1.

INTRODUCTION

1.1 INTRODUCTION
In the wake of globalization and surge in the global uncertainties, financial organizations around the world are devising methods and instruments to contain the price risk that these uncertainties bring. Commodity derivatives are such instruments that have been devised to achieve price risk management by basing the value of a security on the value of an underlying commodity. Commodity derivatives trading although have witnessed a long and chequered history, with the recent measures of liberalization, the sector has witnessed a massive boom in the country. Ever since the first national level commodity exchange was introduced in 2003, commodity exchanges have seen an exponential growth. In the last fiscal, that is, 2012-13 the total turnover of the Indian commodity markets was approximately Rs.170.46 trillion.Currently, there are five national commodity exchanges and several regional exchanges in India. The growth in trading volumes has been primarily propelled by Multi Commodity Exchange (MCX) and National Commodity Exchange (NCDEX).These two exchanges account for a large share of the total number of contracts traded on all the exchanges in India.The main commodities that contributed for the tremendous growth of the market are non-agriculture commodities, out of which bullions (gold and silver) lead the Indian Commodity Market. Following the sharp surge in turnover and trade volumes in recent years, the stakes in commodity trading are higher than ever before. Investment and trading in commodities is now considered a good alternative investment in the country. As the commodities market has seen a steady growth rate over the years. Being in a nascent stage, the commodities futures market is catching up rapidly with equities and in the coming years, it has the potential to equal or surpass the equity turnover.

1.2 OBJECTIVES OF THE STUDY

To study about the commodity derivative market and the mechanism behind the trading of commodities To get a better understanding of the Indian Commodity Market Study of National Commodity Exchanges in India and commodities traded within Growth Estimates based upon the turnover in the National Exchanges( 2003-2013) Evaluating the reasons that lead to the growth in the commodity market Yearly development in the commodity market Growth Projection for future years(2014,2015) using technical analysis

1.3 SCOPE AND LIMITATIONS

By doing this study, it helped me in understanding how the changes in Indian Commodity Market had taken place since its evolution and also the growth of commodity market from the last decade by calculating turnover of national exchanges. This study is limited to only national level exchanges i.e., NCDEX, MCX, NMCE, ACE. Prices estimations and GDP growth rate projections are done for limited commodities and important nations only respectively. Except GDP rates, other macro-economic indicators are not taken into consideration.

1.4 RESEARCH METHODOLOGY

The methodology that I have adopted to do this study is as follows:

The data which provides the information about commodity market is taken from secondary sources.

The date regarding the annual turnovers from 2003-2013 of major national exchanges is taken from the market data published in respective exchanges website.

The Japanese candlestick charts which gives the monthly average prices of various commodities are screenshot from trading platforms of international exchanges.

To project the growth of commodity market, GDP estimations of major nations and Price projection of important commodities is done.

2.COMPANY PROFILE
2.1 ABOUT KARVY GROUP
Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services for over 20 years. Karvy, a name long committed to service at its best. A fame acquired through the range of corporate and retail services including mutual funds, fixed income, equity investments, insurance to name a few. The values and vision of attaining total competence in servicing has served as a building block for creating a great financial enterprise. The birth of Karvy was on a modest scale in the year 1982. It began with the vision and enterprise of a small group of practicing Chartered Accountants based in Hyderabad, who founded Karvy. They started Karvy with consulting and financial accounting automation, and then carved inroads into the field of Registry and Share Transfers. Since then, they have utilized their quality experience and superlative expertise to go from strength to strength to provide better and new services to the investors. And today, they can look with pride at the fruits of our experience into comprehensive financial services provider in the Country.

KARVY Group companies are: Karvy Consultants Limited Karvy Stock Broking Limited Karvy Investor Services Limited Karvy Computershare Private Limited Karvy Global Services Limited Karvy Comtrade Limited Karvy Insurance Broking Private Limited Karvy Mutual Fund Services Karvy Securities Limited

2.2 KARVY COMTRADE LIMITED

An ISO 9001:2008 certified company, Karvy Comtrade Limited (KCTL) is Indias leading commodities brokerage house. They have membership of Multi Commodity Exchange of India (mcx), National Commodity and Derivatives Exchange (ncdex), National Multicommodity Exchange of India (nmce), National Spot Exchange (nsel), NCDEX spot exchange (nspot), Ace commodity exchange (ace) and Indian commodity exchange (icex). Using a superior trading platform, they facilitate futures trading in commodities as per the exchanges. KCTL offers both trading and exclusive research services to its clients. A subsidiary of Karvy Stock Broking Limited (KSBL), KCTL commenced operations in early 2005. At KCTL, they offer a wide reach through our network of around 900 offices located across 400 cities in India. That makes them among the top-3 players in the country, both in terms of number of terminals as well as clients. They have a formidable and well-established research wing, which helps their clients to make informed decisions. The commodities research division has won multiple accolades and awards in recent years, making it one of Indias best-known research houses among media, experts and market participants alike. THE KCTL ADVANTAGE Seamless, online trading platform: clients can trade from anywhere in India, sitting in the comfort of their home or office. Moreover, with Karvys huge network of offices across the 4

country, clients can access KCTL in their neighborhood. No matter where clients are, Karvy will always be within clients reach. Reliable, award-winning research: KCTL has a formidable and well-established research team, which will help its clients to make informed decisions. The commodities research wing has won multiple accolades and awards in recent years. Clearly, it is a one of Indias best-known research houses among media, experts and market participants alike. Personalized services: Karvy offer a suite of custom-made products, after carefully studying the client profile and the reason for which clients are availing its service. Regardless of whether clients are of a farmer, manufacturer, investor, speculator, importer or exporter, KCTL try to understand the clients needs and offer them the product that would best suit your requirements. Cutting-edge technological expertise: The state-of-the-art technological expertise is key to the success of the Karvy group. Little wonder, therefore, that KCTL remain Indias premier player in the financial-services back-office space. KCTL have now extended these strengths to commodities futures business. Karvys robust, nation-wide connectivity offers instant, easy, transparent and efficient transactions on a superior trading platform. CORPORATE DESK The KCTL corporate desk has been helping corporate clients to adopt comprehensive strategies to manage their price and exchange risk volatility. The desk strives to develop customized risk-mitigation solutions and strategies, tailored to protect company profits from excessive volatility, particularly in these uncertain times. KCTL endeavor to provide client with consistent, realistic data-based analysis and recommendations. The corporate desks end-to-end support begins with a comprehensive review of the clients commodity exposure and transaction cycle. Thereafter, KCTL perform an in-depth market analysis and accurately assess client risk and requirements before devising the right strategy. Following a systematic approach, the desk offers a combination of advisory and managed services to keep client profitability on track even as it attempts to minimize regulatory and compliance costs. The corporate desk approach Discover: identify the need and relevant commodity exposure Design: devise a strategy according to the purchase cycle of the company Develop: formulate a strategy 5

Demonstrate: pilot-test the strategy Deploy: put it in action, corresponding to the purchase cycle Control and review: review and modify strategies according to market

movements Special features Expertise in handling large corporates for hedging and trading strategies Customized research reports Customized back-office reports Dedicated relationship managers for instant solutions Large volume-processing capability Adherence to strict time schedules Query handling within 24 hours

MANAGEMENT As head of the commodities business, Mr. Sushil sinha has successfully made Karvy Comtrade a force to reckon with in the marketplace. With over 10 years of expertise in the broking sector, he is a well-known face today in the electronic and print media. Under his aegis, the company has won numerous honors and awards nationwide, including the UTV Bloomberg leadership award 2011 and Indias best market analyst awardfor two consecutive yearsby Zee business. Having joined Karvy Comtrade in December 2005 as senior manager (business development), he has steadily climbed up the organizational ladder to head the business now. A science graduate, Mr. Sinha has completed two mbas one majoring in Personnel management & industrial relations and the other in Agri business management.

3. INTRODUCTION TO DERIVATIVE MARKETS

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A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. In 1848, the Chicago Board of Trade (CBOT) was established to bring farmers and merchants together. A group of traders got together and created the `to-arrive' contract that permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price changes. These were eventually standardized, and in 1925 the first futures clearing house came into existence. Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton, wheat, silver, etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc.

3.1TYPES OF DERIVATIVE MARKETS

Derivatives markets can broadly be classified as commodity derivatives market and financial derivatives markets. As the name suggest, commodity derivatives markets trade contracts are those for which the underlying asset is a commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy products like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade contracts have a financial asset or variable as the underlying. The more popular financial derivatives are those which have equity, interest rates and exchange rates as the underlying.

3.2 SOME COMMONLY USED DERIVATIVES

Here we define some of the more popularly used derivative contracts. Forwards: A forward contract is an agreement between two entities to buy or sell the underlying asset at a future date, at today's pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell the underlying asset at a future date at today's future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded.

Options: There are two types of options - call and put. A Call option gives the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. A Put option gives the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

3.3DIFFERENCE BETWEEN COMMODITIES AND DERIVATIVES

The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlings are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary at times.

3.4 INTRODUCTION TO COMMODITY MARKETS

Ever since the drawn of civilization, commodity trading has become an integral part of mankind. The first and foremost reason is that commodity represents the fundamental elements of lifestyle of human beings. In the early days, people used to exchange goods for goods, which was called as Barter System. With the advancement of civilization, trading system has gone through various changes and has now entered into an era of Future trading besides existence physical trading across the world. The history of Commodity Future trading can be traced back to 1688 with the introduction of Future trading in rice in Japan. This was followed by an increased participation in commodity derivatives, especially in Futures, in the industrialized countries like America and Britain. All the countries opened the avenue for introduction of Future trading in commodities in 19th century. Major commodity Future trading platforms opened in the world are Chicago Board of Trade (NYBOT) and New York Mercantile Exchange (NYMEX). DEFINITION OF COMMODITY DERIVATIVE: 8

A Commodity derivative is a contract which derives its value from an underlying commodity. The main purpose of Future market is to provide a mechanism for successfully managing the price risk associated with commodities. Future markets provide a platform for buyers and sellers to trade in a huge number of diverse commodities such as agricultural products, metals and energy. These markets are not only meant for hedgers, speculators and arbitrages, but also for retail investors who want to trade in booming commodity market. COMMODITY TRADING SYSTEM The commodity trading system functions on a real time basis through online means. Farmers, exporters, importers, and traders are the main participants in this market. The commodity trading system operates through online channels. Trading takes place on a real time basis and is either routed through satellite communication system or the internet. Order Matching Mechanism

Traders place their order through a registered commodity broker of a commodity The trader's order is entered by the authorized dealer into the online terminal. The order finds its match automatically through the online channel. If it doesn't find a match at that very moment then it gets stored in the online order book When two similar and opposite orders (that is, one buy and one sell order) match, then a

exchange.

until and unless a similar and opposite order matches it.

trade is said to be complete.

Trading Clearing Mechanism In a commodity market, trade clearing takes place through a registered clearing house of an exchange. Clearing house helps the system to function smoothly and properly by guaranteeing:

timely settlement registration of a trade and its consequent follow up delivery of the commodity to the concerned buyer and settlement of funds in non-delivery cases

simultaneous payment to the seller

Clearing and Settlement: Clearing and settlement of commodities in the commodity trading system commences only after the end of trading hours on the expiration date of the contract. Processing of delivery matching considers the following:

Location of the order Available warehouse capacity Total quantity of commodities that have already been deposited and given to

dematerialize. After the completion of the delivery matching process, the following steps are followed:

Information on the final outcome of the matching process (amount of commodities to be

delivered or received and amount of unmatched position) is given to the clearing members of the exchange.

Unmatched positions (gains or losses) are cash settled.

Commodity delivery takes place through the following steps:

The concerned buyer asks its depository participant to deliver the commodity. The depository participant, in turn, forwards this request to the designated depository. Depository forwards this message to the registrar and then to the transfer agent. Transfer agent, in turn, verifies authenticity of the request. In case of genuine request, transfer agent passes on the details of delivery to the Warehouse then arranges delivery of the concerned commodity to the designated buyer

warehouse.

(only after thorough identification check).

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4. INDIAN COMMODITY MARKET

In India local markets for futures on agricultural commodities have been recorded to be around from the 1800s. The commodity derivatives markets in India are as old as those of the US. The origin of commodity derivatives markets in India can be traced back to 1875, when Bombay Cotton Trade Association Ltd., was set up to start trading in cotton Futures. Subsequent to this, many other associations have started Future trading in commodities at different places. For example, the Futures trading in oilseeds started in 1900 at Bombay, raw jute and jute products in 1912 in Calcutta, wheat in Hapur in 1913, bullion in Bombay in 1920. The development of the commodity derivatives market in India like many other countries has been hindered by policy reversals on concerns regarding its effect on prices and supplies of essential commodities. This apart, integration of spot and futures market is cited as a critical factor for further growth of commodity futures in India. India was in an era of physical controls since independence and the pursuance of a mixed economy set up with socialist proclivities had ramifications on the operations of commodity markets and commodity exchanges. Government intervention was in the form of buffer stock operations, administered prices, regulation on trade and input prices, restrictions on movement of goods, etc. Agricultural commodities were associated with the poor and were governed by polices such as Minimum Price Support and Government Procurement. Further, as production levels were low and had not stabilized, there was the constant fear of misuse of these platforms which could be manipulated to fix prices by creating artificial scarcities. This was also a period which was associated with wars, natural calamities and disasters which invariably led to shortages and price distortions. Hence, in an era of uncertainty with potential volatility, the government banned futures trading in commodities in the 1960s. The Khusro Committee which was constituted in June 1980 had recommended reintroduction of futures trading in most of the major commodities, including cotton, kapas, raw jute and jute goods and suggested that steps may be taken for introducing futures trading in commodities, like potatoes, onions, etc. at appropriate time. The government, accordingly initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar Pradesh.

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With the gradual trade and industry liberalization of the Indian economy pursuant to the adoption of the economic reform package in 1991, GOI constituted another committee on Forward Markets under the chairmanship of Prof. K.N. Kabra. The Committee which submitted its report in September 1994 recommended that futures trading be introduced in the following commodities:

Basmati Rice Rice bran oil Cotton, Kapas, Raw jute and Jute goods Linseed Silver Onions Castor oil and its oil cake Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflowerseed, copra and soybean and oils and oilcakes

The committee also recommended that some of the existing commodity exchanges particularlythe ones in pepper and castor seed, may be upgraded to the level of international futures markets.

4.1 REGULATORY FRAME WORK

At present, there are three tiers of regulations of forward/futures trading system in India, namely, Government of India, Forward Markets Commission (FMC) and Commodity Exchanges. The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. Proper regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could also have undesirable influence on the spot prices, thereby affecting interests of society at large. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could 12

create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the Exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market. FORWARD MARKETS COMMISSION (FMC) Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority, which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. The Act Provides that the Commission shall consists of not less than two but not exceeding four members appointed by the Central Government out of them being nominated by the Central Government to be the Chairman thereof. Currently Commission comprises three members among whom Dr. Kewal Ram, IES, is acting as Chairman and Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS, are the Members of the Commission. The functions of the Forward Markets Commission are as follows:

To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.

To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.

To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;

To make recommendations generally with a view to improving the organization and working of forward markets;

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To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.

4.2 DEVELOPMENT OF ELECTRONIC SPOT EXCHANGES

Electronic spot exchanges is an emerging phenomenon in the country These spot exchanges provide real time, online, transparent and vibrant spot platform for commodities. The contracts allow participants from all over the country to buy and sell, thereby enabling producers and users to discover best price. The Government has allowed the National Commodity Exchanges to set up three spot exchanges in the country, namely the National Spot Exchange Ltd. (NSEL), NCDEX Spot Exchange Ltd. (NSPOT) and National Agriculture Produce Marketing Company of India Ltd. (NAPMC). During 2009, there was significant expansion of spot exchanges' trading facilities in India. These spot exchanges have created an avenue for direct market linkage among farmers, processors, exporters and end users with a view to reducing the cost of intermediation and enhancing price realization by farmers. They will also provide the most efficient spot price inputs to the futures exchanges. The spot exchanges will encompass the entire spectrum of commodities across the country and will bring home the advantages of an electronic spot trading platform to all market participants in the agricultural and nonagricultural segments. On the agricultural side, the exchanges would enable farmers to trade seamlessly on the platform by providing real-time access to price information and a simplified delivery process, thereby ensuring the best possible price. On the buy side, all users of the commodities in the commodity value chain would have simultaneous access to the exchanges and be able to procure at the best possible price. Therefore, the efficiency levels attained as a result of such seamless spot transactions would result in major benefits for both producers and consumers. In order to overcome current inefficiencies in the commodities spot market and to bring transparency in trading in commodity spot markets, National Commodity and Derivatives Exchange Limited (NCDEX) has set up an electronic spot exchange called NCDEX Spot Exchange Limited.

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5. STUDY OF NATIONAL COMMODITY EXCHANGES

Commodity exchanges are defined as centers where futures trade is organized in a wider sense; it is taken to include any organized market place where trade is routed through one mechanism, allowing effective competition among buyers and among sellers. This would include auctiontype exchanges, but not wholesale markets, where trade is localized, but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers.

5.1 ROLE OF COMMODITY EXCHANGES

Commodity exchanges provide platforms to suit the varied requirements of customers. Firstly, they help in price discovery as players get to set future prices which are also made available to all participants. Hence, a farmer in the southern part of India would be able to know the best price prevailing in the country which would enable him to take informed decisions. For this to happen, the concept of commodity exchanges must percolate down to the villages. Today the farmers base their choice for next year's crop on current year's price. Ideally this decision ought to be based on next year's expected price. Futures prices on the platforms of commodity exchanges will hopefully move farmers of our country from the current 'cobweb' effect where additional acreage comes under cultivation in the year subsequent to one when a commodity had good prices; consequently the next year the commodity price actually falls due to oversupply. Secondly, these exchanges enable actual users (farmers, agro processors, industry where the predominant cost is commodity input/output cost) to hedge their price risk given the uncertainty of the future - especially in agriculture where there is uncertainty regarding the monsoon and hence prices. This holds good also for non-agro products like metals or energy products as well where global forces could exert considerable influence. Purchasers are also assured of a fixed price which is determined in advance, thereby avoiding surprises to them. It must be borne in mind that commodity prices in India have always been woven firmly into the international fabric. Today, price fluctuations in all major commodities in the country mirror both national and international factors and not merely national factors.

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Thirdly, by involving the group of investors and speculators, commodity exchanges provide liquidity and buoyancy to the system. Lastly, the arbitrageurs play an important role in balancing the market as arbitrage conditions, where they exist, are ironed out as arbitrageurs trade with opposite positions on different platforms and hence generate opposing demand and supply forces which ultimately narrows down the gaps in prices. It must be pointed out that while the monsoon conditions affect the prices of agro-based commodities, the phenomenon of globalization has made prices of other products such as metals, energy products, etc., vulnerable to changes in global politics, policies, growth paradigms, etc. This would be strengthened as the world moves closer to the resolution of the WTO impasse, which would become a reality shortly. Commodity exchanges would provide a valuable hedge through the price discovery process while catering to the different kind of players in the market.

5.2 INDIAN COMMODITY EXCHANGES

There are 22 recognized commodity futures exchanges in India under the purview of the Forward Markets Commission (FMC). The country's commodity futures exchanges are divided majorly into two categories:

National Exchanges Regional Exchanges

The five exchanges operating at the national level (as on 1st January 2010) are:
National Commodity and Derivatives Exchange Multi Commodity Exchange National Multi Commodity Exchange Indian Commodity Exchange Ahmedabad Commodity Exchange

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The leading regional exchange is the National Board of Trade (NBOT) located at Indore. There are more than 15 regional commodity exchanges in India.

5.3 FEATURES OF NATINAL AND REGIONAL EXCHANGES

NATIONAL EXCHANGES

Compulsory online trading Transparent trading Multi commodity exchange Large expanding volumes Exchange recognized on permanent basis Exchanges to be de-mutualized

REGIONAL EXCHANGES

On line trading not compulsory De-mutualization not mandatory Recognition given for fixed period after which it could be given for reregulation Generally, these are single commodity exchanges. Exchanges have to apply for tradingeach commodity.

Low volumes in niche markets

MULTI COMMODITY EXCHANGE OF INDIA (MCX): Multi Commodity Exchange of India Limited (MCX), is an Exchange with a mandate for setting up a nationwide, online multi-commodity marketplace, offering unlimited growth opportunities to commodities market participants. As a true neutral market, MCX has taken several initiatives to usher in a new-generation commodities futures market in the process, become the country's premier Exchange. MCX has started operations from November 10, 2003.

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Commodities traded in MCX: Cereals:Barley,wheat, maize Fibers: Kapas, 29- cotton Pulses: Chana Spices: Cardamom, coriander Bullions Gold Gold Guinea Gold M Gold Petal Gold Petal (New Delhi) Platinum Silver Silver M Silver Micro Others Silver 1000 Almond Guar Gum Gaur Seed Melted Menthol Flakes Mentha Oil Potato (Agra) Potato (Tarkeshwar) Sugar M NATIONAL COMMODITY & DERIVATIVES EXCHANGE (NCDEX):

Oil and Oil seeds

Crude Palm Oil Kapasia Khalli Refined Soya Oil Soya Bean

Weather: Carbon Metals Aluminium Aluminium Mini Copper Copper Mini Iron Ore Lead Lead Mini Mild Steel Ingot, Billets Nickel Nickel Mini Tin Energy Zinc ATF Zinc Mini

Brent Crude Oil Crude Oil Gasoline Heating Oil Imported Thermal Coal Natural Gas

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. NCDEX is a technology driven commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

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Forward Market Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. NCDEX is located in Mumbai and to start with would offer facilities in about 40 cities throughout India. The reach will gradually be expanded to other cities. Commodities traded in NCDEX: Both agri and non agri products are traded in NCDEX

Cereals and Pulses

Barley Chana

Fibers
V-797 Kappas Shankar Kappas 29mm- Cotton

Guar Complex
Guar seeds Guar gum

ACE:
Maize

Soft
Sugar Gur

Oil and Oil seeds

Spices

Castor seeds Cotton seed oilcake Soy Bean Refined soy oil Mustard Seed

Pepper Turmeric JEERA Chilli

Plantation: Rubber Others: Potato

Metals Precious Metals Energy

Steel Copper

Gold Gold (100 gms) Gold International

Crude Oil Brent Crude Oil

Others:

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AHMEDABAD COMMODITY EXCHANGE (ACE): Kotak Anchored, Ace Derivatives and Commodity Exchange Limited is a screen based online derivatives exchange for commodities in India. Ace Commodity Exchange earlier known as Ahmedabad Commodity Exchange has been in existence for more than 5 decades in Commodity Business, bringing in the best and transparent Business Practices in the Indian commodity space. With Ace, Kotak Group brings to the commodity market a new, state-of-the-art trading platform which combines the operational efficiency of global exchanges with deep domain expertise in each commodity vertical. Following the Kotak Groups legacy of transparency in their dealings and providing the best solution to the market participants, Ace provides the confidence of trading on a world-class platform to manage risks and reduce complexities of commodity prices. With the lowest latency trading platform, Ace Commodity Exchange sets the industry benchmark for quicker trade synchronization and price information broadcast. Product innovation has always been central to Ace, bringing forward a basket of products that align to leading exchanges worldwide. In addition to its convenient trading platform, Ace Commodity Exchange provides a robust clearing & settlement infrastructure that supports the complete process of trade intermediation including registration of trades, settlement of contracts and mitigation of counter-party risk; giving traders the peace of mind in times of increased market volatility. Direct Delivery System Ace Derivatives and Commodity Exchange Limited (Ace), a Kotak Mahindra Group anchored commodity exchange in India, June 19th 2013, Mumbai announced the introduction of additional delivery mechanism (Direct Delivery System) for new season cotton118 contracts expiring in October 2013 onwards. Under Direct Delivery Model, sellers shall be able to deliver the goods directly from their own location. This facility is available only for the delivery centers in the state of Gujarat. The Direct Delivery System is an additional facility and the existing procedure of delivery through 20

Exchange accredited warehouse (i.e., demat mode of delivery) would continue to exist and can be availed by the participants Key benefits of direct delivery system are as follows:

Cost of delivery on the exchange platform would reduce to a large extent (saving on transportation, warehousing and standard deduction costs). Quantum of deliverable commodity on the exchange platform increases

Selling price quoted by the sellers on the exchange platform will be more realistic to the prevailing spot price, thus encouraging the buyers to use the exchange platform for planning their procurements

Direct delivery model captures the delivery mechanism as currently being followed by the participants in the spot market , thus encouraging the ginner / seller to participate on the platform

Commodities traded in ACE Oil and Oil seeds

Pulses: Chana Fibers: Cotton Others:

Castor oil Mustard oil Soy oil Soybean Soy meal

Guar seed Guar gum

NATIONAL MULTI COMMODITY EXCHANGE (NMCE): In response to the Press Note issued by the Government of India during May'1999, first state-ofthe-art demutualized multi-commodity Exchange, National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State 21

Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). NMCE is unique in many other respects It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. The exchange does not compromise on its delivery provisions to attract speculative volume. Public interest rather than commercial interest guide the functioning of the Exchange. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. NMCE commenced futures trading in 24 commodities on 26th November, 2002 on a national scale and the basket of commodities has grown substantially since then to include cash crops, food grains, plantations, spices, oil seeds, metals & bullion among others. Research Desk of NMCE is constantly in the process of identifying the hedging needs of the commodity economy and the basket of products is likely to grow even further. NMCE has also made immense contribution in raising awareness about and catalyzing implementation of policy reforms in the commodity sector. NMCE was the first Exchange to take up the issue of differential treatment of speculative loss. It was also the first Exchange to enroll participation of high net-worth corporate securities brokers in commodity derivatives market. It was the Exchange, which showed a way to introduce warehouse receipt system within existing legal and regulatory framework. It was the first Exchange to complete the contractual groundwork for dematerialization of the warehouse receipts. Innovation is the way of life at NMCE Commodities traded: Oil and oil seeds, spices (pepper), precious metals, base metals, pulses and others.

6.GROWTH OF COMMODITY MARKET FROM LAST DECADE (2003-13)

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The growth in commodity market is calculated by taking four important national exchanges turnover from 2003-2013. The exchanges taken for calculation of growth are NCDEX, NMCE, MCX and ACE. The following table shows the financial year wise turnover of national commodity exchanges from 2003-2013. TABLE 1:Turnover of National Commodity Exchanges NCDEX 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 148305 26621213 109065664 116431172 77195367 53382878 91758384 141060224 181021013 159842597 NMCE 4737266.36 2815284.36 3678934.19 22366716.5 4971691.43 12291515.7 45580302.4 43682187.5 53670195.3 35307300.1 MCX ACE Turnover(lkhs) 5116850.54 46057786.16 207933447.3 368170247.3 394762970.9 524483790.9 776668870.1 1171856410 1808235357 1700409444

231279.18 16621288.8 95188849.1 229372358.8 312595912.4 458809397.2 639330183.7 984148039.1 2965959.20 1559709547 13834601.7 1488105712 17153835.3

By extrapolating the turnover of national exchanges (trillion) the following graph has obtained GRAPH 1: Growth of Commodity Market from last decade

The graph and the calculated values reveal that there is increase in turnover value from 0.5117 trillion in financial year of 2003-04 to 180.82 trillion in financial year of 2011-12 and in financial year 2012-13 the turnover came down to 170.04 trillion. However the rate at which the commodity market is growing has been declined from financial year of 2003-04 to financial year of 2007-08. Again from the year 2008-09 the growth rate has taken positive path, but in financial year 2012-13 there is a slight decrease in growth rate of market at 5.96%. Table 2: Growth rate of Commodity Market TOTAL GROWTH RATE TURNOVER(lakhs) (%) 5116850.54 23

YEAR 2003-04

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

46057786.16 207933447.3 368170247.3 394762970.9 524483790.9 776668870.1 1171856410 1808235357 1700409444

800.12% 351.46% 77.06% 7.22% 32.86% 48.08% 50.88% 54.31% -5.96%

6.1 REASONS FOR COMMODITY MARKET GROWTH

The turnover of commodity market shows an huge growth from 0.5117 trillion in financial year of 2003-04 to 180.82 trillion in financial year 2011-12 and shows a slight decrease in turnover by 5% during financial year 2012-13 i.e the value is 170.04 trillion. The following are the reasons for growth in commodity market INCREASE IN COMMODITY PRICES: Increase in commodities prices in international markets is one of the best contributors for the growth of commodity market. Some of factors that affect commodity prices are Production related Commodities are capital-intensive products i.e. they are influenced by natural factors like weather conditions, crop diseases, size of land cultivated and factors related to production like labor patterns, development in the tools and technologies used. Other than these there are factors like the economic and political environment which manifest itself in the form of trade constraints, subsidies, taxes to mention a few. Altogether these factors affect the cost of producing the commodity and the demand for it in a market where there is more than one participant. Storage and Transportation constraints All commodities have a real physical form and therefore there is a need for storage prior to distribution. This is not the case of financial products so inventory cost and storage do not have such a large impact on the market prices. This factor does not however affect the prices across all commodity asset classes in the same magnitude but rather depends on the type of commodity in question. Economic and Demand related patterns the uncertainties in the global financial system have made commodities a favorable investment alternative to financial instruments. Typical examples would be gold and silver. The increasing involvement of developing markets as suppliers expose 24

the prices to the political and production related constraints in these countries like economic policy, infrastructure and labor conditions and sometimes pushes prices higher. RISE IN COMMODITES VOLUME BEING TRADED: The quantities of different types of commodities that are being traded over national and regional exchanges have been increasing year by year. The following are the reason for the rise in commodities volume. Commodity is an asset class which is cyclical and tradable by nature. In the western world, the volumes of the commodities market are almost two to three times as compared to the equity market. Commodities is a volume game, you rarely see prices shooting up by 20%-30% in a single day, which is common in the equity markets. So, to make huge profits, one should have a high leverage to make the most of the 3%-4% movements which take place throughout the day. Apart from other reasons that were witnessed around the globe post the 2008 recession, we have seen easy monetary policies being adopted by western central bankers and beyond that any slowdown or fear of a slowdown was tackled by stimulus packages. A massive debasement of currencies is taking place since the past three years and that is one of the prime reasons investors have found refuge in hard assets and commodities. It is not just shortages that are fuelling the Bull Run in commodities. The introduction of exchange traded funds internationally in commodities, pension funds, sovereign funds as well as central bankers (in case of gold), who are increasing the exposure in commodities, are responsible in a very significant way for the spike that we have seen in commodity volumes. Slowing growth in developed nations and high inflationary expectations in emerging markets have also benefited commodities. Investors have found a store of value in commodities. The intrinsic value of commodities in comparison with other asset classes is very high. There is a secular bull run in the complex since the past decade. INCREASE IN TRADING They are two main explanations regarding increase in commodities trading. One explanation for the rise in commodity derivatives trading is that it was simply part of a widespread increase in 25

risky investing during the past decade that was attributed to a search for yield. A second explanation for the rise is that it was driven by a mistaken notion that an investment in commodity futures can be used to hedge equity risk. The Search for Yield Hypothesis The term search for yield is somewhat vague. In an efficient market model, all investors are assumed to optimize over combinations of risk and return. One should not choose more risk unless the expected returns also rise. One way to interpret the search for yield is to argue that, at low interest rates, investors are willing to take on relatively more risk for only small increases in return. In such a case, investors will bid up the price of risky assets and, the price of risk will decline. During the period of rapid growth in commodity derivatives, managers of pension funds, university endowment funds, and other institutional funds began to include commodity derivatives as an asset class in their portfolios. There was a shift out of domestic equities into commodities. One argument was that investing in such real assets could increase returns without adding much risk. Hedging hypothesis: The main prospect for raise in commodity trading is to hedge equity risk. Hedging is a great risk management tool. This is done by taking a position in the commodity futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes. Many participants in the commodity futures market are hedgers. They use the futures market to reduce a particular risk that they face. This risk might relate to the price of commodity that the person deals in. Hedging does not necessarily improve the financial outcome, what it does however is that it makes the outcome more certain. INCREASE IN INVESTMENT:

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Commodities influence a significant portion of the economy, and can be viewed as the largest non-financial market in the world. Investment in commodities has grown substantially over the past few years, a trend that is expected to continue. Studies have shown that commodity price movements have traditionally been negatively correlated to price movements of other financial instruments (such as equities or bonds), so a natural resource investment can provide important portfolio diversification. Equities, bonds and other financial instruments have shown that they tend to follow the same trend in times of economic crisis. In addition, equities are also bound by country-specific economic pressures. In contrast, commodities such as zinc and wheat or orange juice will rarely rise and fall in parallel, regardless of economic fundamentals, and they reflect the global economy. Limited supply resulting from long-term underinvestment, coupled with burgeoning demand from China in particular, has fuelled a fundamentals-based bull run and added to the appeal of investing in commodities. This spectacular bull run has certainly attracted investors but it is the negative correlation to bonds and equities (and positive correlation with inflation) that will continue to attract investment and ensure existing investment is maintained. POLICY DEVELOPMENT: The long period of prohibition on forward trading in major commodities like cotton and oilseeds complex has enfeebled the commodity derivative markets in India. Futures markets in commodities find themselves left far behind the derivative markets in developed countries which have been functioning uninterruptedly. Even the securities market in India, which was far behind the commodity derivatives market in terms of volume, level of participation etc. in 1960s, has grown rapidly. This fall in commodity market lead to an implementation of new policies. The policy initiatives taken by the government since mid-90 in the physical commodity markets have created a conducive environment for the commodity exchanges to flourish.In the early 1990s the Forex Crisis and liberalization of the economy lead to policy changes in India. These led to the re-introduction of futures trading in commodities. With a view to protect Farmers, Traders & Exporters from Price fluctuations of Commodities and to serve as an efficient Price Discovery mechanism, Government of India took the landmark decision in April 1999 to remove all the 27

commodities from the restrictive list for Futures Trading. Government also allowed setting up of new, modern, demutualized, Nation-wide multi-commodity Exchanges with investment support from public and private institutions. Important development and regulatory steps taken by FMC The Forward Markets Commission is committed towards the development of institutional capability of the commodity market. The Commission has taken several steps in this direction, which include sensitizing policy makers and all other co traders improving the efficiency of all the participants in the marketing chain by organizing awareness programs, workshops, subject specific consultancies, study tours, lectures, etc., members FMC has set itself an ambitious target for reaching out to various market segments and grass roots level participants. FMC solicits active collaboration with Universities, Educational Institutions and other organizations desiring to spread awareness about Futures Trading in commodities. The developmental measures also include the price dissemination among the farmers through APMCs (spot market regulators). In addition to above the following are also being undertaken

Increasing the breadth and depth of the market For increasing breadth and depth of market, there is necessity of participation of

farmers aggregators and other hedgers as well as participation of banks and mutual funds.

Improving the Governance of Exchanges and Intermediaries Possible way to improve this can be stricter enforcement of legal and regulatory provisions and improvement in competencies and transparency.

Standardization of contract designs and quality parameters across the market. Removal of interstate tariff and non-tariff barriers Market integration. Capacity Building: Exchanges, Warehouses, Assayers. 28

R and D in Commodity market governance and structural issues. Sensitization of policy makers / opinion makers with respect to the benefits of the commodity futures market.

INCREASE IN LIST OF COMMODITIES TO BE TRADED OVER EXCHANGES The increase in commodities being traded over different national and regional exchanges also contributed for the growth of commodity market National Multi Commodity Exchange of India Limited (NMCE) was the first such exchanges to be granted permanent recognition by the Government. NMCE commenced futures trading in 24 commodities on 26th November 2002 on a national scale. Currently (August 2007) 85 commodities are being traded in NMCE. Multi Commodity Exchange of India (MCX) was established in November 2003 and is a leading Exchange for Bullion & Energy sectors. Now 52 commodities are being traded in MCX National Commodity & Derivatives Exchange Limited (NCDEX) commenced operations in December 2003 and currently facilitates trading in 57 commodities. Ace which was established in October 2010 started its trading in 7 commodities (sugar, castor, castor, channa, mustard, refsoyoil, and soybean) and currently 13 INCREASE IN DEMAND FOR COMMODITIES: As we know the important commodities that contributed for commodity market growth are bullion and metals, their increase in demand for industrial application in form of manufacturing, raw material purposes, fabrication of jewelry, etcraised the prices of commodities, which consequently lead to commodity market. Not only of industrial application, economic growth is also a reason for increase in demand. With a period of good economic growth, demand in India for both jewelry and retail investment remained very strong in Q404, rising 49% and 32% in tonnage terms respectively on Q403, with total consumer demand up 46%. For the year as a whole, total consumer demand rose by 17%.

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Global gold demand reflects challenging global economic climate: ETFs up 56% and India up 9% in Q3 2012 The Indian marketis showing signs of recovery, up 9% to 223.1t from 204.8t in Q3 2011 following increases in both jewellery and investment demand. In comparison with Q3 2011 jewellery demand was up 7% to 136.1t and investment demand rose by 12% to 87.0t. Investors moved into the imitation coin market, up 59%, whilst jewellery increased due to re-stocking ahead of the Indian wedding and festival season.

6.2 YEAR WISE DEVELOPMENT IN COMMODITY MARKET

Year by year the Indian Commodity market has undergone some developments in many ways. The key milestones of Commodity Market are of as following. 2003-2006 developments in commodity markets The Ministry vide its notification S.O. 369(E) dated 1st April, 2003 has exempted all the 54 Commodities from the operation of Section 17 of the Forward Contracts (Regulation) Act, 1952 by rescinding all the relevant notification issued earlier and applied Section 15 of the Act to all these commodities in the whole of India with the issue of these notification prohibition on futures trading has been completely withdrawn. The Ministry vides its notification S.O. 617(E) dated 27th May, 2003 exempted all nontransferable specific delivery (NTSD) contracts in 37 commodities from the operation of Section 17 read with Section 18(3) of the Act in the whole of India. Consequently, Party-to-Party contracts of sale of goods involving delivery and beyond eleven days do not attract any regulatory/prohibiting provision under the Act. India Pepper and Spice Trade Association, Kochi 30

On recommendation of the Forward Markets Commission, the Government of India granted recognition to the India Pepper and Spice Trade Association, Kochi under Section 6 of the FCRA for conducting forward contracts in chilly and Turmeric for a period of one year from 15th September 2003 to 14th September 2004.The Forward Market Commission, on the 6th February, 2004, granted permanent registration under Sec.14 of the F.C. (R) Act to India Pepper and Spice Trade Association, Kochi in respect of rubber. National Commodity and Derivative Exchange Ltd., Mumbai The Government of India in pursuance of notification dated 20.11.2003 granted recognition to the NCDEX on a permanent basis in all the permission to trade in gold, silver, soybean, refined soy oil, rapeseed/mustard seed expeller, mustard oil, crude palm oil, RBD Palmolein, medium staple cotton and long staple cotton for all the 12monthly contracts starting from January 2004 to December 2004 contracts subject to the contract specifications of the Exchange was granted on 9.12.2003. The Exchange has commenced trading on 15th December, 2003. National Multi- Commodity Exchange of India Limited (NMCE), Ahmedabad: Futures trading in Linseed oil cake, Pepper, Lead, Copper, Tin, Zinc, Gram. Guar seed and Sacking commenced for the first time at the Exchange in the month of April after the Exchange was given the national status on 10-1-2003. Proposal received from the Exchange seeking futures trading in Gold, Silver, Wheat and Rice were examined and the recommendations were forwarded to the Government on 14.5.2003 and 31.7.2003 respectively. The Government accepted the recommendations of the Commission and cleared the above proposals on 29.8.2003.commenced trading in Gold and Silver on 3.10.2003. Trading in Wheat and Rice commenced on 13.12.2003. The permission for pulses such as urad, moong, masur and spices such as cardamom was given to the NMCE on 6.2.2004 and the trading in these commodities were commenced by the exchange on 11.2.2004. Multi- Commodity Exchange of India Limited, (MCX), Mumbai:

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The Government of India granted in principle approval to the Exchange on 14.2.2003 with the condition that the exchange would complete all the formalities and make the exchange functional within 10 months period. The Exchange thereafter formed a public company and got incorporated under the Companies Act, 1956 on 28.5.2003Government granted recognition to the Exchange on 28.9.2003 on permanent basis. The proposal seeking futures trading in Gold and Silver submitted by the Exchange on 8.9.2003 was also examined and the recommendation sent to the Government on 11.9.2003.The Government accepted the recommendations of the Commission and cleared the said proposal on 28.9.2003. Consequently the Commission permitted trading in Gold, Silver and Castor seed on 23.10.2003 and the Exchange commenced trading in these commodities on 10.11.2003. Subsequently future trading in Rubber and Pepper is also launched at the Exchange. The trading in other commodities such as Black pepper, kapas, steel, rubber, soybean, its oil, groundnut oil, castor oil, RBD Palmolein, Crude Palm oil was also permitted to the exchange for the first time on various dates. Trading in all the commodities is commenced except groundnut oil. Developments in Commodity Markets during 2006-07 The total value of trade during 2006-07 (April - January 2007) was Rs.30.31 lakh crores. Total value of trade during 2005-06 was Rs. 21.55 lakh crores. The phenomenal growth in the value of trade was largely because of the increase in the number of commodities available for trading and the online trading platform offered by the National Exchanges. MCX, Mumbai and NCDEX, Mumbai contributed 57.48% and 35.67% of the total value of the trade during the year 2006-07. Presently, trading in 103 commodities are regulated under the Forward Contracts (Regulation) Act, 1952. Recognition was granted to East India Jute and Hessian Exchange Ltd., Kolkata in respect of Raw Jute (including Mesta), and renewed in case of First Commodities Exchange of India, Kochi in respect of Rubber and Bikaner Commodity Exchange, Bikaner in respect of Guar seed, Guar gum and Gram as given in Annexure II. To avoid the risk of misuse of multiple terminals, direction issued to the national level Exchanges to impose restrictions on the number of terminals a member can us for proprietary trading. 32

To bring discipline in the market, the penalty for violation of limit on open position was increased from Rs. 1000/- to Rs. 10,000/- or 2% of the value of the limit exceeded whichever is higher to link the penalty with the value of the violation. It also provides for suspension of the habitual defaulters. Training programs/capacity building programs were also organized through National Institute of Bank Management, Pune (for creating awareness amongst the bank officers), Indian Institute of Rural management (IRMA) Anand for creating awareness amongst the Co-operatives and through Indian Institute of Management, Bangalore (IIM, Bangalore) for senior officers of the Agriculture Department, Civil Supplies, Agricultural Produce Market committees of the State Government for creating awareness about these markets. A Memorandum of Understanding was signed between the United States Commodity Futures Trading Commission (USCFTC) and Forward Markets Commission (FMC) at Mumbai on 18th October, 2006. ShriSundareshan, Chairman, FMC signed the MOU on behalf of FMC whereas Shri. Reuben Jeffery, Chairman CFTC signed the MOU on behalf of CFTC. The MOU provides for consultation on matters of mutual interest in order to promote co-operation on market integrity, sharing of information on each others laws, consultation providing for issues relating to Risk Management etc. FMC also signed an MOU with China Securities Regulatory Commission (CSRC) during the visit of the Chinese President Shri. Hu Jintao to India on 21.11.2006. The MOU was signed in the presence of the Chinese President, Shri. Hu Jintao and the Prime Minister of India,Shri. ManmohanSingh,after the summit meeting at Hyderabad. On behalf of FMC, MOU was signed by ShriSundareshan, Chairman FMC and Shri Sun Yuxi, Chinese Ambassador to India, signed the MOU on behalf of CSRC. FMC in consultation with the RBI allowed the members, registered with FMC, to set up wholly owned subsidiaries abroad. No Objection Certificates (NOCs) were issued to 3 members to trade in Commodities related activities. During the period 2007-2008 All the three national Ex- changes were directed on 13th April, 2007, to maintain a minimum 33

margin of 25% on long positions and 20% on short positions in all the pepper and Jeera contracts. On 1.10.2007, the 6% special margin imposed on Jeera was rescinded. However, the additional margin of 5% was continued in addition to the Initial margins of 7.5%. On 15 th October 2007, 10% additional margins were imposed on Chilies, of which 5% was to be paid in cash. On 19 th October 2007, the guidelines for imposition of spread margins were issued to the national Exchanges. On 25th October 2007, directives were issued withdrawing the additional margins of 5% imposed on Mentha Oil Futures contracts w.e.f. 29th October 2007. VaR based initial margins imposed on all commodity contracts at 5% of the value of the contract, except for gold whose margin would be at 4%. On 9th May 2007, the limit on open position for pepper futures contracts was reduced from 3000 MTs to 1500 Mts or 15% of the market wide open position, which-ever is higher, on a real time basis for members and from 1000 MTs to 500 Mts or 15% of the market wide open position, whichever is higher, on a real time basis for clients. The penalty for failure to meet delivery obligations by the market participants also reduced to 2.5% of the Final Settlement Price (FSP) + the difference between FSP and the spot price prevailing on the last day of pay-in-pay-out of the expired contract (Payable to the counterparty) The Commission, held eight meetings with the trade participants/ members of the exchanges to interact and to provide them a common platform to discuss various trade related issues. The details of such meetings are given below: A meeting with the hedgers/ federations of co-operative societies held on 13th July 2007. A meeting with the Commodity Boards, Federations, Chamber of Commerce and other important trade bodies belonging to South and Western India at Hyderabad on 28th July 2007. A meeting with the Members of the Commodity Exchanges belonging to West Zone was held on 31st August 2007. A meeting with the co-operative societies and the Federations held on 12th 34

November 2007. A panel discussion on Commodity Derivatives held at Administrative Staff College of India, Hyderabad held on 16th November 2007. A meeting with the members belonging to East and South Zone, held on 23rd November 2007 and 11th December 2007 respectively. A meeting with the Exchanges and the farmer organizations held on 18th December.

Development in Commodity Market during 2008-2009 During the year, the Commission regulated futures trading in more than 100 commodities at 22 recognized Commodity Exchanges. The total value of commodities traded during the year 200809 (April-March) was Rs. 52.49 lakh crores as against Rs. 40.66 lakh crores during 2007-08. The Commission granted fresh permission to trade in newly introduced futures contracts in Electricity, Heating Oil and Gasoline, ATF, Carbon Credit, Red Aracanut, Coriander seed, Garlic, Steel Long, Thermal Coal Considering the concerns of the Govt. about the inflationary expectations in the economy and to address the perception in certain quarters that futures trading leads to price rise, the FMC, as a measure of abundant caution, suspended futures trading in Chana, soy oil, Rubber and Potato w.e.f. 7th May 2008 for a period of 4 months. This was further extended up to 30th November 2008. The suspension has, however, lapsed on 30th November 2008. Trading in these commodities has resumed w.e.f. 4th December 2008. The open interest limits for aggregate and near month futures contract of Castor seed were revised on 14th May, 2008. The Commission, on 10th February 2009, revised the position limits in selected illiquid agricultural commodities The Commission, on 16th September 2008, revised the penalty structure of the NCDEX, Mumbai on delivery default payable by the seller from 2.5% to 3% plus the difference between the final settlement price (FSP), and the average of the three highest of the last spot prices of the 5 succeeding days (E+1 to E+5 days) after the expiry of the contract, if the average price so determined is higher than FSP, else this component will be zero. 35

To restrict the misuse of multiple client code system for trading, National Exchanges were directed on 23rd July 2008 not to allow multiple client codes to a single client. The Exchanges were also advised to ensure that no client is allowed to trade without having Unique Identification Number assigned by FMC with effect from the said date.

From 2009-2010 On the recommendations of the Forward Markets Commission, the Ministry of Consumer Affairs, Food and Public Distribution, Government of India, on 9th October, 2009, granted recognition to M/s. Indian Commodity Exchange Limited (ICEX), NCR, Gurgaon, on permanent basis in respect of forward contracts in all the commodities in which Section 15 is applicable and in commodities to which neither Section 15 nor Section 17 of FC(R) Act, 1952 is applicable, with prior permission of the FMC. Following the grant of recognition to the Indian Commodity Exchange (ICEX), the permission was granted to ICEX to trade in 13 commodities contracts, viz., Guar Seed, Mustard Seed/Rape Seed, Refined Soy Oil, Turmeric, Soy Bean, Gold, Gold 100 grams, Silver, Silver 5 Kg, Crude Oil, Natural Gas, Copper Cathode and Lead). Recognition of the National Board of Trade, Indore was renewed from 1st June, 2009 to 28th February, 2010 in respect of futures trading in soybean, refined soya oil and soy meal. The Commission granted fresh permissions to trade in newly introduced futures contracts in Almond and Imported Thermal Coal. Exchange of Futures for Physicals (EFP) transactions were permitted at MCX, Mumbai, on 12th October, 2009 in certain commodities, for implementation with effect from 1st November, 2009 viz., (i) Gold and Gold Mini, (ii) Silver and Silver Mini, (iii) Copper, (iv) Zinc, (v) Nickel, (vi) Lead, (vii) Aluminum, (viii) Chana, (ix) Mentha oil, and (x) Wheat. Under these contracts, buyers and sellers exchange a futures position for a physical position of equal quantity by intimating the same to the Exchange with due documentation. Deliveries take place outside the Exchange and Exchange is intimated of the deliveries that have taken place 36

with documentary proof. The delivery can take place at any point of time. The responsibility, risks and enforcement of settlement of the physical transaction lie with the respective counter party. In EFP transactions, first delivery of goods will take place and then corresponding to that the positions will be created under EFP system. Hence, no penalty structure has been prescribed. Alternate Futures Settlement (AFS) transactions was permitted at NCDEX, Mumbai, on 12 th October, 2009 for implementation with effect from 1st November , 2009 in (i) Soya bean, (ii) Steel, (iii) Guar seed, (iv) Rape / Mustard seed, and (v) Cotton. In AFS transactions, buyers and sellers agree to transfer their OTC agreement to the Futures Exchange by taking corresponding long-short positions. All the National Exchanges were directed to fix a price band on the opening day of the contract and to amend their bye-laws/rules/ regulation to rule out excessive volatility and to ensure uniformity across the National Exchanges. (b) The limit on daily price fluctuation limit was increased to 3% initially and after a break of 15 minutes to 1% more (3%+1%=4%) in respect of all the CPO contracts traded at the National Exchanges 2010-2011 developments in Commodity Market On the recommendations of the Forward Markets Commission, the Ministry of Consumer Affairs, Food and Public Distribution, Government of India, vide Notification dated 10th August 2010, granted recognition to the Ahmedabad Commodity Exchange, now rechristened as ACE Derivatives & Commodity Exchange Limited (ACE) as a Nationwide Multi Commodity Exchange on permanent basis in respect of forward contracts in all the commodities to which Section 15 of the Forward Contracts (Regulation) Act, is applicable. In pursuance of section 14 B of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) Certificate of Registration was also granted to the ACE Derivatives and Commodity Exchange Limited, Ahmedabad, On the recommendation of the Forward Markets Commission, the Central Government granted in-principle approval for recognition of the Universal Commodity Exchange Limited (UCX), Mumbai, as a Nationwide Multi-Commodity Exchange subject to the fulfillment of the commitments made / undertakings given to the Commission within the stipulated time 37

On the recommendations of the Forward Markets Commission, the Ministry of Consumer Affairs, Food and Public Distribution, Government of India renewed the recognition of the NBOT, Indore in respect of Rapeseed/ Mustard seed for a period from 1.6.2010 to 31.5.2011 and in respect of Soybean, Refined Soy oil and Soy meal from 1.7.2010 to 31.10.2010 and further up to 28th February, 2011, under Section 6 of Forward Contracts (Regulation)Act, 1952 The Commission recommended to the Ministry for the renewal of recognition to Bikaner Commodity Exchange, Bikaner for the period from 20th January 2011 to 31st March 2012 in respect of guar seed to the ministry. The Commission recommended to the Ministry for the renewal of recognition to the Central India Commercial Exchange Ltd., Gwalior and the Rajdhani Oils and oilseeds Exchange, Ltd, Delhi from 1st March 2011 to 31st March 2012 in respect of forward contracts in Rapeseed / Mustard seed. The Commission issued directives to the commodity exchanges on 28th July 2010 to discontinue the system of sub-broker and asking the members of the National Commodity Exchanges to provide access to their clients only through authorized person(s) appointed as per Commissions guidelines. Developments during the period 2011-2012 During the year, the Commission regulated futures trading in 113 commodities at 21 Recognized Commodity Exchanges. The Commission made recommendations to the Department to renew the recognition of the following Exchanges; Rajdhani Oils and Oilseeds Exchange, Ltd, Delhi for the period 1st April 2012 to 31st

March 2014 for futures trading in Rapeseed/Mustard seed and Gur.

Central India Commercial Exchange Ltd., Gwalior in respect of Rapeseed and

Mustard seed for the period 1st April 2012 to 31st march 2013.

Chamber of Commerce, Hapur for the period 1st April 2012 to 31st March 2014

in respect of futures trading in Gur. 38

In the interest of trade and in public interest, the Commission monitored trading activities of the Commodity Exchanges and imposed various regulatory measures as warranted from time to time such as revision in special margin in respect of Dhaniya, Turmeric, Kapas, Mentha oil, Guar seed, Guar Gum, Pepper, Castor seed and Chana contracts. The Commission, on 20.12.2011 issued guidelines to all the regulated entities / exchanges on formulation of common KYC document for client account opening to be made operational from 1st April 2012. This would facilitate simplicity in procedure for the clients for opening a trading account with Multiple Commodity Exchanges using a single set of document. The Commission approved amendments to Articles of Association of Bikaner Commodity Exchange Ltd., Bikaner pertaining to revision in fees and constitution of the Board of Directors. The Commission also conveyed its approval to the amendments to Articles of Association of NMCE, Ahmedabad relating to capitalization and the bye-laws of MCX, Mumbai pertaining to arbitration. The Commission conveyed its approval to the Amendment to Bye-law 11.4 of the Bye-laws of the National Commodity & Derivatives Exchange Ltd., Mumbai increasing the limitation period for submitting all claims, differences or disputes referred to in clause (1) of Bye-law 11.2 of the Bye-laws of NCDEX from six months to three years. ACE announced tie up with Kotak Mahindra Bank to provide seamless funding on the commodities being traded on its platform. This tie up is expected to bridge the gap of short term funding requirements for both Buyers and Sellers by allowing Kotak Mahindra Bank to provide funding and act as the Professional Clearing Member of the Exchange. This is a welcome move by the Exchange that will help the market to grow. It will aid participants like farmers and aggregators with physical stock to gain easier access to funding and encourage them to trade on the exchange platform.

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7. GROWTH PROJECTION OF COMMODITY MARKET FOR COMING TWO YEARS

The estimation of growth for coming year 2015 is done by calculating the CAGR of the market and projecting GDP rates and commodities prices.

7.1 CAGR: Compound Annual Growth Rate

CAGR is the year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where # is number years in the period being considered.

The calculated CAGR for total turnover of national commodity exchanges is found to be 26.5%. This indicates that the Indian Commodity Market will grow around 26% by 2015. So to examine whether the growth is going to be around 26.5% the following are been projected for 2015.

GDP of US, EUROZONE, INDIA, CHINA and JAPAN Prices of most traded commodities in India

7.2 PROJECTIONS OF GDP

US GDP: Growth in the United States remained uninspiring during 2012, due to significant effects of the financial crisis, continued fiscal consolidation, a weak external environment, and temporary shocks, including the severe drought that affected farm activity and inventories and disruptions in the northeast following Superstorm Sandy. The fiscal cliff threats also have played some prominent role. But the recovery is beginning to show some bright spots. This is because credit growth has picked up, and bank lending conditions have been easing slowly from tight levels. House prices began to rise and job creation picked up in the second half of the year2012, bringing the unemployment rate below 8 percent. 40

Graph 2: USA GDP growth rate

Personal consumption will also be supported by continued, though moderate, job gains and low borrowing rates. At the same time, business investment will be supported by favorable financial conditions and strong profitability. Thus private demand is also going to be strengthened. As a result, GDP growth is expected to pick up toward the end of 2013 and to accelerate from about 2 percent in 2013 to 3 percent in 2014 and 2.7 percent in 2015. EURO ZONE: Since the October 2012, acute crisis risks in the euro area have diminished. Decisive policy actions at the European level including Outright Monetary Transactions (OMTs), the completion of the European Stability Mechanism, the deal on Greek debt relief, and the agreement on the Single Supervisory Mechanism have increased confidence in the viability of the Economic and Monetary Union. Along with progress on economic adjustment by national governments, this has greatly improved financial conditions for sovereigns and banks.

Graph 3: Euro Zone GDP growth rate

Current account balances of adjusting economies have improved significantly, and this improvement is expected to continue this year. This increasingly reflects structural improvements, including falling unit labor costs, rising productivity, and trade gains outside the euro area. Both core and other advanced economies continue to benefit from trade with fastergrowing emerging market economies. Growth in Eurozone is estimated to be -03percent in 2013, 1.5 in 2014 and 2.2 percent in 2015 ASIA: Economic activity had stabilized in Asia by the start of 2013. Growth slowed across the region in the middle of 2012 following a broad-based weakening of exports both within and outside Asia and implementation by China of policies aimed at moderating and better balancing growth

41

(Figure 2.8). Exports have recently picked up across the region, reflecting firmer demand in China and the advanced economies. For Asia as a whole, growth will pick up modestly to about 5.75 percent in 2013, largely as a result of recovering external demand and continued solid domestic demand (Table 2.3). Consumption and private investment will be supported by favorable labor market conditions i.e unemployment is at low in several economies and by relatively easy financial conditions. The easy financial conditions reflect a combination of accommodative monetary policies; rapid credit growth, particularly in some members of the Association of Southeast Asian Nations (ASEAN); and continued robust capital inflows. Asian economies will also benefit from internal demand spillovers, particularly growing Chinese demand and the policy-led pickup in Japan. Indeed, for several economies, direct and indirect demand from China and Japan are almost as important as demand from the United States and Europe. This dynamic may be complicated, however, by the recent yen depreciation, which may put some of the regions exporters in more direct competition with Japanese firms in world markets, while others may benefit through supply chain linkages with Japan. The ASEAN economies have become increasingly competitive in production of final consumer goods, which will contribute favorably to intraregional demand. In Japan, growth is projected to be 1.6 percent in 2013, moderately higher than in the October 2012 WEO as a result of new fiscal and monetary stimulus, despite a sharp contraction in the second half of 2012. Growth will be supported by a recovery in external demand and the substantial further monetary easing. This results in growth of 1.4 percent in 2014 and 1.1 percent in 2015. Graph 4: Japan GDP growth rate

CHINA: Chinas economy expanded rapidly in recent years despite a dire international context, though it slowed in 2011-12. Rebalancing in growth has made both externally and domestically. Growth 42

has been pulled due to increase in consumption and investment mostly in infrastructure. Moreover the inflation rate of china has also been brought under control. More recently, growth has regained momentum, by policy easing system. China has now overtaken the euro area and is on course to become the worlds largest economy. The demand from Europe and the US is likely to pick up, which would significantly boost growth in China. Chinas growth is set to accelerate slightly to about 8 percent in 2013, 8.2 percent in 2014 and around 8.35 percent in 2015, reflecting continued robust domestic demand in both consumption and investment and renewed external demand. Inflation will pick up only modestly to an average of 3 percent in 2013. Graph 5: CHINA GDP growth rate

INDIA: The predicted higher growth in coming years is due to efforts by the government to speed up the approval of large investment projects. The increase in growth is provided by eased monetary conditions following the depreciation of the rupee. Recovery is seen gradual in the Indian economy with monetary policy turning pro-growth, private consumption strengthening with some help from government spending. Increased welfare expenditure by the government, lower interest rates, moderation in inflation and high farm incomes (assuming a normal monsoon) will boost household spending and thereby leading to growth of economy. Further, improved external demand, as a result of marginal recovery of global growth, could raise Indias exports. Growth will rise in India to 5.75 percent in 2013, 6.2 percent in 2014 and 6.9 percent in 2015 as a result of improved external demand and recently implemented pro-growth measures. Graph 6: INDIAN GDP growth rate

7.2 PRICE PROJECTION OF MOST TRADED COMMODITIES

43

As the growth of commodity market is mainly related with the prices of commodities being traded, the projection of commodity prices for 2014 and 2015 helps in estimating the commodity market growth. In Indian commodity market, mostly traded commodities are bullion (gold, silver), metals (aluminum, copper, zinc, lead) and while coming to energy crude oil and natural gas are traded.

BRIEF IDEA ABOUT MOST TRADED COMMODITIES GOLD: Gold is the oldest precious metal known to man and for thousands of years it has been valued as a global currency, a commodity, an investment and simply an object of beauty.

Introduction

Gold (Chemical Symbol-Au) is primarily a monetary asset and partly a commodity. Gold is the world's oldest international currency. Gold is an important element of global monetary reserves. With regard to the investment value, more than two-thirds of gold total accumulated holdings is with central banks' reserves, private players, and held in the form of jewellery. Less than one-third of gold's total accumulated holdings are used as commodity for jewellery in the western markets and industry.

Demand and Supply

World investment amounted to 1614 MT in 2012, broadly flat year-on-year, but the

approximate value of this demand reached a new record of almost $87 billion.

Major drivers of this strong investment included further monetary loosening in the

developed world, continued sovereign debt crisis, rising longer-term inflation fears and in key markets, negative real interest rates coupled with limited attractive risk-free investment alternatives to gold. 44

In 2012, the gold mine production increased by 12 MT to 2848 MT and the combined

demand for bars & coins dropped from 1515 MT to 1256 MT. Global Scenario

London is the worlds biggest clearing house. Mumbai is under India's liberalized gold regime. New York is the home of gold futures trading.

Zurich is a physical turntable. Istanbul, Dubai, Singapore, and Hong Kong are doorways to important consuming regions. Tokyo, where TOCOM sets the mood of Japan.

Indian Scenario

45

India, worlds largest market for gold jewellery and a key driver of the global gold

demand.The domestic drivers of gold demand are largely independent of outside forces. Indian households hold the largest stock of gold in the world.Two thirds of the Indian demand for gold comes from the rural parts of the country.

In 2012, gold's role as an inflation hedge bolstered its appeal in India. India imported

around 850 metric tonne (MT) of gold in 2012.

Japanese candlestick chart 1: Monthly average prices of Gold

46

Factors Influencing the Market

Above ground supply of gold from central bank's sale, reclaimed scrap, and official gold loans. Hedging interest of producers/miners. World macroeconomic factors such as the US Dollar, interest rate and economic events. Commodity-specific events such as the construction of new production facilities or processes, unexpected mine or plant closures, or industry restructuring. In India, gold demand is also determined to a large extent by its price level and volatility.

SILVER: Introduction

Silver (Chemical symbol-Ag) is a brilliant grey-white metal that is soft and

malleable.Silvers unique properties include its strength, malleability, ductility, electrical and thermal conductivity, sensitivity, high reflectance of light, and reactivity.

The main source of silver is lead ore, although it can also be found associated with

copper, zinc and gold and produced as a by-product of base metal mining activities.Secondary silver sources include coin melt, scrap recovery, and dis-hoarding from countries where export is restricted. Secondary sources are price sensitive.

Demand and Supply

In 2011, the worldwide silver fabrication demand was 876.6 million ounces (Moz) down

by 1.5% from the value in 2010, but still reaching its second highest level since 2000.

Globally, in 2011, the physical silver bar investment grew by 67% to 95.7 Moz, while

fabrication of coins and medals rose by almost 19% to an all-time high of 118.2 Moz.

In 2011, silverware offtake dropped by 10.2% to 46.0 Moz from the previous year, as a

result of lower demand in India. Higher prices coupled with ongoing structural decline in the

47

western markets caused a fall in the Indian silverware demand. Part of this fall was offset by some gains in China.

The world silver mine production increased by 1.4% to a new record level of 761.6 Moz

in 2011, as compared with the previous year.

In 2011, scrap supply rose by 12% over the previous fiscal to a second straight record of

256.7 Moz, driven by gains in jewellery and silverware recycling on higher prices.

Government sales fell by a massive 74 per cent to a 14-year low of 11.5 Moz in 2011.The

drastic decline was entirely due to a collapse in sales from Russia, where disposals dropped by nearly 90%.

Notable production losses were observed in Australia, Peru, the United States and Turkey

in 2011, amounting to 20.3 Moz.

Global Scenario

Silver is predominantly traded on the London Bullion Market Association (LBMA) and COMEX in New York.

LBMA, the global hub of over-the-counter (OTC) trading in silver, is the metals main physical market. Comex is a futures and options exchange, where most funds activities are focused.

Silver is invariably quoted in US Dollars per troy ounce.

Indian Scenario

The average annual demand for silver in India is about 2500 Metric tones (MT) per year.

In 2011, the countrys production was around 342.13 MT.Nearly 60% of India's silver demand comes from farmers and rural India, who store their savings in the form of silver bangles and

48

coins.

Japanese candlestick chart 2: Silver monthly average prices

Factors Influencing the Market

Economic events such as Indias industrial growth, the global financial crisis, recession

and inflation affect metal prices.

Commodity-specific events such as the construction of new production facilities or

processes, unexpected mine or plant closures, or industry restructuring affect the market.

Governments set trade policy (implementation or suspension of taxes, penalties, and

49

quotas) that affect supply by regulating (restricting or encouraging) the material flow.

Geopolitical events involving governments or economic paradigms and armed conflict

can cause major changes.

A faster growth in demand against supply often leads to a drop in stocks with the

government and investors.Silver demand is underpinned by the demand from jewellery and silverware, industrial applications, and overall industrial growth.

In India, the real industrial demand occupies a small share in the total industrial demand

for silver. This is in sharp contrast to most developed economies.In India, silver demand is also determined to a large extent by its price level and volatility.

CRUDE OIL: Introduction

Crude oil is a complex mixture of various hydrocarbons found in the upper layers of the

earth's crust.Crude oil is often attributed as the Mother of all Commodities because of its importance in the manufacturing of a wide variety of materials.Crude oil accounts for 35% of the world's primary energy consumption.

Crude oil is used to produce fuel for cars, trucks, airplanes, boats and trains. It is also

used for a wide variety of other products including asphalt for roads, lubricants for all kinds of machines; plastics for toys, bottles, food wraps, among others.

Global Scenario

Global proven oil reserves in 2011 was around 1652.6 thousand million barrels, of which

the OPEC had 1196.3 thousand million barrels.Crude oil accounts for 33% of the world's primaryenergy consumption.Global oil demand was 88.3 million barrels per day (mmb/d) in 2011, anincrease of around 0.7% from the previous year.

50

In 2010, Russia, Saudi Arabia, the US and Iran were the top oil producing countries.

Although the US is the world's third largest oil producing nation, it is the world's largest consumer and importer of oil followed by China, Japan and India.

Indian Scenario

51

Oil accounts for 29% of India's total energy consumption and there seems to be no

possibility of scaling down the dependence on these fuels.Crude oil production during the period April-March 2012 (provisional) was 38.19 million metric tonne (MMT), as compared with 37.71 MMT during the corresponding period last year.

The total oil consumption in 2010 was around 3.34 mmb/d .India is the fourth largest

consumer of oil and imports more than 70% of its crude oil requirement.India's refining capacity stood at 193.39 MMTPA on January 1, 2012 of which 116.89 MMT is in the public sector, 6.00 MMT in joint ventures, and the balance 70.50 MMTPA in the private sector.

The Government of India realized the need to explore more areas and has implemented

New Exploration Licensing Policy (NELP), according to which 100% FDI is permitted for small and medium sized oil fields through competitive bidding.

Japanese candlestick chart 3: Crude oil monthly average prices

52

Price Moving Factors

OPEC output, supply and spare capacities Increased demand from emerging and developing countries; geopolitics US crude and products inventories data Currency fluctuations Weather conditions Speculative buying and selling Changes in refining sector.

NATURAL GAS: Introduction

Natural gas is a vital component of the world's supply of energy. It is one of the cleanest,

safest, and most useful of all energy sources.Natural gas is a combustible mixture of hydrocarbon gases. While natural gas is formed primarily of methane, it can also include ethane, propane, butane and pentane.

Natural gas is likely to play a greater role in the world energy mix given its growing

resource base and its relatively low carbon emissions compared to other fossil fuels.Natural gas, when compressed at a pressure of 250 bars, is termed as compressed natural gas (CNG).

Global Scenario

The worlds natural gas reserves are estimated to be 7,360.9 trillion cubic feet (tcf). The

Middle East holds 38.4% of the worlds reserves, while an additional 21.4% is located in the former Soviet Union, with only 9% held in the OECD countries.

In 2011, the global natural gas production was 3,276.2 billion cubic metre (bcm), up

3.1% from 3,178.2 bcm in 2010, and consumption was 3,222.9 bcm, compared with 3,153.1 bcm in the previous year.

53

The US, Russia and Canada are the largest natural gas producing countries, while the US,

Russia and Iran are the largest natural gas consuming countries in the world.

Indian Scenario

54

The balance recoverable natural gas reserve in the country is around 1240.9 bcm, which

accounts for only 0.6% of the worlds total natural gas reserves.The share of natural gas in the country's primary energy mix decreased to 9.8% in 2011 from11% in 2010.

However, this share is quite low compared to the global average (24%), primarily due to

the supply-side constraints.The natural gas (including CBM) production in 2011 was 46.1 bcm, which is 12.8% higher than the actual production of 50.8 bcm in 2010.

India's consumption of natural gas was around 61.1 bcm in 2011, which accounts for only

1.9% of the world natural gas market.As India does not have any pipeline connection, all the gas currently imported is LNG. India's current operational LNG import capacity is 18 bcm.

Japanese candlestick chart 4:Natural gasmonthly average prices.

55

Price Moving Factors

Natural Gas inventory data The US weather conditions and active hurricane season poses a threat to the US Gulf coasts natural gas production Price of crude oil Industrial and Residential demand in the US

ALUMINUM: Introduction

Aluminum (chemical symbol - Al) is the third most abundant element present in the

earth's crust. It exists in a very stable combination with other materials particularly silicates and oxides.It is resistant to common atmospheric gases and a wide range of liquids. Hence, aluminum is known for its durability and high resale value.

Aluminum is a unique metal; which is light weight, strong, durable, flexible, and

impermeable. It is rust resistant and is 100% recyclable.

Demand and Supply

In 2012, global primary aluminium production was 40.974 million metric tonnes (MMT),

up from 39.930 MMT in 2011.

Global primary aluminium consumption rose to 48.075 MMT in 2012, compared with

44.594 MMT in 2011. 56

Global Scenario

World primary aluminum production increased in 2012 compared to the production in

2011, as a result of starting new smelters and restarting smelters that had been shut down in 2008 and early 2009.

Major aluminium exporting countries are Germany, Russia and Canada, while major

aluminium importing countries are USA, Germany and China.

Indian Scenario

Currently, India is the fifth largest producer of aluminium in the world with an average

annual production of 171,3924 MT.Indian aluminium industry consists of four primary producers: Hindalco, NALCO (a Government of India enterprise), BALCO, and Vedanta Aluminium are the four major aluminium producing companies in India.

Japanese candlestick chart 5:Aluminum monthly average prices

57

Factors Influencing the Market

Aluminium prices in India are fixed on the basis of the rates that rule on the international

spot market, and Indian Rupee and US Dollar exchange rates.Economic events such as national industrial growth, global financial crisis, recession, and inflation affect metal prices.

Commodity-specific events such as the construction of new production facilities or

processes, new uses or the discontinuance of historical uses, unexpected mine or plant closures (natural disaster, supply disruption, accident, strike, and so forth), or industry restructuring, all affect metal prices.

Trade policies set by the Government (implementation or suspension of taxes, penalties,

and quotas) affect supply as they regulate (restricting or encouraging) material flow.

Geopolitical events involving governments or economic paradigms and armed conflict

can cause major changes.As societies develop, their demand for metal increases based on their current economic position, which could also be referred as National Economic Growth Factor.

COPPER: 58

Introduction

Copper (chemical symbol - Cu) is a malleable and ductile metallic element that is an

excellent conductor of heat and electricity. It is also corrosion resistant and antimicrobial.It stands at the third place after steel and aluminium, in the context of consumption.

Copper is an important contributor to the national economies of mature, newly developed

and developing countries.Copper is one of the most recycled of all metals. It is our ability to recycle metals over and over again that makes them a material of choice.

Demand and Supply

In 2011, worlds copper mine production continued to underperform with respect to

capacity, and remained at the 2010 level of 16.005 million metric tonnes (MMT).

In 2011, the global refined copper production was 19.630 MMT, up from 18.998 MMT in

2010. The global refined copper consumption was 19.988 MMT, compared with 19.375 MMT in the previous year.

On a regional basis, refined copper production increased in Africa (11%), Asia (6%),

Europe (4.5%) and Oceania (12.5) but decreased in the Americas (-3.5%).

Global Scenario

Growth in refined copper usage has been especially strong in Asia, where demand has

expanded more than five-fold in less than 30 years.

Major refined copper exporting countries are Chile, Zambia, Japan, Russia and Peru,

while major refined copper importing countries are China, USA, Germany, Italy and Taiwan.

Indian Scenario

In 2012, India's production of refined copper is 689,312 MT, which is around 4% of the

total world production.Sterlite Industries, Hindalco, and Hindustan Copper are three major

59

producers of copper in India. From the status of a net importer, India is emerging as a net exporter of copper on account of a rise in the production of copper.

Electric and electronic products industry has become India's largest copper consuming

sector, accounting for 36% of the total Indian copper consumption. Telecom is still India's second largest copper consuming sector, accounting for 20% of the total Indian copper consumption.

Japanese Candlestick chart 6:Coppermonthly average prices

Factors Influencing the Market

Copper prices in India are fixed on the basis of the rates that rule in the international spot

market, and Indian Rupee and US Dollar exchange rates.

Economic events such as the national industrial growth, global financial crisis, recession

and inflation affect metal prices.

Commodity-specific events such as the construction of new production facilities or

60

processes, new uses or the discontinuance of historical uses, unexpected mine or plant closures (natural disaster, supply disruption, accident, strike, and so forth), or industry restructuring, all affect metal prices.

Trade policies set by the Government (implementation or suspension of taxes, penalties,

and quotas) affect supply as they regulate (restricting or encouraging) material flow.

Geopolitical events involving governments or economic paradigms and armed conflict

can cause major changes.

As societies develop, their demand for metal increases based on their current economic

position, which could also be referred as National Economic Growth Factor.

LEAD: Introduction

Lead (chemical symbol - Pb) is very corrosion-resistant, ductile, and malleable blue-grey

metal that has been in use for at least 5,000 years.It is usually found in association with zinc, silver, as well as copper ores.

It is one of the most sustainable and recyclable commodities. It can be recycled

indefinitely, without loss of its physical or chemical properties. Recycled lead accounts for more than 60% of the total lead production.The lead production process consumes less energy as compared to the production of any other metal.

Demand and Supply

In 2012, the global lead mine production increased by 11.5%, over that of 2011.Global

refined lead production increased by 0.22% from 10.594 million metric tonnes (MMT) in 2011 to 10.617 MMT in 2012.The worlds refined lead consumption rose to 10.553 MMT in 2012, up from 10.418 MMT in 2011.

India and the Republic of Korea saw an increase in production of 8.9% and 8.2%, 61

respectively, while India and Japan saw an increase in consumption of 15.6% and 12.2%, respectively.

Global Scenario

In 2012, the global lead mine production was higher in a number of countries including

Mexico, Peru, the Russian Federation and Turkey, however, the increase was principally due to a reported 20.4% rise in China.

Increased output of refined lead metal in India, the Republic of Korea, the United

Kingdom and the United States were largely balanced by reductions in Australia, Kazakhstan, Morocco, New Zealand and Spain.

In 2012, despite a further decline in Europes demand for refined lead metal by 2.4%, the

global usage increased by 1.3%, over the previous year. This was primarily a consequence of higher demand in India, Japan, Mexico and the United States. Apparent demand in China was unchanged from 2011.

Chinas import lead concentrates rose by 26.3% in 2012 over the previous year, to reach a

record of just over 1 MMT.

In 2011, the leading refined lead exporting countries were Australia, Canada and

Germany; whereas the leading refined lead importing countries were USA, UK and India.

Indian Scenario

In 2012, refined lead production was around 169,301 MT. The main producers of lead are Hindustan Zinc Limited (HZL) and Indian Lead Limited

62

(ILL).

Japanese candlestick chart 7: Lead monthly average prices

Factors Influencing the Market

Lead prices in India are fixed on the basis of the rates in the international spot market,

and Indian Rupee and US Dollar exchange rates.

Economic events such as national industrial growth, global financial crisis, recession, and

63

inflation affect the metal prices.

Commodity-specific events such as the construction of new production facilities or

processes, new uses or the discontinuance of historical uses, unexpected mine or plant closures (natural disaster, supply disruption, accident, strike, and so forth), or industry restructuring, all affect metal prices.

Trade policies set by the Government (implementation or suspension of taxes, penalties,

and quotas) affect supply as they regulate (restricting or encouraging) material flow.Geopolitical events involving governments or economic paradigms and armed conflict can cause major changes. ZINC: Introduction

Zinc (chemical symbol - Zn) is a bluish white lustrous metal. It is normally covered with

a white coating on exposure to the atmosphere.Zinc is the fourth most common metal in use, after iron, aluminium and copper in terms of the metals annual production.

Zinc can be recycled indefinitely, without loss of its physical or chemical properties.It is

present in a wide variety of foods, and found particularly in association with protein foods.

Demand and Supply

There was a decrease of 3.5% in the global refined zinc output in 2012 over the previous

year. This was mainly due to a reported 7.5% decrease in Chinas output, which offset the increase witnessed by Mexico, Peru, United States, Japan and the Republic of Korea.

Similarly, the global refined zinc metal usage also decreased by 2.80%. This was

primarily influenced by a decrease in demand from all major countries, except India and the Republic of Korea.

Global Scenario

The major refined zinc exporting countries are Belgium, Canada and the Republic of 64

Korea, while the major refined zinc importing countries are USA, Germany and China in 2011.

In 2011, the Chinese imports of zinc contained in zinc concentrates declined by 34% to

821 KT, over the previous year. However, the nations net refined zinc metal imports increased by 68.5% to 509 KT, during the year 2011.

Indian Scenario

65

India's refined zinc production was 711,266 metric tonnes (MT) in 2012. In India, the primary end use of zinc is in the galvanizing and coating sectors, which

currently account for an estimated 57% and 16% of the total production respectively.

Japanese candlestick chart 8: Zinc monthly average prices.

Factors Influencing the Market

66

Zinc prices in India are fixed on the basis of rates that rule in the international spot

market, and Indian Rupee and US Dollar exchange rates.Economic events such as the national industrial growth, global financial crisis, recession and inflation affect metal prices.

Commodity-specific events such as the construction of new production facilities or

processes, new uses or the discontinuance of historical uses, unexpected mine or plant closures (natural disaster, supply disruption, accident, strike, and so forth), or industry restructuring, all affect metal prices.

Trade policies set by the Government (implementation or suspension of taxes, penalties,

and quotas) affect supply as they regulate (restricting or encouraging) material flow.

Geopolitical events involving governments or economic paradigms and armed conflict

can cause major changes. NICKEL: Introduction

Nickel is a metal with a bright future as it is the main alloying metal needed in the

production of certain types of stainless steel.The strength and life span of products manufactured using stainless steel are superior to the ones produced using non-stainless steels.

Demand and Supply

World production of primary Nickel during 2011 was 1.612 million metric tonnes

(MMT), up by 11.53% as compared with 1.446 MMT in 2010. Whereas, the world's consumption during 2011is at 1.608 MMT vis--vis 1.465 MMT in 2010, up by 9.76%.

Global Scenario

Russia, Canada and Norway are the world's largest nickel exporters accounting for almost

49% of world exports. On the other hand, China, USA and Germany are the world's largest nickel importers accounting for around 48% of world imports. Indian Scenario 67

The annual demand for nickel in India is around 40,000 MT and its market in India is

totally dependent on imports.

Japanese candlestick chart 9: Nickel monthly average prices.

Factors Influencing the Market 68

Nickel prices in India are fixed on the basis of the rates that rule on the international spot

market, and Indian Rupee and US Dollar exchange rates.

Economic events such as national industrial growth, global financial crisis, recession and

inflation affect metal prices.

Commodity-specific events such as the construction of new production facilities or

processes, new uses or the discontinuance of historical uses, unexpected mine or plant closures, or industry restructuring affect the market.

Trade policies set by the Government (implementation or suspension of taxes, penalties,

and quotas) affect supply as they regulate (restricting or encouraging) material flow.

Geopolitical events involving governments or economic paradigms and armed conflict

can cause major changes.

SHORT TIME VIEW OF COMMODITY PRICES:

The commodity prices for coming years 2014 and 2015 have been projected by using

technical analysis known as Elliott Wave Theory. ELLIOTT WAVE THEORY: Introduction: Elliott wave principle is a form of technical analysis used to analyze financial market cycles and to forecast market trends. It was developed by Ralph Nelson Elliott. Elliott identified a certain structure to price movements in the financial markets and proposed that market prices unfold in specific patterns known as Elliott waves. Elliott wave theory consists of basic 5 wave pattern and 3- wave corrective sequence. The Five Wave Pattern In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4, as shown in Figure 1. 69

The two interruptions are apparently a requisite for overall directional movement to occur.

Figure 1 At any time, the market may be identified as being somewhere in the basic five wave pattern at the largest degree of trend. Because the five wave pattern is the overriding form of market progress, all other patterns are subsumed by it. Wave Mode There are two modes of wave development: impulsive and corrective. Impulsive waves have a five wave structure, while corrective waves have a three wave structure or a variation thereof. Impulsive mode is employed by both the five wave pattern of Figure 1 and its same-directional components, i.e., waves 1, 3 and 5. Their structures are called impulsive because they powerfully impel the market. Corrective mode is employed by all countertrend interruptions, which include waves 2 and 4 in Figure 1. Their structures are called corrective because they can accomplish only a partial retracement, or correction, of the progress achieved by any preceding impulsive wave. Thus, the two modes are fundamentally different, both in their roles and in their construction, as will be detailed in an upcoming section. The Complete Cycle A five-wave impulse (whose sub waves are denoted by numbers) is followed by a three-wave correction (whose sub waves are denoted by letters) to form a complete cycle of eight waves. 70

The concept of five waves up followed by three waves down is shown in Figure 2. The eightwave cycle shown in Figure 2 is a component of a cycle of one degree larger, as shown in Figure 3. As Figure 3 illustrates, each same-direction component of an impulsive wave, and each full cycle component (i.e., waves 1 + 2, or waves 3 + 4) of a cycle, is a smaller version of itself.

Figure 2

It is crucial to understand an essential point: Figure 3 not only illustrates a larger version of Figure 2, it also illustrates Figure 2 itself, in greater detail. In Figure 2, each sub wave 1, 3 and 5 is an impulsive wave that will subdivide into a five, and each sub wave 2 and 4 is a corrective wave that will subdivide into an a, b, c. Waves (1) and (2) in Figure 3, if examined under a

microscope, would take the same form as waves

and

. Thus, waves of any degree in any

series always subdivide and re-subdivide into waves of lesser degree and simultaneously are components of waves of higher degree. We can use Figure 3 to illustrate two waves, eight waves or thirty-four waves, depending upon the degree to which we are referring. 71

Figure 3 The Essential Design

Now observe that within the corrective pattern illustrated as wave

in Figure 3, waves (a) and

(c), which point downward, are composed of five waves: 1, 2, 3, 4 and 5. Similarly, wave (b), which points upward, is composed of three waves: a, b and c. This construction discloses a crucial point: that impulsive waves do not always point upward, and corrective waves do not always point downward. The mode of a wave is greatly determined not by its absolute direction but by its relative direction. Aside from four specific exceptions, which will be discussed later in this booklet, waves divide in impulsive mode (five waves) when trending in the same direction as the wave of one larger degree of which it is a part, and in corrective mode (three waves or a variation) when trending in the opposite direction. Waves (a) and (c) are impulsive, trending in

the same direction as wave

. Wave (b) is corrective because it corrects wave (a) and

is countertrend to wave

. In summary, the essential underlying tendency of the Wave Principle

is that action in the same direction as the one larger trend develops in five waves, while reaction 72

against the one larger trend develops in three waves, at all degrees of trend. Neither does Figure 3 imply finality. As before, the termination of yet another eight wave movement (five up and three down) completes a cycle that automatically becomes two subdivisions of the wave of next higher degree. As long as progress continues, the process of building to greater degrees continues. The reverse process of subdividing into lesser degrees apparently continues indefinitely as well. As far as we can determine, then, all waves both have and are component waves. Variations on the Basic Theme The Wave Principle would be simple to apply if the basic theme described above were the complete description of market behavior. However, the real world, fortunately or unfortunately, is not so simple. The rest of this chapter fills out the description of how the market behaves in reality. Wave Degree All waves may be categorized by relative size, or degree. Elliott discerned nine degrees of waves, from the smallest wiggle on an hourly chart to the largest wave he could assume existed from the data then available. He chose the names listed below to label these degrees, from largest to smallest:

Grandsupercycle Supercycle Cycle Primary Intermediate Minor Minute

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Minuette Subminuette

Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor and sub-Minor waves. It is important to understand that these labels refer to specifically identifiable degrees of waves. By using this nomenclature, the analyst can identify precisely the position of a wave in the overall progression of the market, much as longitude and latitude are used to identify a geographical location. To say, the Dow Jones Industrial Average is in Minute wave v of Minor wave 1 of Intermediate wave (3) of Primary wave of Cycle wave I of Supercycle wave (V) of the current Grand Supercycle is to identify a specific point along the progression of market history. When numbering and lettering waves, some scheme such as the one shown below is recommended to differentiate the degrees of waves in the stock markets progression: Wave Degree Supercycle Cycle Primary Intermediate Minor Minute Minuette

5s With the Trend (I) (II) (III) (IV) (V) I II III IV V

3s Against the Trend (A) (B) (C) ABC

(1) (2) (3) (4) (5) 12345 i ii iii iv v 12345

(a) (b) (c) ABC abc abc

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The below box gives the commodity price projections for 2014 and 2015 using Elliott Wave Theory Table 3: Commodity price projections for 2014 and 2015

Commodity price projections for 2014 and 2015

Commodity Gold COMEX Silver COMEX Crude Oil NYMEX Natural Gas Aluminum Copper LME Lead LME Nickel LME Zinc LME The growth rate of mostly traded commodities for year 2015 is as follows Table 4: Prices growth rate of mostly traded commodities Prices Growth Rate for 2015 Commodity Gold Silver Crude oil Natural Gas Aluminum Copper Lead Nickel Zinc Exchang e COME COME NYMEX NYMEX LME LME LME LME LME Growth Rate 11.76% 9.09% 6.36% 19.11% 17.65% 16.92% 26.82% 9.70% 20.00% 75 1840 1700 2040 14100 13400 14700 2085 1790 2270 3.8 NYMEX 1860 LME 7050 6500 7600 1700 2000 4.5 5.36 97 110 117 21.76 25 27.5 Exchan ge Current price 1218 Average price of Average price of 2014 2015 1360 1520

The average growth rate is found to be 15.7%, which indicates that in 2015 due to increase in prices on an average by 15.7% the commodity market shows an increase of 15.7% in terms of turnover.

8. CONCLUSION
In this project I have projected the Growth of Indian Commodity Market for the year 2015. This projection is done on the basis of estimating the GDP growth rate for five important nations (USA, EUROZONE, JAPAN, CHINA and INDIA) which plays crucial role in commodity market and projecting the prices of mostly traded commodities which contributes high percentage for commodity market growth. The price projection is done by using technical analysis known as Elliott wave theory. After estimating the GDP and Prices of important commodities being traded in Indian National Exchanges, it is observed that the GDP of nations under consideration for 2015 shows positive nature(Indias GDP growth rate for 2015 was found to be 6.9) and the commodity prices are going to be increased by 15.7% on an average. Therefore it indicates that the overall growth of commodity market for 2015 can be increased between 20- 26% by taking other factors also into consideration. The other factors include increase in volume to be traded, improvements in investments etc.

SUGGESTIONS
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After my understanding and analysis of Indian Commodity Market, I would like to give some suggestions as follows.

Though commodity market shows good growth, some are not aware of commodity trading. To show further improvements in commodity market awareness programs should be taken

Even the main aim of commodities trading is price hedging; this is not reaching the satisfactory levels. To maximize the investors satisfaction in commodity market trading price transparency should be developed.

Regulatory board, FMC (Forward Markets Commission) should implement more regulatory measures to prohibit fraudulent deals.

As the Lot Size of some commodities is too huge for small investors or farmers to trade in, the lot size should be available in various forms for the convenience of small investors or farmers.

Focus should also be there in warehousing system.

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