Commodity Market

What is Commodity???
Tangible good Bulk good such as gold, silver, lead and oil. Bulk food product like grain, oats, corn, beef, pork and coffee.

What is Commodity Market???

raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges Bought and sold in standardized contracts. Two types of Market
SPOT MARKET-Mandis FUTURES MARKET-Exchanges

Derivatives defined
A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. Eg If the prices of Underlying Assets like Real Estate goes up then on the other hand prices of Real Estate Futures goes UP. What is Forwards contract
A forward contract is an agreement between two parties to buy or sell the underlying asset at a future date at today's future price. A futures contract is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price

What is a Futures Contract?

Origin of Derivatives
Protect themselves against fluctuations Price uncertainty Sowed & harvest

Oversupply & Scarcity

agreement to fixed prices Eliminate price risk 1848, the Chicago Board of Trade was established

Participants
Hedgers

Speculators

Arbitragers

MAJOR PLAYERS
Big Farmers Speculators/ Traders Government Institutions Importers/Exporters Corporate having price risk exposure in commodities Arbitrageurs

Companies which suffered due to unexpected fluctuations in commodity prices Cosmetic giant Avon reported a 7% drop in net profit in third quarter of 2005 and cited higher energy cost and high cost of petroleum based raw material.
Delta and Northwest airlines filed for bankruptcy due to sky rocking petroleum prices during Katrina Hurricane.

Indian Companies that hedged their physical exposure

Godrej Consumer Products (GCPL) has hedged a 2009s supply of a key imported raw material that goes into making soaps, in an attempt to preserve profit margins. Around 50 per cent of the raw material costs in the soaps business is accounted by palm oil derivatives. Hedging for the entire year has helped Godrej plan its pricing strategy as the price of palm oil complex had moved up by almost 50 per cent from the lows. FMCG companies like Dabur & ITC are aggressively hedging their commodity exposure.

Evolution in India
Bombay Cotton Exchange Ltd (1893) Gujarati Vyapari Mandali, (1900) Calcutta Hessian Exchange Ltd(1919) Futures trading in bullion (1920)

Forward Contracts (Regulation) Act (1952)

Forwards Markets Commission (FMC) 1953

Indian Commodity Market

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

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

Why Commodity Exchange in India

47% of GDP is Commodity related 18% of GDP is from Agriculture Over 65% of 1 trillion population depend on agriculture directly/indirectly Over 7500 physical market yards History of more than 150 years of derivatives trading Contributes to 1/6th of the export earnings.

Future of Commodity Market

Worlds third largest food producer Worlds second largest food Consumer India - Largest Consumer - Producer - Exporter Importer Banks to Finance commodities RBI permits Banks to hedge their bullion risk through Futures Exchange New class of commodity Traders & Value Investors

Facts and figures

Percentage share Indias Economy in the GDP (1990-91)
Agriculture 32% and now 18% Industry 27% and now 26% Services 41% and now 56%

Inflation
The Prices of Commodity are Increasing then why the inflation is reducing???? Wholesale Price Index (WPI) Consumer Price Index (CPI)

Weighting Diagrams Inflation

Primary Food Articles 32%
Fuel, Power, Light & Lubricants 11% Manufactured Products 57%

Types of Commodities Traded

Pulses: Chana, Urad & Tur Spices: Pepper, jeera, Chilli, Turmeric & Cardamom Precious Metals: Gold, Silver, Platinum etc Base Metals: Nickel, Aluminum, Copper etc Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds. Soft Commodities: Coffee, Cocoa, Sugar etc Live-Stock: Live Cattle, Pork Bellies etc Energy: Crude Oil, Natural Gas, Gasoline etc Others: Guar Seed, Wheat, Sugar, Mentha Oil, Potato, Kapas, Soya, Etc.

Major Commodities on Indian Exchanges

Commodities Metals Agro Spices Chilli Turmeric Pepper Jeera Castor Oil Rape seed Oil Seeds Mustard Soybean Castor Seed Edible Oils Rape seed Oil Soya oil Crude Oil Natural Gas Cotton Sugar Energy Softs

Precious
Metals

Metals Copper

Base

Gold Zinc Silver Aluminum Steel Plantation

Furnace Oil

Gur

Pulses Chana

Others Guar Potato

Cereals Maize Barley

Rubber

Cardamom Mentha Oil

FMC

Structure of Commodity Market

Commodity Exchange

National Exchange

Regional Exchange

NCDEX 20 other Regional Exchange

MCX

NBOT

NMCE

Commodity Exchanges
Multi Commodity Exchange (MCX) National Commodity and Derivatives Exchange (NCDEX) National Multi Commodity Exchange (NMCE)

Multi Commodity Exchange

Established in 2003 and is based in Mumbai

Independent commodity exchange

average daily turnover of around 30000 CR

Accredited with ISO 9001:2000 for quality standards

MCX has also setup in joint venture the National Spot Exchange a purely agricultural commodity exchange and National Bulk Handling Corporation (NBHC) which provides bulk storage and handling of agricultural products. MCX currently facilitates trading of 80+ commodities

National Commodity and Derivatives Exchange Ltd

Promoted by national level institutions
NCDEX is a public limited company incorporated on April 23, 2003 NCDEX currently facilitates trading of 57 commodities Total Average Volumes 3600 CR Daily Basis

National Multi Commodity Exchange (NMCE)

Promoted by Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB) First Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the first commodity exchange to provide trading facility through internet, through Virtual Private Network (VPN).

First Online Multi-Commodity Exchange of India and operational since 26th November 2002.
Total Average Volumes 1400 CR Daily Basis

NMCE
Headquarters Ahmedabad

MCX
Mumbai

NCDEX
Mumbai

Promoters

CWC,NAFED,GAIC,GS AMB, NIAM,NOL,PNB

FT,SBI,UBI,NSE,NABA RD,HDFC BANK,SBI LIFE INSURABCE,BOB,BOI, CORPORATION BANK,CANARA BANK, NYSE Euronext, Merrill Lynch.Citi Group 80+ Gold,Silver,Soya,Crude Oil,Mentha Oil 30000 Crores

NSE,ICICI BANK,CANARA BANK,CRISIL,LIC,NAB ARD,PNB, IFFCO, Goldman Sachs, Intercontinental Exchange (ICE), 57 Guar Seed,Guar Gum,Chana,Silver, Gold,Soya 3600 Crores

Number of Commodities listed Major Traded Commodities Average Daily Volume

60+ Rubber,Pepper, Cardamom,Jute, Coffee 1400 Crores

Hours of Trading

For All Commodities: 10:00 Am to 05:00 Pm

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

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

Turnover in Different Commodities Segments (MCX)

Turnover in Different Commodities Segments(NCDEX)

Contract Specification

MCX
No. 1 2 3 4 5 6 7 8 9 10 11 Commodity Trade Gold Silver Ref Soy Oil Kapas Chana Urad Guar Seed Pepper Guar Gum Mentha Oil Crude Oil Unit of Value Quote/Base Unit Delivery Tick Size 1 Kg 10 Grams 1 Kg Re 1 30 Kg 1 Kg 30 Kg Re 1 10 Mt 10 Kg 10 Mt 5 Ps 4 Mt 20 Kg 4 Mt 10 Ps 10 Mt 100 Kg 10 Mt Re 1 10 Mt 100 Kg 10 Mt Re 1 10 Mt 100 Kg 10 Mt Re 1 1 Mt 100 Kg 1 Mt Re 1 10 Mt 100 Kg 10 Mt Re 1 360 Kg 1 Kg 720 Kg 40 Ps 100 Barrels 1 Barrels 50000 Barrels Re 1

NCDEX
No. 1 2 3 4 5 6 7 8 9 Commodity Trade Guar Seed Guar Gum Soya Bean Ref Soya Oil Urad Wheat Chana Gold Pure Sona Unit of Value 10 Mt 5 Mt 10 Mt 10 Mt 10 Mt 10 Mt 10 Mt 1 Kg 1 Kg Quote/Base Unit 100 Kg 100 Kg 100 Kg 10 Kg 100 Kg 100 Kg 100 Kg 10 Grams 10 Grams Delivery 10 Mt 5 Mt 10 Mt 10 Mt 10 Mt 10 Mt 10 Mt 1 Kg 1 Kg Tick Size Re 1 Re 1 5 Ps 5 Ps Re 1 20 Ps Re 1 Re 1 Re 1

Major Commodity Exchange

Major Commodity Exchange

Chicago Board of Trade (CBOT) New York Mercantile Exchange (NYMEX) London Metal Exchange (LME) Tokyo Commodity Exchange (TOCOM)

World Commodities Exchanges Volumes

160 140 120 100 80 60

Metals
Energy Agri

40 20 0
NYMEX CBOT TOCOM LME NYBOT CME MCX NCDEX

Regulation of commodity markets

Country U.K Exchange Chicago Board of Trade Chicago Mercantile Exchange New York Board of Trade New York Mercantile Exchange Kansas City Board of Trade Regulator U.S.A CommodityFuture Trading Commission

India

National Commodity & Derivatives Forward Markets Exchange NationalMulti-Commodity Exchange Commission London Metal Exchange Services Euronext London International Financial Authority (1986) Financial Futures Exchange Dalian Commodity Exchange Shanghai Futures Exchange ChinaSecurities Regulatory Commission

China

Brokerage Calculation
Volume Brokerage TOT Service Charge Stamp Duty Total 10000000 0.03 0.0020% 10.30% 0.0010% Total 3000 200 329.6 100 3629.6 Brok+TOT 3200

Volume Brokerage TOT Service Charge Stamp Duty Total

NCDEX Commodities 10000000 0.01 0.0037% 10.30% 0.0010%

Total 1000 370 141.11 100 1611.11

Brok+TOT 1370

Daily Time of Different Exchange

Exchange
Tokyo Commodity Exchange Shanghai Metal Exchange London Metal Exchange COMEX/NYMEX/CBOT MCX & NCDEX

Timing IST
5.30 am 12 pm 6.30 am - 12.30 pm 5:20 PM - 10:30 PM (Winter) 4:20 PM - 9:30 PM (Summer) 6:40 PM - 11:30 PM (Winter) 5:40 PM - 10:30 PM (Summer) 10:00 AM - 23:55 PM (Winter) 10:00 AM - 23:30 PM (Summer)

Why choose Commodities over Equities?

In developed countries, commodity market is 5 times bigger than equity markets. Market has grown from 200 Cr in 2003 to 14000 Cr in 2006 per day & expected to be around 60000 Cr till Dec 2010. Low number of commodities, therefore choice is easy. No need to go into exotic maze of financial statements created by corporate world. Margins are low; therefore return ratios are favorable on winning deals. No single individual can control on longer terms basis on demand and supply in commodities. Does not involve individual / company specific risk.

Commodity v/s Financial Derivatives

COMMODITY DERIVATIVES Commodity Derivatives are settled by actual deliveries Quantity and quality differences exist FINANCIAL DERIVATIVES Financial Derivatives are only cash settled today No such differences exist

Holding cost includes assaying, warehousing, & insurance costs

Physical markets are seasonal in nature Factors Impacting : Demand & Supply Import-Export Regulations Government Intervention

Holding costs normally consists of only interest costs.

Cash markets are active throughout the year. Factors Impacting : Global & Local Economic Condition Performance of the entity Taxation Structure

Upfront margin between 5-10%

Upfront margin between 25-30%

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Comparative returns from Various Asset Classes

Commodity /Indices MCX Energy MCX Metal MCX Comdex BSE SENSEX USD Euro GBP Gold Silver Crude Oil Copper Nickel Rubber Mentha Castor Seed Pepper Jeera Sugar Guar. Ref Soya oil Months ago Units Rs/dollar Rs/euro Rs/Gbp Rs/10 gms Rs/kgs Rs/Barrels Rs/kg Rs/kg Rs/100Kgs Rs/kgs Rs/100kg Rs/100kgs Rs/kgs Rs/100kgs Rs/kgs Rs/10 kgs Feb07 2216 2721 2226 12938 44 58 87 9628 20486 27703 272 1901 9219 574 1888 12268 10242 1511 485 443 Price 2094 2617 2141 14091 44 57 87 9242 19933 2612 261 1709 10675 580 1897 12795 8427 1600 477 452 % 5.8 4.0 4.0 -8.2 1.0 .0 4.2 2.8 3.5 4.3 11.2 -13.6 -1.0 -0.4 -4.1 21.5 -5.6 1.7 -2.0 3Months ago Price 2360 2741 2285 13696 45 59 88 9269 20395 2889 320 1481 7931 669 1919 11105 7663 1757 532 466 % -6.1 -0.7 -2.6 -5.5 -1.2 -1.9 -1.6 3.9 0.4 -6.4 -14.9 28.4 16.2 -14.2 -1.6 10.5 33.7 -14.0 -8.8 -4.8 6Months ago Price 2716 2685 2335 2335 46 60 88 9692 19969 3256 358 1584 8710 570 1655 11580 8892 1823 572 435 % -18.4 1.4 -4.7 10.6 -4.9 -2.6 -2.0 -0.7 2.6 -17.0 -23.8 20.0 5.8 0.7 14.1 5.9 15.2 -17.1 -15.2 2.0 Year ago Price 2289 1965 1889 10370 44 53 78 8112 14049 2739 216 676 8223 457 1604 7541 5739 2061 571 378 % -3.2 38.4 17.8 24.8 -0.5 9.8 11.3 18.7 45.8 -1.3 26.1 181.1 12.1 25.6 17.7 62.7 78.5 -26.7 -15.0 17.2

Delivery Process for Buyer

Take Position Delivery Intension Pay Delivery Margin Pay-in/ Pay-out of funds/ Commodity Exchange of Buyers & Sellers Settlement of Premium/ Discounts & sales Tax 5 Days Prior Notice

Delivery Process for Seller

Take Position Delivery Intension 15 Days Prior Notice

Contact the Warehouse for Availability of Space Take Physical Commodity to the Warehouse for Assaying Warehouse Issues Receipt against the Deposit of Commodity Assayer takes Sample and Issues a Quality Report as per standard Quality mention by the Exchange

 If Approved/ Disapproved
If Approved then delivery is given and Amount is Credit to the Seller in T+5 Days If Disapproved then has to take the good back and then seller has to cut its position before 5 days of Expiry

Thank You