Commodity Market

What is Commodity???

– Tangible good

– Bulk good such as gold, silver, lead and oil.

– Bulk food product like grain, oats, corn, beef, pork and coffee.

What is Commodity Market??? – raw or primary products are exchanged.

– These raw commodities are traded on regulated commodities exchanges

– Bought and sold in standardized contracts.

Two types of Market

• SPOT MARKET-Mandis

• FUTURES MARKET-Exchanges

Derivatives defined

• A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner.

• Eg If the prices of Underlying Assets like Real Estate goes up then on the other hand prices of Real Estate Futures goes UP.

• What is Forwards contract• A forward contract is an agreement between two parties to buy or sell the underlying

asset at a future date at today's future price.

• What is a Futures Contract?• A futures contract is an agreement to buy or sell in the future a specific quantity of a

commodity at a specific price

Origin of Derivatives• Protect themselves against fluctuations

• Price uncertainty

• Sowed & harvest

• Oversupply & Scarcity

• agreement to fixed prices

• Eliminate price risk

• 1848, the Chicago Board of Trade was established

Participants

– Hedgers

– Speculators

– Arbitragers

MAJOR PLAYERS

• Big Farmers

• Speculators/ Traders

• Government Institutions

• Importers/Exporters

• Corporate having price risk exposure in commodities

• Arbitrageurs

Companies which suffered due to unexpected fluctuations in commodity prices

• Cosmetic giant Avon reported a 7% drop in net profit in third quarter of 2005 and cited higher energy cost and high cost of petroleum based raw material.

• Delta and Northwest airlines filed for bankruptcy due to sky rocking petroleum prices during Katrina Hurricane.

Indian Companies that hedged their physical exposure

• Godrej Consumer Products (GCPL) has hedged a 2009’s supply of a key imported raw material that goes into making soaps, in an attempt to preserve profit margins.

• Around 50 per cent of the raw material costs in the soaps business is accounted by palm oil derivatives.

• Hedging for the entire year has helped Godrej plan its pricing strategy as the price of palm oil complex had moved up by almost 50 per cent from the lows.

• FMCG companies like Dabur & ITC are aggressively hedging their commodity exposure.

Evolution in India • Bombay Cotton Exchange Ltd (1893)

• Gujarati Vyapari Mandali, (1900)

• Calcutta Hessian Exchange Ltd(1919)

• Futures trading in bullion (1920)

• Forward Contracts (Regulation) Act (1952)

• Forwards Markets Commission (FMC) 1953

Indian Commodity Market

• Ban in forward trading from mid-sixties • Prior to ban• commodity exchanges for cotton, gold, edible oils etc• more than 20 regional commodity specific exchanges

• Ban completely lifted in 2003• online multi-commodity exchanges• 3 National and 21 regional exchanges• Trade in around 60 commodities• Option of their investment portfolio • good opportunities for long term investors, arbitrageurs and speculators.

Why Commodity Exchange in India• 47% of GDP is Commodity related

• 18% of GDP is from Agriculture

• Over 65% of 1 trillion population depend on agriculture directly/indirectly

• Over 7500 physical market yards

• History of more than 150 years of derivatives trading

• Contributes to 1/6th of the export earnings.

Future of Commodity Market• World’s third largest food producer

• World’s second largest food Consumer

• India - Largest Consumer - Producer - Exporter – Importer

• Banks to Finance commodities

• RBI permits Banks to hedge their bullion risk through Futures Exchange

• New class of commodity Traders & Value Investors

Facts and figuresPercentage share India’s Economy in the GDP (1990-91)

• Agriculture 32% and now 18%• Industry 27% and now 26%• Services 41% and now 56%

Inflation• The Prices of Commodity are Increasing then why the inflation is

reducing????

• Wholesale Price Index (WPI)• Consumer Price Index (CPI)

Weighting Diagrams Inflation

•Primary Food Articles 32%

•Fuel, Power, Light & Lubricants 11%

•Manufactured Products 57%

Types of Commodities Traded • Pulses: Chana, Urad & Tur

• Spices: Pepper, jeera, Chilli, Turmeric & Cardamom

• Precious Metals: Gold, Silver, Platinum etc

• Base Metals: Nickel, Aluminum, Copper etc

• Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds.

• Soft Commodities: Coffee, Cocoa, Sugar etc

• Live-Stock: Live Cattle, Pork Bellies etc

• Energy: Crude Oil, Natural Gas, Gasoline etc

• Others: Guar Seed, Wheat, Sugar, Mentha Oil, Potato, Kapas, Soya, Etc.

Major Commodities on Indian Exchanges

Commodities

MetalsMetals EnergyEnergyAgroAgro SoftsSofts

Pulses

Precious Metals

Edible OilsBase Metals

Rape seed Oil

Castor Oil

Rape seed Oil

Soya oil

Chana

Spices

Seeds Others

Pepper

Soybean

Mustard

Guar

CardamomMentha

Oil

Potato

Jeera

Castor Seed

Cotton

Sugar

Crude Oil

Natural Gas

Furnace Oil

Gur

Gold

Silver

Copper

Zinc

Aluminum

Steel

Cereals

Maize

Barley

Chilli

Turmeric

Plantation

Rubber

Commodity Exchange

FMC

Regional ExchangeNational Exchange

NCDEX

MCX

NMCE

NBOT 20 other Regional Exchange

Structure of Commodity Market

Commodity Exchanges

• Multi Commodity Exchange (MCX)

• National Commodity and Derivatives Exchange (NCDEX)

• National Multi Commodity Exchange (NMCE)

Multi Commodity Exchange• Established in 2003 and is based in Mumbai

• Independent commodity exchange

• average daily turnover of around 30000 CR

• Accredited with ISO 9001:2000 for quality standards

• MCX has also setup in joint venture the National Spot Exchange a purely agricultural commodity exchange and National Bulk Handling Corporation (NBHC) which provides bulk storage and handling of agricultural products.

• MCX currently facilitates trading of 80+ commodities

National Commodity and Derivatives Exchange Ltd

• Promoted by national level institutions

• NCDEX is a public limited company incorporated on April 23, 2003

• NCDEX currently facilitates trading of 57 commodities

• Total Average Volumes 3600 CR Daily Basis

National Multi Commodity Exchange (NMCE)

• Promoted by Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB)

• First Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI).

• NMCE was the first commodity exchange to provide trading facility through internet, through Virtual Private Network (VPN).

• First Online Multi-Commodity Exchange of India and operational since 26th November 2002.

• Total Average Volumes 1400 CR Daily Basis

NMCE MCX NCDEX

Headquarters Ahmedabad Mumbai Mumbai

Promoters CWC,NAFED,GAIC,GSAMB, NIAM,NOL,PNB

FT,SBI,UBI,NSE,NABARD,HDFC BANK,SBI LIFE INSURABCE,BOB,BOI,CORPORATION BANK,CANARA BANK, NYSE Euronext, Merrill Lynch.Citi Group

NSE,ICICI BANK,CANARA BANK,CRISIL,LIC,NABARD,PNB, IFFCO,

Goldman Sachs,

Intercontinental Exchange (ICE),

Number of Commodities listed 60+ 80+ 57

Major Traded Commodities

Rubber,Pepper, Cardamom,Jute, Coffee

Gold,Silver,Soya,Crude Oil,Mentha Oil

Guar Seed,Guar Gum,Chana,Silver, Gold,Soya

Average Daily Volume 1400 Crores 30000 Crores 3600 Crores

Hours of Trading For All Commodities:

10:00 Am to 05:00 Pm

Agro:10:00 Am to 05:00 PmMetal:10:00 Am to 11.30 Pm

Agro:10:00 Am to 05:00 PmMetal:10:00 Am to 11.30 Pm

Turnover in Different Commodities Segments (MCX)

Turnover in Different Commodities Segments(NCDEX)

Contract Specification

No. Commodity Trade Unit of Value Quote/Base Unit Delivery Tick Size1 Gold 1 Kg 10 Grams 1 Kg Re 12 Silver 30 Kg 1 Kg 30 Kg Re 13 Ref Soy Oil 10 Mt 10 Kg 10 Mt 5 Ps4 Kapas 4 Mt 20 Kg 4 Mt 10 Ps5 Chana 10 Mt 100 Kg 10 Mt Re 16 Urad 10 Mt 100 Kg 10 Mt Re 17 Guar Seed 10 Mt 100 Kg 10 Mt Re 18 Pepper 1 Mt 100 Kg 1 Mt Re 19 Guar Gum 10 Mt 100 Kg 10 Mt Re 1

10 Mentha Oil 360 Kg 1 Kg 720 Kg 40 Ps11 Crude Oil 100 Barrels 1 Barrels 50000 Barrels Re 1

MCX

No. Commodity Trade Unit of Value Quote/Base Unit Delivery Tick Size1 Guar Seed 10 Mt 100 Kg 10 Mt Re 12 Guar Gum 5 Mt 100 Kg 5 Mt Re 13 Soya Bean 10 Mt 100 Kg 10 Mt 5 Ps4 Ref Soya Oil 10 Mt 10 Kg 10 Mt 5 Ps5 Urad 10 Mt 100 Kg 10 Mt Re 16 Wheat 10 Mt 100 Kg 10 Mt 20 Ps7 Chana 10 Mt 100 Kg 10 Mt Re 18 Gold Pure 1 Kg 10 Grams 1 Kg Re 19 Sona 1 Kg 10 Grams 1 Kg Re 1

NCDEX

Major Commodity Exchange

Major Commodity Exchange

• Chicago Board of Trade (CBOT)

• New York Mercantile Exchange (NYMEX)

• London Metal Exchange (LME)

• Tokyo Commodity Exchange (TOCOM)

World Commodities Exchanges Volumes

0

20

40

60

80

100

120

140

160

NYMEX CBOT TOCOM LME NYBOT CME MCX NCDEX

Metals

Energy

Agri

Regulation of commodity markets

Country

Exchange

Regulator

U.S.A Chicago Board of Trade Chicago Mercantile Exchange New York Board of Trade New York Mercantile Exchange Kansas City Board of Trade

CommodityFuture Trading Commission

India National Commodity & Derivatives

Exchange NationalMulti-Commodity Exchange

Forward Markets Commission

U.K London Metal Exchange Euronext London International

Financial Futures Exchange

Financial Services Authority (1986)

China Dalian Commodity Exchange Shanghai Futures Exchange ChinaSecurities Regulatory

Commission

Brokerage CalculationVolume 10000000 Total Brok+TOT

Brokerage 0.03 3000TOT 0.0020% 200 3200Service Charge 10.30% 329.6Stamp Duty 0.0010% 100Total 3629.6

Volume 10000000 Total Brok+TOTBrokerage 0.01 1000TOT 0.0037% 370 1370Service Charge 10.30% 141.11Stamp Duty 0.0010% 100Total 1611.11

NCDEX Commodities

Daily Time of Different Exchange

Exchange Timing IST

Tokyo Commodity Exchange 5.30 am – 12 pm

Shanghai Metal Exchange 6.30 am - 12.30 pm

London Metal Exchange 5:20 PM - 10:30 PM (Winter) 4:20 PM - 9:30 PM (Summer)

COMEX/NYMEX/CBOT 6:40 PM - 11:30 PM (Winter) 5:40 PM - 10:30 PM (Summer)

MCX & NCDEX 10:00 AM - 23:55 PM (Winter) 10:00 AM - 23:30 PM (Summer)

Why choose Commodities over Equities?

• In developed countries, commodity market is 5 times bigger than equity markets.

• Market has grown from 200 Cr in 2003 to 14000 Cr in 2006 per day & expected to be around 60000 Cr till Dec 2010.

• Low number of commodities, therefore choice is easy.• No need to go into exotic maze of financial statements

created by corporate world.• Margins are low; therefore return ratios are favorable on

winning deals.• No single individual can control on longer terms basis on

demand and supply in commodities.• Does not involve individual / company specific risk.

Commodity v/s Financial Derivatives

COMMODITY DERIVATIVES FINANCIAL DERIVATIVES

Commodity Derivatives are settled by actual deliveries

Financial Derivatives are only cash settled today

Quantity and quality differences exist

No such differences exist

Holding cost includes assaying, warehousing, & insurance costs

Holding costs normally consists of only interest costs.

Physical markets are seasonal in nature

Cash markets are active throughout the year.

Factors Impacting :

• Demand & Supply• Import-Export Regulations• Government Intervention

Factors Impacting :

• Global & Local Economic Condition• Performance of the entity• Taxation Structure

Upfront margin between 5-10% Upfront margin between 25-30%

37

Comparative returns from Various Asset Classes

Commodity /Indices

Units

Feb07

Months ago 3Months ago 6Months ago Year ago

Price % Price % Price % Price % MCX Energy - 2216 2094 5.8 2360 -6.1 2716 -18.4 2289 -3.2

MCX Metal - 2721 2617 4.0 2741 -0.7 2685 1.4 1965 38.4 MCX Comdex - 2226 2141 4.0 2285 -2.6 2335 -4.7 1889 17.8

BSE SENSEX - 12938 14091 -8.2 13696 -5.5 2335 10.6 10370 24.8 USD Rs/dollar 44 44 - 45 -1.2 46 -4.9 44 -0.5

Euro Rs/euro 58 57 1.0 59 -1.9 60 -2.6 53 9.8 GBP Rs/Gbp 87 87 .0 88 -1.6 88 -2.0 78 11.3

Gold Rs/10 gms 9628 9242 4.2 9269 3.9 9692 -0.7 8112 18.7 Silver Rs/kgs 20486 19933 2.8 20395 0.4 19969 2.6 14049 45.8

Crude Oil Rs/Barrels 27703 2612 3.5 2889 -6.4 3256 -17.0 2739 -1.3 Copper Rs/kg 272 261 4.3 320 -14.9 358 -23.8 216 26.1

Nickel Rs/kg 1901 1709 11.2 1481 28.4 1584 20.0 676 181.1 Rubber Rs/100Kgs 9219 10675 -13.6 7931 16.2 8710 5.8 8223 12.1

Mentha Rs/kgs 574 580 -1.0 669 -14.2 570 0.7 457 25.6 Castor Seed Rs/100kg 1888 1897 -0.4 1919 -1.6 1655 14.1 1604 17.7

Pepper Rs/100kgs 12268 12795 -4.1 11105 10.5 11580 5.9 7541 62.7 Jeera Rs/kgs 10242 8427 21.5 7663 33.7 8892 15.2 5739 78.5

Sugar Rs/100kgs 1511 1600 -5.6 1757 -14.0 1823 -17.1 2061 -26.7 Guar. Rs/kgs 485 477 1.7 532 -8.8 572 -15.2 571 -15.0

Ref Soya oil Rs/10 kgs 443 452 -2.0 466 -4.8 435 2.0 378 17.2

Delivery Process for Buyer• Take Position

• Delivery Intension 5 Days Prior Notice

• Pay Delivery Margin

• Pay-in/ Pay-out of funds/ Commodity

• Exchange of Buyers & Sellers

• Settlement of Premium/ Discounts & sales Tax

Delivery Process for Seller • Take Position

• Delivery Intension 15 Days Prior Notice

• Contact the Warehouse for Availability of Space

• Take Physical Commodity to the Warehouse for Assaying

• Warehouse Issues Receipt against the Deposit of Commodity

• Assayer takes Sample and Issues a Quality Report as per standard Quality mention by the Exchange

• If Approved/ Disapproved

– If Approved then delivery is given and Amount is Credit to the Seller in T+5 Days

– If Disapproved then has to take the good back and then seller has to cut its position before 5 days of Expiry

Thank You