broadly classified as Express couriers (FedEx, UPS), 3rd party logistics, Freight forwarders and In-house export services.

World Scenario
As per World Banks Logistics Performance Index (LPI), which is a benchmarking tool that measures performance along the logistics supply chain within a country trade, is directly linked with important economic outcomes, such as trade expansion, diversification of exports, and growth. Germany has very stable logistic industry and since 2007 has raised by two to

become Numero Uno. [Refer Table 1]

Countries which want to improve its LPI need to revolutionize transport regulation policy, Road to Success restructure and modernize border management institutions, and if needed, invest significantly in Building Partners: It is almost impossible to go trade-related infrastructure. alone in international arena of logistic, given the dynamic nature of target locations. A provider Challenges should figure out ways to synchronize activities Escalating Cost: In logistics there are two types and control of processes with custom brokers, of cost: direct and indirect. Direct cost covers freight forwarders, ocean carriers, other logistics fuel cost, government duties while indirect cost service providers in order to succeed. It should covers cost associated with various cross border also involve local logistic and operational bureaucracies and agencies; for instance US support early and often, which can give a deep department of agriculture on perishables, Food insight in new and unexplored areas. and Drug Authority (FDA) on product safety etc from U.S. Owing to the terrorism, securities, Visibility and Control: International logistics is time required for check-in and check -out has all about managing a network of third-party increased incurring more access cost. Aberdeen providers. Companies which use phone calls, surveyed and interviewed more than 400 emails etc. to track down shipments are at a international logistics and trade managers in competitive disadvantage. Real-time knowledge 2005. When asked to choose top 3 areas where of the location of goods throughout the supply expense was huge, 67% of respondent pointed chain makes for faster-moving goods and out transportation expense. inventory management in case of troubles like congestion on some port etc. Systems such as Data loggers, GPS, which provide automatic status and alerts, need to be set up. An alert can also act as a proactive measure of controlling deviated and delayed activities. Automation and Streamline Documentation: Automation of the processes is the need of the hour for swift progress of the logistic services. Streamlining Custom Processes by automating documentation or by creating paperless structure can reduce the time and cost. Add-ons: Logistic providers basically concentrate on transportation but if they give additional services like consultancy in business areas by point out new strategic locations for client business, easy access to letters of credit

which can only be solved through technology and automation

Manual intensive Processes: Logistics provider relying on manual processes are finding it difficult to sustain the performance pressure as it increases time and cost. The greatest problem of logistics performance is the lack of visibility and metrics for managing logistics service providers

then this will help logistic provider in business enlargement and will enhance its significance in the Value Chain.

WTO v/s Regional Trade Blocs

Ankit Bansal, Rohini Raman Jha
SJSOM, Mumbai

Indian Outlook:
Total value of logistic industry in the world is US $3.5 trillion and the major contributor is US with the 25% of total logistics industry. As per CII Indian logistic industry is about US $125 billion i.e. 3.57% and it is forecasted it will grow at CGAR at 8% in next three to five years. India being a developing countries has a huge potential for growing in the fields of Retail, Agriculture, Pharmacy, Automobile, FMCG, Textile sectors which is mainly affected by transportation conditions. Today India has opportunity to reduce logistics cost because of its huge investment in infrastructure and also if Goods and Services Tax (GST) is implemented in FY12 or in the near future, differential states taxes will eliminate and number of warehouses will reduce. This will pave a way for more integrated logistics solutions.

ABSTRACT
Free trade is a system of trade policy that allows traders to act and or transact without interference from government. Under a free trade policy, prices are a reflection of true supply and demand, and are the sole determinant of resource allocation. This policy is supported by well-known economists like Adam Smith, John Maynard Keynes and Ricardo. The World Trade Organization (WTO) established on January 1, 1995 is an important international organization that governs and promotes free trade by providing countries with a platform to organize trade negotiations, settlement of trade disputes and removing all forms of trade barriers. With 153 members and 31 observer nations it represents over 95% of world trade. Recently, Regionalism is sweeping the world trading system like wildfire while the multilateral negotiations proceed at a glacial pace. In the last 2 decades there has been a rapid growth in the number of regional trade agreements (RTAs) led by Regional Trade Blocs (RTBs) like EUROPEAN UNION in Europe, NAFTA and MERCOSUR in the America, ASEAN in Asia along with some smaller blocs like ANDEAN, CIS, SAARC, COMESA etc.

Epilogue
Going global, brings additional cost to the companies as they are experiencing unexpected transportation, higher inventory, unpredictable cycle times but consumers are demanding products at same or rather at a lower prices. So in order to compete, companies are finding ways to make their logistics processes more reliable, flexible and less expensive. Thus success of logistics providers lies in proper implementation of best practices of logistics and determining where the weakest links are and addressing them through targeted development.

Consequences of RTBs: Creation v/s Trade Diversion

Trade prevented from entering the PTA by tariff or

In general, trade creation means that a free trade area creates trade that would not have existed otherwise. Let us take example of European Regional trade bloc EU. The diagram below illustrates a shift in domestic consumer spending from a higher cost domestic source in Albania to a lower cost partner source within the EU, as a result of the abolition of tariffs on intra -union trade. This reduction in the cost of products to consumers leads to a rise in consumer surplus and eventually a net improvement in the economic welfare. The orange triangle represents "A gain in the world efficiency lost before with the tariff and the green triangle represents A gain in the consumer surplus also previously lost . Trade diversion imports from a

non-tariff barriers, and are replaced by higher-cost imports from a member nation. Trade diversion reduces world economic well-being since it shifts production from more efficient producers outside the PTA to less efficient producers within the PTA.

In this example, Albania had an agreement with India by which they could purchase shirts at a price of P-India, If Albania signs an agreement with the EU, and theyll have to assume the EUs tariff on the Indian shirts (P - EU + T) which is a price higher than the EU price for shirts. In this instance, Albania ceases to trade with India and, instead, purchases EU shirts beyond domestic production. Therefore, the red trapezoid represents the loss of world efficiency (the left triangle and rectangle) and the loss of occurs when lower-cost consumer surplus (the right triangle) enjoyed non-member nation are before the agreement.

are good for the welfare of the people but due to Consider a country which is not part of any the protectionist policies they prevent further regional bloc as well as WTO. Let us assume for a particular product the supply curve is S1 and Demand curve is D. The equilibrium price is then P1.Let us say it joins a regional trade bloc and now it allows free trade of all the products within that group without any tariff. The supply curve of that product of the group is denoted by S2. Consumers can now access the same product expansion into free trade agreement with the rest at cheaper rate produced in some other country of the regions and a country is at a welfare loss and the equilibrium price is at P2. Hence there is shown by area of triangle BFC. The table below a welfare gain denoted by yellow colored tri- aptly summarizes our findings: angle.

The Way Ahead: WTO or RTBs

Conclusion
Regional Trading Blocs has been growing in importance in recent years. Trading blocs account for about three-fourths of world trade. By their nature, RTB favour trade among member nations and discriminate against non-members. Trade among members grows at the expense of the rest of the world. Whether or not this situation is allowed to continue under the new World Trade Organization remains to be seen. Free trade is certainly more efficient than discriminatory trade, but in a world of less-than-free trade, RTB may permit major economic gains under certain conditions. Long term gains, such as increased competition, economies of scale, and greater investment may far exceed the short term gains from trade creation. Policy makers should seek to maximize the likelihood that regional agreements eventually serve as building blocs to achieve global liberalization.

Let us say now the country becomes part of WTO and enters into multilateral trade agreements with other member states. The supply curve of the world of this product is shown by S3. Now the product is available to the consumers at much cheaper rate and the welfare gain further increases by area of grey colored triangle. So from above discussion it is evident that formation of Regional Trade blocs

commodities be it Cocoa, Cashew, Sesame, Cotton, Rice, Teak, etc worldwide. Olams The story beyond the Salaries growth strategy in the first 20 years was driven by a clear focus on their core business and a Ashish Agarwal systematic and repeatable formula for adjacency MBA(IB), 1st year, IIFT Delhi expansion based on that core. In addition to We all know Olam as one of the highest organic growth, they have also grown through paymaster not just at IIFT but throughout the carefully selected acquisitions since 2007. MBA placement circuit. Heres an attempt to explore Olam beyond what meets the eye. Growth at Olam has been a result of innovation and the ability to spot opportunities Olam: An Indian entrepreneurial before its competitors.

OLAM INTERNATIONAL

Foresight

Kewalram Chanrai group now a global conglomerate was started in 1860 by brothers Kewalram and Chanrai in Hyderabad. In 1989, the Kewalram Chanrai Group established Olam Nigeria Plc to set up a non-oil based export operation out of Nigeria. In its initial years, Olam began its operations by setting up cashew exports from Nigeria. Its global operations were based out of London. Over time, exports were expanded to cotton & cocoa. From 1993 onwards, Olam expanded to other geographies such as Toga, Senegal and Ghana and shifted the base of its global business from London to Singapore. This allowed Olam to expand the reach of its business across the world to Thailand, Indonesia, Vietnam, Brazil.

Olam has grown over the 20 years by taking advantage of adjacent business opportunities in business and acquiring new businesses and competencies. Olam has strategized to evolve from a one-product and one-country business to a global business of 20 agricultural products across more than 60 countries.

The Agri-business Value Chain

The agri-business value chain consists of four parts:

An upstream piece which includes plantations, farming, forest concessions, dairy farming, and agri-inputs. A supply chain piece (Olams core) A midstream, value-added processing piece A downstream contract manufacturing, Today, Olam has an annual turnover of $9 private label manufacturing and distribution piece. billion and operations across more than 60 countries. It sources 20 products from over 45 origin countries and market them to over 10,000 Olam has focused on developing expertise in whole supply chain and processing of Agri customers with a global employee strength of commodities and while doing so extends those more than 13,000 employees.. It is the leader or expertises to new and more profitable one of the top 3 supplier of all major commodities.

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The strong core has helped Olam to perform strongly and consistently over the last 20 years across both economic and commodity cycles. Olam has built a strong business portfolio based on key strengths developed over the past two decades.

repeatable and scalable growth model that has allowed the company to reinforce and expand the core through geographic, value chain and product adjacencies by sharing customers, costs and capabilities. The culture incorporated by Olam has made sure that while management makes the core decisions the teams at the lower level have sufficient independence to access situations and take charge.

Olams Strengths
Olam has historically maintained its business model of dealing and enhancing its capabilities in agri commodities. Olams complete integration allows them to control the supply chain, achieve operational efficiencies, add value and manage the various risks along the entire supply chain, enabling Olam to exploit the margins that can made in the supply chain. Olam has consciously maintained the idea of being the first mover in lookout for new commodities in the new markets. Olams distinctive position is based on the strength of their origination capability, their strong position in the destination markets worldwide by virtue of their ability to offer customised marketing solutions and value-added services to the customers. The key to our strong core business is a

Five typical roles in Olam

Branch manager: The Branch Manager is primarily responsible for operational efficiency and control for the business of a product in the country. Profit centre head: The PCH is overall responsible for the bottom line of one or more products in a country. Country head: The Country Head's primary focus is to be sensitive and responsive to the local market. He plays three vital roles: the sensor and interpreter of local opportunities and threats, the builder of local resources and capabilities and the contributor to global strategy for the businesses in his country.

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Global product head: The role of Global Business Head or PMH is to capture the full benefit of integrated world-wide operations by furthering global-scale efficiency, competitiveness and extracting synergies across different countries

Implications of Budget 2011 on Trade

MBA(IB), 1st year, IIFT Delhi

Vishnu Ram

Finance manager: The Finance person has The Honourable finance minister, in paragraph direct responsibility for the accounts and finance 54 of his speech has stressed the importance of function for one or more Profit Centers. edible oil, more importantly oil palm and has provided an amount of Rs. 300 crore to bring Future Outlook Olams approach over the next six years strategy 60,000 hectares under palm oil plantation; this initiative will yield about 3 lakh metric tonnes of (till 2015) is to: palm oil. It is needless to say that this measure 1. Consolidate the core by focusing and will result in bringing down the price of the said oil and also in the prices of other edible oil, this recognizing its full potential; 2. Identify the hidden assets, skills and would have a favourable impact on the economy capabilities that we have acquired over the last of country like India, dependent heavily on 20 years and explore how these could be imported oil. leveraged; 3. Expand by exploiting the power of the Paragraphs 81-84 have dealt with measures to repeatable adjacency expansion formula; support exports, these include: 4. Refine the strategy by following profit pools as a direction finder for our future investments in different parts of the agri-business value Commitment to reduce transaction cost, all but two suggestions of the Department of chain. Commerce in this regard have been Olam is looking all set moving into the new implemented, the Minister in his budget decade with strong fundamentals and base set speech has affirmed that action on the other in Africa which has become the new eye candy two will be taken in the next few months and of the corporate world. has also quantified the reduction in transaction cost at Rs. 2,100 Crore.

Introduction of self assessment in Customs, under which importers and exporters will assess their duty liabilities while filing returns and declarations in the EDI system. These measures will quicken clearance of cargo by the customs authorities and further modernise

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customs administration. Proposal to introduce a new scheme for the refund of taxes paid on service used for export of goods, in the lines of duty drawback. This benefit will translate into reduced and competitive export prices, and thus has the potential to increase our exports. Concessional rate of duty of 2.5% on Agricultural machinery and parts of machinery has great potential in increasing agricultural productivity, through increased use of machines. Iron ore has been recognised as an important resource, the recent controversies have only enhanced the belief and the export duty has been increased to 20% from the existing 15 %, this will go a long way in keeping this important resource within the country by making exports unattractive.

About IIFT
Indian Institute of Foreign Trade (IIFT) is Indias nodal institution of excellence in the field of International Trade and Business. Since its inception in 1963, IIFT has kept pace with the extremely dynamic Global business environment by focusing on International Trade and Logistics-related issues. The rigorous, extremely dynamic and up-to-date course curriculum stands testimony to this fact. Supplementing the classroom, IIFT organizes several events and discussions on currently relevant issues in the field of Trade and Logistics, which are graced by pre-eminent professionals, industry veterans and academicians, alike. Our students have maintained and sustained IIFTs rich legacy by successfully exhibiting their skills time and again in various Live Projects and Competitions. The institution has groomed international business managers for over 40 years and boasts alumni base spread over geographies and business verticals

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