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COMMODITY MARKETS

DIFFERENCE BETWEEN FUTURES & FORWARD CONTRACT

Futures Contract: It is an agreement between two parties to buy or sell a specified quantity of asset at a certain
time in future at a certain price agreed at the time of entering into the contract on the futures exchange.

Forward Contract: It is an agreement between two parties to buy or sell an asset at a future date for an agreed
price. Forward contract is not traded on the exchange.

Futures Contract Forward Contract

* Contract is entered on the centralized * Contract is OTC in nature


Trading platform of the exchange

* Contract is standardized in term of * Contract is customized as per


Quantity specified by the exchange agreement between buyer & seller

* Contract is transparent- available on * Contract price is not transparent


Centralized trading screen of exchange It is not publicly disclosed

* Contract is more liquid * Contract is less liquid

* Mark – to – market is applicable * No Mark – to – market is applicable

* Contracts are regulated by exchange * Contracts are not regulated.

MCX
MULTI COMMODITY EXCHANGE OF INDIA
OVERVIEW

1. MCX is an independent & de-mutualised Multi Commodity Exchange.


2. It has started on 10th November 2003
3. It has permanent recognition from Govt. of India for facilitating on-line trading, clearing & settlement
operations for commodity futures market across the country.
4. MCX is the world’s top three Bullion Exchanges.
5. MCX offers opportunities to producers / processors, traders, corporate regional trading centres,
importers & exporters.
KEY SHAREHOLDERS

1. Financial Technologies 2. State Bank of India 3. NABARD


4. NSE 5. Fidelity – FID FUND 6. Canara Bank
7. Union Bank of India 8. HDFC Bank 9. Bank of Baroda
10. Corporation Bank 11. SBI Life Ins. Co.

WORLD’S MAJOR COMMODITY EXCHANGES & THEIR MAJOR PRODUCTS

1. CHICAGO MERCANTILE EXCHANGE ( CME ) – BUTTER / MILK / UREA


2. NEW YORK MERCANTILE EXCHANGE ( NYMEX )–CRUDE OIL/GOLD/SILVER/METALS
3. LONDON INTnl. FINANCIAL FUT EXCH ( LIFFE ) – COFFEE / CORN / POTATO/ COCOA
4. CHICAGO BOARD OF TRADE ( CBOT )–SOYBEANS/OIL/WHEAT/ETHANOL/GOLD/SILV.
5. LONDON METAL EXCHANGE ( LME ) – BASE METALS / ALLOYS / POLYPROPELENE
6. NEW YORK BOARD OF TRADE ( NYBOT ) – COTTON / ETHANOL / SUGAR / PULP
7. TOKYO COMMODITY EXCHANGE ( TOCOM )–KEROSENE/CRUDE OIL/PLATINUM
8. SYNDEY FUTURES EXCHANGE ( SFE ) – FINE WOOL / BROAD WOOL.

TIMING OF THE MARKETS

MCX – 10am TO 11.30pm ( FLEXIBLE )

\NCDEX 10 TO 5

Commodities are categorized in following manner:

1. BULLION FUTURES – GOLD - SILVER


2. ENERGY FUTURES – CRUDE OIL & NATURAL GAS
3. BASE METALS – COPPER / ALUMINIUM / ZINCE / STEEL
4. AGRO COMMODITIES–SPICES/SEEDS/EDIBLE OILS / PULSES / COTTON/ SUGAR
FUNDAMENTAL ANALYSIS
It is an analysis of factors that affect demand & supply of any asset class.

It involves following factors

1. Production & consumption


2. Import & Export
3. Distance between consuming centre & producing centre
4. Cost of Production
5. Means of transportation
6. Cultivation Period
7. Impact of weather & technology.
8. Government policies
9. Inflation
10. Foreign currency exchange rate

NCDEX
NATIONAL COMMODITY & DERIVATIVES EXCHANGE LIMITED

It is a professionally managed on – line commodity exchange promoted by Intercontinental Exchange (ICE), LIC,
NABARD , NSE, Canara Bank, CRISIL, Goldman Sachs, IFFCO & PNB.

NCDEX is a public limited company incorporated on 23rd April 2003. It is a nation – level, technology driven de-
mutualised on –line commodity exchange. It is regulated by Forward Market Commission. NCDEX is located in
Mumbai and offers facilities to its 550 centres throughout the India.

NCDEX currently facilitates trading of 57 commodities from – Agriculture / Metals / Energy

PRODUCT PROFILES
BULLION FUTURES
GOLD

Characteristics of GOLD

1. Gold is primarily a monetary asset and partly a commodity


2. More than two third of gold’s total accumulated holdings relate to investment with central bank
reserves, private players & high – carat jewellery.
3. Less than one third of gold’s total accumulated holdings is as a ‘commodity’ for jewellery markets &
usage in industry.
4.

Characteristics of World GOLD Market

1. Gold market is highly liquid & gold held by central banks, other major institutions and retail jewellery
keep coming back to the market.
2. Economic forces that determine the price of gold are different from, and in many cases opposed the
forces that influence most financial assets.

Supply & Demand

1. South Africa is the world’s largest gold producer.


2. India is the world’s largest gold consumer with an annual demand of 800 tons.

Important World Gold Markets

1. London as the great clearing house.


2. New York
3. Zurich as a physical turntable.
4. Istanbul, Dubai, Singapore & Hong Kong

Indian Gold Market

1. Gold is valued in India as a savings & investment vehicle and is the second preferred investment
after bank deposits.
2. At present, 13 banks are active in the import of gold.
3. Domestic consumption is dictated by monsoon, harvest and marriage season.
4. Facilities for refining, assaying, making them into standard bars in India.

Gold Market Moving Factors

1. Producer / miner hedging interest.


2. World macro-economic factors – US Dollar, Interest Rates etc.
3. Comparative returns on stock markets
4. Domestic demand based on monsoon & agricultural output.

SILVER

1. It is also called as ‘ Industrial Commodity’, silver’s unique properties include its strength, malleability
and ductility, its electrical conductivity. Therefore, it is also called as precious metals.
2. The largest industrial users of Silver are the photographic, jewellery & electronic industries.

Indian Scenario

1. India is still one of the largest users of Silver in the world, ranking alongside those Industrial giants,
Japan & United States.

World Silver Markets

1. Silver is predominantly traded on the London Bullion Market and Comex in New York.
2. COMEX is a global hub of OTC trading in Silver, is the metal’s main physical market/
3. Silver is invariably quoted in US Dollars.

Influencing Factors

1. World mine production is more a function of the prices of other metals.


2. Faster growth in demand against supply leads to drop in stocks with government and investors.
3. Silver demand stands on three pillars – Jewellery & Silverware, industrial & photography, which are
in turn factors of monsoon & agricultural output, overall industrial growth and performance of the
tourism & services industry at large, respectively.

ENERGY FUTURES
CRUDE OIL

FEATURES
1. Oil & gas are of prime importance in economies of the world.
2. Oil & gas accounts for about 61 % of the total world’s primary energy consumption.
3. It is mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs.
4. Extensive domestic dependence on oil for house heating, lighting & cooking.
5. Wide range of chemicals, medicines & toiletry items are derived from oil.
6. Products obtained from processing of Crude include aviation gasoline, motor gasoline, naptha,
kerosene, jet fuel, LPG, lubricants, paraffin wax, petroleum coke.
7. Prices of crude oil are highly volatile. High oil prices lead to inflation that in turn increases input
costs.

CRUDE OIL UNITS

1 US BARREL = 158.98 LTRs

GLOBAL SCENARIO

1. Oil accounts for 40 % of the world’ total energy demand.


2. The world consumes about 84mn bbl/ day of oil
3. US, CHINA & JAPAN are top oil consuming countries.

OPEC Fact Sheet

1. OPEC stands for “Organisation of Petroleum Exporting Countries”.


2. It is an organisation of 11 developing countries that are heavily dependent on oil revenues as their
main source of income.
3. Current members are Algeria, Indonesia, Iraq, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia,
UAE, Venezuela.
4. OPEC controls almost 40 % of the word crude oil.
5. It accounts for about 75% of the world’s oil reserves.

Indian Scenario

1. India ranks among the top 10 largest oil consuming countries.


2. Oil accounts for about 32% of India total energy consumption.
3. India’s total oil consumption is about 2.4 mn bbl/day.

Imports & Exports

1. India faces a large supply deficit , as domestic oil production is unlikely to keep pace with demand.
2. India imports more than 70 % of its total oil consumption & it makes no exports.
3. The oil reserves of the country are located primarily in Mumbai High, Upper Assam, Cambay, KG Basin.
Influencing Factors

1. OPEC output & supply.


2. Terrorism, weather / storms, war & any other unforeseen geopolitical factors that cause supply
disruptions.
3. Global demand particularly from emerging markets.
4. Dollar fluctuations
5. Refining fires.

Categories of Crude Oil

WTI ( West Texas Intermediate ) – Sweet Crude

1. WTI crude oil is of very high quality for refining a large portion of gasoline.
2. BRENT Crude Oil stands as a Benchmark for EUROPE.

BASE METALS
Base metals include:

Nickel, Copper, TIN, Steel, Aluminium, Zinc,

Nickel

1. Nickel finds its usage in various industries such as engineering, electrical and electronics,
infrastructure, automobiles, packaging, batteries.
2. Among base metals Nickel is most volatile owing to its strong demand and tight supply.
3. About 65 % of Nickel is used in manufacturing of stainless steel.
4. More than 54 % of global supply comes from just five companies
5. Major producers of Nickel are Russia, Australia, Canada, Indonesia representing over 70 % of global
production.
6. Important world Nickel market is – London Metal Exchange ( LME )
7. Nickel market in India is import dependent.

Copper

1. Copper ranks third in world metal consumption after steel and aluminium.
2. Copper is the best non-precious metal conductor of electricity.
3. Copper’s exceptional strength, ductility and resistance to creeping and corrosion makes it the
preferred and safest conductor for building wiring.
4. Copper is also used in power cables, either insulated or uninsulated.
5. Copper is an essential components of energy efficient motors, transformers & automobiles.
6. The major copper consuming nations are Western Europe, US, Japan, USSR & CHINA
7. Birla Copper & Sterlite Industries are two major private producers in India
8. Copper prices in the country are fixed on the basis of the rates that rule on LME the preceding day
9. LME & NYMEX are the two international markets provide future direction to copper prices.

TIN

1. Tin is used in hundreds of industrial processes throughout the world.


2. Tin is widely used in many industries such as food packaging, culinary equipment, electronics, tin
chemicals, plumbing solders, engineering alloys, dental amalgams, wine capsules & fire retardants.
3. World’s largest producer – CHINA, Indonesia, Peru, Brazil, Bolivia & Australia.
4. In India tin is imported from various countries and a small amount is also produced.
5. LME & Malaysia are the two important world markets for tin, which determine the direction of tin
price.
6. Japan being major consumer of Tin influences the world markets.

ALUMINIUM

1. Aluminium is the third most abundant element in the Earth’s crust.


2. Aluminium is light. Its density is only one third that of steel. It is resistant to weather, common
atmospheric gases and a wide range of liquids
3. Aluminium has high elasticity, which is an advantage in structures under shock loads.
4. It conducts electricity & heat nearly as well as copper
5. Aluminium ore most commonly bauxite, is plentiful and occurs mainly in tropicaland sub – tropical
areas – Africa, West Indies, South America & Australia
6. Leading producing countries – US, Russia, Canada, China, Australia
7. Largest Aluminium markets are North America, Europe & East Asia.

8. India is considered the fifth largest producer of Aluminium in the world.


9. Indian Aluminium producers – INDAL, NALCO, HINDALCO, MALCO
10. LME, TOCOM, SHFE & NYMEX are important international markets.
11. Growth & demand in the building & construction, packaging & transportation influence the
Aluminium prices.

AGRO COMMODITIES

SPICES FUTURES

It consists of mainly – PEPPER, JEERA, RED CHILLY, TURMERIC


PEPPER

1. Black Pepper comes from the whole fruit, picked just before they are completely ripe.
2. Supply of Pepper has seen a dramatic increase over last ten years.
3. Global production of Pepper fluctuates between 3 to 3.5 Lac tons
4. Vietnam, Indonesia, India, Brazil, Malaysia, Sri Lanka, Thailand, China are the major producers of
Pepper in the world.
5. Harvesting in Malaysia takes place in Jun-July. In Brazil the season in Aug-Sep.
6. Vietnam is the world’s largest producer & exporter of Pepper.
7. New York, Singapore & Rotterdam are major international trading centres.
8. Pepper vines in India usually flower during May to June.
9. USA, Canada, Japan & Gulf countries are the favoured destination for Indian Pepper.
10. Kochi, Sulthan, Nagpur, Indore & Delhi are major Indian markets.

JEERA

1. Jeera is a native of the Levant & Upper Egypt.


2. It is grown mainly in hot countries especially India, North Africa, China
3. Jeera is diuretic, carminative, stimulant, astringent & antispasmodic.
4. India is the world’s largest producer & consumer of Jeera.
5. It is almost exclusively cultivated in Rajasthan & Gujarat.
6. In India, Jeera is harvested in February. The crop normally arrives in the market in March.
7. India exports Jeera to Bangladesh, Brazil, Japan, Malaysia, Nepal, Singapore, UAE, UK.
8. Gujarat, with UNJHA as the centre is the major trading zone for Jeera.
9. The Mandi in Nagpur is the largest centre for Jeera.

RED CHILLY

1. Chillies belong to the genus capsicum.


2. Chillies are valued principally for their high pungency & colour
3. It is used in beverages & in the preparation of medicines.
4. India is the world’s largest producer, consumer & exporter of Chillies in the world.
5. Almost all the states of India produce the crop. The important Chilli growing states of India are
Andhra Pradesh, Orissa, West Bengal, Rajasthan & Tamilnadu.
6. The crop planting starts from August & extends till October.
7. Around 90% of India’s production, is consumed within country.
8. India exports around 80,000 to 1 Lakh tons of Chillies a year.
9. Indian Chilli is mainly exported to USA, Sri Lanka, Bangladesh, Middle East
10. Well established sport markets at GUNTUR – Andhra Pradesh, Raichur, Bellary.

TURMERIC

1. It is an important spice among the rice eating people of India.


2. Turmeric is a part of Indian culture.
3. It is an important ingredient in curry dishes.
4. India is the largest producer, consumer & exporter of Turmeric.
5. Other producers in ASIA include Bangladesh, Pakistan, Sri Lanka, Taiwan, China & Indonesia.
6. The yearly world consumption of Turmeric is approximately 38 Lakh bags to 40 Lakh bags.
7. India has 150 thousand hectors under Turmeric cultivation with a total production of 528 thousand tons.

PULSES
1. India is the world’s largest pulse producer, consumer and importer, acoounting for 27 % of the global
pulse production.
2. The major pulses grown in India are:
a. Pigeon Peas ( ARHAR or TUR )
b. Tyson chickpeas ( Gram or Desi Chana )
c. Lentils ( Masoor )
d. Green Beans ( Moong )
e. Black Matpe ( Urad )
3. Dry edible beans & field peas dominate world trade pulses.
4. Global pulse trade has expanded rapidly in the last twenty years.
5. The next twenty year period is likely to see these types of changes continue as Canada Puts pressure
on the supply side.
6. India’s total production hovers at ab average of 12-14 mn tons in a crop year.
7. Madhya Pradesh is the largest pulse producer.
8. Other states in India are Uttar Pradesh, Maharashtra, Rajasthan, Karnataka, Andhra Pradesh.
9. In India pulses are grown in the two major cropping seasons – khariff ( harvested in Sep/Oct ) and Rabi (
harvested in Mar-Apr ).
10. The important pulses markets in India include Mumbai, Delhi, Chennai, Indore, Kanpur, Bikaner,
Hyderabad, Jaipur.

SUGAR

1. Sugar is a carbohydrate named as SUCROS that occurs naturally in every fruit and vegetable.
2. Globally sugarcane and sugar beet are the major sources of sugar.
3. The global production of sugar, in the recent years has been observed to be fluctuating between
135-145 mn tons
4. The major producers of sugar in the world are: Brazil, India, China, USA, Thailand, Mexico,
Australia, Cuba & Pakistan which together account for 72% of world production.
5. Each year around 40mn tons of raw sugar is traded in the world market.
6. Brazil is the world’s leading sugar exporter with 25% of world exports
7. Brazil sets the trend for world sugar prices.
8. The Brazilian price is dependent on the situation in the fuel sector since a major portion of its sugar
production goes for ethanol production, which is used as fuel in the country.
9. New York ( NYBOT ), is the largest sugar futures market.
10. The Indian sugar industry is the second largest agro processing industry.
11. Around 4 mn hectares of land under sugar cultivation in India.
12. The Indian Sugar prices are largely governed by the releases of sugar made by the Government.
13. Gur & Khandsari are traditional Indian sweeteners, which are produced in addition to sugar.
14. Muzzafarnagar, Mumbai, Delhi, Ludhiana, Kolkatta, Hyderabad, Chennai are major trading centres
of sugar in India.

PLASTIC FUTURES

1. Plastics are known for lightweight, antirust & good insulation properties.
2. Role of plastics multiplied with rapid industrial development across the globe.
3. Plastic manufacturing process starts with refined fractions of oil ( Naptha ) and or natural gas
( ethane ).
4. Plastics are organic high polymers consisting of large chainlike molecules containing carbon.
5. Polypropylene (PP), Polyethylene (PE) & Poly Vinyl Chloride (PVC) are the examples.
6. India has an estimated production capacity of 4500 thousand metric tons annually.
7. Top domestic players – Reliance, IPCL, Haldia Petrochemicals, GAIL.
8. Top international players – Exxon Mobile, Samsung, Shell, Dow Chemicals.
EDIBLE OILS

1. India is the fifth largest producer of oil seeds after United States, China, Brazil & Argentina.
2. India harvests around 25-26 mn tonnes of various oilseeds against a world production of around
300-320 mn tonnes.
3. Among the oils & oilseeds physical market volumes are Groundnut, Soy Bean, Rapeseed- Mustard,
Sunflower seed, Sesame seed, Safflower seed, Linseed, Castor Seed, Cotton Seed & Niger Seed.
4. Three other major sources of vegetable oils COPRA ( coconut ), Rice Bran & Palm Tree.

SOY BEAN & REFINED SOY OIL

1. The market size of Soy Bean, popularly known ‘Miracle bean’ in India is over Rs.5000 Cr.
2. Soybean constitutes nearly 25% of the country’s total oilseed production.
3. Soy oil prices traded across the world is highly volatile in nature.
4. Soybean is the single largest oilseed produced in the world.
5. The plantation date of vegetable soybean is dependent upon temperature & day length.
6. Soy oil is the derivative of Soybean.
7. United states is the major producer of soy oil in the world.
8. At the international level, the CHICAGO BOARD OF TRADE ( CBOT ) is the most vibrant futures
exchange.
9. In India soybean constitutes nearly 25% of the country’s total oilseed production.
10. Madhya Pradesh is the soybean bowl of India. Other states are Maharashtra, Rajasthan,,
Karnataka, Uttar Pradesh, Andhra Pradesh & Gujarat.
11. Soybean exports from India is not allowed.
12. Indore, Ujjain, Dewas & Astha in Madhya Pradesh, Nagpur & Sangli are major trading centres of soy
oil.

RAPESEED – MUSTARD SEED & EXPELLER RAPESEED – MUSTARD OIL

1. Rapeseed ( also called Mustard or Canola ) oil is the third largest edible oil produced in the world.
2. Mustard oil traditionally the most favoured oils in the major production tracts world over.
3. China, Canada & India are the major producers of this commodity. Others are Germany, France,
Australia, Pakistan & Poland.
4. Rapeseed & Mustard generally divided into four groups:
a. Brown mustard ( Raya or Laha )
b. Sarson: (i) Yellow sarson (ii) Brown sarson
c. Toria ( Lahi or Maghi Labi )
d. Tamamira or Taria
5. Rapeseed & mustard crops are of the tropical as well as of the temperate zones & require relatively
cool temperatures.
6. China & India are among the major consumers of rapeseed in the world.
7. Rajasthan & Uttar Pradesh are the major rapeseed producing states in the country.
8. India neither imports nor exports rapeseed.
9. Rapeseed oil industry is not very well organized in terms of large National level corporate or
producers or traders.
CRUDE PALM OIL & RBD PALMOLEIN

1. Palm oil extracted from the mature fresh fruit bunches of oils palm plantations.
2. Crude Palm Oil ( CPO ), RBD ( Refined, Bleached, Deodorized ), Palm Oil, RBD Palmolein and
Crude Palm Kernel oil (CPKO) are the various forms of palm oil traded in the market.
3. Oil palm requires an average annual rainfall of 2000 mm.
4. Malaysia & Indonesia produce the lion’s share 83.3% of world’s palm oil production.
5. Palm oil dominates the global vegetable oil export trade.
6. CPO is used for human consumption as well as for industrial purposes.
7. India, China, Pakistan & European Union are the major importers.
8. The Kuala Lumpur based Malaysia Derivatives Exchange ( MDEX ) could be considered as the price
maker of Palm oil traded world over.
9. India, is one of the largest importer & consumer.
10. The major importing & trading centres for palm oil in India are Chennai, Kakinada, Mumbai &
Kandla.