25/- Out Of With major economies failing Steam

Invest & HarvestA Comprehensive English Monthly Magazine on Commodity Futures

Karvy Comtrade’s

Volume 07 Issue 12 Hyderabad January 2015 Pages 36 `25/-

Out Of Steam

With major economies failing to meet infl ation targets, 2015 faces defl ationaryrisks that can takethe strength offcommodity prices

January 2015 Karvy Comtrade’s Invest And Harvest 3

EditorSushil Sinha

Managing EditorTR Vivek

Executive EditorAurobinda Prasad Gayan

Sunil Kumar Singh

Research TeamJitendra K Parashar

Madhu N.Ramesh Chenchala

Ravi Shankar PandeySarika R. Agarwal

Sonali PatnaikTapan Trivedi

ProductionVijayendra Kumar Ch.

DistributionShabna R. Iyer

Printed & Published by:Sushil Kumar Sinha

on behalf ofKarvy Consultants Limited.

Karvy House, 46Avenue 4, Street No-1, Banjara Hills

Hyderabad-500034. AP.

Printed at:Harshitha Printers

6-2-985, Yousuf BuildingAdj. Railway Gate,

Khairatabad, Hyderabad-500004

Editor: Sushil Sinha

2015 has dawned with raised hopes for a revival in the Indian economy piggy-backing on a stable government helmed by Narendra Modi and expectations of reform measures that will

aid in attracting investments to the cash-strapped sectors. The global scenario however does not present a pretty picture.

Our cover story highlights how geopolitical issues and slump in economic output at major consumers such as China, Europe and Japan, have only added pain to the extremely low interest rate climate. The global economy is entering a defl ationary mode with large economies, mainly the US, Europe, Japan and China, failing to achieve their infl ation targets of 2-2.5%. Additionally, oil has slumped more than 45% during 2014. This is likely to exert pressure on select commodities in 2015.

In the article titled Commodities, Currency & Equity (C2E), Sushil Sinha, Director, Karvy Comtrade Ltd, speaks about the importance of the commodities market in present times and how investing in commodities serves as a hedge to risk from other market instruments. He calls for combined efforts from market players and the exchange to increase the knowledge base to attract more participants to the market so that the benefi ts can be reaped by all.

Meanwhile, gold glistens boosted by its safe-haven demand. The balance of power is seen shifting away from London with Shanghai opening up its market to gold imports aided by a liberal public policy on gold. China has single-handedly managed to tilt the gold axis from the west to the east. Back home, to monetise India’s large stock of household gold, estimated at nearly 22,000 tonne, the Federation of Indian Chambers of Commerce and Industry (FICCI) and the World Gold Council have come out with seven key suggestions for an effective “India Gold Policy”. One of them is establishing an India Gold Exchange to ensure pricing standardisation, increase transparency and improve supply and demand analysis.

Silver meanwhile remained under pressure over the close of the past year and we expect no immediate change to the situation ahead. We hold a bearish bias on the precious metal. However, huge losses in future prices from here on towards the 2010 levels of below Rs 30000 per Kg could infuse heavy investment in the local spot markets and indirectly stem silver’s fall, at least in the local markets.

Chana is our pick of the month. Tight supply given lower production and lesser acreage, thanks to unfavourable weather conditions during the sowing season, has led to far-month contracts trading at a premium. The situation will likely remain, at least in the near term. We believe the commodity might continue to trade on a bullish trend in the coming months and recommend traders to look into buying the same on small declines.

EDITORIAL

Note: The data in all charts and tables have been sourced from Bloomberg, unless otherwise indicated.

Of Inflation And DeflationOf Inflation And Deflation


CONTENTS

Cover Story

Defl ation: A boon Or A Bane? 12

DisclaimerThe technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The report contains the opinions of the author(s) that are not to be construed as invest-ment advice. The author, directors and other employees of Karvy, and its affi liates, cannot be held responsible for the accuracy of the information presented herein or for results of the posi-tions taken based on the opinions expressed within. The opinions are based on the information believed to be accurate, and no assurance can be given for the accuracy of this information. There is risk of loss in trading in derivatives. The author, directors and other employees of Karvy and its affi liates cannot be held responsible for any losses in trading.Commodity derivatives trading involves substantial risk. The valuation of the underlying may fl uctuate, and as a result, clients may lose their entire original investment. In no event should the content of this research report be construed as an express or an implied promise, guarantee or implication by, or from, Karvy Comtrade that you will profi t or that losses can, or will be, limited in any manner whatsoever. The past results are no indication of future performance. The information provided in this report is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. We do not offer any sort of portfolio advisory, portfolio management, or investment advisory services.

Features & Updates

By Invitation

Special Feature

Why India Needs An Effective Gold Policy 18 - MMR Bureau

Prices To Dip Further In 2015 20

Nickel Defi cit Set To Widen 23

Pick Up Some Chana 27

Classroom: Spread Trading 31

GM Crops: Do We Really Need To Worry? 26 - Vikas Singh – Ex-Manager Monsanto India, Pursuing PhD in IIPM

Commodities, Currency & Equity (C2E) 10

Tilting The Gold Axis From West To East 16 - Nidhi Nath Srinivas, CMO, NCDEX


50

62

74

86

98

110

Dec-13 Mar-14 Jun-14 Sep-14 Dec-141135

1185

1235

1285

1335

1385


415

465

515

565

615

665


12800

13600

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16000

1-Dec 8-Dec 15-Dec 22-Dec 29-Dec

6200

6800

7400

8000

8600

9200

1-Dec 8-Dec 15-Dec 22-Dec 29-Dec

STATISTICS

765

815

865

915

965

1015

1-Dec 8-Dec 15-Dec 22-Dec 29-Dec225

245

265

285

305

325


2750

2960

3170

3380

3590

3800


COMEX Gold (US$/oz) NYMEX Crude (US$/bbl)

Thomson Reuters Jefferies CRB Index MCX Cardamom Price Movement (Rs/kg)

Rogers International Commodity Index NCDEX Turmeric Price Movement (Rs/quintal)

S&P GSCI Commodity Index NCDEX Jeera Price Movement (Rs/quintal)

Major Global Commodity Index Performers Of The Month (MCX/NCDEX)


0.0

1.5

3.0

4.5

6.0

7.5

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-

14

Aug

-14

Sep-

14

Oct

-14

Nov

-14

7.8

8.1

8.3

8.6

8.8

9.1

Dec-13 Mar-14 Jun-14 Sep-14 Dec-1458.5

59.6

60.7

61.8

62.9

64.0


STATISTICS

-4.0

-2.0

0.0

2.0

4.0

6.0

Oct

-13

Nov

-13

Dec

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Jan-

14

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Mar

-14

Apr

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May

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Jun-

14

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14

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-14

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-14

Rupee Movement 10-year Bond Yield (%)

Infl ation (%) Index of Industrial Production (%)

DoE Inventory levels (December) Inventory level M/M change (%)

Crude oil 379335 -1.59

Gasoline 208567 -8.94

Distillate 27212 -13.59

Refi nery Utilization (%) 93.4 -1.06Note: DoE - Department of Energy; volumes in thousand barrel

LME Inventory levels (December) Inventory level M/M change (%)

Nickel 413148 2.14Aluminium 4210275 -2.63Copper 177025 7.74Zinc 691600 2.76Lead 221975 1.93

Note: LME - London Metal Exchange; volumes in metric tonne

Exchange rate trendsDec 31,

2014Nov 28,

2014% Change 52 Week

High% Change from 52

Week High52 Week

Low% Change for 52

Week Low

Indian Rupee 63.044 62.033 1.63% 63.888 -1.32% 58.335 8.07%

Euro 1.210 1.245 -2.84% 1.399 -13.54% 1.175 2.93%

Great Britain Pound 1.558 1.565 -0.43% 1.719 -9.39% 1.504 3.60%

Japanese Yen 119.780 118.630 0.97% 121.850 -1.70% 100.760 18.88%

Swiss Franc 0.994 0.965 3.00% 1.022 -2.68% 0.870 14.30%

Canadian Dollar 1.162 1.142 1.80% 1.189 -2.26% 1.062 9.42%

Australian Dollar 0.818 0.851 -3.89% 0.951 -13.99% 0.803 1.77%

New Zealand Dollar 0.780 0.784 -0.56% 0.884 -11.76% 0.761 2.47%

Danish Krone 6.156 5.975 3.02% 6.329 -2.74% 5.334 15.41%

Norwegian Krone 7.452 7.030 6.00% 7.875 -5.37% 5.849 27.40%

Swedish Krona 7.807 7.451 4.78% 8.069 -3.24% 6.325 23.42%Note: All quotes are against the US dollar.


News Digest

Eurozone Offi cially Falls Into Defl ation, Piling Pressure On ECBThe eurozone has offi cially slipped into defl ation, fur-ther raising the prospect of a multi-billion euro inter-vention by the region’s central bank to try and prop up the sluggish economy. Figures published by EU statis-tics offi ce showed that prices in the euro area in De-cember were 0.2% lower than a year earlier. The data, far short of the European Central Bank’s target of under 2% infl ation and worse than forecasts of a 0.1% fall, is the latest signal that the bank will embark upon a major stimulus programme. This is the fi rst time the euro area has experienced defl ation since 2009. Energy prices slumped 6.3% compared to a year ago, driven by a large fall in oil prices. The ECB will meet on Janu-ary 22 to consider whether to go beyond its existing stimulus measures and start buying sovereign bonds in a programme of quantitative easing (QE). ECB presi-dent Mario Draghi has dropped numerous hints that he hopes to push cash through the eurozone economy in this way, despite grumblings in Germany that such measures are outside the central bank’s mandate.Source: http://www.telegraph.co.uk/

U.S. Oil Exports Jump To Record As Shale Production BoomsThe US exported a record amount of crude oil in No-vember after a fi ve-year run of production growth that has made the country the most oil-independent in 20 years. Shipments surged 34 percent to average 502,000 barrels a day in November, the most on record dating back to 1920, data from the US Census Bureau and the Energy Information Administration show. The previ-ous peak was 455,000 in March 1957. The US is now the 17th largest exporter. Shale oil from places like the Bakken formation in North Dakota and the Eagle Ford in Texas is typically light and has driven most of the growth in US production. Light oil output increased to 4.5 million barrels a day last year from 1.8 million bar-

rels a day in 2011, according to the Energy Informa-tion Administra-tion. However, note that on a cu-mulative demand-supply compari-son, exports mark up just near 2.5%

of total consumption of Crude oil in the US and nearly 5% of total oil production as per latest data from EIA. Source: Bloomberg, KCTL Research

Copper Scrap Supply To Remain Tight In Coming Year : CMRAA senior offi cial from China’s scrap industry said that tightness in China’s scrap copper import market is ex-pected to continue in the coming year as developed countries are already past their peak scrap generation phase and China’s domestic market is providing in-cremental supply. Mr Zhang Xizhong, vice secretary general of the China Metal Recycling Assn, said that “We’re unlikely to see obvious improvement in scrap copper supply in 2015 because the peak obsolescence time of developed countries has ended and global sup-ply of copper scrap has been declining in recent years.” China’s copper scrap imports in 2013 fell about 10% on an annual basis in 2013. Source: http://metal.steelguru.com/

Gold Imports Slump To 39 Tonnes In DecProviding relief to the economy from widening trade defi cit on account of gold imports, the inward ship-ments of the metal slumped in December to 39 tonnes, Commerce Secretary Rajeev Kher said today. India im-ported an astonishing 152 tonnes of gold in November which had threatened to disrupt the trade balance and impact the current account defi cit (CAD). In January so far, the imports was aggregated at seven tonnes (about US$ 200 million) only. In Sep and Oct, the imports were 95.62 tonnes and 109 tonnes respectively. Kher also said that there were no plans to curb gold imports and bring back restrictions like 80:20 scheme. Higher gold imports in November have pushed up trade defi cit to one-and-a-half year high of US$ 16.86 billion in No-vember as against US$ 9.57 billion in the same month last year. CAD too had widened to US$ 10.1 billion or 2.1 per cent of GDP in July-September period. Source: Business Standard

Nickel Demand Hikes As Aerospace In-dustry GrowsThe nickel industry around the globe is experiencing a huge growth in the increasing demand for nickel in every part of the world. The demand for nickel in the global market is mainly affected by the increase in the production of stainless steel. According to the state-ment released by the RNCOS; ‘Global Nickel Market Outlook 2016’, both the aviation as well as the aero-


News Digest

space industry is growing rapidly, and these indus-tries, mainly relies on nickel based super alloys, as it has the ability retain strength and also resist metal fatigue in very high temperatures. The strength, light weight, and also the metal’s aesthetic appearance make the nickel alloys an excellent choice in making the parts and also the components, which is required in aerospace as well as in the aviation operations. The report added nickel is highly made use of in the aerospace industry, mainly in the aircraft engines. Nickel alloys, most importantly steel is used for the production of required materials which are of special shapes. The increase in demand is mainly expected for nickel based super alloys; high performing alloys which are made out of nickel, cobalt or from nickel-iron, with the help of high temperature, and these materials would have high resistance towards corrosion and temperature. The aerospace industry consumes almost 50% percent of the total amount of super alloy production. It has been also forecasted that, the consumption of nickel would increase by 9% in the period 2014-2016. Source: http://www.metal.com/

ILZSG: Refi ned Lead Metal Exceeded DemandThe International Lead and Zinc Study Group (ILZSG) released preliminary data for world lead supply and de-mand during the fi rst ten months of 2014. Provisional data reported to the ILZSG indicate that world supply of refi ned lead metal exceeded demand by 15kt during the fi rst ten months of 2014. Over the same period, despite a rise in LME inventories of 13kt, total reported stock levels declined by 27kt. Falls in lead mine production in Bolivia, Canada and China were partially offset by increases in Australia, Peru and the United States re-

sulting in an overall global reduc-tion of 2.5% compared to

the fi rst ten months of 2013. World refi ned lead metal produc-tion increased by 1.8%. This was mainly a conse-quence of higher output China, In-

dia, Italy, Kazakhstan and the Republic of Korea that more than balanced reductions in Peru and the United States. Demand for refi ned lead metal rose by 3% in Europe, 1.9% in China and 5.6% in India but declined by 1.1% in the United States. Overall global usage rose by 1.3%. Chinese imports of lead contained in lead concentrates increased by 19.3% to total 809kt. Source: International Lead and Zinc Study Group

US Natural Gas Production In December Hits New RecordNatural gas production in the US Lower 48 increased by 2.2 billion cubic feet per day (Bcf/d) during December 2014, according to Bentek Energy, the Platts oil and gas analytics unit. Production averaged 72.8 Bcf/d in De-cember 2014, the highest monthly average on record, and a 11.6% increase (7.5 Bcf/d) over daily average production levels in December 2013. US production hit another one-day record of 73.6 Bcf/d on December 20, 2014, according to Bentek, and US Northeast produc-tion achieved a new one-day re-cord of 19.8 Bcf/d on December 19, 2014. Bentek data analysis suggests that 2014 produc-tion averaged ap-proximately 68.4 Bcf/d, driven pri-marily by extraor-dinary gains in the Northeast and continued growth in liquids-rich ba-sins such as the Eagle Ford, Bakken, Permian, and Greater Anadarko shale plays. Source: Oil & Gas Financial Journal

Palm Oil Output In Malaysia Slumps Most Since 2006 On Floods Palm oil output in Malaysia fell by the most in eight years after fl oods hit plantations in the second-largest producer, according to offi cial data that showed a big-ger decline than expected. Output tumbled 22% to 1.36 mn MT last month from November, the biggest drop since December 2006, the Palm Oil Board said on January 12. That compares with a 1.46 mn MT esti-mate in a Bloomberg survey published in earlier week.


Please read the Disclaimer carefully on page 4

Reserves fell 12% to 2.01 mn MT tons, smaller than the 2.05 mn MT median estimate. Exports rose 0.4% to 1.52 mn MT, while the survey showed a 2% drop. Source: Bloomberg, KCTL Research

Jeera To Remain Supportive On Weak Production EstimatesBullish trend is likely to continue in jeera market on the back of huge decline is estimated in Jeera sowing in the current year coupled with limited supplies in lo-cal mandies. As per market sources, poor realization

from jeera crop in the current year coupled with de-lay in kharif har-vesting in major producing areas will reduce jeera sowing in the cur-rent year. The to-tal sowing area is likely to decline

by 20-25 per cent in the current year as cultivators are planning to shift towards other lucrative crop. More-over, receding supplies of Jeera in major mandies will also provide some support to futures prices. Source: http://www.marketonmobile.com/

Government Extends Duty-Free Imports Of Chana Till MarchIndia, the world’s biggest producer and importer of pulses, has extended duty-free imports of chickpea, or chana, till March-end, due to lower area under cultiva-tion, a government notifi cation said. The government was considering a 10% tax on overseas purchases of pulses to support falling prices and also to lift a ban on exports of pulses and edible oils. “Duty-free imports have been extended due to expectations of lower pro-duction as area under chickpeas cultivation has fallen this year,” said Bimal Kothari, vice-chairman at India Pulses & Grains Association. As on December last week, farmers had sown chickpea on 7.78 mn hectares as against 9.06 mn hectares a year earlier, government data showed. Sources: The Economic Times

News Digest


India is on the move and so are its inhabitants. Digi-talisation and changing face of market dynamics have reshaped the entire spectrum of investment.

Gone are the days when people used to collect informa-tion and news from various sources assuming them as a scarce material and even had a tendency to manage them secretly treating it as an object of treasure.

Thanks to the fl ow of information with a speed that is like velocity of light, now anyone can easily get access to plethora of sources to gather and analyse such infl ows with much easiness and logic. It’s no longer a secret weapon now. The above facts get more prominent when one thinks of investment. Discussion on why to do investment has lost the relevance. In the same way, where to invest is an open secret now. What is how-ever, still a closed book is the per-centage of allocation within which the merits of the different fi nancial instruments play a major role. However, this is dynamic in nature and continuous attention has to be given for a balanced return over a period of time.

When one product or instrument attracts attention, it is based on the demand and supply which is fundamen-tal in nature rather than technical. When price of almost all sub-segments of any segment are low due to sub-dued demand or more supplies, you notice people start migrating to such avenues and thus participation gets increased in the form of buying at lower levels. This becomes a rational choice. Same scenarios we notice in the commodities segment where a number of com-modities move towards a lower end and these force can keep them at lower levels for a prolonged period. Since over the long-term prices have to respond to market dy-namics like any other fi nancial instruments, they start moving higher. This is what has been termed as com-moditisation a phenomenon where people would look to go for as a rational choice rather than a forced choice to adopt some asset as alternate product, says Mr. Su-shil Sinha, Director, Karvy Comtrade Ltd.

There are various types of participants in commod-ity futures. Each type has a distinct objective which is backed by economic sense and utility, driving different objectives for different class while participating in the market. A hedger has physical exposure connected to the price of commodity, which is why it wants to mini-mize the risk by participating in commodity futures.

Due to various economic, funda-mental and geopolitical factors, there is possibility of wide fl uctua-tions in the prices of various com-modities. To hedge this risk, hedg-ers take positions in futures market.

The commodity futures market is directly linked with the spot market. Different features like arrival, supply, demand etc., not only affect the spot prices but also affect and give direc-tion to the prices in the futures market. Similarly, large producers participate in commodity futures wherein it helps

them to lock in a particular price for their produce thus reducing the price risk of the commodity. It not only provides assured demand for the produce but also in-creases holding power by providing an option for stor-age in exchange-accredited warehouses. Arbitragers also take benefi t from the price discrepancy of com-modity in two different markets. They take different positions at one time and book risk-free premium.

Importers, exporters and HNIs are always dealing with various risks in businesses which have direct in-fl uence on their bottom line. All of them are exposed to the price risk of commodity and also to the fl uc-tuations in value of currency. The volatility in forex market can make an enormous alteration in prices of commodity which are either being purchased or sold by hedgers, exporters and importers. These big play-ers can secure and curtail their risk by participating in commodity futures.

The commodity market doesn’t work in isolation. Any international event or news which has an effect on major global asset class also exerts infl uence in prices of commodities both globally and in domestic

FEATURE

Commodities, Currency & Equity (C2E)— Smita, Manager at Karvy Comtrade Ltd.

COMMODITIESURRENCY

QUITY

STOCKS

FUTURES CONTRACT

RECOMMENDATIONS

TOP GAINERS

TOP LOSERSLONG SHORTHEDGING

ARBITRAGE



markets. Commodities, equities and currency markets have a strong relation with each other; none of them is unscathed by other’s movement. Because of this con-nection any Retail, HNI or Corporate who is involved and exposed to one market can secure themselves by taking relevant positions in other markets. Big corpo-rate either belonging to manufacturing or service sector thus participate in commodity futures even though they might not have direct linkage so as to minimise their exposure to other assets.

Although the main motive behind the inception of commodities market was for hedging and price discov-ery, it can also be used as an investment tool. Note that, commodity futures having direct links to the prices of agricultural and non-agricultural products, thus they come to the rescue in case we see intense increase in their prices. Traders or investors can mitigate their risk and can also diversify their investment with help of commodity futures market. Those who are dealing with commodities in their physical form as a raw material or for export-import purposes can use commodity futures for broadening their horizons.

Another feature worth mentioning is since prices in commodity futures are correlated with those in interna-tional markets, there therefore is less possibility of ma-

nipulations and rigging. Given the unique initial margin factor, one can take position in any commodity by just spending a small percentage of actual value of the com-modity, making it an attractive endeavour. Investors can use this factor of leveraging for their benefi t.

The commodity futures market in India is now over a decade old, but there is still a lack of awareness regard-ing this market among investors. It is highly disappoint-ing that still only a limited percentage of people par-ticipate in commodities futures, nevertheless the same talk about the opportunity in the coming years for the trading and investing class alike. It is noteworthy that various benefi ts of commodity futures like hedging and price discovery mechanisms are not fully known even to HNIs, big corporate and primary producers. People think that those who are related directly to the physical commodities only can take advantage from commod-ity futures. There should be efforts made by exchanges along with brokers and other market players so as to create awareness and spread information about com-modity markets and to notify its critical advantages. We should enrich the knowledge base of investors so that more and more players can enter the market. With the help of large participation, market will evolve itself and its benefi ts reaped by everyone.

FEATURE


De�lation: A boon Or A Bane?

COVER STORY

The year 2014 started with rosy forecasts of in-creased growth in the world economy, but it suffered a severe blow as the year progressed.

Now that the year has come to an end, many would heave a sigh of relief. The middle of the year witnessed geopolitical problems while economic output at major consumers, namely China and Europe, and to an ex-tent, Japan, has not been up to the mark. Participation by these power houses has dwindled while some of the major macro indicators such as infl ation, manufac-turing, employment and trade balance among others, slid down persistently. Questions are being raised on how the world’s torch-bearer, i.e., the US alone would maintain the balance given the issues erupting in some of the aforementioned economies. In this article, we look at the trend in the world economy based on the most important variable, infl ation, and how it could impact the other sub-sets of the broader economy over the medium-term.

During the initial half of 2014, IMF warned that strengthening defl ationary trends could pose a threat to the world economy. Risks that defl ation engenders are well known, however, the question is whether defl ation in some regions (advanced economies) could be a relief for some others (most emerging economies)?

Much has been spoken about the growing concerns regarding advanced economies going into a defl ation-ary mode. However, from the other side of the viewing glass, it seems to be a boon for some of the developing nations. Emerging economies excluding China have been troubled by high infl ation rates for a consider-able time now. Since many emerging economies have bi-lateral trade setups with advanced economies, defl a-tion in the counter economy means cheaper imports, thereby lower infl ation rate, especially CPI for the emerging economies.

In the recent months, the stubborn economic slow-down combined with high unemployment rate and slowdown in consumer spending made way for the trend that is conducive to prices falling further. Major-ity of larger economies, mainly the US, Europe, Japan and even China had targeted infl ation rate of around 2-2.5% but have failed to achieve the same. The low

infl ation which stood consistently below the target is bad in itself. Several reasons are associated with slow-ing infl ation or defl ation, the primary being the notion that money earned tomorrow would be of lesser value than the money today that stagnates investment, while the belief that goods would become cheaper each pass-ing day chokes consumption. Wages, incomes and tax revenues all reach a stagnation point, undermining the ability of households, governments and businesses to honour their debts which tend to be more burdensome under defl ation.

To counter the threat of defl ation, central banks of major advanced economies have already lowered their interest rates close to zero which is being appended with non-conventional monetary policy approaches such as bond purchases among others. US FED initi-ated a Quantitative Easing (QE 1) programme post the economic crisis of 2008 and added successive stimu-lus packages over the next few years up till the QE 3 in Nov 2012 (Monthly Bond Purchases worth $85 bn). During the past years, these measures helped the country to regain strength. While employment situation standing healthy and also major segments of the econ-omy like manufacturing and services too holding high,

— Sarika R. Agarwal


the FOMC brought the MBS programme to an end in October 2014. However, Fed was smart enough to re-alise the fragility in the world economy and has con-tinued to keep its interest rates close to zero. A sense of insecurity crept in as the Euro zone failed to achieve its desired infl ation rates and China’s robust economy witnessed a lag after an exponential growth rate for al-most a decade.

On one hand, as the US has managed to get its econ-omy back on its feet, on the other hand, Europe, China and Japan too still lag. Hence, they have been forced to add onto the easing programmes to improve their re-spective economies. This is refl ected as the divergence in the long-term bond yields of the US, Europe and Ja-pan, and it is likely that we would see the gaps widen-ing further. Anticipated rise in interest rates by the US by mid-2015 would mark an uptrend in the bond yields of the US whereas the reversal could be seen, especial-ly for the EU and Japan.

Balance Sheet (FED and ECB, JPY) Since the US is one of the largest importers, there is fear that the defl ation or rather the lower infl ation in the remainder of the major global economies could dampen the hard-achieved growth rate for the US. The nation’s recovery post the end of the QE programme has been the only straw of hope for the broader markets in the past couple of months. The likely scenario that could take place during 2015 is that the US Fed is forced to shift the anticipated hike in the interest rate towards the end of the year instead of the fi rst half of 2015.

The Eurozone has been struggling for long due to its fragile economic status. During 2014, the infl ation rate dipped to be as low as 0.3%, saved by better econom-ic activities in Germany. Separately, sanctions against Russia by the US and Europe are likely to worsen the economic scenario more for Europe than to Russia itself

as Europe exports and imports a large number of goods and services to Russia. ECB’s Mario Draghi has spoken much about the plans of infusing stimulus for growth in the economy, but has so far failed to achieve the same. ECB has pinned its hopes on targeted loans to banks, purchases of covered bonds that began on October 20 and purchases of asset-backed securities that are yet to start. Those efforts have yet to change the market’s psy-chology by much, in part because they will not signifi -cantly expand the ECB’s balance-sheet, which has been shrinking as banks pay off previous loans. In the event of this measure failing to achieve the desired results, ECB has further proposed to purchase €1.1 tn of non-fi nancial corporate debt and €7.8 tn fi nancial corporate debt outstanding. Lately, ECB has also commented that it is ready to add further stimulus if required to save the nation from running into a defl ationary mode of opera-tion. The impact of this fi nancial move is mainly a boost to the domestic capex cycle backed by easy availability of money and indirectly rejuvenating the growth phase.

Additionally, huge fl ow of liquidity is likely to push Euro lower, which in turn would raise the cost of im-port for the nation. Cumulatively, higher investment from corporate and rise in the import cost may lead to a rise in the price levels, indirectly boosting the infl a-tion rate. One of the major developments in the EU re-gion, speculation too is increasing, is that Greece which would be holding early elections by late January, 2015, may or may not choose to be a part of the EU, which could bring massive volatility in the coming months. We agree that Greece as an economy has a very small share in the EU as a whole, however, uncertain politi-cal environment may trigger mercurial movement in the common currency over medium term.

Another major advanced economy that stands at the brink of plunging into recession is Japan. Infl ation stood at 2.9% where it has risen from close to zero lev-

YoY CPI Comparison In The Us With Europe And China

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0

2

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COVER STORY

Gap Between US 10Y And EU 10Y Bond Yeilds Widening In Last Few Quarters

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els since 2009, only as a result of renewed economic strategy called Abenomics proposed by Prime Minister Abe. However, real GDP came to be -1.3% YoY indicat-ing an economic chaos in the nation. Abe government and the Bank of Japan have committed themselves to a policy of doubling the country’s money supply. Abe-nomics failed to deliver as its promise, but saved the nation from collapsing into a recession. Re-elections were held in Japan in December with Abe witnessing a landslide victory. Post new government formation, he proposed a stimulus worth 3.5 tn Yen, including around 420 bn Yen in new subsidies to help personal spending and reinvigorate regions outside big cities and juice up the stagnant rural economies. The impact of this abun-dant monetary stimulus is yet to be seen and could be a turning point for the Japanese economy.

China, one of the major economies, used to be the showstopper of world economic growth over the past one and half decades. However, it has been traversing a sluggish path over the recent two-three years. If we go by the recent PMI numbers, both the government and private numbers are just hovering near the critical 50 mark, managing to stay over contraction. The same is being replicated on the industrial production side. We have seen Chinese IP averaging fi rmly below the 8% mark for the past year and with each passing quarter the reading is declining from the previous fi gure. If we talk about consumption, it is quite understandable that the staggering and somewhat superfi cial output between the 2005 and 2008 was backed by huge spending in steel, aluminium, construction and real estate sectors among others, which in a slowing phase are experienc-ing problems of overcapacity.

On the infl ation front, Chinese numbers for the pro-ducers have continued to stay in the negative territory for over two and a half years. Contracting PPI along with slippage in actual consumption is getting refl ected in CPI as well which is creating further problems for future growth potential of the economy. Recent gov-ernment data shows CPI at just 1.4% YoY, the lowest rate since 2009. PPI, meanwhile, contracted at a higher rate by 2.7% YoY. IMF forecasts in October showed China’s GDP grow around 7.1% for 2015 against 7.3%-plus in 2014 amid slower credit growth and modera-tion in real estate sector also continues. Looking at the current stature of the world’s largest consumer from metals to oil and conjugating the economic scenario in EU and Japan, we may see extended deterioration in China’s growth wherein even a 7% mark may be hard to achieve unless the government or its central bank

comes to the rescue. Persistently subdued economic scenario in China has pressurised PBOC to infuse mon-etary stimulus. However, it has remained tight lipped on any major boost and is making slight changes like lowering the deposit-to-lending ratio etc., to ensure steady investment and consumption in the economy.

Looking at the prominent developing economies that have made a mark during 2014, countries such as India, Russia, Venezuela and Ukraine have been battling high infl ation for years now. Although the economic scenar-io worsened for Venezuela and Russia with political un-rest, sanctions and smuggling rising to the surface, the overall defl ation managed to cap the infl ation rates. Cur-rently, the infl ation rate for Venezuela stands at around 57% and for Russia it is 9%. Russia has been threatened by the US and Europe, imposing sanctions against the country, which means that the trades between the na-tions would be put to an end. This could have widened the infl ation rates for Russia but the overall defl ationary trend in other economies helped infl ation in Russia to remain in check. Venezuela has altogether a different story to tell. The country has been baffl ed by high infl a-tion rates as crimes such as smuggling goods to Colum-bia at cheaper rates have been creating an artifi cial sup-ply shortage, even for basic necessities of life. During the year, the infl ation rate for Venezuela reached 60%, rising questions on the political ability of the country.

One country that seems to have benefi tted the most is India as infl ation has been brought down to 4.98% with real GDP of 5.3% despite fresh elections that were held mid-year.

It should be noted that though the overall defl ationary trends did help some of the nations in bringing down their own infl ation, a consistent defl ation scene might start hurting growth of the developing nations more as advanced countries rush towards depreciating their cur-rencies, thereby lowering the appeal for the exporters largely. This in turn could paint a much darker picture in terms of trade balance for various economies as the gap is likely to broaden further.

OutlookOn a cumulative note, the global economic story con-tinues to be on similar lines with the economic pow-er blocks wherein the US has emerged as the major growth driver for the world. Europe is persistently in and out of the woods, though latest data variables point towards a forthcoming drop at least in the short-term. Looking at the Asian space, China has and continues to be under pressure in the distant future. Owing to

COVER STORY



COVER STORY

slowdown in the past few years in the world’s second largest economy, global commodity markets, mainly investment-related commodities, have roiled as China remains one of the top consumers for many of them.

Note that economic cues in China such as indus-trial production, PMI gauge, housing sector, infl ation and cumulatively, the GDP, have maintained on lower ground, but Chinese long-term goals under the new government, to gradually enhance consumption and re-duce the economy’s dependence on export growth, is also making a case for further deterioration in immedi-ate economic output. With consumption not at its best levels internally and also other growth economies such as Europe and Japan continuing to remain in doldrums, it looks highly likely that slower growth would further complicate problems in the coming quarters.

In the current environment, the US economy comes across as the silver lining, though economists are hard-ly content that rise in US-related variables could on its own drive positivity in other global economic hubs such as the EU, China and Japan. On the fl ip side, risks have increased that consistent weakness on the other side of the Atlantic and Pacifi c too may start acting negatively on the world’s largest economy. We do hope that effects of monetary policy easing from EU and Japan among others start aiding the economic recovery in those re-

gions, probably sometime during the second quarter of 2015. EU economic cues could seem more stable than now if that actually takes place. While only time would tell whether we will see any decent and stable optimism coming back into the major global economies within the aforementioned period or not, till such time, traders and investors might continue to see pressure on major global industrial commodities continuing.

However, despite the efforts put in by the central banks to raise infl ation for their respective economies, a major aspect which can’t be missed is the slump in oil prices. Oil which is one of the most traded and con-sumed commodity in the world has slumped more than 45% during 2014, mainly due to higher supplies and also subdued demand among major consumers, particu-larly the EU and China. Oil forms a major inherent cost for commodities/products as part of their transportation costs across the globe and is likely to lead to savings on those products as it indirectly reduces cumulative cost for producers. As per our own expectations, it is highly anticipated that oil as an average during 2015 might see huge cuts as equated to 2014 which may further push select commodity prices lower. Problems as such could drain the efforts of the central banks to revive their respective economies wherein a gloomy picture of the global economy may emerge as 2015 progresses.


India is burdened by its love for gold. Our position as the one of world’s top gold consumers has be-come a cross around our neck. But need it be so?

Not if China’s success is any indicator. China has sin-gle-handedly tilted the balance of power in the world gold market from the West to the East.

China is the most important player in the world gold market today. It accumulates gold for its monetary value and in anticipation of a new monetary system. In 2013, China emerged as the world’s largest producer and con-sumer of gold. In 2014, it effectively sealed this domi-nance with a unique mix of market-savvy strategies.

The fi rst one was to encourage its people to start holding gold. In 1950, communist China prohibited private ownership of bullion and put the gold industry under state control. Fifty years later, the People’s Bank of China abandoned its monopoly on the purchase, al-location and pricing of gold. In 2004, for the fi rst time since the ban, private persons were permitted to own and trade gold.

Gold demand in China could not have fl ourished as it has without the support of the authorities. Accord-

ing to the World Gold Council’s recent report China Gold Market: Progress and Prospects, China’s leaders regard the public’s gold holdings as part of the nation’s reserves that could be called upon in an emergency.

China should accumulate 8,500 tonnes in offi cial gold reserves, more than the US, according to Song Xin, President of the China Gold Association, Gen-eral Manager of the China National Gold Group Cor-poration and Party Secretary. Investment in gold has also benefi ted from the limited selection of alternative forms of savings in China. Today, China is the world’s largest market for gold bars.

This demand will only accelerate in future and it will be a fundamental factor supporting the fl ow of gold from the West to the East.

The second part of China’s strategy is to consoli-date its pole position as the largest producer of gold in the world. Gold’s Big Three (South Africa, the United States and Australia) had been the big three for a long time. In 2007, China overtook them. Gold production over the past decade has more than doubled. Interest-ingly, the major source of China’s big increase in pro-

Tilting The Gold Axis From West To East— Nidhi Nath Srinivas, CMO, NCDEX

SPECIAL FEATURE


duction is thousands of new small-scale mines. With labour and materials being economical, coupled with a generally lax regulatory system, it’s not too diffi cult to develop a mining operation.

Foreign expansion will be a growing priority for Chinese mining companies. Australia, Peru, Canada, Colombia and the United States are all attractive desti-nations for investment. Growing political ties between China and Africa will also spur development of projects in Ghana and Congo. China’s Central bank recently cir-culated a draft plan to ease restrictions on gold imports by local miners.

The third strategy is internationalisation of its gold market. Until recently, China’s gold market was closed. Now, Chinese regulators are pushing to open-up the country’s gold trade and lure foreign investors as part of its broader efforts to link the Mainland to global markets.

In September, it began offering international insti-tutions access to Yuan-denominated gold contracts in Shanghai’s free-trade zone through the International Board of Shanghai Gold Exchange (SGE). The core business of the SGEI is to facilitate offshore gold trad-ing in RMB. International customers can only deposit and withdrawal gold into and from IB-certifi ed vaults. This way, international banks or investors trading IB physical products cannot drain physical gold from the Chinese mainland.

The fi rst transactions were put through by a diverse group comprising HSBC, MKS (Switzerland) and the Chinese banks—ICBC, Bank of China and Bank of Communications. MKS is the Geneva-headquartered precious metals trading group that also owns the large PAMP refi nery in Switzerland. International bullion banks who have already announced their participation include ANZ, Standard Chartered and HSBC.

The presence of international refi neries within SGEI trading should help it become a serious competitor to gold price discovery in the London and New York markets. Since there is a lot of physical gold fl owing through the exchange, price discovery is not based just on unallocated gold as is in London or paper gold as is in New York.

There is also a larger game plan here. The world price of gold is dollar-linked and fl uctuates with the US dollar. With the shaky status of the dollar as the international reserve currency, China wants a new global currency set up. China has established a free-trade Yuan-denominated spot gold trading platform and

a corresponding settlement system to increase China’s infl uence over global bullion prices.

Fourth, and related development has been the closer relationship between Hong Kong, Singapore and Shang-hai gold markets. The Hong Kong-based Chinese Gold and Silver Society recently announced that they plan to build a massive new precious metals vault in Qianhai in Shenzhen. The real purpose is to support a CGSE gold trading platform in Shenzhen and allow this new Shen-zhen gold exchange to link up with the Shanghai Gold Exchange. Singapore has also introduced a physical gold contract this year in tandem with SGE, highlight-ing a push in the biggest consuming region to establish new price benchmarks as demand shifts east.

In the past, the world’s gold supply was channeled through London. Now, a majority of refi ners are in Switzerland and they are increasingly producing the 1 kg bar destined for Asia. With China opening up gold importing to bullion banks to channel gold directly to Shanghai, the supply through London is falling. This translates to the ability of London to refl ect a price that accounts for the bulk of global demand/supply dimin-ishing. Soon, global gold suppliers and buyers will fl ock to do business in Shanghai rather than in London. In short, China is changing the structure of the world gold market.

China’s moves show that some governments believe gold will return to its role as an international currency, that gold can fi ll the vacuum created by the fl ailing Ruble, Dollar and the Euro. India, as the other engine of the demand pull from the East, can equally and eas-ily take advantage of this shift. But that will happen only when we stop seeing gold as a burden or as merely raw material for the jewellery sector, and fi t it into our broader strategic and fi nancial imperatives.

SPECIAL FEATURE



Why India Needs An Effective Gold Policy— MMR Bureau

Gold has always been an integral part of the socio-economic ethos of the Indian house-hold. As a commodity, it has carried with

it the tendency of invoking a sense of cultural and sentimental attachment, making its consumption and investment in India very different from that of other countries.

Consumption of gold has been greatly intertwined with the Indian household’s fi nancial planning goals. Bought as bullion or as jewellery, for either person-al consumption or as investment or as even a gift, gold invariably exists in every household’s fi nancial portfolio. In India, gold has, through generations, re-mained an obvious and natural choice of savings of all households.

The Federation of Indian Chambers of Commerce and Industry (FICCI) and the World Gold Council recently released a report that highlights key policy recommendations to monetise India’s large stock of household gold. The report titled Why India needs a

gold policy makes seven key recommendations for an effective ‘India Gold Policy’:1. Establish an India Gold Exchange to ensure pric-

ing standardisation, increase transparency and im-prove supply and demand analysis.

2. Establish a Gold Board to manage imports, en-courage exports and facilitate development of infrastructure needed to ensure the Indian gold market functions to its optimum level.

3. Develop accredited refi neries in line with interna-tional standards, including upscaling the current domestic refi neries.

4. Allow Indian banks to use gold as part of their liquidity reserves. This would incentivise them to introduce gold-based savings products.

5. Drive monetisation of gold by incentivising banks, revitalise gold deposit schemes, introduce gold-backed investment and savings products.

6. Create a more active marketing strategy for Indian handcrafted jewellery. This could boost exports

BY INVITE


and highlight India’s expertise in this highly-val-ued sector e.g. by promoting handcrafted ‘India-made jewellery’ like the Swiss-made watches.

7. Drive the standardisation of gold so that buyers and sellers can have faith in both the quality and price of their products. Introduce guidelines for compulsory quality certifi cation of all forms of gold to encourage accountability and foster an en-vironment of trust.

The report also assesses the policies adopted in countries like Turkey and China that have faced chal-lenges similar to India and have devised public poli-cies which have monetised the local stock of gold to positive effect.

Commenting at the launch of the policy report, So-masundaram PR, Managing Director - India, World Gold Council, said: “Demand for gold in India is in-terwoven with culture, tradition, the desire for beauty and fi nancial protection. It would be futile to control gold demand knowing how much the passion for gold drives savings itself. We believe the solution to meeting India’s enduring appetite for gold lies not in restricting the import of gold, but in making better use of the gold that is already in the country, making it a productive fungible asset class like any other fi -nancial savings. The need of the hour is to re-engage all stakeholders to develop a coherent long-term ‘In-dia Gold Policy’ that results in robust infrastructure for gold, drives standardisation and transparency, encourages gold-based investment products and sup-ports the economic priorities of the country. With In-dia at the centre of the global gold eco-system, it is imperative that we fi nd ways of mobilising and mon-etising the 22,000 tonne of gold in Indian households to fund economic growth.”

The recommendations in the report are backed by data-driven analytics, for which, the World Gold Council commissioned FICCI that conducted a wide-spread survey of Indian consumers to discover why they buy gold, why they sell it and how they would respond to initiatives aimed at monetising gold in India. The survey was conducted with 5,000 respon-dents across India, including roundtable discussions and extensive interviews with stakeholders from the industry.Key fi ndings from the survey are:

� Consumers’ continue to buy gold whatever the fi s-cal circumstance – 77% of respondents bought gold

at least once during 2013 and more than half bought more gold in 2013 than the previous year

� Indian consumers buy gold as an investment as well as an adornment – 77% of respondents bought gold as a safe investment and 53% consider it primar-ily an adornment; 50% believe that gold is both

� Gold demand is not dependent on price fl uctua-tions - Among respondents, 19% said they would buy more gold if prices rose and 34% said they would do nothing. Only 14% said they would stop buying gold if prices increased, while just 6% said they would sell

� Gold is an integral part of the family budget - The purchase of gold jewellery and coins comprises 8% of daily consumption of a household, which is only marginally behind medical expenses and education

� Consumers’ attitude towards utilising gold as an investment product – 50% of respondents said they would be willing to deposit their gold to earn interest while a further 12% said they might do so. More than a third of the respondents would be willing to deposit 26-50% of gold in their possession while 3% would deposit between 76% and 100% of their gold.

� Among the respondents’ savings and investments, gold products lie just behind cash, bank deposits and other mainstream savings accounts

� Consumers’ view on gold monetisation – 49% of respondents said they would be willing to deposit their gold to earn interest, 73% said they were happy to receive gold in different form against their initial deposit while 62% said they would prefer cash or In-dia branded coins at maturity

- A FICCI and World Gold Council report


BY INVITE


Prices To Dip Further In 2015— Tapan Trivedi

Silver during 2014 was down around 20% with the last quote for the year seen around $16 per ounce against 2013 closing of around $19.40.

Note that higher beta nature of the commodity and its alliance to the movement in gold weighed further more on the whitish metal. Gold during the aforementioned period was almost stable with latest quote tad lower than $1200 per ounce, similar to the closing in 2013.

Review: � Overall, the Bullion complex remained under pres-

sure for most of 2014. Silver likewise Gold was largely ranged in the fi rst half and one can see the chart below where it is clearly seen that most of the yearly losses came in late Q3 and Q4 of 2014.

� Silver, similar to Gold, was weighed down by rising US Dollar index which moved to its four year highs against the basket of currencies above the 88 mark.

� Equities broadly staying higher maintained their negative impact on Silver whereas Base metals record-ing decent sell-off in the second half of 2014 also hurt investment.

� Weakness was also enhanced due to winding down

of FED’s ultra loose monetary policy stance where in the month of October, the FOMC voted for completely reducing the monthly bond purchases to zero though call in lower benchmark interest rates was maintain, at least over the medium term.

On the macro-economic side, one major factor which has been putting pressure on Silver is the subdued infl a-tion reading in the major economies of EU and China. Eurozone YoY infl ation stays below the 0.5% mark in past few months, the lowest since 2009, whereas in China too, both the CPI and PPI infl ation are consis-tently staying lower. Gold and silver are considered as alternative investment vehicles against economic un-certainty and infl ation wherein extended weaker infl a-tionary scenario is making a case for lower investment in the two. Bullion over the years has maintained al-most linear correlation with infl ation. Silver gets a mix of demand from industrial and precious metals segment so we have checked for its correlation and linearity with PPI of major economies globally. One can simply see the overall movement in Silver prices followed the broad pattern in international producer prices infl ation.

If we look at the actual demand-supply numbers for

FEATURE


the commodity, recently “Thomson Reuters GFMS Interim Sil-ver Market Review” was published. As per the report, Silver mined production is seen increasing at a moderate pace of around 3.5% to 867 mn ounce after a decent over 5% increase in 2013. Mined output is expected to touch fresh all-time highs as supply from Guatemala, Mexico, Chile and Peru increase. Nevertheless, total supply to the market is expected to increase at a modest pace as scrap supply continues to contract. Scrap supply for 2014 is expected to fall by around 14%, sliding for the second year in a row amid persistent lower prices for the commodity.

Silver demand is subdivided into Physical (Jewellery and coins/Bars) and Industrial Fabrication (Electrical & Electronics, Brazing Alloys & Solders, Photography and Other Industrial). Industrial Fabrication YoY growth is seen sliding moderately by

Monthly PPI Infl ation Chart for Euro and China (YoY Data) and Spot Silver prices in lower panel

Source: Bloomberg data, KCTL Research

Silver Balance Sheet (Data in Million Ounce)

Supply 2010 2011 2012 2013 2014 % Growth

Mine Production 751.2 755.0 793.3 838.0 867.7 3.54%

Net Government Sales 44.2 12.0 7.4 7.9 -

Scrap 225.7 258.9 252.8 190.4 163.2 -14.29%

Net Hedging Supply 50.4 12.2 -47.0 -34.3 -

Total Supply 1071.5 1038.2 1006.4 1002.0 1030.9 2.88%

Demand

Jewellery 191.8 190.0 187.8 197.9 189.2 -4.40%

Coins & Bars 143.3 210.6 138.0 241.6 191.6 -20.70%

Silverware 51.8 47.3 43.9 49.5 46.2 -6.67%

Industrial Fabrication 641.6 622.4 586.7 588.1 577.5 -1.80%

Physical Demand 1028.5 1070.3 956.4 1077.1 1004.5 -6.74%

Physical Surplus/Defi cit 43.0 -32.1 50.0 -75.1 26.4Source: Thomson Reuters Interim Silver Market Review, KCTL Research

1.8% to 577 mn ounce. No major growth in important consumers China and EU could be reason behind decline in Industrial demand for the commodity. Note that cumulative Indus-trial demand is seen weakening despite strong increase from Ethylene-Oxide on a lower base and largely stable Electrical & Electronics though demand in other segments slipped.

Total commodity demand is seen lower by 6.75% to 1004 mn ounce as the agency ex-pects modest cut in physical demand as well, which registered near record consumption last year. Physical demand from Jewelry segment is seen lower as retailers pushed for higher sales of gold jewelry as along with fall in sil-ver, Gold the more adored metal too traded near four-year low.

As per the Thomson-GFMS forecasts, physical demand for coins and bars demand in totality is anticipated to have fallen by 20% to 191 mn ounce in 2014 however we believe there is a high probability of upwards revision in these numbers. Recent numbers from US Mint showed sales of 1 ounce American Ea-gle silver coins jumped 40% in October to its highest in 21 months as silver prices slipped to four years low, below $16 per ounce. 2014 sales till October stand around 38 mn ounce, marking the second-quickest pace ever after 2013. Retailers not only in the US but other

FEATURE


major regions like UK, parts of Europe, Indian and a number of other Asian countries are also witnessing decent demand lately as prices remain low. Subdued prices currently could push in further higher demand for the last two months of 2014 which indirectly should balance the physical demand for 2014 to 2013 levels or may outpace it by a slight margin. Also the same aspect might pull-down the surplus scenario for the commod-ity lower to balance or may push it in its second straight defi cit year.

Nevertheless, as we have said in our earlier reports too, silver is one such commodity wherein its price ac-tion is more dependent on movement in Gold commod-ity, base metals complex (Industrial Demand) and macro factors like movement in major currencies, monetary policy stance for major economies and infl ation amongst others rather than compared to its own fundamentals. This can simply be justifi ed by the fact that despite Silver seeing healthy demand defi cit in 2013, we saw around 35% correction in prices and in 2014 too, Silver Comex is lower by around 15% since 2013 closing.

Silver mined supply as a by-product stands around 70%; indirectly reducing the cash costsLarge portion of Silver supplies globally come as a by-product during mining of other metals. A number of metals mined, namely Lead/Zinc, Gold and Copper help supplies of silver commodity based on their geo-logical formations. Notably, only around 30% of total commodity output comes from primary silver mines, where silver is the main source of revenue. This is one of the critical aspects behind consistent fall in silver commodity notwithstanding the claims that it is already trading below its marginal cost of production in and around $18-$16 for most major miners globally.

Problem lies with the fact that while fall in silver prices impact primary silver production, its output as a by-product is dependent on the price of the other met-als which lead towards continued higher output for the commodity. Also note, most silver primary mines do contain other metals mainly gold, copper or zinc as a by-product which is aiding them continue production notwithstanding the weaker prices for whitish metal over last couple of year wherein we have also seen signifi cant deterioration over pricing especially since second half of 2013. As per the data from The Silver Institute, Primary silver miner’s ‘Total Cash Costs’ re-mained broadly fl at YoY around the $9.27/ounce mark

for 2013 which is smartly better than deal for miners as 2013 average prices for silver commodity at Comex stood at $23.85 per ounce (Daily Closing Average). Nevertheless, the same aspect acts negatively for prices as it provides that extra support to miners to continue mining the commodity despite it being trading below marginal costs.

Looking at all the aforementioned factors, cumula-tively we feel strengthening US Dollar, extended posi-tive performance over equities, infl ation staying mut-ed in major developed economies globally and most importantly, serious questions raised on Chinese and EU region demand in the coming quarters, we hold a bearish bias in the silver commodity. If we talk about the physical demand aspect for the whitish precious metal, we feel that decent decline in prices might fuel healthy consumption from retailers and corporate alike. However, we re-iterate that silver’s price movements are more dependent on macro economic factors and critically, Gold commodity, than even its own demand-supply variables. The commodity, after plunging 35% in 2013, is down 20% in 2014, and we feel investors should start building shorts positions on some good pullback from here. The only ‘Silver Lining’ which might aid the commodity against its downside should be that in India, Gold and Silver still remain major physical investment bets. Huge losses in prices from here towards 2010 levels below the Rs 30000 per Kg mark could infuse heavy investment in local spot mar-kets and indirectly stem the commodity’s fall, at least in the local markets, notwithstanding the movement going on in international markets at the same time. The bot-tom-line is commodity should continue to see good fall in the coming year as well, however long-term inves-tors may see the emergence of value buying sometime during the middle of 2015 into the commodity.


Silver Output by Source Metal

(Units : mn Ounce) 2013 Output % of Total

Primary 235.9 29.0%

Gold 105.4 13.0%

Lead/Zinc 307.4 38.0%

Copper 167 20.0%

Other 3.9 0.0%

Total 819.6 100.0%

Source: GFMS, Thomson Reuters

FEATURE


Nickel De�icit Set To Widen— Sarika R. Agarwal

Review � Indonesia imposed an export ban on its

mineral ores in January, 2014. Indonesia, be-ing the largest Nickel mining country, it led to major chaos in the commodity markets and the price of the metal soared like never before, marking gains of more than 40% from February to May 2014. In May, the price of Nickel reached a high of $21000 MT.

� The surprise move by Indonesia banning the ex-port caught the market off guard, the result of which was the rally in the prices. However, as the year pro-gressed, the Philippines, the second largest producer of the metal, stepped into the big shoes. Production levels were ramped in the existing mines in the coun-try to cover the vacuum in supply created by the ban in Indonesia.

� Apart from the ramped production levels from Phil-ippines, the decline in the prices was also due to the weak global economic cues which led to lower demand especially during the latter half of 2014.

� Adding to Nickel’s price woes, inventories also rose to record highs of 389,766 MT. The rise in the inven-tories is rumoured to be mainly due to the fl ow of the Indonesian nickel ore inventories from China to more transparent bodies such as the LME.

� Nonetheless, much of the price loss in nickel was

restricted as the cancelled warrants rose, especially

during the fi rst half of 2014, reaching up to 110,544

MT, an astounding increase of 332% from the prior

year of a mere 25,614 MT, indicating good spot de-

mand for the metal.

Looking at the balance sheet, comparison of the fi rst nine months of 2014 with the same time period in 2013 reveals an immense decline across the board from mined production to demand of the refi ned met-al. Indonesia’s ban on export of its unprocessed min-eral ore was the turning point for the metal. Global mined production deteriorated from the Philippines by around 40% amid the weak global economic condi-tion, followed by Indonesia, the mined production for which declined by around 80% due to the uncertainty

FEATURE

Balance Sheet AnalysisDescription 2011 2012 2013 2013 Jan-Sep 2014 Jan-Sep Comparison

Global Mined Nickel Production 1.823 2.272 2.483 1.795 1.184 -34.02%

China 0.090 0.093 0.098 0.074 0.066 -11.11%

Indonesia 0.227 0.622 0.811 0.531 0.111 -79.12%

Philippines 0.319 0.318 0.316 0.258 0.153 -40.72%

Global Refi ned Nickel Production 1.664 1.842 1.987 1.444 1.218 -15.69%

China 0.470 0.591 0.711 0.494 0.415 -16.05%

Indonesia 0.020 0.018 0.023 0.018 0.012 -32.65%

Global Refi ned Nickel Demand 1.661 1.729 1.801 1.312 1.111 -15.32%

China 0.703 0.805 0.909 0.634 0.500 -21.04%

Refi ned Nickel Net Surplus/-Defi cit 0.002 0.112 0.186 0.132 0.107 (Source: WBMS Data)


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Cancelled warrants vs inventories

Source: KCTL Research

from the announcement of the export ban. This in turn led to decline in refi ned nickel production by nearly 15%. The interesting fact is that even though mined production and refi ned production declined massively, demand continued to decline after May as production levels were ramped up in the Philippines to overcome the vacuum in the supply created by the ban from In-donesia; also, due to the global economic weakness, demand remained subdued, especially in the second half of the year and the swelled up inventories of the Indonesian nickel ores at the Chinese bonded ware-houses restricted the time frame of the gains for the metal. Analysing the current scenario with Indonesia reiterating its export ban and the Philippines unable to cope with demand for the metal, it is likely that Nickel turns into a defi cit mode next year.

The cancelled warrants vs inventories for Nickel gives further clarifi cation to the price movement of the metal. During the initial part of the year, cancelled war-rants rose high indicating a sharp rise in spot demand as Indonesia imposed the export ban on the mineral ore. However, with the Philippines stepping up its pro-duction levels and subdued global demand, cancelled warrants declined, especially during the second half of 2014. At the end of November, 2014, the inventories at LME reached a record high of 0.41 mn MT with cancelled warrants at 0.09 mn MT. In 2014, cancelled warrants formed around 50% of the global inventories which gradually declined to close to 25% of the global stock level at LME. Such movement had an impact on Nickel prices as well; prices declined from September 2014 as inventories rose along with the decline in the cancelled warrants. During 2014, global inventories rose from 0.26 mn MT at the beginning of 2014 to 0.4 mn MT in November, while cancelled warrants which rose to around 0.13 mn MT from 0.1 mn MT has de-clined to become mostly fl attish in comparison to last year numbers.

Nickel: Indonesian ban storyIndonesia is the largest producer of Nickel in the world. The country has been talking about imposing a ban on its exports since 2009, but due to the country’s track record of shelving unpopular policies time and again, nobody took much notice when Indonesia once again mentioned about imposing an export ban to bolster industrial development in the country. On January 12, 2014, Indonesia fi nally put its plan into action and im-posed a ban on exports of Nickel and Bauxite ores.

Nickel ores are basically of two categories: sulphide ores and laterite ores. While the production of sulphide ores has been mostly stagnant, laterite nickel produc-tion has boomed. In 2013, world nickel ore production totalled 2.374 mn MT, of which 855 kt were sulphides and 1,519 kt were laterites. Indonesia’s 775 kt of mined laterite accounted for one-third of global nickel ore production. In terms of refi ned nickel globally, be-tween 2009 and 2013, Indonesia’s share of production rose from 13.4% to 38.2%.The Effect Of The BanClose to 450 kt of Indonesian nickel ore used in 2013 in China, Japan and Europe was expected to be removed from the market. This is equivalent to 25% of global nickel use in the year. It was expected that China had large refi ned stocks of Nickel and the stock level at LME was also considered to be good enough. How-ever, the expectation that the inventories of Nickel would soon be depleted without any equivalent source of replacement dragged the prices of the metal from $14000 MT to around $21000 MT during the earlier part of 2014.

What ultimately happened was quite the reverse. Philippines, which is the second largest producer of Nickel in the world, ramped up its production levels to match the demand side, thereby easing off the supply concerns to a certain extent. Additionally, China had very large quantities of Indonesian Nickel ore stored and with Philippines ramping up production, nickel pig iron (NPI) producers fi gured out new ways to blend the lower quality nickel ores from Philippines with the existing Indonesian inventories, thereby increas-ing the lifetime of the higher quality nickel ores. How-ever, with the Qingdao scam, Nickel was moved out of Chinese bonded warehouses to LME warehouses. LME warehouse stocks rose higher up to 0.39 mn MT with the metal pouring out of Chinese warehouses into the LME system. Furthermore, reaction of the physi-cal stainless steel supply chain accelerated the down trend for Nickel. Pricing of stainless steel is directly


linked to the nickel market by the nickel surcharge. Falling nickel prices encouraged both destocking of the existing product and the withdrawal of new orders as stainless steel operators looked to clear their books of higher-priced material and restock at lower prices. The combined effect of all these factors acted against the metal and wiped out around 30% of the gains made on the back of the Indonesian ban to a current annual gain of only 10%. Nickel Pig IronFollowing the massive run-up in nickel prices in 2006-07, China developed and has continued to use, on an ever-increasing basis, nickel pig iron (NPI) produced from Indonesian ore in its production of primary nickel. It was invented by the Chinese as a (cheaper) substitute for pure nickel in the production of stain-less steel, which is the main use for nickel. In 2013, around 25% of global primary nickel production was NPI and 15% was ferronickel. Nearly half of China’s nickel production came from Indonesian ore, and was predominantly NPI.

China expects to cut down the volumes of NPI by around 70,000 tonnes per year from 510 kt in 2013, as the rising cost of the laterite nickel ore from Philip-pines, post the Indonesian ban, is expected to increase NPI production costs using the RKEF technology by around 34% by 2015. China is also attempting to re-

duce the pollution levels. This cut of NPI supply will further push the prices of Nickel up in the long term as NPI was being used as a substitute for producing lower quality stainless steel. Lack of adequate supply of NPI would make the producers shift towards the metal, in turn increasing demand.OutlookBased on the investor report of GlencoreXstrata, Nick-el supply is forecast to decline around 1.4% for 2014 on the prior year refl ecting poor performance at its existing producers and new projects, coupled with de-creased NPI output during the year. According to INSG too, the defi cit is expected to broaden towards 2015 as world primary nickel production is projected at 1.95 kt whereas the world primary nickel usage is expected to increase up to 1.97 kt. In 2014, however, the world pri-mary nickel production is expected to reach up to 1.93 kt from 1.94 kt in 2013 and the world primary nickel usage may rise up to 1.92 kt from 1.78 kt in 2013.

Nickel supply from new and existing Greenfi elds and Brownfi elds expansions is expected to double by 2019 from an expected level of 230 kt in 2014. However, a cautious outlook is recommended from this ramp in production as majority of the new assets are delayed and underperforming due to technical, environmental and social challenges, apart from permissions. Overall, we hold a bullish stance for Nickel for 2015.


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— Vikas Singh – Ex-Manager Monsanto India, Pursuing PhD in IIPM

The debate on genetically-modifi ed crops always takes us back to the history of agriculture. Cen-turies ago, farmer learnt that they can consume

certain plants and animals. To have uninterrupted supply of food, they started rearing such animals and plants, and to make it a process, they thought of multiplication of plants and animals. Few animals and plants were ‘select-ed’ to act as parents for generating progenies. The crite-ria of selection was simply to observe whether the plants and animals give better yield initially and later good taste, were robust against climate and were disease-free.

The basic need to have food led our farmers to act as plant and animal breeders in ancient times. Agriculture became a subject of scientifi c research in modern age with a large population to feed and provision of raw materials becoming a requisite for industries. Breeding developed as a technique under agriculture research and has not remained limited to the old way of seed selection by only appearance. Breeding research acted as a base to develop varieties with desired characters for our food, feed and fi ber. In addition to yield, quality, increased tolerance to environmental pressures, resis-tance to viruses, fungi and bacteria, increased tolerance to insects, pests and many other crop specifi c characters were selected in much sophisticated laboratories. Simi-larity between farmers and breeders is of selection of good characters in plants.

Plant breeding uses inter crossing of closely or distant-ly related plants to produce new crop varieties with desir-able properties. Plants are crossbred to introduce charac-ters from one variety into a different plant with different genetic background. For example, a disease-resistant pea may be crossed with a high-yielding but disease-suscep-tible pea, with a goal to introduce a disease-resistance variety of pea that is high-yielding. From the selection of merely healthy looking seed, with time, science has de-veloped a well established process of plant breeding, e.g., collection of variations, selections, evaluations, release, multiplications, and distribution of the new variety.

When it comes to plant breeding, modifi cation of plants is achieved by adding a selected gene or genes to

a plant to produce a desirable character. Genetic modifi -cation can produce a plant with a desired character faster than normal plant breeding (crossing) simply because the whole plant’s genetic makeup is not changed while only the desired character is selected, taken from the source and injected into the plant. For example, popu-lar Bacillus thuringiensis (used in Bt-Cotton) is taken from soil which is toxic to few worms (harmful for cot-ton crop) and inserted in cotton seed, developing a plant resistant to those worms. Nobel laureate Venkataram-an Ramakrishnan at the time of his visit to India said “Genetic modifi cation is just another tool for selection [developed scientifi cally].” ( http://www.thehindu.com/news/national/cannot-ignore-benefi ts-of-gm-crops-says-venki-ramakrishnan/article5467005.ece).

An important concern of environmentalists is that such a selection will lead to monoculture and the plants which are rejected may become extinct, causing harm to our diversifi cation. But then, the practice of selec-tion has been happening since ancient times by farm-ers, and now is simply being adopted by breeders and bio-technologists. There are agencies, public and pri-vate, which are responsible for conservation of plant genetic material which is rejected or not suitable today for cultivation, such as the National Bureau of Plant Ge-netic Resource (NBPGR) that need to be strengthened further. Similar to Mr. Shiv Vishwanathan, Dr. M.S. Swaminathan, the father of green revolution in India, has also appealed to plant biotechnology stakehold-ers to communicate the benefi ts of GM technology to consumers and a wider public so that a consensus can be built (http://www.thehindu.com/todays-paper/tp-na-tional/tp-karnataka/build-consumer-confi dence-to-stop-controversies-swaminathan/article5428094.ece ). In the case of cotton, India has already harvested growth in yields through GM technology. Conservation of reject-ed plants, fi xing companies’ accountability and public investment in strengthening government plant biotech-nology research defi nitely require much more attention of the government, but this should not hinder the pro-cess of scientifi c trials. Let us give science a chance.

GM Crops: Do We Really Need To Worry?


BY INVITE


— KCTL Research

COMMODITY OF THE MONTH

Chana prices fell during most of 2014, trading well below the minimum support price (MSP) level for most of the year. Despite fall in production

of Chana in 2013-14, prices have not drawn any sup-port as the crop quality turned out to be poor. With the spot prices trading below MSP, farmers were expected to most likely sell their stock to Government procurement agencies. However, market sources say that the actual procurement happened lower than expectation which created negativity among the farmers.

As of the current sowing season, total sowing of Rabi crops lags by 6% as of 1st week of Dec, 2014 compared with the same period previous year. Pulses sowing area stands at 107.85 lakh hectares, down 12% from the pre-vious year. Within that, Chana sowing is nearing com-pletion across the major growing areas in India and lags by 17% at 69.43 lakh hectares. Chana consists of 45% of the total pulses production in India, so we believe the fall in acreage in Chana might impact the total pulses output in 2015. The fall in acreage is due to unfavorable weather conditions, which has led to sowing being de-layed. Chana mainly grows in areas with cooler environ-ments and is grown in the winter season. But this year,

temperature across key growing regions remained warm during the initial phase of the sowing window owing to which sowing is delayed. Moreover, the decline in acre-age can also be due to unattractiveness of chana to the farming fraternity given its subdued price performance over past two years.

From our physical market survey wherein we con-tacted a few traders and farmers to understand the likely production and demand estimates for 2014-15, chana production is likely to decline by 15% to 7.22 mn tonnes while consumption is expected at 8-8.5 mn tonnes. The carryover stock is calculated at 0.85 mn tonnes. Import

Pick Up Some Chana

Balance Sheet Study

YearsTotal Supply

(Million Tonnes)Total Demand

(Million Tonnes)

Imports Production Exports Consumption

2010-11 0.10 8.22Export is ban since

2006 until further orders

10.72

2011-12 0.21 7.70 11.58

2012-13 0.70 8.83 12.68

2013-14 0.28 8.50 10.16

2014-15* 0.13 7.00 8.00-8.50

*Estimated �igures, Source: MOA


of chickpeas for the April–September 2014 period stands at 0.13 mn tonnes and we expect it to increase in the coming year on lower out-put. The production fi gures for pulses is likely to fall by 8% to 17.7 mn tonnes, and we believe it may show further once the production estimates of the government is out.

NCDEX Chana prices are trading in contango which is unusual for chana given its crop seasonality. Normally, when sowing commences in any agri commodity, prices remain elevated as inventories/supplies are low in that period, and with the expectation of good arrivals, the further month contract trade at a discount. However, chana production is expected to decline in 2014-15, and the supplies will be lower dur-ing the harvesting period, so the far month contract (April contract) prices are trading at a premium to Feb contract prices and likely that similar scenario might continue in near-term. Already, moderate im-pact of likely supply cut is being registered on the commodity wherein we have seen February NCDEX Chana contract rising from Rs 3100 to Rs 3500+ per quintal levels during the last one month. Overall, we believe the commodity might continue to trade on a bullish trend in the coming months and recommend traders to look into buying the same on small declines.

Recommendation

Chana Feb NCDEXBuy at 3300-3320;

TP 3600/3800;SL 3170


Technical Outlook Prices had dropped from a record high of 5137/quintal to 2584/quintal during the July 2012 to June 2013, after that it is hover-ing within a confi ned range of 3458-2584. Prices have broken the consolidation resis-tance levels at 3220 and hovering above the same. Based on the below discussed techni-cal study we are anticipating Chana futures to extend the gains in the coming month. Price had rebounded after taking long term rising trend line support levels around 2745 in the month of July 2014, the same trend line is now providing supports around 2800 levels. In the consolidation phase prices are witnessing formation of multiple bearish reversal candle stick patterns like Hammer, pining bottom and engulf pattern, cumula-tively these are showing the change in the traders psychology towards the buying. In addition to above moving averages are also supportive for building bullish view since prices are trading above the monthly short term 8, 13 and 21 exponential moving av-erages in the monthly price chart, besides moving averages bullish crossover 13/8 had occurred in the weekly price chart. The monthly momentum indicator RSI-14 is treading at equilibrium point (0.50), it has a potential to move higher up to 0.650. High-er side resistances are seen at 3450 which is a previous top (March/2014). Sustainable trade above the same may extend gains up to the Fibonacci retracement 38.2% (3530) and then 50% (3818) resistance levels of the range 2584-5055. Note: The above view will be intact as long as theDecember low near Rs 3034 is not interrupted.



Domestic Commodities Monthly Supports And ResistanceCommodity Contract S3 S2 S1 Close R1 R2 R3 Direction Recommendation/Range

BULLION

Gold MCX Feb-15 24589 25094 25856 26703 27529 28274 28789 Down Sell at 27050-27100 TP 26600/26370 SL 27550

Gold Hedge Feb-14 23640 23970 24210 24329 24490 24650 24900 Down Sell at 24530-24550 TP 23950/23650 SL 24950

Silver MCX Mar-15 31320 32546 34182 35990 38021 39844 40958 Down Sell at 37700-37800 TP 36300/35400 SL 39300

METALS

Copper MCX Feb-15 377.6 383.6 391.0 399.1 409.0 417.9 422.9 Down Sell at 388-389 TP 373/364 SL 400

Lead MCX Feb-15 111 113 116 119 123 128 129 Down Sell at 118-119 TP 113/110 SL 122

Zinc MCX Feb-15 131 133 135 138 142 144 146 Sideways Trading range 127-140

Nickel MCX Feb-15 879 909 939 970 1023 1069 1090 Up Buy at 910-920 TP 970/1020 SL 870

Aluminium MCX Feb-15 110 113 115 118 123 127 129 Down Sell at 114-115 TP 110/108 SL 119

ENERGY

Crude Oil MCX Feb-15 2683 2958 3184 3426 3898 4315 4475 Down Sell at 3300-3340 TP 3100/2800 SL 3550

Natural Gas MCX Feb-15 145 162 176 191 221 248 258 Down Sell at 186-188 TP 175/168 SL 200

EDIBLE OILS

Soybean NCDEX Feb-15 3224 3277 3361 3455 3541 3619 3676 Sideways Trading range 3320-3580

Soy Oil NCDEX Feb-15 565 578 607 639 661 681 699 S i d e -ways Trading range 638-690

RM Seed NCDEX Apr-15 3200 3265 3387 3524 3628 3723 3805 Up Buy at 3540-3550 TP 3740 SL 3410

CPO MCX Jan-15 416 426 445 467 482 495 508 Sideways Trading range 455-480

Castor seed NCDEX Feb-15 4006 4216 4560 4943 5284 5593 5824 Down Sell at 4750-4760 TP 4500 SL 4880

SPICES

Dhaniya NCDEX Feb-15 7311 7524 7774 8048 8404 8723 8894 Up Buy at 8140-8160 TP 8400/8650 SL 7950

Turmeric NCDEX Apr-15 7032 7337 8113 8990 9453 9883 10395 UP Buy at 8400-8450 TP 9200/9600 SL 8050

Jeera NCDEX Feb-15 11821 12492 14140 16000 17024 17975 19064 UP Buy at 15000-15100 TP 15900/16500 SL 14450

Cardamom MCX Feb-15 814 842 915 999 1041 1080 1129 Up Buy at 1030-1040 TP 1090/1120 SL 995

OTHERS

Chana NCDEX Feb-15 2918 3038 3279 3550 3740 3913 4074 Up Buy at 3450-3460 TP 3620/3750 SL 3290

Mentha Oil MCX Feb-15 689 702 721 743 765 784 797 Up Buy at 730-735 TP 780 SL 700

Wheat NCDEX Feb-15 1608 1627 1668 1714 1744 1772 1799 Up Buy at 1680-1670 TP 1770 SL 1630

Sugar NCDEX Mar-15 2568 2606 2669 2739 2800 2855 2898 Sideways Trading range 2850-2630

Maize NDDEX Feb-15 1127 1147 1183 1224 1256 1284 1309 Up Buy at 1230-1235 TP 1270/1310 SL 1195



International Commodities Monthly Supports And ResistanceCommodity Contract S3 S2 S1 Close R1 R2 R3 Direction Recommendation/Range

BULLION

Gold Comex Feb-15 1096 1119 1150 1184 1222 1255 1276 Down Sell at 1245-1247 TP 1180 SL 1292

Silver Comex Mar-14 12.69 13.43 14.46 15.60 16.82 17.91 18.61 Down Sell at 16.90-17.00 TP 15.50 SL 17.80

METALS

Copper Comex Mar-15 2.655 2.702 2.761 2.826 2.904 2.974 3.015 Down Sell at 2.790-2.800 TP 2.650/2.600 SL 2.900

Copper LME 3M Fwd 6037 6117 6197 6284 6420 6541 6596 Down Sell at 6200-6210 TP 6040/5950 SL 6330

Lead LME 3M Fwd 1659 1723 1787 1857 1966 2063 2108 Down Sell at 1920-1930 TP 1750 SL 2000

Zinc LME 3M Fwd 2042 2076 2125 2180 2236 2286 2319 Sideways Trading range 2236-2070

Nickel LME 3M Fwd 13294 13927 14514 15148 16227 17184 17595 Up Buy at 14600-14500 TP 16200 SL 13900

Aluminum LME 3M Fwd 1716 1767 1812 1859 1948 2026 2057 Sideways Buy at 1780-1770 TP 1900 SL 1670

ENERGY

Crude Nymex Feb-15 39.96 44.79 48.88 53.27 61.54 68.87 71.76 Down Sell at 51.00-51.50 TP 46/43.50 SL 55.00

Natural Gas Nymex Feb-15 2.009 2.340 2.605 2.889 3.459 3.962 4.151 Down Sell at 3.220-3.230 TP 2.600/2.350 SL 3.500

EDIBLE OILS

Soybean CBOT Mar-15 954 972 997 1024 1053 1080 1097 Sideways Trading range 1080-1000

Soy Oil CBOT Mar-15 30.22 30.76 31.42 32.14 33.05 33.86 34.31 Sideways Trading range 35.00-32.00

CPO BMD Mar-15 2039 2080 2167 2266 2330 2389 2448 Sideways Trading range 2310-2450

Others

Corn CBOT Mar-15 360 373 382 397 412 425 434 Down Sell at 412-413 TP 385/376 SL 430

Wheat Mar-15 502 541 559 590 638 680 700 Down Sell at 592-593 TP 562/545 SL 625

Cotton Ice Mar-15 56.90 58.23 59.00 60.27 61.85 63.27 64.06 Down Sell at 61.30-61.40 TP 57.80/56.3 SL 63.20

Sugar Mar-15 15.00 15.15 15.30 15.49 15.80 16.05 16.30 Down Sell at 15.40-15.50 TP 14.60/13.90 SL 15.90




— Rohit Kumar /Quant& Mkt Structure /NCDEX

CLASSROOM

Spread trading involves building opposite posi-tions simultaneously in two different contracts. Calendar spread is a variant of spread trading

where the traded contracts belong to the same com-modity or asset in the same proportion but of different maturity months. Inter-commodity/asset spreads be-tween related commodities/assets where opposite posi-tions are taken in different commodities of same expiry but of varying proportions is also a common strategy.

Calendar spreads provide an opportunity to exploit any relative mispricing between various contracts of the same commodity. Generally, calendar spreads fol-low a mean reverting process, which means, prices tend to move towards the mean. This attribute makes calendar spreads more predictable and range bound, thereby making trading in spreads easier and less risky than its outrights.

From Fig 1, it can be observed that the spread price for a defi ned time period moves within a range and exhibits a reverted movement across the mean.

Additionally, trading in calendar spreads also en-ables effi cient fund utilisation as the commodity ex-changes provide margin benefi ts for trading in spreads (In case of NCDEX, margin charged is half of the higher value outright (leg) which turns out to be ap-proximately a quarter of the overall spread position).

In the fi nancial year 2013-14, NCDEX launched Spread Limit Order functionality which allows par-ticipants to enter and exit opposite positions in two calendar month contracts of the same commodity by just quoting the price difference. With this function-ality, NCDEX has become the fi rst exchange in Asia to provide such an advanced and user-friendly spread entry system.

Another tool Spread Order functionality launched by NCDEX provides the market participants with Spread limit order. On execution, this results in sepa-rate trades in outright contracts. Spread order match-ing strictly follows price-time priority simultaneous-ly, conserving the price-time priority in the outright futures contracts as well.

Spread Trading


Some of the unique features are listed below: � Display of spread order book and depth � Provides spread order – spread order match, thus im-

proving the order fi ll frequency � Provides easy and effective roll-overs � No leg-risk, exchange guarantee - execution of both

legs at the desired price differential. � Spread trades result in trade in outright futures con-

tracts � Spread orders are valid for a day and can be viewed/

modifi ed/ cancelled any time during the day � Help participants to control order-to-trade ratio in a

signifi cant mannerBesides this, spread functionality empowers participants

to effi ciently work on various strategies such as Scalping, Rollover and Butterfl y spreads, among others. The utility of this functionality has grown over the months and it has reached an extent where, on an average, 20-25% of the exchange orders and trades are routed through this system. It has been adopted and appreciated equally by several sec-tions of the market, largely comprised of jobbers, hedgers and retail traders.

Currently, this functionality is enabled on all major trad-ing platforms including Tradex, Odin and Omnesys; and available for trading in commodities such as Soybean, Soyoil, Chana, Castor, Dhaniya etc. In the coming days, with availability of more spread combinations across com-modities, spread trading is expected to grow and contrib-ute to a major share of daily trades.

Castor Seed Intraday Near-next Spread Price (Rs/Quintal)

Note: As on August 25


STATISTICS

Source: Bloomberg ; EC: European Union; IN: India; US: United States; CH: China; GE: Germany; UK: United Kingdom; JN: Japan

Economic Events In January 2015Date Time Region Event Period Surv(M) Prior

1/1/2015 6:30 CH Manufacturing PMI Dec 50 50.3

2/1/2015 10:30 IN HSBC India Manufacturing PMI Dec -- 53.3

2/1/2015 20:30 US Construction Spending MoM Nov 0.40% 1.10%

2/1/2015 20:30 US ISM Manufacturing Dec 57.5 58.7

5/1/2015 15:00 EC Sentix Investor Confi dence Jan -1 -2.5

6/1/2015 14:30 EC Markit Eurozone Composite PMI Dec F 51.7 51.7

6/1/2015 15:00 UK Markit/CIPS UK Composite PMI Dec 57.4 57.6

6/1/2015 20:30 US Factory Orders Nov -0.50% -0.70%

6/1/2015 20:30 US ISM Non-Manf. Composite Dec 58 59.3

7/1/2015 12:30 GE Retail Sales YoY Nov 0.60% 1.70%

7/1/2015 14:25 GE Unemployment Change (000's) Dec -5K -14K

7/1/2015 15:30 EC Unemployment Rate Nov 11.50% 11.50%

7/1/2015 15:30 EC CPI Estimate YoY Dec -0.10% 0.30%

7/1/2015 18:45 US ADP Employment Change Dec 225K 208K

7/1/2015 19:00 US Trade Balance Nov -$42.0B -$43.4B

8/1/2015 0:30 US Fed Releases Minutes from Its Dec. 16-17 FOMC Meeting

8/1/2015 12:30 GE Factory Orders MoM Nov -0.80% 2.50%

8/1/2015 15:30 EC PPI YoY Nov -1.40% -1.30%

8/1/2015 15:30 EC Business Climate Indicator Dec 0.17 0.18

8/1/2015 15:30 EC Economic Confi dence Dec 101.2 100.8

8/1/2015 17:30 UK Bank of England Bank Rate Jan-08 0.50% 0.50%

01/09/15-01/15/15 IN Exports YoY Dec -- 7.30%

01/09/15-01/15/15 IN Imports YoY Dec -- 26.80%

9/1/2015 7:00 CH PPI YoY Dec -3.10% -2.70%

9/1/2015 7:00 CH CPI YoY Dec 1.50% 1.40%

9/1/2015 15:00 UK Trade Balance Nov -Â£2000 -Â£2024

01/09/15 15:00 UK Industrial Production MoM Nov 0.20% -0.10%

9/1/2015 19:00 US Change in Nonfarm Payrolls Dec 240K 321K

9/1/2015 19:00 US Unemployment Rate Dec 5.70% 5.80%

12/1/2015 17:30 IN Industrial Production YoY Nov 2.30% -4.20%

12/1/2015 17:30 IN CPI YoY Dec 5.33% 4.38%

01/13/15 10:30 JN Eco Watchers Survey Outlook Dec -- 44

01/13/15 15:00 UK CPI YoY Dec -- 1.00%

01/13/15 CH Trade Balance Dec $48.65B $54.47B

01/14/15 12:00 IN Wholesale Prices YoY Dec 0.50% 0.00%


STATISTICS

Economic Events In January 2015 (cont’d)

Source: Bloomberg ; EC: European Union; IN: India; US: United States; CH: China; GE: Germany; UK: United Kingdom; JN: Japan

Date Time Region Event Period Surv(M) Prior

01/14/15 15:30 EC Industrial Production SA MoM Nov -- 0.10%

01/14/15 19:00 US Retail Sales Advance MoM Dec 0.10% 0.70%

01/14/15 20:30 US Business Inventories Nov 0.20% 0.20%

01/15/15 05:20 JN PPI YoY Dec 2.20% 2.70%

01/15/15 14:30 GE GDP NSA YoY 2014 -- 0.10%

01/15/15 15:30 EC Trade Balance SA Nov -- 19.4B

01/15/15 19:00 US PPI Final Demand YoY Dec -- 1.40%

01/16/15 19:00 US CPI YoY Dec 0.80% 1.30%

01/16/15 19:45 US Industrial Production MoM Dec 0.10% 1.30%

01/19/15 10:00 JN Industrial Production YoY Nov F -- -3.80%

01/20/15 07:30 CH Industrial Production YoY Dec 7.40% 7.20%

01/20/15 07:30 CH GDP YoY 4Q 7.20% 7.30%

01/20/15 15:30 EC ZEW Survey Expectations Jan -- 31.8

01/21/15 11:30 JN Machine Tool Orders YoY Dec F -- --

01/21/15 15:00 UK ILO Unemployment Rate 3Mths Nov -- 6.00%

01/21/15 19:00 US Building Permits Dec -- 1035K

01/21/15 19:00 US Housing Starts Dec -- 1028K

01/21/15 JN Bank of Japan Monetary Policy Statement

01/22/15 18:15 EC ECB Main Refi nancing Rate Jan-22 -- 0.05%

01/23/15 20:30 US Existing Home Sales Dec -- 4.93M

01/26/15 05:20 JN Trade Balance Dec -- -Â¥891.9B

01/26/15 14:30 GE IFO Business Climate Jan -- 105.5

01/27/15 15:00 UK GDP QoQ 4Q A -- 0.70%

01/27/15 19:00 US Durable Goods Orders Dec -- -0.70%

01/27/15 20:30 US New Home Sales Dec -- 438K

01/27/15 20:30 US Consumer Confi dence Index Jan -- 92.6

01/29/15 00:30 US FOMC Rate Decision (Upper Bound) Jan-28 0.25% 0.25%

01/29/15 20:30 US Pending Home Sales MoM Dec -- 0.80%

01/30/15 05:00 JN Jobless Rate Dec -- 3.50%

01/30/15 05:00 JN Natl CPI YoY Dec -- 2.40%

01/30/15 05:35 UK GfK Consumer Confi dence Jan -- -4

01/30/15 15:30 EC CPI Core YoY Jan A -- --

01/30/15 16:00 IN Fiscal Defi cit INR Crore Dec -- 49383

01/30/15 17:30 IN GDP Annual Estimate YoY 1Q R -- --

01/30/15 19:00 US GDP Annualized QoQ 4Q A -- 5.00%

01/30/15 20:15 US Chicago Purchasing Manager Jan -- 58.3


Natural Gas

-27.1%

Crude Oil-20.0%

Aluminum-9.5%

Lead-6.6%

Nickel-5.3%

Zinc, 0.0%

Cotton 0.1%

Copper 2.1%

Gold, 3.5%

Silver4.2%

Mentha Oil, 5.4%

Cardamom, 28.9%

Barley-3.2%

Soybean 2.0%

Wheat 3.5%

Soy Oil 10.4%

Rm Seed 10.7%

Jeera 28.7%

Turmeric 40.4%

December International Commodity Price TrendsNov 28,

2014Dec 31,

2014% Change 52 Week

High% Change from

52 Week High52 Week

Low% Change from

52 Week Low

Nymex Crude Oil (S/bbl) 66.15 53.27 -19.5% 107.73 -50.55% 46.83 13.75%

CBOT Soy Oil (cents/lb) 32.18 31.97 -0.7% 44.70 -28.48% 31.12 2.73%

ICE Cotton (cents/lb) 60.96 60.27 -1.1% 97.35 -38.09% 57.84 4.20%

LME Copper 3 Month ($/t) 6351.00 6300.00 -0.8% 7370.00 -14.52% 6073.50 3.73%

LME Zinc 3 Month ($/t) 2215.00 2178.00 -1.7% 2416.00 -9.85% 1937.00 12.44%

Comex Silver (S.oz) 15.49 15.57 0.5% 22.18 -29.82% 14.10 10.39%

LIFFE Sugar (S/t) 406.90 391.20 -3.9% 495.90 -21.11% 376.00 4.04%

CBOT Soybean (cents/bushel) 1016.00 1019.25 0.3% 1536.75 -33.67% 904.00 12.75%

ICE Sugar (cents/lb) 15.59 14.52 -6.9% 18.47 -21.39% 13.32 9.01%

LME Aluminium 3 Month ($/t) 2004.00 1852.50 -7.6% 2119.50 -12.60% 1671.25 10.85%

ICE Coffee (cents/lb) 186.65 166.60 -10.7% 225.50 -26.12% 113.15 47.24%

CBOT Corn (cents/bushel) 375.75 397.00 5.7% 519.50 -23.58% 318.25 24.74%

Comex Gold (S/oz) 1175.20 1184.10 0.8% 1392.60 -14.97% 1130.40 4.75%

CBOT Soy Meal ($/t) 391.10 364.60 -6.8% 509.40 -28.43% 302.00 20.73%

LME Lead 3 Month ($/t) 2028.00 1858.00 -8.4% 2307.00 -19.46% 1815.25 2.36%

LME Nickel 3 Month ($/t) 16275.00 15150.00 -6.9% 21625.00 -29.94% 13650.00 10.99%

Nymex Natural Gas ($/mmbtu) 4.09 2.89 -29.3% 6.49 -55.51% 2.81 2.99%

CBOT Wheat (cents/bushel) 577.25 589.75 2.2% 735.00 -19.76% 466.25 26.49%

STATISTICS

December Gainers and Losers (M/M%)MCX NCDEX

Karvy Comtrade’s Invest & HarvestJanuary 2015

RNI No.APENG/2008/24815

Documents

25/- Out Of With major economies failing Steam