Commodity market

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Commodity market
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Flow of Presentation

• What do we mean by Commodity Market?
• Global classification of commodities.
• Commodities not traded in commodity market
• How Commodities is an alternate asset class?
• Scope of commodities market.
• How to Trade in Commodities?
• Various commodity Exchanges.
• Commodity trading
• Risk factors involved
• Conclusion

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Commodities

• A commodity is anything for which there is
  demand, but which is supplied without qualitative
  differentiation across a markets.
• Key Learning here was the difference between
  commodity and a brand.

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Global classification of commodities
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Commodities not traded in commodity market
Non-tradable commodities

1. Rare Metals
2. Agricultural Products
3. Minerals and other materials

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Rare metals - Germanium, Cadmium, Cobalt,
Chromium, Magnesium, Manganese, Molybdenum,
Silicon, Rhodium, Selenium, Titanium, Vanadium,
Niobium, Lithium, Indium, Gallium, Tantalum,
Tellurium, and Beryllium.
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Agricultural products - Fresh Flowers, Cut
Flowers, Melons, Lemons, Tung Oil, Gum Arabic,
Pine Oil, Milk, Tomatoes, Grapes, Eggs, Potatoes,
and Figs.
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Asphalt, Aggregate, Arsenic, Borax, Boron,
Gypsum, Asbestos, Chlorine, Fluoride, Cement,
Sulfuric Acid, Carbon Dioxide, Fluorspar,
Bromine, Titanium Dioxide.  
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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.

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Portfolio Diversification

• Low or negative co-relation allows commodities to
  reduce overall risk.
• Hedge against inflation.
• An improved risk/return profile in strategic
  asset allocation.

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• Lets assume your total portfolio is 250,000 and
  you invest 80 in stocks and bonds (200,000) and
  20 in managed Commodities (50,000). Lets
  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

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Now lets 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
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• By investing only 20 of your portfolio in
  futures, if you were to earn 25, it would
  outperform 80 of your portfolio invested in
  stocks and bonds if the stocks and bonds earned
  5.
• You can also see that a 25 loss in futures would
  still leave you with a net profit of 7,500 if
  your stock and bond allocation returned 10.

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SCOPE OF COMMODITY MARKET

• Allowing mutual funds and FIIs to participate in
  the commodity market
• Widening the definition of commodities to
  include also commodity indices and weather
  derivatives
• Changes in the Banking Regulation Act allowing
  banks to operate in the commodity exchanges
• Allow set-offs on trading losses in the
  derivatives market.

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FUTURE PLANS

• NCDEX constantly plans to widen the menu of
  products available for trading to include-
• Other agricultural products,
• Base metals,
• plastics,
• energy products
• indices (including weather)

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WAY AHEAD

• Commodity exchanges in India are expected to
  contribute significantly in strengthening Indian
  economy to face the challenges of globalization.
• Indian markets are poised to witness further
  developments in the areas of electronic warehouse
  receipts (equivalent of dematerialized shares),
  which would facilitate seamless nationwide spot
  market for commodities.

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• Amendments to Essential Commodities Act and
  implementation of Value-Added-tax
• Options contracts in commodities.
• Their may see increased interest from the
  international players in the Indian commodity
  markets once national exchanges become
  operational.

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• Commodity derivatives as an industry is poised to
  take-off which may provide the numerous investors
  in this country with another opportunity to
  invest and diversify their portfolio. Finally
  their may be greater convergence of markets
  equity, commodities, Forex and debt which could
  enhance the business opportunities for those have
  specialized in the above markets.

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COMMODITY MARKET

• Commodity market is a place where trading in
  commodities takes place. These are the markets
  where raw and primary products are exchanged.
• 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.

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HOW TO TRADE IN COMMODITIES

• COMMODITY FUTURE
• A standardized agreement to buy (or sell) an
  asset in the future, at a price agreed today

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COMMODITY EXCHANGE TRADED FUNDS (ETFs)

• Commodity ETFs generally are index funds and
  track commodities indices.

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COMMODITY STOCKS

• Stocks which belongs to commodity related
  sector like metals, energy, agriculture etc.

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COMMODITY MUTUAL FUNDS

• Mutual funds which invest in stocks belonging
  to commodity sectors or fund of funds which
  invest in other commodity funds etc.

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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
  center where trading takes place

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CONT.

• 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.

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CONT.

• 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)

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Structure of Indian Commodity Futures Exchanges
FMC
Commodity Exchanges
National exchanges
Regional exchanges
20 Other Regional Exchanges
NMCE
MCX
NBOT
NCDEX
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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.

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• NCDEX currently facilitates trading of
  57, commodities including
• Agri-based commodities
• Bullion
• Energy
• Ferrous metals
• Non-ferrous metals
• Plastics

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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 Indias first largest credit rating agency. Now a Standard Poor company
IFFCO 12 Largest farmer cooperative with affiliation of 36,000 cooperatives
PNB 8 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
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MCX

• Multi Commodity Exchange of India Limited (MCX),
  is an independent and de-mutulised exchange with
  a permanent recognition from Government of India.
  
• Key shareholders of MCX are Financial
  Technologies (India) Ltd., State Bank of India,
  Union Bank of India, Bank of India and Canara
  Bank.
• MCX started offering trade in November 2003 and
  has built strategic alliances with Bombay Bullion
  Association, Bombay Metal Exchange, Solvent
  Extractors Association of India, Pulses
  Importers Association and Shetkari Sanghatana.

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NMCE

• 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.

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SPOT TRADING
Spot trading is any transaction where delivery
either takes place immediately, or with a minimum
lag between the trade and delivery due to
technical constraints. Spot trading normally
involves visual inspection of the commodity or a
sample of the commodity, and is carried out in
markets such as wholesale markets. Commodity
markets, on the other hand, require the existence
of agreed standards so that trades can be made
without visual inspection.
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FORWARD CONTRACT
A forward contract or simply a forward is an
agreement between two parties to buy or sell an
asset at a certain future time for a certain
price agreed. It costs nothing to enter a forward
contract. The party agreeing to buy the
underlying asset in the future assumes a long
position, and the party agreeing to sell the
asset in the future assumes a short position. The
price agreed upon is called the delivery price,
which is equal to the forward pricing at the time
the contract is entered into.
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• Futures contract, in refers to a standardized
  contract to buy or sell a specified commodity of
  standardized quality at a certain date in the
  future, at a market determined price (the futures
  price).
• The price is determined by the instantaneous
  equilibrium between the forces of supply and
  demand among competing buy and sell orders on the
  exchange at the time of the purchase or sale of
  the contract.

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Features of Future ..

• Futures are used for hedging, particularly in a
  bear market.
• Futures are exchange-traded derivatives.
• The particular asset as well as the quantity are
  specified in the futures contract.
• The currency in which the contract is to be
  executed is also specified in future contracts.

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• Futures have lower transaction costs than other
  debt instruments.
• Future contracts have high liquidity, since
  buyers and sellers of futures contracts can be
  found easily.
• Futures are highly standardized.
• Settlement - The delivery month and the last
  trading date are also mentioned in the contract.

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Forward Vs. Futures

• While futures and forward contracts are both
  contracts to deliver an asset on a future date at
  a prearranged price, they are different in
  different respects
• Futures are margined, while forwards are not.
• Forward contracts are private agreements. Futures
  contracts have clearing houses.
• For forward contracts, settlement of the
  contract occurs at the end of the contract.
  Futures contracts are marked-to market daily,
  which means that daily changes are settled day by
  day until the end of the contract.

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• Futures contracts are quite frequently employed
  by speculators. On the other hand, forward
  contracts are mostly used by hedgers.
• Futures are exchange-traded, while forwards are
  traded over-the-counter.
• Thus futures are standardized and face an
  exchange, while forwards are customized and face
  a non-exchange counterparty.

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The Major Actors in commodity market
KEY PLAYERS IN THE COMMODITY MARKET

• SPECULATOR
• HEDGER
• BROKER

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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.

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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.

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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.

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• 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.

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Risk factors involved

• Changing demandsupply dynamics.
• Climatic factors.
• Industry related factors.
• Geopolitical consideration.

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Conclusion

• Commodities are the distinct class of assets that
  are largely independent of equity and bond
  returns.
• Long term fundamentals of commodity companies
  appears bright given the supply demand mismatch ,
  emphasis on infrastructure development in many
  developing economies

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SUBMITTED BY

• Abhinav Kansal
• Deepak Jain
• Arpit Khandelwal
• Apeksha Khandelwal
• Saumyadeep Dalal
• Aastha Mittal
• Ankit Mehta
• Divya Jolly
• Amit Goel