Commodities Market

Wealth ManagementPresented By: Prashant

Shukla

What is Commodity market?

• Commodity markets are markets where raw or primary products are exchanged or traded.

• These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized contracts. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities.

History of Commodity Market

• Modern Commodity Market have their roots in the trading of agricultural products.

• Wheat and corn, cattle and live stocks, were widely traded in the 19th century in India.

Size of the Market• The trading of commodities includes physical

trading of food items, Energy and Metals, etc. and trading of derivatives.

• In the five years up to 2007, the value of global physical exports of commodities increased by 17% while the commodity derivative trading on exchanges rose to more than 200%.

Continued…• Agricultural contracts trading grew by 32% in

2007, energy 29% and industrial metals by 30%.

• Precious metals trading grew by 3%• OTC trading accounts for the majority of

trading in gold and silver.

Commodities – An Alternate Asset Class

• Traditional choice of asset allocation includes stocks, bonds and real estate.

• Now portfolio has shifted to alternative assets like hedge funds, private equity, derivatives and commodities.

• Traded on spot and forward markets.

• Positively correlated with inflation.

• Independent risk and return profile.

Global classification of commodities

• Precious Metals: Gold, Silver, Platinum, etc.• Other Metals: Nickel, Aluminum, Copper, Zinc,

etc.• Agro-Based Commodities: Wheat, Rice, Corn,

Cotton, Oils, Oilseeds, etc.• Soft Commodities: Coffee, Cocoa, Sugar, etc.• Petrochemicals: High Density Polyethylene,

Polypropylene.• Energy: Crude Oil, Natural Gas, Gasoline, etc.

Commodities that are not traded in the commodity market.

• Rare metals - Germanium, Cadmium, Cobalt, Chromium, Magnesium, Manganese, Molybdenum, Silicon, Rhodium, Selenium, Titanium, Vanadium, Wolframite, Niobium, Lithium, Indium, Gallium, Tantalum, Tellurium, and Beryllium.

• Agricultural products - Fresh Flowers, Cut Flowers, Melons, Lemons, Tung Oil, Gum Arabic, Pine Oil, Xanthan, Milk, Tomatoes, Grapes, Eggs, Potatoes, and Figs.

How to Trade in Commodities

Continued…• Spot trading - Spot trading is any transaction

where delivery either takes place immediately, or if there is a minimum lag, due to technical constraints, between the trade and delivery. Commodities constitute the only spot markets which have existed nearly throughout the history of humankind.

Continued…• Forward Contract - A forward contract is an

agreement between two parties (counterparties) for the delivery of a physical asset (e.g., oil or gold) at a certain time in the future for a certain price that is fixed at the inception of the contract.

• Forward contracts can be customized to accommodate any commodity, in any quantity, for delivery at any point in the future, at any place.

Continued…• Futures contracts are highly uniform and well-

specified commitments for a carefully described good (quantity and quality of the good) to be delivered at a certain time and place (acceptable delivery date) and in a certain manner (method for closing the contract) and the permissible price fluctuations are specified (minimum and maximum daily price changes).

Continued…

• Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified under section 15 of the Act can be conducted only on the Exchanges, which are granted recognition by the Central Government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution).

• Let’s assume your total portfolio is $250,000 and you invest 80% in stocks and bonds ($200,000) and 20% in managed Commodities ($50,000). Let’s assume at the end of the year you realize a 5% return on your stocks and bonds and a 25% return on Commodities. The result would be as follows:

• Now let’s assume you earn 10% on the 80% of your portfolio invested in stocks and bonds, but lose 25% in managed futures. The results would be as follows:

Risk factors involved

• Changing demand–supply dynamics.• Climatic factors.• Industry related factors.

The Major Actors in commodity market

• SpeculatorA trader who enters the futures market in pursuit of profit, accepting risk in the endeavor.

• HedgerA Trader who enters the futures market to reduce some pre-existing risk exposure.

• BrokerAn Individual or firm acting as an intermediary by conveying customers’ trade instructions. Account executives or floor brokers are examples of brokers.

Portfolio Diversification

• Hedge against inflation.

• An improved risk/return profile in strategic asset allocation.

Structure of Indian Commodity Futures Exchanges

FORWARD MARKETS COMMISSION

• Forward Markets Commission (FMC) is headquartered at Mumbai.

• It is a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India.

• It was set up in 1953 under the Forward Contracts (Regulation) Act, 1952.

• The Act provides that the Commission shall consist of not less than two but not exceeding four members appointed by the Central Government.

OBJECTIVES OF FMC• To create competitive conditions so that no

unscrupulous participants could use these leveraged contracts for manipulating prices.

• To ensure that the market has appropriate risk management system.

• To ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders.

FUNCTIONS OF THE FMC• FMC advises the central government to either

grant recognition or to withdraw the recognition of any association.

• It keeps the forward market under strong observation and takes action wherever necessary.

• To make recommendations generally with respect to improving the organization and working of forward markets.

Continued…• To undertake the inspection of the accounts

and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.

• To collect and publish the information relating to trading conditions in respect of goods including information relating to demand, supply and prices.

COMMODITY EXCHANGE• An entity, usually an incorporated non-profit

association, that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures.

• Commodities exchange also refers to the physical centre where trading takes place.

Continued…

• 18 existing commodity exchanges in India offering domestic contracts in 8 commodities and 2 exchanges that have permission to conduct trading in international (USD denominated) contracts.

Continued…

• The two most important commodity exchanges in India are;

1)Multi-Commodity Exchange of India Limited (MCX),

2)National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX)

National Commodity and Derivatives Exchange Limited - NCDEX

• National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodity exchange. It has commenced its operations on December 15, 2003.

• LIC, NABARD & NSE are Promoter Shareholder.

• NCDEX is regulated by Forward Markets Commission.

• NCDEX currently facilitates trading of 57, commodities including :

• Agri-based commodities• Bullion• Energy• Ferrous metals• Non-ferrous metals• Plastics

Institution Share Domain Expertise

NABARD 15 % Apex bank for agricultural lending

ICICI Bank 8 % Largest private sector bank in India. Listed on NYSE

NSE 15 %Largest stock exchange in India. Highest volume in single stock futures in world.

LIC 15 % Largest life insurance company in India

CRISIL 12% India’s first & largest credit rating agency. Now a Standard & Poor company

IFFCO12% Largest farmer cooperative with affiliation of 36,000 cooperatives

PNB8% Large public sector bank with strong rural reach specially in North India

Canara Bank 8% Large public sector bank with strong rural reach specially in South India

Goldman Sachs

7% Global Expertise in commodity markets

Multi Commodity Exchange of India Ltd - MCX

• MCX is an independent multi commodity exchange, headquartered in Mumbai, 2003.

• MCX is promoted by Financial Technologies.

• It is recognized by the government for conducting the following in the area of commodities futures and options:• facilitating online trading• clearing • settlement operations

Continued…

MCX offers connects to the following;

• Producers and Processors• Traders• Corporate house• Regional trading centers• Importers• Exporters• Co-operatives • Industry Associations and institutions

National Multi Commodity Exchange of India Limited

• National Multi Commodity Exchange of India Limited (NMCE) is the first de-mutualized, Electronic Multi-Commodity Exchange in India.

• On 25th July, 2001, it was granted approval by the Government to organize trading in the edible oil complex.

• It has operationalized from November 26, 2002.

• It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited.

Conclusion

Thank You…