Commodity Markets

GROUP 8 – SECTION B
SANJEET KUMAR 102
SAURABH GARG 103
SHAILLEY FIRDOUS 104
SHANTANU SHARMA 105
SHIVAPRIYA 106
Commodities – in Real Life

Wheat in your bread

Petrol in your vehicle

Coffee on your table

Sugar in your sweets

Chana in your chhole

Gold in your necklace

……… and so on …….

Commodities are everywhere

Classification of Commodities
 Commodity – Indian Structure

FMC – The Regulator

Commodity Exchanges

National Regional
Exchanges Exchanges

NCDEX NMCE MCX NBOT 20 Other Regional

Exchanges

Leadership position with >90% share

 Indian Growth so far
Volume Growth in Indian Exchanges
Significant rise in
volume since 700
launch of 600 > 65% CAGR Growth

exchanges in 2003
500

400

300

200
MCX
Leader in Metals & Energy 100
0
2004 2005 2006 2007 2008 2009 2010
MCX NCDEX TOTAL

Segment wise % Share of Commodities

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Bullion and other metals 31.5 36.1 57.9 64.6 56.7 40.8
Other than bullion metals - 23.2 NCDEX
Leader in Agri
Agriculture 68.2 55.3- 35.8- -
23.1 11.9 - 15.7
Energy 0.3 8.4 6.3 12.3 20.3
Others 0.0 0.1 0.0 0.0 31.4 0.0 -
Source:FMC * 2008-09 other segment includes energy& other metals
 Indian Growth during 2004-09

Exchange wise commodity Volumes in 2004

Exchange wise commodity Volumes in 2009

12%

38%

62%

88%

MCX NCDEX
MCX NCDEX
Returns in Indian commodities
Returns Across Various Com m odities in 5 Yrs.
600

485.86
500

400

300

200
142.80
92.86 87.12 94.21
100 62.54 51.16
9.25 22.25 23.60
3.83 4.96 9.65
0
-12.36
-45.21
-100

Mentha O il
G uar G um
G uar Seed
Crude oil

Aluminium

Turmeric
Soy O il

Soy bean
Copper

Pepper

J eera
G old

Silver

Lead
Zinc

Source:Bloomberg,Way2Wealth Research

 Almost 45 commodities are available for trading in both NCDEX & MCX
 Though few have been de-listed during high inflation times, re-listing also has happened
 Bullion, Base metals, energy & Agri are the major contributors in terms of volumes
Why Invest in Commodities

 Commodity provides true diversification in

financial portfolio

 Commodity act as hedge against risks

involved in business

 Rising income will ensure Inflation which in

turn will ensure secure bull market in
commodities

 Lower Margins – High Leverage for Traders

Who Can Invest

 Hedgers : Risk Management

o For the people associated with commodities, the Futures
market can provide an effective hedging mechanism
against price movements. For example an oil-seed farmer
may go short in oil-seed futures, thus ‘locking’ his sale
price and in the process hedging against any adverse
price risks.
o Gold – Safe

 Speculators: High Volatility Higher Leverage

o Retail investors, Commodity spot trader
o Institutional, Corporate & proprietary traders

 Arbitrageurs : Safe Opportunist

o Spot future arbitrage
o Intra and inter market arbitrage

 Investors: Portfolio diversifier

o Individuals, Pension & Mutual Funds
o Corporate bodies
Attracting new participants
 Farmers
Offering them pre & post harvest risk mitigation
platform
Ease of trade through aggregators
 Banks
Role of aggregators
Proprietary trade
 Mutual Funds
Attracting retail trade to the commodity exchanges
 FIIs
 FDIs

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 Risk Mitigation: Pre-harvest
Small
Small Small Large
Farmers
Farmers Farmers Farmers
Farmers

Aggregators
Future price ensured

Liquidity
Liquidity enhanced
enhanced
Banks
Insurance
Insurance Weather derivatives
NCDEX /Crop Insurance
NCMSL
Bank lending

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Risk Mitigation: Post-harvest
Small
Small Large
Farmers
Farmers Farmers
Farmers

Sell
Sell forward
forward

Banks
NCDEX Storage facility
NCMSL

Assaying & grading

Commodity backed bank

finance
finance (WR)
(WR)

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 Large number of Physical Deliveries taking place on NCDEX Platform

 Globally less than 2%

volumes result in Period Deliveries (MT)
deliveries Q4' FY05 43214
 Physical deliveries are Q1 ‘FY06 109562
incidental Q2 FY06 83081
 Exchanges not delivery
Q3 FY06 77160
platform
Q4 FY06 134260
 However, NCDEX has
seen an average delivery Q1 FY07 103,444
of 40-50,000 MT per Q2 FY07 125,989
month Q3 FY07 94,128
Jan-Feb FY07 37,136

Exchange’s are a platform for better prices discovery

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New Products
Market would move towards trading more exotic
products
 Index based products
Commodity Indices
Rainfall & other weather indices
 Spread Trading
 Electricity
 Real Estate
 Emission Credits
..Idea will be to forge closer links with global commodities

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 How to Invest

Procedure for Trading in Commodities

• Open Demat & Trading A/C
 Filling KYC (Know Your Customer)
 Documents required : Pan Card, Address Proof, Networth, Cancelled cheque (MICR),
Photo etc

• To get familiar with this asset class, start reading research reports and
monitor advisory and execution

• Acquire full knowledge of risk involved in futures

 Mark to Market
 Daily Pay-in & pay-out
 Margin requirements
 Contract expiry & rollover
 Leverage, profit & loss etc
Ways of Research

Methodology - Analysis

 Fundamental
• Supply-n-demand, crop survey, climatic changes, policies, logistics,
specifications, delivery stocks, physical market linkages, Cartel move, etc

 Technical
• Chart patterns, indicators etc

 Derivative
• Volume and Open Interest Change, Contract duration, rollover, Relative
analysis with other markets etc

 Statistical
• Arima modelling, Correlation & regression study, Deviation, Time series,
Seasonality, Ratio study etc.
Thank you