Commodity MarketOverview & Prospects of

Arbitrage

WHAT COMPRISES COMMODITY MARKET?

Precious Metals

Agriculture

Commodity markets

Power

Other Metals

CONCEPT

 

Commodity futures are tool used to hedge the price risk of underlying commodity.

 Helps in price discovery of underlying commodity

Helps in stabilizing the price of commodity for longer term.

Reduce the price disparity over two geographical locations and bridge the demand/supply position over two locations and manage the regional distortion

 Bring out the information about the commodity indicating the price trend.

CURRENT ISSUES FOR GROWTH OF MARKET

Lack of education and awareness of exchange amongst the marks of Investors, Traders (resulting low liquidity)

 Low participation of Indian Corporate (Again due to the above)

 Common delivery system for all exchange in demat form, which would ensure automatically the product standards

 

  Delay in formations of Regulation for Institutional Investor, which are in pipeline.

  The differential Sales Tax & Local Tax requires an early introduction of Value added Tax System.

The delivery center of commodity should be in multiple locations as presently in one location for one product in most of commodities.

COMMODITY MARKET IN INDIAN SCENARIO

Bullion

   Market

     Largest consumer (Rs. 400 bn) – traditional form of investment

     Large stock of unaccounted metal

     Skills in hand made jewellery

    Potential

     Use it as monetary unit to boost rural economy

     Effective instrument for investment diversification

     Boost jewellery exports

     Impediments

     Differences in sales tax, octroi & stamp duty among states

     Lack of good assaying practices – difficult to liquidate

     Little avenue to hedge price risk of jewellery exporters

 

Other metals

     Market

  Indian Production (Al, Cu & steel) – Rs. 600 bn

Largest exporter of iron ore and alumina

  Large importer of copper

   Current trade by negotiation / price setting by producers

      Potential

  Increased scope for aluminum & steel exports

(as against alumina and iron ore)

    Stable metal prices can fuel boom in downstream industries

    Rival China as preferred manufacturing location

    Growth in manufacturing to equal that in services

  Impediments

    No organised exchange in India – price discovery difficult

Significant PSU participation

 

 

Agriculture

        Market

     Agricultural share in GDP – 26% (Rs. 5000 bn)

     Large producer of cotton, cereals, sugar, fruits, spices etc

     Current exports of about USD 4 bn

     Specific commodity based exchanges – not very successful

       Potential

     Diverse gene pool and climatic conditions

     Increase in agricultural exports – sugar, cereals

     Increase in processed foods production & consumption

       Impediments

     Restrictions on inter state movement

     Poor transport & warehousing – 30% wastage in cereals

     Member controlled exchanges – transparency issues

 

Power

        Market

     Large requirement and trading in Power units

     Exports and imports of excessive units.

     Specific commodity based exchanges – not very successful

        Potential

     Diverse climatic conditions

     Increase in demand.

     Increase in disinvestments among PSU’s involved in trading.

        Impediments

     Restrictions on inter state movement

     Poor transport mechanism

     No organised exchange in India – price discovery difficult

Significant PSU participation

 

 

Trade Potential Physical trade (Rs. in

bn)

3 time multiple (Rs. in

bn)

5 time multiple (Rs. in bn)

Bullion 400 1,200 2,000

Metals 600 1,800 3,000

Agriculture

5,000 15,000 25,000

Energy 5,000 15,000 25,000

Total 11,000 33,000 55,000

ADVANTAGE THE ORGANIZED SECTOR OFFERS

Facilitate high quality intermediation

Foster professionalism and transparency

Nation-wide reach and consistent offering

Provide impetus to commodity market and generate higher volumes

Inculcate international best practices

Demutualisation

Technology platforms

Information dissemination without noise

Low cost solutions

FUTURE PROSPECTS

 The prospect of commodity exchange in India store a bundle of opportunities in term of following:

 

In term of volume, as many of market player would tend to participate for their ask management which would ensure liquidity for the lines to come.

 

FUTURE PROSPECTS contd.

Since the exchange would play like a nationwide common market, it would reduce the dis-equilibrium of price/demand supply

Creation of employment opportunities.

The participation of institutional Investor, like Files, Mutual Funds, would with distinct emails and provide further depth to the market.

Commodity Exchange Products Approx Annual Vol. (Rs. Crore)

NBoT, Indore Soya, Mustard 80,000

NMCE, Ahmedabad Multiple 40,000

Ahmedabad Commodity Exch.

Castor, Cotton seed

3,500

Rajdhani Oil & OilSeeds Mustard 3,500

Vijai Beopar Ch., Muzzaffarnagar

Gur 2,500

Rajkot Seeds Oil & Bullion Castor, Groundnut 2,500

IPSTA, Cochin Pepper 2,500

Chamber of Commerce, Hapur

Gur, Mustard 2,500

Bhatinda Om and Oil & Oilseeds

Gur 1,500

Others (mostly inactive) 1,500

TOTAL 140,000

Volume of Existing Exchanges

ARBITRAGE IN COMMODITY EXCHANGE

Arbitrage can be in the following ways:

Cash (Spot market Vs. future market)

Future Vs Future (Intra Exchange)

Domestic Vs International.

 

WHY ARBITRAGE OPPORTUNITIES EXITS

Different in perception of different investors;

Demand and supply over market or over location

Market inefficiency

ADVANTAGES OF ARBITRAGE

 

Reduces market inefficiency

Provide liquidity to the market

Act like a market equalizer tool

Ensure risk free profit