You are on page 1of 90

Analysis of Commodity Market with

respect to Silver and Sugar

Project Report submitted to:


Karvy Comtrade Ltd.

Submitted by:
Gautam V. Foria

MET Institute Of Management


Mumbai
Acknowledgement
I express my sincere gratitude and thanks to Karvy Comtrade Ltd. for
giving me an opportunity to undertake an important and crucial study related
to the analysis of Commodity Market. I am very much confident that this
project will go a long way in shaping my future.

I would like to sincerely thank my project guide Mr. Amit Mishra and
Mr. Mandeep Singh for their invaluable guidance, constructive suggestions,
keen and sustained interest, incessant and constant encouragement in the
development, planning and execution of the project and preparation of this
report.

I also express my sincere thanks to Mr. Jayprakash Gupta his


invaluable suggestions and timely feedback.

I am obliged to Ms. Seema Salvi, Assistant Vice President – HRD, for


providing the necessary facilities and co-operation, for helping me complete
this project to the best of my abilities.

I also thank the other employees of Karvy for their co-operation and
support.

Date:
Place:

Gautam V. Foria
(Summer Trainee)

2
Index
Content Page no.

Executive Summary 4

1. Introduction to Company 5
1.1. Karvy ltd. 5
1.2. Karvy Comtrade ltd. 6
1.2.1. Company Analysis 7
1.2.2. SWOT Analysis 7
1.2.3. Organization Structure 8
1.2.4. Financial Details 8
1.2.5. Competitors 8

2. Introduction to Commodity market 9


2.1. Commodity 9
2.2. Derivatives 10
2.3. Commodity Market 11
2.3.1. History of Commodity Market 11
2.3.2. International Commodity Market 12
2.3.3. Types of players 13
2.4. Commodity Market in India 14
2.4.1. National exchanges 18
2.4.2. The NCDEX Platform 25
2.5. Exchanges: International and Domestic 38

3. Silver 39
3.1. Supply/Demand Scenario 40
3.2. Global Scenario for Silver 44
3.3. Indian Scenario for Silver 48
3.4. Outlook for Silver 61

4. Sugar 62
4.1. Introduction 62
4.2. Global Scenario for Sugar 64
4.3. Indian Scenario for Sugar 66
4.4. Outlook for Sugar 74

5. Bibliography 75

3
Executive Summery:
One may have their debt and equity funds in place, but investing in
commodities could just be the one element to improve their portfolio.
Commodity trading provides an ideal asset allocation, also helps one hedge
against inflation and also helps buy a piece of global demand growth.

In 2003, the ban on commodity trading was lifted after 40 years in


India. Now, more and more people are interested in investing in this new
asset class. While price fluctuations in the sector could get rather volatile
depending on the category, returns are relatively higher. However, as this is
not a primary area of investment for most, there is a lot of apprehension
about when and how to invest. The Report seeks to answer all of these
questions by comparing Indian commodities market with the Asian markets.
The Report specifically takes up Silver and Sugar and analyses the
fundamental aspects of both of these commodities thereby highlighting the
future price outlook for both the commodities.

The Report examines the case for Silver as a long-term or strategic


investment. The role of Silver in asset management is currently very topical.
Much of the interest, however, is related to short-term issues such as
investing in Silver as an asset. From a longer term perspective a fairly wide
consensus exists that Silver retains industrial demand despite considerable
fluctuations in the shorter term.

Report is based on the simple economics of “supply and demand” that


is consistent with the view that Silver remains the industrial demand in the
long-run, yet at the same time allows the price of Silver to fluctuate
considerably in the short run. In this model, the total supply of Silver is a
function of the production, mining of its base metals, price of gold, industrial
demand and currency fluctuation. The short-run demand for Silver is
modeled as a function of the price of base metals, the US dollar/world
exchange rate, industrial demand, investment in metals and jewellery.

The report also analyses Sugar and its price movements. It seeks to
analyze the fundamentals of Sugar and the involvement of the use of
sugarcane in production of gasoline so also the cultivation pattern and
demand and supply situation in India and the world and thereby gives an
insight about Sugar futures on NCDEX and how they are traded.

4
1. Introduction to Company:

1.1. Karvy Ltd.:


KARVY, is a premier integrated financial services provider, and
ranked among the top five in the country in all its business segments,
services over 16 million individual investors in various capacities, and
provides investor services to over 300 corporate, comprising the who is who
of Corporate India. Karvy covers the entire spectrum of financial services
such as Stock broking, Depository Participants, Distribution of financial
products like mutual funds, bonds, fixed deposit, Merchant Banking &
Corporate Finance, Insurance Broking, Commodities Broking, Personal
Finance Advisory Services, placement of equity, IPOs, among others. Karvy
has a professional management team and ranks among the best in
technology, operations, and more importantly, in research of various
industrial segments.

Karvy Group Companies are:

1. Karvy Cunsultants Limited


2. Karvy Stock Broking Limited
3. Karvy Investor Services Limited
4. Karvy Computershare Private Limited
5. Karvy Global Services Limited
6. Karvy Comtrade Limited
7. Karvy Insurance Broking Private Limited
8. Karvy Mutual Fund Services
9. Karvy Securities Limited

5
1.2. Karvy Comtrade Ltd.:
Commodities market, contrary to the beliefs of many people, has been
in existence in India through the ages. However the recent attempt by the
Government to permit Multi-commodity National levels exchanges has
indeed given it, a shot in the arm. As a result two exchanges Multi
Commodity Exchange (MCX) and National Commodity and derivatives
Exchange (NCDEX) have come into being. These exchanges, by virtue of
their high profile promoters and stakeholders, bundle in themselves, online
trading facilities, robust surveillance measures and a hassle-free settlement
system. The futures contracts available on a wide spectrum of commodities
like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa
etc., provide excellent opportunities for hedging the risks of the farmers,
importers, exporters, traders and large scale consumers. They also make
open an avenue for quality investments in precious metals. The commodities
market, as it is not affected by the movements of the stock market or debt
market provides tremendous opportunities for better diversification of risk.
Realizing this fact, even mutual funds are contemplating of entering into this
market.
Karvy Comtrade Limited is another venture of the prestigious Karvy
group. With well established presence in the multifarious facets of the
modern Financial services industry from stock broking to registry services, it
is indeed a pleasure for them to make foray into the commodities derivatives
market which opens yet another door for Karvy to deliver its service to
customers and the investor public at large.

The company provides investment, advisory and brokerage


services in Indian Commodities Markets. And most importantly, it offers a
wide reach through our branch network of over 225 branches located across
180 cities.

6
1.2.1. Company Analysis:
Trade from anywhere in India: Karvy, with its network of branches across
the length and breadth of the country, gives the facility to trade from
anywhere in India.

Reliable research: Karvy has a dedicated team of research analysts who


work round the clock to provide the best research newsletters and advices. It
provides daily, weekly and monthly reports.

Personalized Services: Karvy has wide array of personalized services from


registry to stock broking for commodities broking. Karvy provides personal
relationship managers who your manage customer’s portfolio as per the
needs.

State of Infrastructure: The strong IT backbone of Karvy helps it to


provide customized direct services through its back office system, nation-
wide connectivity and website.

Round the clock operations in commodities trading: Indian commodities


market, unlike stock market keeps awake till 11 in the night and Karvy
offers round the clock services through its dedicated team of professionals.

No.1 in commodities: Karvy stands as a leader in terms of research,


volumes, branches, brokerage and clientele.

1.2.2. SWOT Analysis:

Strength Weakness
• No1. in commodities • Hampered reputation due to
• Trade anywhere in India bad news in market about
• Free Software for trading Karvy
• Personalized Service

Opportunity Threats
• Emerging Commodity Market • New Entrants
• Increase in customer base • New Adverse Regulations

7
from FMC

8
1.2.3. Organizational Structure:
Chairman

Board Of Directors

Vice President (commodity)

General Manager

Regional Manager

Branch Manager

Personal Financial Executives


Sales Manager (PFE)
Relationship Manager (RM)

Deputy PFEs
Deputy RMs

1.2.4. Financial Details:

Average daily turnover is approx 300 crores in terms of volumes.


* Profit figures not disclosed.

1.2.5. Competitors:
The main competitors to Karvy comtrade are:
• Religare
• India Infoline
• Kotak Commodities
• Manfinancial

9
2. Introduction to Commodity Market
2.1. Commodity:
Definition 1: A physical substance, such as food, grains, and metals, which
is interchangeable with another product of the same type, and which
investors buy or sell, usually through futures contracts.

Definition2: Any product that can be used for commerce or an article of


commerce which is traded on an authorized commodity exchange is known
as commodity. The article should be movable of value, something which is
bought or sold and which is produced or used as the subject or barter or sale

Defination3: Commodities, in simple words are any goods that are common
and unbranded. Eg: Gold, silver, rubber, pepper, jute, wheat, sugar, cotton
etc., are some of the common commodities.

Why commodity?

Commodities market essentially represents another kind of organised


market just like the stock market and the debt market. However,
commodities market, because of its unique nature lends to the benefits of a
wide spectrum of people like investors, importers, exporters, producers,
corporate etc.,

What can commodities market offer?


If you are an investor, commodities futures represent a good form of
investment because of the following reasons..
• High Leverage – The margins in the commodity futures market are
less than the F&O section of the equity market.
• Less Manipulations - Commodities markets, as they are governed by
international price movements are less prone to rigging or price
manipulations.
• Diversification – The returns from commodities market are free from
the direct influence of the equity and debt market, which means that
they are capable of being used as effective hedging instruments
providing better diversification.

10
If you are an importer or an exporter, commodities futures can help you in
the following ways…
• Hedge against price fluctuations – Wide fluctuations in the prices of
import or export products can directly affect your bottom-line as the
price at which you import/export is fixed before-hand. Commodity
futures help you to procure or sell the commodities at a price decided
months before the actual transaction, thereby ironing out any change
in prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
• Lock-in the price for your produce – If you are a farmer, there is every
chance that the price of your produce may come down drastically at
the time of harvest. By taking positions in commodity futures you can
effectively lock-in the price at which you wish to sell your produce
• Assured demand – Any glut in the market can make you wait
unendingly for a buyer. Selling commodity futures contract can give
you assured demand at the time of harvest.
If you are a large scale consumer of a product, here is how this market can
help you:
• Control your cost – If you are an industrialist, the raw material cost
dictates the final price of your output. Any sudden rise in the price of
raw materials can compel you to pass on the hike to your customers
and make your products unattractive in the market. By buying
commodity futures, you can fix the price of your raw material.
• Ensure continuous supply – Any shortfall in the supply of raw
materials can stall your production and make you default on your sale
obligations. You can avoid this risk by buying a commodity futures
contract by which you are assured of supply of a fixed quantity of
materials at a pre-decided price at the appointed time.

2.2. Derivatives:
Definition: A commodity derivative derives its value from an underlying
asset which is necessarily a commodity.

Types of Instruments in Derivative Market:


• Forward contract
• Future Contract
• Swap Contract
• Option Contract

11
2.3. Commodity Market:
Definition: Commodity markets represent the formal system for the
interplay of demand for and supply of commodities.

These markets can be broadly classified into spot market and futures
market. Commodities for immediate delivery are traded through the spot
market. The players in the spot market are the actual producers and the
consumers of the commodities.

The other type of market called the ‘Futures market’ is for facilitating
contracts for future delivery. These markets make available for trading, the
various derivatives based on commodities. Usually traded ones are the
futures and options. However in India options on commodities are not
available and are expected to be introduced soon.

2.3.1. History of Commodity Markets:


When and where exactly the markets began is still a mystery, but the
earliest evidence for the commodity market is found in ancient Sumerian
culture. In this culture, people traded the commodity goods using small
baked clay tokens shaped as sheep or goats as commodity money. The actual
trade took place in this way a trader promised to supply a person certain
number say 10 goats and sheep. The trader would then put 10 baked tokens
of sheep into a sealed clay vessel and hand it over to the person. The number
of tokens put was written on the outside along with the date and time of
delivery. This sealed vessel was then made official by getting the signature
of the authority, who promised to act as a judge for the above mentioned
transaction. This sealed clay vessel is the earliest evidenced commodity
money, which can be equated on par with the futures contract used in the
commodity markets in the modern days. Thus people of this culture had
standardized the trade contracts and the delivery of goods to make the trade
smooth and predictable.

12
2.3.2. International commodity market:
Agricultural products such as wheat, rice, cattle, pigs, corn, etc., were
the first commodities to be traded. As the trade increased, it started occurring
at a fixed place in the area. In due course of time, this place was called a
market. As the time passed, the market grew in time and space. It took the
global form. But the name, commodity market remained the same. In this
article let us scan through and find where and how the commodity market
started and how it grew through the ages.

International commodity exchanges:


Some of the most popular commodity exchanges in the world are listed
below:

London Metals Exchange, London


New York Mercantile Exchange, New York
Chicago Mercantile Exchange, Chicago
Chicago Board of Trade, Chicago
London International Financial Futures and Options Exchange
(LIFFE), London
Tokyo Commodity Exchange, Tokyo
Winnipeg Commodity Exchange, Canada

Some of the most popular exchanges around the world are given
below along with the major commodities traded:

EXCHANGE MAJOR COMMODITIES TRADED


New York Mercantile Exchange Crude Oil, Heating Oil
(NYMEX)
Chicago Board of Trade Soy Oil, Soy Beans, Corn
London Metals Exchange Aluminum, Copper, Tin, Lead
Chicago Board Option Exchange Options on Energy, Interest rate
Tokyo Commodity Exchange Silver, Gold, Crude oil, Rubber

13
Malaysian Derivatives Exchange Rubber, Soy Oil, Palm Oil

2.3.3. Types of players in Commodity Market:


Hedger: Hedger is a user of the market, who enters into futures contract to
manage the risk of adverse price fluctuation in respect of his existing or
future asset.

Arbitragers: Arbitrage refers to the simultaneous purchase and sale in two


markets so that the selling price is higher than the buying price by more than
the transaction cost, so that the arbitrageur makes risk-less profit.

Speculators: A trader, who trades or takes position without having exposure


in the physical market, with the sole intention of earning profit is a
speculator.

14
2.4. Commodity Markets in India:
Evolution of the commodity market in India:
Although India has a long history of trade in commodity derivatives,
this segment remained underdeveloped due to government intervention in
many commodity markets to control prices. The production, supply and
distribution of many agricultural commodities are still governed by the state
and forwards and futures trading are selectively introduced with stringent
controls. While free trade in many commodity items is restricted under the
Essential Commodities Act (ECA), 1955, forward and futures contracts are
limited to certain commodity items under the Forward Contracts
(Regulation) Act (FCRA), 1952.

The first commodity exchange was set up in India by Bombay Cotton


Trade Association Ltd., and formal organized futures trading started in
cotton in 1875. Subsequently, many exchanges came up in different parts of
the country for futures trade in various commodities. The Gujrati Vyapari
Mandali came into existence in 1900 which has undertaken futures trade in
oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and
East India Jute Association Ltd were set up in 1919 and 1927 respectively
for futures trade in raw jute. In 1921, futures in cotton were organized in
Mumbai under the auspices of East India Cotton Association (EICA). Many
exchanges were set up in major agricultural centres in north India before
world war broke out and they were mostly engaged in wheat futures until it
was prohibited. The existing exchanges in Hapur, Muzaffarnagar, Meerut,
Bhatinda, etc were established during this period. The futures trade in spices
was first organized by India Pepper and Spices Trade Association (IPSTA)
in Cochin in 1957. Futures in gold and silver began in Mumbai in 1920 and
continued until it was prohibited by the government by mid-1950s. Options
are though permitted now in stock market, they are not allowed in
commodities. The commodity options were traded during the pre-
independence period. Options on cotton were traded until they along with
futures were banned in 1939 (Ministry of Food and Consumer Affairs,
1999). However, the government withdrew the ban on futures with passage
of FCRA in 1952. The Act has provided for the establishment and
constitution of Forward Markets Commission (FMC) for the purpose of
exercising the regulatory powers assigned to it by the Act. Later, futures

15
trade was altogether banned by the government in 1966 in order to have
control on the movement of prices of many agricultural and essential
commodities.

After the ban of futures trade all the exchanges went out of business
and many traders started resorting to unofficial and informal trade in futures.
On recommendation of the Khusro Committee in 1980 government
reintroduced futures on some selected commodities including cotton, jute,
potatoes, etc. As part of economic liberalization of 1990s an expert
committee on forward markets under the chairmanship of Prof. K.N. Kabra
was appointed by the government of India in 1993. Its report submitted in
1994 recommended the reintroduction of futures which were banned in 1966
and also to widen its coverage to many more agricultural commodities and
silver. In order to give more thrust on agricultural sector, the National
Agricultural Policy 2000 has envisaged external and domestic market
reforms and dismantling of all controls and regulations in agricultural
commodity markets. It has also proposed to enlarge the coverage of futures
markets to minimize the wide fluctuations in commodity prices and for
hedging the risk arising from price fluctuations. In line with the proposal
many more agricultural commodities are being brought under futures
trading.

The Present Status:

Presently future trading is permitted in all the commodities. Trading


is taking place in about 78 commodities through 25 Exchanges/Associations
as given in the table below:-

No. Exchange COMMODITY


1. India Pepper & Spice Trade Pepper (both domestic and
Association, Kochi (IPSTA) international contracts)
2. Vijai Beopar Chambers Ltd., Gur, Mustard seed
Muzaffarnagar
3. Rajdhani Oils & Oilseeds Exchange Gur, Mustard seed its oil &
Ltd., Delhi oilcake
4. Bhatinda Om & Oil Exchange Ltd., Gur
Bhatinda
5. The Chamber of Commerce, Hapur Gur, Potatoes and Mustard

16
seed
6. The Meerut Agro Commodities Gur
Exchange Ltd., Meerut
7. The Bombay Commodity Exchange Oilseed Complex, Castor oil
Ltd., Mumbai international contracts
8. Rajkot Seeds, Oil & Bullion Merchants Castor seed, Groundnut, its
Association, Rajkot oil & cake, cottonseed, its oil
& cake, cotton (kapas) and
RBD palmolein.
9. The Ahmedabad Commodity Castorseed, cottonseed, its oil
Exchange, Ahmedabad and oilcake
10. The East India Jute & Hessian Hessian & Sacking
Exchange Ltd., Calcutta
11. The East India Cotton Association Ltd., Cotton
Mumbai
12. The Spices & Oilseeds Exchange Ltd., Turmeric
Sangli.
13. National Board of Trade, Indore Soya seed, Soyaoil and Soya
meals, Rapeseed/Mustardseed
its oil and oilcake and RBD
Palmolien
14. The First Commodities Exchange of Copra/coconut, its oil &
India Ltd., Kochi oilcake
15. Central India Commercial Exchange Gur and Mustard seed
Ltd., Gwalior
16. E-sugar India Ltd., Mumbai Sugar
17. National Multi-Commodity Exchange Several Commodities
of India Ltd., Ahmedabad
18. Coffee Futures Exchange India Ltd., Coffee
Bangalore
19. Surendranagar Cotton Oil & Oilseeds, Cotton, Cottonseed, Kapas
Surendranagar
20. E-Commodities Ltd., New Delhi Sugar (trading yet to
commence)
21. National Commodity & Derivatives, Several Commodities
Exchange Ltd., Mumbai

17
22. Multi Commodity Exchange Ltd., Several Commodities
Mumbai
23. Bikaner commodity Exchange Ltd., Mustard seeds its oil &
Bikaner oilcake, Gram. Guar seed.
Guar Gum
24. Haryana Commodities Ltd., Hissar Mustard seed complex
25. Bullion Association Ltd., Jaipur Mustard seed Complex

Futures trading perform two important functions of price discovery


and price risk management with reference to the given commodity. It is
useful to all segments of the economy. It is useful to the producer because he
can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities, the best that
suits him. It enables the consumer, in that he gets an idea of the price at
which the commodity would be available at a future point of time. He can do
proper costing and also cover his purchases by making forward contracts. A
future trading is very useful to the exporters as it provides an advance
indication of the price likely to prevail and thereby help the exporter in
quoting a realistic price and thereby secure export contract in a competitive
market. Having entered into an export contract, it enables him to hedge his
risk by operating in futures market.

Forward/futures trading involve a passage of time between entering


into a contract and its performance making thereby the contracts susceptible
to risks, uncertainties, etc. Hence there is a need for the regulatory functions
to be exercised by an exchange that is the 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.

Exchange is an association of members which provides all


organizational support for carrying out futures trading in a formal
environment. These exchanges are managed by the Board of Directors which
is composed primarily of the members of the association. There are also
representatives of the government and public nominated by the Forward
Markets Commission. The majority of members of the Board have been

18
chosen from among the members of the Association who have trading and
business interest in the exchange. The Board is assisted by the chief
executive officer and his team in day-to-day administration.

2.4.1. National Exchanges


In enhancing the institutional capabilities for futures trading the idea
of setting up of National Commodity Exchange(s) has been pursued since
1999. Three such Exchanges, viz, National Multi-Commodity Exchange of
India Ltd., (NMCE), Ahmedabad, National Commodity & Derivatives
Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX),
Mumbai have become operational. “National Status” implies that these
exchanges would be automatically permitted to conduct futures trading in all
commodities subject to clearance of byelaws and contract specifications by
the FMC. While the NMCE, Ahmedabad commenced futures trading in
November 2002, MCX and NCDEX, Mumbai commenced operations in
October/ December 2003 respectively.

MCX
MCX (Multi Commodity Exchange of India Ltd.) an independent
and de-mutulised multi commodity exchange has permanent recognition
from Government of India for facilitating online trading, clearing and
settlement operations for commodity futures markets across the country. Key
shareholders of MCX are Financial Technologies (India) Ltd., State Bank of
India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State
Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank
Of India, Bank Of Baroda, Canara Bank, Corporation Bank.

Headquartered in Mumbai, MCX is led by an expert management


team with deep domain knowledge of the commodity futures markets. Today
MCX is offering spectacular growth opportunities and advantages to a large
cross section of the participants including Producers / Processors, Traders,
Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives,
Industry Associations, amongst others MCX being nation-wide commodity
exchange, offering multiple commodities for trading with wide reach and
penetration and robust infrastructure.

19
MCX, having a permanent recognition from the Government of
India, is an independent and demutualised multi commodity Exchange.
MCX, a state-of-the-art nationwide, digital Exchange, facilitates online
trading, clearing and settlement operations for a commodities futures trading.

NMCE

National Multi Commodity Exchange of India Ltd. (NMCE) was


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), National Institute of Agricultural Marketing
(NIAM), and Neptune Overseas Limited (NOL). While various integral
aspects of commodity economy, viz., warehousing, cooperatives, private and
public sector marketing of agricultural commodities, research and training
were adequately addressed in structuring the Exchange, finance was still a
vital missing link. Punjab National Bank (PNB) took equity of the Exchange
to establish that linkage. Even today, NMCE is the only Exchange in India to
have such investment and technical support from the commodity relevant
institutions.

NMCE facilitates electronic derivatives trading through robust and


tested trading platform, Derivative Trading Settlement System (DTSS),
provided by CMC. It has robust delivery mechanism making it the most
suitable for the participants in the physical commodity markets. It has also
established fair and transparent rule-based procedures and demonstrated total
commitment towards eliminating any conflicts of interest. It is the only
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).

NMCE follows best international risk management practices. The


contracts are marked to market on daily basis. The system of upfront
margining based on Value at Risk is followed to ensure financial security
of the market. In the event of high volatility in the prices, special intra-
day clearing and settlement is held. NMCE was the first to initiate
process of dematerialization and electronic transfer of warehoused
commodity stocks. The unique strength of NMCE is its settlements via a
Delivery Backed System, an imperative in the commodity trading

20
business. These deliveries are executed through a sound and reliable
Warehouse Receipt System, leading to guaranteed clearing and
settlement.

NCDEX

National Commodity and Derivatives Exchange Ltd (NCDEX) is a


technology driven commodity exchange. It is a public limited company
registered under the Companies Act, 1956 with the Registrar of Companies,
Maharashtra in Mumbai on April 23,2003. It has an independent Board of
Directors and professionals not having any vested interest in commodity
markets. It has been launched 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.

Forward Markets 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. It is located in Mumbai and offers facilities to its members in
more than 390 centers throughout India. The reach will gradually be
expanded to more centers.

NCDEX currently facilitates trading of thirty six commodities


- Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake,
Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur,
Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons,
Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy
Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur,
Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize &
Yellow Soybean Meal.

In case of commodity the quality of the asset underlying a contract cab


vary largely. This becomes an important issue to b managed. We will have a
brief look at this issue:

Domestic Exchanges Market Share:

21
22
Terminology:

Physical settlement
Physical settlement involves the physical delivery of the underlying
commodity, typically at an accredited warehouse. The seller intending to
make delivery would have to take the commodities to the designated
warehouse and the buyer intending to take delivery would have to go to the
designated warehouse and pick up the commodity. This may sound simple,
but the physical settlement of commodities is a complex process. The issues
faced in physical settlement are enormous. They are:-
• Limits on storage facilities in different states.
• Restrictions on interstate movement of commodities.
• State level octroi and duties have an impact on the cost of movement of
goods across locations.

The process of taking physical delivery in commodities is quite different


from the process of taking physical delivery in financial assets. We take a
general overview at the process flow of physical settlement of commodities.

Delivery notice period


Unlike in the case of equity futures, typically a seller of commodity
futures has the option to give notice of delivery. This option is given during
a period identified as `delivery notice period'. The intention of the notice is
to allow verification of delivery and to give adequate notice to the buyer of a
possible requirement to take delivery. These are required by virtue of the fact
that the actual physical settlement of commodities requires preparation from
both delivering and receiving members.

Typically, in all commodity exchanges, delivery notice is required to


be supported by a warehouse receipt. The warehouse receipt is the proof for
the quantity and quality of commodities being delivered. Some exchanges
have certified laboratories for verifying the quality of goods. In these
exchanges the seller has to produce a verification report from these
laboratories along with delivery notice. Some exchanges like LIFFE, accept
warehouse receipts as quality verification documents while others like BMF-
Brazil have independent grading and classification agency to verify the
quality.

23
Assignment
Whenever delivery notices are given by the seller, the clearing house
of the exchange identifies the buyer to whom this notice may be assigned.
Exchanges follow different practices for the assignment process. One
approach is to display the delivery notice and allow buyers wishing to take
delivery to bid for taking delivery. Among the international exchanges,
BMF, CBOT and CME display delivery notices. Alternatively, the clearing
houses may assign deliveries to buyers on some basis. Exchanges such as
COMMEX and the Indian commodities exchanges have adopted this
method.

Any seller/ buyer who has given intention to deliver/ been assigned a
delivery has an option to square off positions till the market close of the day
of delivery notice. After the close of trading, exchanges assign the delivery
intentions to open long positions. Assignment is done typically either on
random basis or first-in-first out basis. In some exchanges, the buyer has the
option to give his preference for delivery location. The clearing house
decides on the daily delivery order rate at which delivery will be settled.
Delivery rate depends on the spot rate of the underlying adjusted for
discount/ premium for quality and freight costs. The discount/ premium for
quality and freight costs are published by the clearing house before
introduction of the contract. The most active spot market is normally taken
as the benchmark for deciding spot prices. Alternatively, the delivery rate is
determined based on the previous day closing rate for the contract or the
closing rate for the day.

Delivery
After the assignment process, clearing house/ exchange issues a
delivery order to the buyer. The exchange also informs the respective
warehouse about the identity of the buyer. The buyer is required to deposit a
certain percentage of the contract amount with the clearing house as margin
against the warehouse receipt. The period available for the buyer to take
physical delivery is stipulated by the exchange. Buyer or his authorised
representative in the presence of seller or his representative takes the
physical stocks against the delivery order. Proof of physical delivery having
been effected is forwarded by the seller to the clearing house and the invoice
amount is credited to the seller's account. In India if a seller does not give
notice of delivery then at the expiry of the contract the positions are cash
settled by price difference exactly as in cash settled equity futures contracts.

24
Warehousing
One of the main differences between financial and commodity
derivatives are the need for warehousing. In case of most exchange-traded
financial derivatives, all the positions are cash settled. Cash settlement
involves paying up the difference in prices between the time the contract was
entered into and the time the contract was closed. In case of commodity
derivatives however, there is a possibility of physical settlement. Which
means that if the seller chooses to hand over the commodity instead of the
difference in cash, the buyer must take physical delivery of the underlying
asset. This requires the exchange to make an arrangement with warehouses
to handle the settlements. The efficacy of the commodities settlements
depends on the warehousing system available. Most international
commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements. Such CWH are required to provide storage
facilities for participants in the commodities markets and to certify the
quantity and quality of the underlying commodity. In India, the warehousing
system is not as efficient as it is in some of the other developed markets.

Quality of underlying assets


A derivatives contract is written on a given underlying. Variance in
quality is not an issue in case of financial derivatives as the physical attribute
is missing. When the underlying asset is a commodity, the quality of the
underlying asset is of prime importance. There may be quite some variation
in the quality of what is available in the marketplace. When the asset is
specified, it is therefore important that the exchange stipulate the grade or
grades of the commodity that are acceptable. Commodity derivatives
demand good standards and quality assurance/ certification procedures. A
good grading system allows commodities to be traded by specification.
Currently there are various agencies that are responsible for specifying
grades for commodities. For example, the Bureau of Indian Standards (BIS)
under Ministry of Consumer Affairs specifies standards for processed
agricultural commodities whereas AGMARK under the department of rural
development under Ministry of Agriculture is responsible for promulgating
standards for basic agricultural commodities. Apart from these, there are
other agencies like EIA, which specify standards for export oriented
commodities.

25
2.4.2. The NCDEX Platform:
Structure of NCDEX:
Promoters:
A consortium of institutions promotes NCDEX. These include the
ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India
(LIC), National Bank for Agriculture and Rural Development (NABARD)
and National Stock Exchange of India Limited (NSE). Punjab National Bank
(PNB), CRISIL Limited (formerly the Credit Rating Information Services of
India Limited), Indian Farmers Fertiliser Cooperative Limited
(IFFCO) and Canara Bank by subsciribing to the equity shares have
joined the initial promoters as shareholders of the Exchange. NCDEX is the
only commodity exchange in the country promoted by national level
institutions. This unique parentage enables it to offer a variety of benefits
which are currently in short supply in the commodity markets. The four
institutional promoters of NCDEX are prominent players in their respective
fields and bring with them institution building experience, trust, nationwide
reach, technology and risk management skills.

Governance:
NCDEX is run by an independent Board of Directors. Promoters do
not participate in the day-to-day activities of the exchange. The directors are
appointed in accordance with the provisions of the Articles of Association of
the company. The board is responsible for managing and regulating all the
operations of the exchange and commodities transactions. It formulates the
rules and regulations related to the operations of the exchange. Board
appoints an executive committee and other committees for the purpose of
managing activities of the exchange. The executive committee consists of
Managing Director of the exchange who would be acting as the Chief
Executive of the exchange, and also other members appointed by the board.
Apart from the executive committee the board has constitute committee like
Membership committee, Audit Committee, Risk Committee, Nomination
Committee, Compensation Committee and Business Strategy Committee,
which, help the Board in policy formulation.

26
Exchange membership:
Membership of NCDEX is open to any person, association of
persons, partnerships, co-operative societies, companies etc. that fulfills the
eligibility criteria set by the exchange. All the members of the exchange
have to register themselves with the competent authority before commencing
their operations. The members of NCDEX fall into two categories.

Trading cum clearing members (TCMs)

NCDEX invites applications for (TCMs) from persons who fulfill the
specified eligibility criteria for trading in commodities. The TCM
membership entitles the members to trade and clear, both for themselves
and/ or on behalf of their clients. Applicants accepted for admission as TCM
are required to satisfy the following:
Particulars (Rupees in Lakh)
1) Interest free cash security deposit 15.00
2) Collateral Security deposit 15.00
3) Annual subscription charges 0.50
4) Advance minimum transaction charges 0.50
5) Net worth requirement 50.00

Professional clearing members (PCMs)

NCDEX also invites applications for Professional Clearing


Membership (PCMs) from persons who fulfill the specified eligibility
criteria for trading in commodities. The PCM membership entitles the
members to clear trades executed through Trading cum Clearing Members
(TCMs), both for themselves and/ or on behalf of their clients. Applicants
accepted for admission as PCMs are required to satisfy the following:
Particulars (Rupees in Lakh)
1) Interest free cash security deposit 25.00
2) Collateral security deposit 25.00
3) Annual subscription charges 1.00
4) Advance minimum transaction charges 1.00
5) Net worth requirement 5000.00

27
Capital requirements

NCDEX has specified capital requirements for its members. On


approval as a member of NCDEX, the member has to deposit Base
Minimum Capital (BMC) with the exchange. Base Minimum Capital
comprises of the following:
1. Interest free cash security deposit
2. Collateral security deposit
All Members have to comply with the security deposit requirement before
the activation of their trading terminal. Members can opt to meet the security
deposit requirement by way of the following:
 Cash: This can be deposited by issuing a cheque/ demand draft payable at
Mumbai in favour of National Commodity & Derivatives Exchange
Limited.
 Bank guarantee: Bank guarantee in favour of NCDEX as per the
specified format from approved banks. The minimum term of the bank
guarantee should be 12 months.
 Fixed deposit receipt: Fixed deposit receipts (FDRs) issued by approved
banks are accepted. The FDR should be issued for a minimum period of
36 months from any of the approved banks.
 Government of India securities: National Securities Clearing Corporation
Limited (NSCCL) is the approved custodian for acceptance of
Government of India securities. The securities are valued on a daily basis
and a haircut of 25% is levied.
Members are required to maintain minimum level of security deposit i.e.
Rs.15 Lakh in case of TCM and Rs. 25 Lakh in case of PCM at any point of
time. If the security deposit falls below the minimum required level,
NCDEX may initiate suitable action including withdrawal of trading
facilities as given below:
 If the security deposit shortage is equal to or greater than Rs. 5 Lakh,
the trading facility would be withdrawn with immediate effect.
 If the security deposit shortageis less than Rs.5 Lakh the member
would be given one calendar weeks’ time to replenish the shortages
and if the same is not done within the specified time the trading
facility would be withdrawn.
Members who wish to increase their limit can do so by bringing in additional
capital in the form of cash, bank guarantee, fixed deposit receipts or
Government of India securities.

28
The System of NCDEX:

Every market transaction consists of three components namely:


trading, clearing and settlement. A brief overview of how transactions
happen on the market.

Trading
The trading system provides a fully automated screen-based trading
for futures on commodities on a nationwide basis as well as an online
monitoring and surveillance mechanism. It supports an order driven market
and provides complete transparency of trading operations. The trade timings
of the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been
proposed for implementation at a later stage. The system supports an order
driven market, where orders match automatically. Order matching is
essentially on the basis of commodity, its price, time and quantity. The
exchange specifies the unit of trading and the delivery unit for futures
contracts on various commodities. The exchange notifies the regular lot size
and tick size for each of the contracts traded from time to time. When any
order enters the trading system, it is an active order. It tries to find a match
on the other side of the book. If it finds a match, a trade is generated. If it
does not find a match, the order becomes passive and gets queued in the
respective outstanding order book in the system.

The exchange trades commodity futures contracts having one-


month, two-month and three-month expiry cycles. All contracts expire on
the 20th of the expiry month. If the 20th of the expiry month is a trading
holiday, the contracts shall expire on the previous trading day. New contracts
will be introduced on the trading day following the expiry of the near month
contract.

29
Contract cycle

The figure shows the contract cycle for futures contracts. As can be seen, at
any given point of time, three contracts are available for trading - a near-
month, a middle-month and a far-month. As the January contract expires on
the 20th of the month, a new three-month contract starts trading from the
following day, once more making available three index futures contracts for
trading.

30
Types of Order:
An electronic trading system allows the trading members to enter
orders with various conditions attached to them as per their requirements.
These conditions are broadly divided into the following categories:
 Time conditions
 Price conditions
 Other conditions

Time conditions:

Good till day order: A day order, as the name suggests is an order which is
valid for the day on which it is entered. If the order is not executed during
the day, the system cancels the order automatically at the end of the day.

Good till cancelled (GTC): A GTC order remains in the system until the
user cancels it.
Consequently, it spans trading days, if not traded on the day the order
is entered. The maximum number of days an order can remain in the system
is notified by the exchange from time to time after which the order is
automatically cancelled by the system. The GTC order on the exchange is
cancelled at the end of a period of seven calendar days from the date of
entering an order or when the contract expires, whichever is earlier.

Good till date (GTD): A GTD order allows the user to specify the date till
which the order should remain in the system if not executed. The maximum
days allowed by the system are the same as in GTC order. At the end of this
day/ date, the order is cancelled from the system.

Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a
contract as soon as the order is released into the system, failing which the
order is cancelled from the system. Partial match is possible for the order,
and the unmatched portion of the order is cancelled immediately.

All or none order: All or none order (AON) is a limit order, which is to be
executed in its entirety, or not at all.

31
Fill or kill order: This order is a limit order that is placed to be executed
immediately and if the order is unable to be filled immediately, it gets
cancelled.

Price conditions:

Limit order: An order to buy or sell a stated amount of a commodity at a


specified price, or at a better price, if obtainable at the time of execution. The
disadvantage is that the order may not get filled at all if the price for that day
does not reach the specified price.

Stop-loss: A stop-loss order is an order, placed with the broker, to buy or


sell a particular futures contract at the market price if and when the price
reaches a specified level. Futures traders often use stop orders in an effort to
limit the amount of loss if the futures price moves against their position.
Stop orders are not executed until the price reaches the specified point.
When the price reaches that point the stop order becomes a market order. A
buy stop order is initiated when one wants to buy a contract or go long and a
sell stop order when one wants to sell or go short. For the stop-loss sell
order, the trigger price has to be greater than the limit price.

Other conditions:

Market price: Market orders are orders for which no price is specified at the
time the order is entered (i.e. price is market price). For such orders, the
system determines the price. Only the position to be taken long/ short is
stated.

Market on open: The order will be executed on the market open within the
opening range. This trade is used to enter a new trade, or exit an open trade.

Market on close: The order will be executed on the market close. The fill
price will be within the closing range, which may, in some markets, be
substantially different from the settlement price. This trade is also used to
enter a new trade, or exit an open trade.

Trigger price: Price at which an order gets triggered from the stop-loss
book.

32
Limit price: Price of the orders after triggering from stop-loss book.

Spread order: A simple spread order involves two positions, one long and
one short. They are taken in the same commodity with different months or in
closely related commodities. Prices of the two futures contract therefore tend
to go up and down together, and gains on one side of the spread are offset by
losses on the other. The spreaders goal is to profit from a change in the
difference between the two futures prices.

One cancels the other order: An order placed so as to take advantage of


price movement, which consists of both a stop and a limit price. Once one
level is reached, one half of the order will be executed (either stop or limit)
and the remaining order cancelled (either limit or stop). This type of order
would close the position if the market moved to either the stop rate or the
limit rate, thereby closing the trade and at the same time, cancelling the other
entry order.

Trading parameters:
Tick size for contracts
The tick size is the smallest price change that can occur for the trades
on the exchange. The tick size in respect of all futures contracts admitted to
dealings on the NCDEX is 5 paise.

Quantity freeze
Orders placed have to be within the quantity specified by the exchange
regard. Any order exceeding this specified quantity will not be executed but
will lie pending with the exchange as a quantity freeze. In respect of orders
which have come under quantity freeze, the member is required to confirm
to the exchange that there is no inadvertent error in the order entry and that
the order is genuine. On such confirmation, the exchange can approve such
order. However, in exceptional cases, the exchange may, at its discretion, not
allow the orders that have come under quantity freeze for execution.

33
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each
contract. The margin levels are set by the exchanges based on volatility
(market conditions) and can be changed at any time. The margin
requirements for most futures contracts range from 2% to 15% of the value
of the contract.

Charges
Members are liable to pay transaction charges for the trade done
through the exchange during the previous month. The transaction charges are
payable at the rate of Rs.6 per Rs.one Lakh trade done. This rate is subject to
change from time to time. The transaction charges are payable on the 7th day
from the date of the bill every month in respect of the trade done in the
previous month.

Pricing commodity futures:

Commodity futures began trading on the NCDEX from the 14th


December 2003. The market is still in its nascent phase, however the
volumes and open interest on the various contracts trading in this market
have been steadily growing.

The process of arriving at a figure at which a person buys and


another sells a futures contract for a specific expiration date is called price
discovery. In an active futures market, the process of price discovery
continues from the market's opening until its close. The prices are freely and
competitively derived. Future prices are therefore considered to be superior
to the administered prices or the prices that are determined privately.
Further, the low transaction costs and frequent trading encourages wide
participation in futures markets lessening the opportunity for control by a
few buyers and sellers.

In an active futures markets the free flow of information is vital.


Futures exchanges act as a focal point for the collection and dissemination of
statistics on supplies, transportation, storage, purchases, exports, imports,
currency values, interest rates and other pertinent information. Any
significant change in this data is immediately reflected in the trading pits as
traders digest the new information and adjust their bids and offers
accordingly. As a result of this free flow of information the market

34
determines the best estimate of today and tomorrow's prices and it is
considered to be the accurate reflection of the supply and demand for the
underlying commodity. The cost-of-carry model explains the dynamics of
pricing that constitute the estimation of fair value of futures.

The cost of carry model


We use arbitrage arguments to arrive at the fair value of futures. For
pricing purposes, we treat the forward and the futures market as one and the
same. A futures contract is nothing but a forward contract that is exchange
traded and that is settled at the end of each day. The buyer who needs an
asset in the future has the choice between buying the underlying asset today
in the spot market and holding it, or buying it in the forward market. If he
buys it in the spot market today, it involves opportunity costs. He incurs the
cash outlay for buying the asset and he also incurs costs for storing it. If
instead he buys the asset in the forward market, he does not incur an initial
outlay. However the costs of holding the asset are now incurred by the seller
of the forward contract who charges the buyer a price that is higher than the
price of the asset in the spot market. This forms the basis for the cost-of-
carry model where the price of the futures contract is defined as:

F= S + C  eq(1)
Where: F = Futures price
S = Spot price
C = Holding costs or carry costs
The fair value of a futures contract can also be expressed as:
F = S(1 + r)T  eq(2)
Where: r = Percent cost of financing
T = Time till expiration
Whenever the futures price moves away from the fair value, there
would be opportunities for arbitrage. If F < (1 + r)T or F > (1 + r)T , arbitrage
would exist. In the case of commodity futures, the holding cost is the cost of
financing plus cost of storage and insurance purchased. In the case of equity
futures, the holding cost is the cost of financing minus the dividends returns.
Equation 2 uses the concept of discrete compounding, where interest rates
are compounded at discrete intervals, for example, annually or semiannually.
Pricing of continuously compounded interest rates is expressed as:
F = SerT  eq (3)
Where: r = Cost of financing (using continuously compounded interest rate)
T = Time till expiration

35
e = 2.71828
The above equations provides for pricing futures in general.

Investment assets
An investment asset is an asset that is held for investment purposes
by most investors. Stocks and bonds are examples of investment assets. Gold
and silver are also examples of investment assets. Note however that
investment assets do not always have to be held exclusively for investment.
However, to classify as investment assets, these assets do have to satisfy the
requirement that they are held by a large number of investors solely for
investment. we can use arbitrage arguments to determine the futures prices
of an investment asset from its spot price and other observable market
variables.

Pricing futures contracts on investment commodities


In above equations the storage costs is ignored. The table bellow
gives the indicative warehouse charges for accredited warehouses/ vaults
that will function as delivery centres for contracts that trade on the NCDEX.
Warehouse charges include a fixed charge per deposit of commodity into the
warehouse, and a per unit per week charge. The per unit charges include
storage costs and insurance charges.
We saw that in the absence of storage costs, the futures price of a
commodity that is an investment asset is given by F = SerT. Storage costs add
to the cost of carry. If U is the present value of all the storage costs that will
be incurred during the life of a futures contract, it follows that the futures
price will be equal to
F = (S + U)erT  eq(4)
Where: r = Cost of financing (annualised)
T = Time till expiration
U = Present value of all storage costs

Consumption assets
A consumption asset is an asset that is held primarily for
consumption. It is not usually held for investment. Examples of consumption
assets are commodities such as copper, oil, and pork bellies. For pricing
consumption assets, we need to review the arbitrage arguments a little
differently. We consider the cost-of-carry model and the pricing of futures
contracts on investment assets to determine the price of consumption assets.

36
Pricing futures contracts on consumption commodities:
The arbitrage argument is used to price futures on investment
commodities. For commodities that are consumption commodities rather
than investment assets, the arbitrage arguments used to determine futures
prices need to be reviewed carefully. Suppose we have
F > (S + U)erT  eq(5)
To take advantage of this opportunity, an arbitrager can implement the
following strategy:
1. Borrow an amount S + U at the risk-free interest rate and use it to
purchase one unit of the commodity and pay storage costs.
2. Short a forward contract on one unit of the commodity.
If we regard the futures contract as a forward contract, this strategy leads to a
profit of F- (S + U)erT at the expiration of the futures contract. As
arbitragers exploit this opportunity, the spot price will increase and the
futures price will decrease until Equation 5 does not hold good.
Suppose next that
F < (S + U)erT  eq(6)
In case of investment assets such as gold and silver, many investors
hold the commodity purely for investment. When they observe the inequality
in equation 6, they will find it profitable to trade in the following manner:
1. Sell the commodity, save the storage costs, and invest the proceeds at the
risk-free interest rate.
2. Take a long position in a forward contract.
This would result in a profit at maturity of (S + U)erT - F relative to the
position that the investors would have been in had they held the underlying
commodity. As arbitragers exploit this opportunity, the spot price will
decrease and the futures price will increase until equation 6 does not hold
good. This means that for investment assets, equation 4 holds good.
However, for commodities like cotton or wheat that are held for
consumption purpose, this argument cannot be used. Individuals and
companies, who keep such a commodity in inventory, do so, because of its
consumption value - not because of its value as an investment. They are
reluctant to sell these commodities and buy forward or futures contracts
because these contracts cannot be consumed. Therefore there is unlikely to
be arbitrage when equation 6 holds good. In short, for a consumption
commodity therefore,
F <= (S + U)erT  eq(7)
That is the futures price is less than or equal to the spot price plus the cost of
carry.

37
Convergence of Future and Spot Price:

The figure shows how basis changes over time. As the time to expiration of a
contract reduces, the basis reduces. Towards the close of trading on the day
of settlement, the futures price and the spot price converge. The closing price
for the April gold futures contract is the closing value of gold in the spot
market on that day.

Turnover on Commodity Future Market:

38
2.5. Exchanges: International and Domestic

39
3. Silver
Silver is a soft white precious univalent metallic element that is highly
ductile and malleable having the highest electrical and thermal conductivity
of any metal. It is found in the metallic state and also in a large amount of
minerals mainly in argentite and in a free form. That is why it is called
argentum in Latin.

Silver is one of the oldest found metals on earth and it had been used
since 4th millennium B.C. Old books indicate that at that time it was
extracted from lead. First attempt to mine silver is said to be have been made
around 3000 BC in the areas of Anatolia. A process, ”culpellation” was
found out in order to extract silver from silver ores around 2500BC. This led
to the discovery of more silver mines around the world.Used in coins and
jewelry and tableware and photography. It was used as currency in many
civilizations. Silver coin as a currency was first introduced in the eastern
Mediterranean in 550 B.C. It started gaining popularity as a medium of
exchange since then. The discovery of the American countries marked an
important twist in the history of silver as the major silver mines in Mexico,
Peru and Bolivia were found.

Silver is a metal that is associated with metals like gold, lead, zinc and
copper, though it’s unusual properties makes it very different from them. It
is used in making various kinds of jewelry, as it is considered as a precious
metal second to gold but its contribution in the various industrial sectors as a
raw material makes it unmatchable. No other metal can replace silver as it
has an endless number of uses.

There have been important technological improvements till now,


which have resulted in the increased production of silver and have made it an
unmatchable commodity.

Demand for silver is built on three main pillars; industrial uses,


photography and jewelry & silverware. Together, these three categories
represent more than 95 percent of annual silver consumption.
Today, the demands of modern technology have revealed the remarkable
range of electrical, mechanical, optical, and medicinal properties that have
placed silver as the key metal in many applications.

40
Basic Information:

Symbol: Ag
Mass: 107.868
Density @ 293 K: 10.5 g/cm3
Melting Point: 961.93 C (1235.1 K)
Boiling Point: 2212 C (2428 K)
Classification: Transition Metal
Crystal Structure: Face-centered Cubic
Color: silver
Characteristics: soft, ductile, tarnishes

3.1. Supply/demand for silver:


Silver Supply Dynamics:

Like all metals or precisely precious metals, silver cannot be created.


It occurs naturally. The source of silver are mine production, government’s
central bank reserves (which is also termed as above ground supply of silver)
and recycled scrap. Delay, interrupt or reduction in any one of these supply
sources result into big market price hikes, as daily demand for silver bullion
begins to surpass supply.

41
Mine production of silver is the largest component of silver supply. It
can be seen that mine production accounts for nearly 72 % of silver supply.
Other sources of silver being scrap and sales by government bodies also play
their role in meeting the ever-increasing demand of silver. Government sales
are most done to stabilize the price of silver or in crisis situations like war or
natural disasters. The detailed trend analysis of the various source of silver
will facilitate in predicting the future movement of silver production and its
repercussions.

World supply for Silver:

When considering the supply of silver from mines it is very important


to have a look at the break up of the various source metal mines and their
contribution in silver supply. Around 30% of silver comes from mines where
the main source of revenue is silver. Such mines are called primary silver
mines. This is important as price of silver will have impact on primary
output, which means that amount of silver mined is more a function of the
price of other source metals.

42
Supply from above the ground constitute of Scrap and Government
sales. Together they constitute of around 25% of silver supply. Scrap is
recovered from industrial waste or existing goods such as photographic
chemicals, jewellery, discarded electronic goods such as computers etc.

Disinvestments and government sales comprise of old coins and bars


of silver that return to market. Another minor component of supply of silver
is producer hedging or early sale one by mining companies of future
production by entering into forward contracts. This is done to hedge against
the price and quantity risk associated with silver. Like hedging there can also
be de-hedging and the effect on supply will be on net basis.

The analysis of literature and statistics of various sources of supply of


silver give positive picture for the silver supply but the deficit between the
supply and demand is expected to stay and the repercussions of this deficit
would be felt only when the inventories fall to zero.

Silver Demand Dynamics:

Demand of silver has three main components namely; Jewellery &


Silver are, Industrial Fabrication, Photographic Fabrication.

Another minor component is Coins and medals. Other avenues of


demand that are on rise are government purchases and investment. These
two are taken on net basis, as there can be government sales and
disinvestments of silver also. Since 1992 net purchases by government are
not significant but the role of investments in silver has seen dramatic
changes. Silver investment is the reason for the recent rally of silver prices.

Silver demand is governed by various application of silver. Sale of the


goods in which silver is used like silver batteries; tableware, etc determine
the demand of silver in the market. Events like declaration of decline in sales
of analog cameras affect the prices of silver. New applications of silver like
in medicine and RFID tags used by retail stores also affect the demand and
price dynamics of silver.

43
Most of the industrial applications of silver, the demand is price
inelastic as there it is required in minute quantities where as the demand of
silver in jewellery is highly price sensitive.

World demand for silver:

44
3.2. Global scenario for Silver:
Silver producing countries:

The below-mentioned figures are the silver production figures of the


countries. Clearly, Mexico leads the list of silver producing countries. It
contributes to about 15% of the world’s total production. Already
mentioned, only 25% of the world’s total production (i.e. 615 million
ounces) comes from the primary silver mines and the rest from other sources
like refining of other metals and also from scrap recycling. World silver
survey done in 1998 depicts that around 152.2 million ounces of silver was
separated from the waste for recycling purposes. This percentage of
separated silver has improved due to advanced methods of separation.
United States is the major silver producing country through scrap and waste
followed by Japan.

• Mexico (99 million • Bolivia (13.1


ounces) million ounces)
• Peru (98.4 million • Sweden (9.4
ounces) million ounces)
• Australia (71.9 • Indonesia (8.6
million ounces) million ounces)
• China (63.8 million • Morocco (6.3
ounces) million ounces)
• Poland (43.8 • Argentina (5
million ounces) million ounces)
• Chile (42.8 million • Turkey (3.7 million
ounces) ounces)
• Canada (40.6 • South Africa (3.2
million ounces) million ounces)
• United States (40.2 • Iran (2.6 million
million ounces) ounces)
• Russia (37.9 • Japan (2.4 million
million ounces) ounces)
• Kazakhstan (20.6 • India (2.1 million
million ounces) ounces)

Silver consuming countries:

45
The Silver is mainly consumed for the
industrial uses. The main uses of silver are Batteries,
Electroplating, Bearings, Jewellery and Silverware,
Brazing and Soldering, Medical Applications,
Catalysts Mirrors and Coatings, Coins Photography,
Electrical Solar Energy, Electronics Water
Purification.

46
The countries that are the major consumers of silver
are: -

• United states
• Canada
• Mexico
• United Kingdom
• France
• Germany
• Italy
• Japan
• India

Grading of Silver:
Silver that is found with some percentage of other
elements in it is called impure silver. That is why it
is graded upon its fineness. According to the Indian
standards, silver is graded into six categories

Grade 9999 9995 999 970 925 916


Fineness 999.9 999.5 999 970 925 916

World Markets:
• London Bullion Market is the global hub of
OTC (Over-The-Counter) trading in silver.
• Comex futures in New York is where most
fund activity is focused

Contract specifications at Comex


exchange:

There are two different contracts of Silver


traded on this exchange; they are Silver Futures and
Silver Mini Futures.

Contract specification for Silver


Future:

47
Trading Symbol: SI

Trading Unit: 5,000 troy ounces.

Price Quotation: U.S. cents per troy ounce.

48
Trading Hours (All times are New York time):
Open outcry trading is conducted from 8:25 AM
until 1:25 PM.

Electronic trading is conducted from 6:00 PM until


5:15 PM via the CME Globex® trading platform,
Sunday through Friday. There is a 45-minute break
each day between 5:15PM (current trade date) and
6:00 PM (next trade date).

Trading Months:
Trading is conducted for delivery during the current
calendar month; the next two calendar months; any
January, March, May, and September falling within
a 23-month period; and any July and December
falling within a 60-month period beginning with the
current month.

Minimum Price Fluctuation:


Price changes for outright transactions are in
multiples of one-half cent (0.5¢ or $0.005) per troy
ounce, equivalent to $25.00 per contract. A
fluctuation of one cent (1¢ or $0.01) is equivalent to
$50.00 per contract.

Last Trading Day:


Trading terminates at the close of business on the
third to last business day of the maturing delivery
month.

Delivery:
Silver delivered against the futures contract must
bear a serial number and identifying stamp of a
refiner's officially listed brand. Delivery must be
must be made from a warehouse or vault licensed or
designated by the Exchange specifically for the
storage of silver.

Delivery Period:

49
The first delivery day is the first business day of the
delivery month; the last delivery day is the last
business day of the delivery month.

Exchange of Futures for Physicals (EFP):


The buyer or seller may exchange a futures position
for a physical position of equal quantity by
submitting a notice to the Exchange. EFPs may be
used to either initiate or liquidate a futures position.

50
Grade and Quality Specifications:
In fulfillment of each contract, the seller must
deliver 5,000 troy ounces (±6%) of refined silver,
assaying not less than .999 fineness, in cast bars
weighing 1,000 or 1,100 troy ounces each and
bearing a serial number and identifying stamp of a
refiner approved and listed by the Exchange. A list
of approved refiners and assayers is available from
the Exchange upon request.

Position Accountability Levels and Limits:


Any one month/all months: 6,000 net futures
equivalent, but not to exceed 1,500 in the spot
month.

Margin Requirements: Margins are required for


open futures positions.

Contract specification for Silver


Mini Futures:

Trading Symbol: QI

Trading Unit: 2,500 troy ounces

Price Quotation: U.S. dollars and cents per ounce.

Minimum Price Fluctuation: $0.0125 per ounce.

Trading Hours:
The contracts are available for trading on the CME
Globex® trading platform from 6:00 PM Sundays
through 5:15 PM Fridays, Eastern Time, with a 45-
minute break each day between 5:15 PM and 6:00
PM.

Trading Months:

51
Trading is conducted during the same months as the
full-sized silver futures contract (SI), except the
current month.

Last Day of Trading:


Trading terminates at the close of business on the
third to last business day of the month preceding the
named contract month.

Settlement: Financial.

Margin Requirements: Margins are required for


open futures positions.
Major trading centers of silver:

• London
• Zurich
• New York (COMEX)
• Chicago (CBOT)
• Hong Kong
• Tokyo Commodity Exchange (TOCOM)

3.3. Indian scenario for Silver:


India is primarily a silver importing country,
as the production of India is not sufficient to satisfy
the ever-growing domestic demand. The production
of silver in India stands out at the figure of around
2.1 million ounces placing it at the 20th position in
the list of major silver producing countries. The
import of silver in India hovers over 110 million
ounces that shows the huge size of Indian domestic
demand.

However, this import level fell sharply as a


result of the decline in demand due to rise in silver
prices and inconsistent monsoon on which the
income of the rural sector depends. But, even this

52
sharp decline could not affect India’s reputation of
being one of the largest consumer countries of silver
in the world. India stands third after United States
and Japan among the leading consumers of silver in
the world. By contrast with United States and Japan,
Indian industrial off take for fabrication in hardcore
industrial applications like electronics and brazing
alloys accounts for only 15 % and the rest being for
foils for use in the decorative covering of food,
plating of jewelry and silverware and jari.

The countries from which India imports silver


and maintain the flow of silver in the market are: -

• China
• United Kingdom
• European Union
• Australia
• Dubai

Over 50% share of import of silver in India is


held by Chinese silver. The major importing center
of silver in India was Mumbai but now it has been
shifted to Ahmedabad and Jaipur due to high sales
tax and octroi charges.

Production of silver in India:

India hardly produces any silver and is


basically a silver importing country. It holds the 20th
place in the list of silver producing countries and the
total production of silver in India in 2004 was
around 2.1 million ounces. The three major silver
producing states in India are: -

• Rajasthan
• Gujarat
• Jharkhand

Rajasthan is the leading silver producing state


in India with a production of around 32 thousand

53
tons. Gujarat follows on the second place with a
production of around 20 thousand tons.

In India, silver is traded at the following places:

• Delhi
• Indore
• Rajasthan
• Madhya Pradesh
• Mathura (Uttar Pradesh)
• Rajkot (Gujarat)

Also, silver is traded in the Indian commodity


exchanges like National Commodity &
Derivatives Exchange ltd, Multi Commodity
Exchange of India ltd. and National Multi
Commodity Exchange of India ltd.

54
Silver at MCX:
Though the silver futures are traded on
NCDEX and MCX, bigger volumes are traded on
MCX. So we will have a look on silver specification
on MCX. There are three different types of silver
contracts traded on MCX; they are Silver future,
Silver HNI Futures and Silver Mini Futures.

Specification of Silver Futures Contract:

Symbol: SILVER

Description: SILVERMMMYY

Contracts available for trading:


March contract: 16th March of the previous year to
5th March of the contract year
May contract: 16th May of the previous year to 5th
May of the contract year
July contract: 16th July of the previous year to 5th
July of the contract year
September contract: 16th September of the previous
year to 5th September of the contract year
December contract: 16th December of the previous
year to 5th December of the contract year

Trading period: Mondays through Saturdays

Trading session:
Mondays to Friday: 10.00 a.m. to 11.30 p.m.
Saturday: 10.00 a.m. to 2.00 p.m.

Trading unit: 30 kg

Quotation/Base Value: 1 kg

Price Quote:
Ex-Ahmedabad (inclusive of all taxes and levies
relating to import duty, customs , if applicable but

55
excluding Sales Tax / VAT, any other additional tax
or surcharge on sales tax, local taxes and octroi.

Maximum order size: 600 kg

Tick size (minimum price movement): Re. 1 per


kg

Daily price limit: 4%

Initial margin: 5%

Special Margin:
In case of additional volatility, a special margin at
such percentage, as deemed fit, will be imposed
immediately on both buy and sale side in respect of
all outstanding position, which will remain in force
for next 2 days, after which the special margin will
be relaxed.

Maximum Allowable Open Position:


• For individual client: 50 MT collectively for all
contracts in Silver (i.e. including Silver M and
Silver HNI contracts)
• For a member collectively for all clients: 150 MT
or 15% of the market-wide open position,
whichever is higher.
(As per FMC letter no. 6/3/2006/MKT-II (VOL II)
dated August 18, 2006)

Delivery unit: 30 kg

Delivery period margin: 25%

Delivery center(s): Ahmedabad at designated


Clearing House facilities.

Quality specifications:
Grade: 999 and Fineness: 999 (as per IS 2112: 1981)
• No negative tolerance on the minimum fineness
shall be permitted.

56
• If it is below 999 purity it is rejected.
It should be serially numbered silver bars supplied
by LBMA approved suppliers or other suppliers as
may be approved by MCX.

Delivery and Settlement Procedure of Silver:

Last Day of Trading: 5th day of the contract expiry


month.

Tender Period: 1st to 6th day of the contract expiry


month.

Delivery Period: 1st to 6th day of the contract


expiry month.

Buyer’s intention: On 1st, 2nd, 3rd & 4th of the


contract expiry month by 6.00 p.m.

Tender Notice by Seller:


The seller will issue tender notice along with
evidence of delivery to the Exchange in a specified
format by 6.00p.m. The seller is also required to
submit the certificate issued by the supplier in
original.

Dissemination of information on tendered


delivery and buyers interest:
The Exchange will inform members through Trader
Work Station (TWS) regarding tender and delivery
intentions of the buyer members and the seller
members by 7.00 p.m. on the respective tender days.

Tender and Delivery Period Margin:


Tender and Delivery period margin of 25% will be
imposed with effect from the beginning of the tender
period.

Exemption from Delivery Period Margin:


Delivery Period Margin is exempted if goods
tendered on designated tender days of the contract

57
month and seller submits all the documentary
evidence.

58
Delivery Logic:
Compulsory Delivery. Any seller having open
position on the expiry date fails to deliver on the
next day then a penalty of 5% shall be imposed out
of which 90% will be passed on to the buyer.

Delivery Pay-in:
On any tender days by 6.00 p.m.
Funds Pay-in
T+1 working day by 11.00 a.m. (T stands for tender
day).
Funds Pay-out
T+1 working day by 05.00 p.m.
Delivery Pay-out:
T+1 working day after completion of pay-in funds.

Mode of Communication: Fax or Courier

Allocation of Delivery:On the respective tender


days after the end of the day.

Delivery Order Rate: Settlement/closing price on


the date of allocation and the due date rate on expiry
date.

Buyer’s obligation:
The buyer shall not refuse taking delivery and such
refusal will entertain 5% penalty out of which 90%
of the penalty amount shall be passed on to the
seller.10% will be retained by the Exchange.

Close out of outstanding positions:


All outstanding positions on the expiry of contract
not settled by way of delivery in the aforesaid
manner, will be settled as per the due date rate with
penalty of 5% and out of which 90% shall be passed
on to the buyer.

Verification by the buyer at the time of release of


delivery:

59
At the time of taking delivery, the buyer can open
the sealed packets in front of Group 4 personnel. If
he is satisfied with the quantity, weight and quality
of material, then he will issue receipt of the metals
instantly. If he is not satisfied with the metal, he can
insist for assaying by any of the approved assayers
available at that center.

60
Legal obligation:
The members will provide appropriate tax forms
wherever required as per law and as customary and
neither of the parties will unreasonably refuse to do
so.

Duties, Cess and Levies:


Ex-Ahmedabad, inclusive of all charges / levies
relating to import duty, customs to be borne by
Seller. But excluding Sales Tax / VAT, any other
additional tax or surcharge on sales tax, local taxes
and octroi to be borne by the Buyer.

Vault, Insurance and Transportation charges:


Borne by the seller upto Funds Pay-out date.
Borne by the buyer after Funds Pay-out date.

Evidence of Stocks in Possession:


At the time of issuing the Delivery order, the
Member must satisfy MCX that he holds stocks of
the quantity and quality specified in the Delivery
Order at the declared delivery center by producing
warehouse receipt.

Validation Process:
On receipt of delivery, the Group 4 personnel will
do the following validations:
a. whether the person carrying Silver is the
designated clearing agent of the member;
b. whether the selling member is listed in the
statement forwarded by the Exchange as a delivering
member
c. whether the quantity being delivered by the seller
is exactly the same quantity as communicated by the
Exchange;
d. whether the serial no of all the bars is mentioned
in the seller’s bill;
e. whether the original certificates are accompanied
with the Silver Bars

61
f. whether the serial nos listed in the certificate tally
with the nos written inscribed on the bars
g. whether the seller has issued individual bills of
relevant quantity in favour of each of the buyer
Any other validation checks, as they may desire.

Delivery Process:
In case any of the above validation fails, the Group 4
Securitas will contact the Exchange office and take
any further action, only as per instructions received
from the Exchange in writing. If all validations are
through, then the Group 4 personnel will put the
Silver in bag/s and seal the same in front of the
customer with unique tamper-proof seal/s. Then the
custodian of Group 4 will cut a serially numbered
Group 4 receipt (in triplicate consisting of White,
Pink and Yellow slips), get the signature of the
seller’s clearing agent and signing the same for
authorization, hand over the Pink slip to seller’s
clearing agent, send by courier the third copy
(Yellow Colour slip) while retaining the White for
the records of Group 4 Securitas. The receipt details
in full are then entered into the package supplied by
MCX and is uploaded to MCX server for
authorization and further processing. Group 4 in
front of the selling member’s clearing agent deposit
the said metal into a bag and seal it with a tamper-
proof unique numbered Group 4 seal and give a
copy of the same to the customer, send the second
one to MCX for its records and third copy of the
receipt for its record. The sealed bag will be vaulted
in the same condition with Group 4 Securitas until
further delivery to MCX customer. Even in case if
the metal has to be sent to various destinations, it
shall be done in same bag only. Each bag shall not
contain not more than 30 kg of Silver and where the
depository is more than 30 kg, the same will be
stored in multiple bags with each having individual
seals with unique number. If the metal delivered by
a seller has to go to 10 different buyers, 10

62
individual packets will be made for each buyer and
unique numbers will be assigned to each packet.

Quality adjustment:
The price of Silver is on the basis of 999 purity.
If the quality is less than 999, it is rejected.

Quantity adjustment:
The tolerance limit will be +/- 3 kg. The weight of
Silver bar must be between 27 kg to 33 kg.

Appointment of Clearing Agent of Buyer’s and


Sellers:
For the purpose of effecting delivery of Silver, every
member will be entitled to appoint a maximum
number of two Clearing Agents, who will be entitled
to receive and deliver precious metals on behalf of
such member. These Clearing members have to
submit requisite form, four photographs, a copy of
their ration card / driving license or other document,
as may be specified by the Exchange. The Exchange
will issue a photo identity card for each Clearing
Agent, which will be duly signed and stamped by
the Exchange and the member with lamination. At
the time of giving or receiving delivery of precious
metal, the Clearing Agent will be required to show
this Card to Group 4 Securitas persons. A list of all
such Clearing agents will be forwarded by the
Exchange to Group 4 Securitas in advance.

Intimation about the Clearing Agents:


On last day of contract maturity, the buyer will be
required to inform name of the Clearing agent, who
will visit Group 4 Securitas office for lifting
delivery. This information will be compiled by the
Exchange and will be forwarded to Group 4
Securitas by 12.00 noon on 1st day of the contract
maturity month.

Endorsement of Delivery Order:

63
The buying member can endorse delivery order to a
client or any third party with full disclosure given to
MCX. Responsibility for contractual liability would
be with the original assignee.

Extension of Delivery Period:


As per Exchange decision due to a force majeure or
otherwise.

Due Date Rate:


Due Date Rate is calculated on 5th day of the
contract month. This is calculated by way of taking
simple average of last 5 days of the spot market of
Ahmedabad.

Applicability of Business Rules:


The general provisions of Business Rules and
decisions taken by FMC / Board / Executive
Committee in respect of matters specified above will
apply mutatis mutandis. The Exchange may further
prescribe additional measures relating to delivery
procedures, warehousing, quality certification,
margining, risk management from time to time. In
case of any interpretational dispute or clarifications
the decision of the Exchange shall be final and
binding on the members and others.

64
Specification of Silver HNI Futures Contract:

Symbol:SILVER

Description:SILVERHNIMMMYY

Trading unit: 50 kg

Quotation/Base Value: 1 kg

Maximum order size: 600 kg

Tick size (minimum price movement): Re. 1 per


kg

Daily price limits: 6%

Initial margin: 5 %

Maximum Allowable Open Position:


• For individual client: 50 MT collectively for all
contracts in Silver (i.e. including Silver and
Silver Mini contracts)
• For a member collectively for all clients: 200 MT
or 20 % of the market’s open position in a
contract at any point of time

Delivery unit: 150 kg

Delivery margin: 25%

Delivery logic: Both Option

Delivery period margin: 25% margin will be


imposed during tender and delivery period on both
buyers and sellers on matched quantity.

Delivery pay-in: On tender days

Delivery pay-out: E+3 working day by 11.00 a.m.


(E stands for expiry date of the contract)

65
Pay-in of funds: E+2 working day by 11.00 a.m.

Pay-out of funds: E+3 working day by 11.00 a.m.


In case the buyer opts for second sampling, he has to
inform the Exchange on E+2 working day by
6.00p.m and in such case the pay-out of funds will
be released only after completion of sampling
procedure.

Specification of Silver Mini Futures Contract:

Symbol: SILVERM

Description: SILVERM MMMYY

Trading unit: 5 kg

Quotation/Base Value: 1 kg

Maximum order size: 600 kg

Tick size (minimum price movement): Re. 1 per


kg

Daily price limits: 4%

Initial margin: 5%

Maximum Allowable Open Position


• For individual client: 50 MT collectively for all
contracts in Silver (i.e. including Silver and
Silver HNI contracts)
• For a member collectively for all clients: 150 MT
or 15% of the market-wide open position,
whichever is higher.
(As per FMC letter no. 6/3/2006/MKT-II (VOL II)
dated August 18, 2006)

66
Delivery unit: 30 kg

Delivery center(s): Office of Group 4 Securitas at


Ahmedabad.

Delivery logic: Both Option

Delivery period margin;


25% margin will be imposed during tender and
delivery period on both buyers and sellers on
matched quantity.

Exemption from delivery period margin:


Delivery period margin is exempted if the Seller
provides with documentary evidence of the delivery
at the Exchange’s designated delivery center.

Delivery allocation:
- Date
- Rate
On expiry date of the Contract
At due date rate (DDR)

Delivery pay-in: On tender days

Delivery pay-out: E+3 working day by 11.00 a.m.

Pay-in of funds: E+2 working day by 11.00 a.m.

Pay-out of funds: E+3 working day by 11.00 a.m.

67
Factors influencing the price of Silver:
• Demand – Supply
• Price movements of other metals
• Income level of the rural sector of the
economy
• Fluctuation in deficits and interest rates
• Inflation
• Monsoon, Agricultural output
• Currency fluctuation

Biggest Price Movement since 1995

Between February 4 - 6, 1998, daily prices rocketed


by 22.3%, based on a noted US financier had
accumulated nearly 130 ounces of physical silver.
Note: Post September 1999 daily silver prices have
shown more than 5% movement not once and
weekly silver prices only once.

68
3.4. Outlook on Silver:
The price of silver has shown a downward
trend in last few weeks. The various reasons for the
same are:
• The decisions of interest rates in US and its
focus on inflation rate due to which investors
began to move away from the precious metals
segment into treasuries
• Lower industrial demand in the India
• Price fluctuation of gold
• The sliding demand of photography industry due
to the growing demand of digital world.

Buts still there is a bullish sentiment awaiting for


silver for the following reasons:
• The falling silver production and declining silver
inventories
• Rising investment in metals and jewellery
• As investors learn about silver's intrinsic
properties
• People will buy silver without regard to price, or
they will buy simply because prices are going up

69
• The tiniest bit of investment demand will drive
prices sky high

VIEW: Silver may have a downward tread for a


short duration but will be a good bet to invest in
near future.

4. Sugar

4.1. Introduction:
Sugar is a sweet white (or brownish yellow)
crystalline substance, of a sandy or granular
consistency, obtained by crystallizing the evaporated
juice of certain plants, as the sugar cane, sorghum,
beet root, sugar maple, etc. It is used for seasoning
and preserving many kinds of food and drink.
Ordinary sugar is essentially sucrose. Sugar or
sucrose is a carbohydrate that is derived as an end
product of the process called photosynthesis, a
process from which plants convert sun’s energy to
produce their food. Sugar is used by the plant cells
as a source of energy. That is why it naturally occurs
in all the fruits and vegetables. The word is taken
from the Sanskrit word 'sharkara' which means a
sweetener only.

Sugarcane, the main source of sugar, is said to


have originated in New Guinea. This crop spread
over rest of the world in the pre-historic times but
initially it was consumed raw. The process of sugar
production, i.e. by evaporating the cane juice, came
from India in around 500BC. In Alexander’s reign,
the people from west termed this process as “honey
produced without bees”.

70
For a long time, the rest of the world did not
know the process of cane sugar production because
it was kept as a secret as it earned them a good
amount of profits. Finally Arabs broke this secret
and started growing sugarcane in Spain and other
parts of Europe and Africa around 7th century AD. It
started gaining popularity in the European continent
and it was considered a luxurious product at that
time. A large amount of sugar was imported from
the East as it started giving competition to honey as
a sweetening agent. Christopher Columbus was the
person who took sugarcane to the new world. This is
how the concept of sugar production spread in
Europe and with the European invasions in the rest
of the world; sugarcane was especially cultivated to
extract sugar from it.

Initially, the cane was beaten up to extract the


juice but after the invention of a press, the quantity
extracted was raised to almost a double. The concept
of extracting sugar from the sugarbeet or beetroot
came into notice in the eighteenth century in
Germany. With other inventions, modern methods of
extracting juice from the cane and sugar from the
juice were developed.

Sugar is a very important sweetening agent


that is widely used and traded throughout the world.
It has gained its importance gradually with time and
now no cuisines in any culture can consider itself
complete without sugar. The main sources from
which sugar is extracted are sugarcane (bamboo like
grass) and sugarbeet (small tubular plants with white
tap root), providing the maximum sugar level than
any other crop i.e. 12 to 20% of the dry weight of
the plant. Sugar from sugarcane is produced in the
warmer regions of the world and sugar from
sugarbeet is produced in the cooler areas. The
processes of production from these different sources
are very much different unlike the final output i.e.

71
refined sugar produced. Sugarcane and sugarbeet
contribute in production of sugar in the ratio 3:1
respectively. In fact this ratio is further moving into
the direction of dominance of sugarcane in the
production process as producing sugar from
sugarbeet is relatively expensive. Generally sugar is
consumed to add sweet taste to many cuisines and
recipes and also for preserving them.

Cultivation pattern:

Sugar is mostly derived from sugarcane and


sugarbeet crops and the cultivation pattern of both
these crops are quite distinguished from each other.
While sugarcane is generally grown in the tropical
regions of the world that are featured with hot and
humid climate, sugarbeet is cultivated in the
temperate areas featuring much cooler climate than
tropical areas.

Sugarcane needs a minimum of 8 months of


high temperatures and frost-free weather conditions
to prosper. Both heavier soil with adequate irrigation
and lighter soils with heavy clays and proper
drainage are suited for sugarcane cultivation. The
level of production of this crop is dependent upon
the extent of the rainfall received. It is an annual
crop that is planted in the months of February to
April and harvested during the months of October to
March.

The sugarbeet, on the other hand, is a crop,


the roots of which are used to produce sugar. It is
sown in the months of March and April and
harvested in the months of September to December.

72
4.2. Global scenario of Sugar:
Over the past fifty years, especially, the
international trade in sugar has changed
dramatically. Since it is either imported or exported
by every country on earth, sugar has become an
integral component of the economic relationships
among nations. Because of that unique position, the
trade in sugar has both reflected-and been affected
by-a wide range of divergent forces, including
global politics, health consciousness, the emergence
of developing nations as suppliers and consumers,
and many others.

Sugarcane is produced in around 120


countries of the world and the world’s total
production of sugar figures around 135 to 145
million tons. Brazil stands at the top regarding the
production level followed by India and the European
Union. Over 3/4ths of the total sugar produced is
consumed domestically in the countries in which it
is produced, and the rest is traded around the globe
which is often termed as World Sugar. The
consumption figures of sugar in the world have
shown an increasing trend during the last few years.

Sugar producing countries:

73
As most of the sugar producing countries are
indulged in self consumption of sugar, the exports of
sugar are concentrated among a very few countries.
Major sugar exporting countries are: -
• Brazil • Australia
• European Union • Cuba
• India • United states
• Thailand • China

74
60% of world’s sugar production is
concentrated in seven countries, with the top four
producers – Brazil, India, China and the EU,
accounting for almost 50% of the total world
production. However, two of the top four producers
– India and China – are not among the top exporters
due to large domestic demand. 70% of sugar exports
are accounted by Brazil, Thailand, Australia and the
EU.

The world exports of sugar hover around 40


million tons and the leading sugar exporting country
is Brazil exporting to around 55% of its total
produce. Brazil is followed by European Union,
Thailand, Australia and Cuba in this list. These top
five exporting countries constitute almost 65% of the
world total exports. Australia’s dependency on its
sugar exports is much higher than that of any
country as it exports over 75% of its total sugar
production.

Unlike exports, imports of sugar are


diversified in nature, among more than 100
countries. The sugar imports account to around 38
million tons. The major importers of sugar in the
world are: -
• Russia • Korea
• Indonesia • Malaysia
• European Union • China
• Japan • Algeria
• USA • Iran

The leading sugar importing country is Russia


with an average of 6 million tons. Indonesia,
European Union, Japan, Korea stand on 2nd, 3rd,
4th and 5th place respectively in the context of sugar
imports. Being so much of imports taking place
throughout the world, there are different sugar

75
import and production policies practiced by different
nations to protect their domestic produce from
competition. A voluntary body named International
Sugar Organization looks upon the trade of world
sugar.

Important World Sugar Markets:

• BrazilL • Philippines
• Australia • China
• U.S. • Bangladesh
• Cuba
• Iran

76
4.3. Indian scenario:
As history foretells, India had been connected
to sugar for a long time. In fact, it is known as the
place of origin of sugar. India maintains this
reputation of sugar connection by producing the
second largest quantity of sugar in the world and
also being the largest consumer of sugar. Indian
sugar industry is the largest processing industry for
agricultural products constituting of both organized
and unorganized sectors.

India had been the largest producer of sugar in


the world for 7 out of 10 years but now Brazil has
taken a lead from India. Indian production from both
the sectors sums up to 22 million tons. Indian share
in the world’s total production has shown an
increasing trend in the past few years and currently
India is contributing to around 14%. The country has
been indulged in the production of cane sugar rather
than beet sugar as India’s tropical weather
conditions support sugarcane production.
Maharashtra holds the lead in the production of cane
and sugar in the country. The consumption level of
sugar in India reaches up to 18.5 million tons
annually making India the largest consumer of sugar
in the world. This demand and consumption level is
still showing a rising trend. The government largely
controls the demand and supply of sugar in India and
the prices fluctuate according to the government
releases of sugar.

India had been an exporter of sugar but the


export-import policy depends on the production-
demand mismatch in the country. The crushing
period difference between India and other countries
gives an advantageous edge to Indian exports.
Exports from India show a rising trend as a result of
the upcoming policies of free international trade.
The trade figures of India correspond to the mark of

77
1.5 million tons. The Indian sugar industry has
successfully satisfied the domestic demand till now.
That is why India no imports of sugar were done
during the past few years.

78
Production of sugar in India:

The production of sugarcane in India has


increased during the last ten years and is still on an
increasing trend. The productivity of sugarcane in
the northern areas of the country is lower than the
productivity in southern areas. In India, sugar is
grown over 4 million hectares of land.

India is the second largest producer of sugar


in the world after Brazil and is indulged in the
production of cane sugar and not beet sugar. It
produces approximately 22 million tons of sugar
annually. The major states that are producing
sugarcane in India are: -
• Maharashtra
• Uttar Pradesh
• Karnataka
• Tamil Nadu
• Andhra Pradesh
• Gujarat

These states contribute around 85% sugarcane


production of the country. The other important
producers of sugar in the country are Assam, Bihar,
Gujarat, Haryana, Kerala, Madhya Pradesh, Orissa,
Punjab, Rajasthan and West Bengal. The production
of sugar in the country highly depends upon the
availability of sugarcane. The leading producer of
sugar is Maharashtra producing about 6 million tons
of sugar followed by Uttar Pradesh and Karnataka.
Uttar Pradesh constitutes the maximum area covered
and the sugarcane production in the country. Two
grades of sugar namely S-30 and M-30 are produced
in India; grade S-30 dominating the share in total
production.

In India, sugar is traded at the following markets

79
• Muzzafarnagar • Kolkata
• Mumbai • Hyderabad
• Delhi • Chennai
• Ludhiana

Also, sugar is traded at the commodity exchanges in


India namely National Commodity & Derivatives
Exchange ltd, Multi Commodity Exchange of
India ltd and National Multi Commodity
Exchange of India ltd.

80
Ethanol:

Ethanol is produced through biochemical


processes based on fermentation using cane juice or
molasses as a feedstock (or a mixture of cane juice
and molasses). After preparation of a mash with the
appropriate concentration of sugars and solids, the
sugars are transformed into alcohol using yeasts as
the catalyst.
After fermentation, the ethanol is distilled
from other by-products, resulting in a level of purity
of approximately 95%. This is often referred to as
hydrous ethanol because it contains 5% water.
Hydrous ethanol can be commercially used, but
cannot be blended with gasoline. An additional
reactant, such as cyclohexane, is needed in order to
dehydrate the ethanol, by forming a tertiary
azeotropic mixture with water and alcohol.
Anhydrous ethanol is nearly 100% pure and can
therefore be blended with gasoline.
Based on the relative economic value of sugar
vs. ethanol, along with the size of the two product
markets, co-producing sugar and ethanol is often
accomplished by co-locating (annexing) the
distillery with the sugar factory. Molasses or a
mixture of cane juice and molasses is used as the
primary feedstock. The value of molasses from a
sugar factory is generally much greater as an ethanol
feedstock on-site than the value of exporting the
molasses to a separate distillery. A distillery without
access to a sugar factory must obtain feedstock from
another source, thereby incurring transportation
costs and transaction costs. In addition, the ethanol
distillery often supplies fertilizer for the cane fields.

India is one of the largest sugarcane producers


in the world. The Indian sugar industry has been
carrying large sugar stock for past few years.
However in view of the present change in cropping
pattern and shift from sweeteners like gur and

81
khandsari to consumption of sugar, the use of
cultivable land for growing sugarcane may increase
with simultaneous reduction in diversion of
sugarcane for production of alternate sweeteners.
Such a trend may lead to an unabated increase in
sugar production
As there is concern about the rate of increase in the
global warming India through its large sugarcane
industry can play a pro-active role in mitigating the
same. The advantages of using green fuel for
generation of power and use of gasohol to reduce
automobile emissions have led sugar mills and the
Government of India is taking steps to encourage
manufacture of Ethanol for the purpose of doping
motor fuel to reduce air pollution. The Indian sugar
industry is taking various steps to make use of this
opportunity for its sustainable growth.
Sugar on NCDEX:
There are two types of sugar traded on
NCDEX, S-30 and M-30. The volume of sugar
traded is more in NCDEX then MCX.

Specification for Sugar M Grade:

Symbol: SUGARMMZR

Trading system: NCDEX Trading System

Basis: Ex-Warehouse Muzaffarnagar inclusive of all


taxes

Unit of trading: 10 MT

Delivery unit:
10 MT net basis packed in 50 kgs new A Twill
Bags/PP bags Also deliverable in 100 kgs new A
Twill jute bags.

Quotation/Base value: Rs/Quintal

82
Tick Size: Re. 1

Quality Specification:
Sugar in crystal form manufactured by vacuum pan
method with:
Moisture: 0.08% Max
Polarization: 99.80% Min
ICUMSA > or = 150 ICUMSA and < 200 ICUMSA
as determined by GS9/1/2/3-8 prescribed in Sugar
Analysis ICUMSA Method Book
Grade: M
Grain Size: Medium as determined by the methods
prescribed in IS: 498-2003

Quantity Variation: +/- 5%

Delivery Center: Muzaffarnagar (up to 50 km from


city limits)

Additional delivery centres:


Ahmedabad, Belgaum, Chennai, Delhi, Erode,
Indore, Jaipur, Kanpur, Kolhapur, Kolkata, Pune,
Vijaywada and Vizag.

Hours of Trading:
Mondays through Fridays: 10:00 AM to 5:00 PM
Saturdays: 10.00 AM to 2.00 PM

Due date/Expiry date: 20th day of the delivery


month
If 20th happens to be a holiday, a Saturday or a
Sunday then the due date shall be the immediately
preceding trading day of the Exchange.

Delivery specification:
Compulsory delivery: Upon expiry of the contracts,
all open positions will be settled by taking or giving
delivery as the case may be.

83
Closing of contract:
Upon expiry of the contract all the outstanding open
position would result in compulsory delivery.

Opening of contracts:
Trading in new contract will open on the 10th day of
the month in which near month contract is due to
expire. If the 10thday happens to be a non-trading
day, contracts would open on the next trading day

No. of active contracts:


Minimum 2 contracts and maximum 12 contracts
running concurrently

Price Band:
Daily price fluctuation limit is (+/-) 4%. If the trade
hits the prescribed daily price limit there will be a
cooling off period for 15 minutes. Trade will be
allowed during this cooling off period within the
price band. Thereafter the price band would be
raised by another 50% of the existing limit i.e. (+/-)
2% and trade will be resumed. If the price hits the
revised price band (6%) again during the day, trade
will only be allowed within the revised price band.
No trade/order shall be permitted during the day.

Position limits:
Member-wise: 30,000 MT for all contracts or 15%
of market - wide open interest whichever is higher
Client-wise: 10,000 MT
This limit will not apply to bonafide hedge limit if
granted by the Exchange)

Near Month Limits


The following limits would be applicable for one
month prior to the expiry of a contract
Member-wise: 7,500 MT
Client-wise: 2,500 MT

Special margins:

84
Special margin of 10% of the value of the contract,
whenever the rise and fall in price exceeds 20%
from the first day's closing price, depending upon
whether price rise or fall respectively. The margin
shall stay in force so long as price stays beyond 20%
limit and will be withdrawn as soon as the price is
within 20% band.

Premium/Discount:
M grade sugar with ICUMSA 100 - 150 could be
accepted as good delivery but with no premium.
Sugar with ICUMSA more than 200 shall be
rejected.

Specification for Sugar S Grade:

Ticker symbol: SUGARSKOL

Trading system: NCDEX Trading System

Basis: Ex- Warehouse Kolkata inclusive of all taxes

Unit of trading: 10 MT

Delivery unit:
10 MT net basis packed in 50 kgs new A Twill Bags
/PP bags. Also deliverable in 100 kgs new A Twill
jute bags.

Quotation/Base value: Rs/Quintal

Tick Size: Re. 1

85
Quality Specification:
Sugar in crystal form manufactured by vaccum pan
method with:
Moisture: 0.08% Max
Polarization: 99.80% Min
ICUMSA > or = 100 ICUMSA and < 150 ICUMSA
as determined by GS9/1/2/3-8 prescribed in Sugar
Analysis ICUMSA Method Book
Grade: S
Grain Size: Small as determined by the methods
prescribed in IS:498-2003

Quantity Variation: +/- 5%

Delivery Center: Kolkata (upto 50 Kms of the city


limits)

Additional delivery centres:


Ahmedabad, Belgaum, Chennai, Delhi, Erode,
Indore, Jaipur, Kanpur, Kolhapur, Muzaffarnagar,
Pune, Vijaywada and Vizag.
(Upto 50 Kms of City limits)
No location premium and discount shall be
applicable.

Hours of Trading:
Mondays through Fridays: Trading Hours - 10:00
AM to 05:00 PM
Saturdays: Trading Hours - 10.00 AM to 2.00 PM

Due date/Expiry date: 20th day of the delivery


month
If 20th happens to be a holiday, a Saturday or a
Sunday then the due date shall be the immediately
preceding trading day of the Exchange.

Delivery specification:
Compulsory delivery: Upon expiry of the contracts,
all open positions will be settled by taking or giving
delivery as the case may be.

86
No. of active contracts:
Minimum 2 contracts and maximum 12 contracts
running concurrently

Price Band: Daily price fluctuation limit is (+/-)


4%.

Position limits:
Member-wise: 30,000 MT for all contracts or 15%
of market - wide open interest whichever is higher

Client-wise: 10,000 MT
(This limit will not apply to bonafide hedge limit if
granted by the Exchange)
Near Month Limits
The following limits would be applicable for one
month prior to the expiry of a contract
Member-wise: 7,500 MT
Client-wise: 2,500 MT

Special margins:
Special margin of 10% of the value of the contract,
whenever the rise and fall in price exceeds 20%
from the first day's closing price, depending upon
whether price rise or fall respectively. The margin
shall stay in force so long as price stays beyond 20%
limit and will be withdrawn as soon as the price is
within 20% band.

Discount:
S grade sugar with ICUMSA more than 150 shall be
rejected. S grade sugar with ICUMSA less than 100
is also accepted as good delivery but with no
premium.

Factors influencing the price of sugar:


• Refinery activity

87
• Candy and confectionery sales
• Sugars use in new technologies, such as
ethanol production for automobile fuel.
• Factors pertaining to the climatic conditions
and rainfall
• Production of sugarcane in the country
• Political factors

• Income of the consumer

88
3.4. Outlook on Sugar:
The current volatility in sugar prices has led
the market to believe that sugar is not being guided
by its own fundamentals but by the world energy
prices and policy developments.
The key dynamic governing the sugar market
currently is ethanol Brazil’s decision on how much
cane to be diverted for ethanol production.
The new market structure in the EU reforms also
plays an important role in the price movement of
sugar.
Global prices have declined 30% from their
peak as global supply has expanded in response to
spikes in sugar prices.
India has enters a phase of domestic surplus
and the ability of producers to export the surplus
remains uncertain as low global prices make exports
unattractive and catalysts for higher global prices are
not obvious.
Also various factors like a ban on sugar
exports, anticipation of excess production, and price
decline with the onset of the crushing season showed
the decline in sugar prices.
But various policies by Indian government
like increase in buffer stocks and relief in export
policies have eased the pressure on sugar prices.

89
Thus the declining trend of sugar price will remain
to be range bound depending in various factors as
below:
• The surplus production of sugar has prompted
the country to export.
• More stock to release.
• Upcoming monsoon.
• World energy prices and policy developments.

VIEW: Sugar price will see a downward trend for


this season.

5. Bibliography:
www.karvycomtrade.com

www.mcxindia.com

www.ncdex.com

www.nymex.com

www.kitco.com

www.crnindia.com

www.bloomberg.com

www.google.com

90

You might also like