swati final report

8/3/2019 Swati Final Report

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A

Specialization Project Report on

Commodity Price Movement and Trading in Indian Commodity Market in

Pre-recession, Recession and Post recession Era

Report submitted in partial fulfillment of

POST GRADUATE DIPLOMA IN MANAGEMENTSubmitted By

Swati Dixit

PGDM-TPS-17th

Batch

Roll No. 17112

Under The Esteemed Guidance of

Prof. V.G.Chari

Professor (Finance)

SIVA SIVANI INSTITUTE OF MANAGEMENT, KOMPALLY

SECUNDERABAD-500014

(2008-10)


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ACKNOWLEDGEMENT

I bow to Almighty for bestowing upon me with patience, perseverance and courage to

complete this project timely and successfully.

I express my heartiest gratitude to my extreme teacher, Prof. V. G. Chari, Professor (finance),

SSIM, whose thorough knowledge, excellent guidance, valuable helps and co-operative nature

became the way to complete this project report in the proper manner.

I am also thankful to Mr. Pardha Saradhi and Dr. Murlidhar Prasad, Faculty Finance, SSIM for

their help and guidance on this project.

I also thank Mr. Shyam Sunder, in charge Library and other library staff for providing all the

literatures required completing the project.

Last but not the least; I want to express my gratitude towards my parents and my friends for

their cooperation during the project.


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DECLARATION

I, Swati Dixit, declare that this project report titled Commodity Price

Movement and Trading in Indian Commodity Market in Pre-recession,

Recession and Post recession Era is done by me on my own. I further declare

that it is my original work as a part of my academic course. I have not published

it anywhere else for any academic or business purpose.

PLACE: Hyderabad (Swati Dixit)

DATE: PGDM-TPS-17th batch


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CONTENTS

1 Chapter-1

Abstract

Objective of the study

Scope of the Study

Review of literature

2 Chapter 2

Commodity market- A brief introduction

Indian commodity market

Important products of commodity market

Evolution, development and future prospects of


3 Chapter-3

Research methodology

4 Chapter-4

Data Analysis and Interpretation

5 Chapter-5

Findings

Conclusion

Bibliography


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CHAPTER 1ABSTRACT

OBJECTIVES

SCOPE

REVIEW OF LITERATURE


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ABSTRACT

World economy featured recently robust real economic growth, averaging about 4.5-5.5

percent per year during 200307. However, inflationary pressures re-emerged. Commodities

market experienced highest inflation rates in post-war period with all commodities price index

increasing at 23 percent per year during 200307. Prices hit US$119/barrel in April 2008 andmight accelerate to dramatic levels. Parallel to commodities markets, real estate markets

experienced phenomenal speculative price increases. In the same vein, the exchange rate of the

U.S. dollar has depreciated considerably during 200208, plummeting to US$1.6 per Euro in

April 2008, and might fall further. Financial markets face high uncertainty stemming from

rising inflationary expectations, credit risks, and depreciating currencies. Moreover, many

vulnerable countries were recently shaken by food riots and may face alarming food crisis

arising from exorbitant food prices. The global economy is in the midst of a deep downturn as

an adverse feedback loop between the real and financial sectors is taking its toll both in

advanced and in emerging and developing countries. As a result, commodity prices are

unlikely to recover in the short run. All major advanced economies are in recession, while

activity in emerging and developing economies is slowing abruptly. Continued deleveraging by

the financial sector and dramatic declines in consumer and business confidence have triggered

a sharp deceleration in domestic demand across the globe. World trade and industrial activity

are falling sharply, while labor markets are weakening at a rapid pace, particularly in the

United States. The decline in commodity prices is providing some support to commodity

importers, but is weighing heavily on growth in commodity exporters. With growth well below

trend in emerging and developing economies, commodity prices have collapsed over the past

few months. Expectations of resilience in these economics had underpinned commodity prices

for much of 2008, but hopes for decoupling have since evaporated. Commodity prices tend

to be significantly cyclical, as output contraction in commodity-intensive sectors exceeds that

in other sectors. Financial turmoil and U.S. dollar appreciation have exacerbated the downward

price momentum. Investors have sought to reduce their holdings of commodity assets, given

increasing concerns about counterparty risks (many standard commodity investment

instruments such as total return swaps involve such risks), decreasing availability of credit for

leveraged commodity market exposure (e.g., by hedge funds), a rising preference for liquidity,

and sizable recent appreciation of the U.S. dollar in nominal effective terms. Commodity prices

are unlikely to recover while global activity is slowing. To measure the risk is vitally important

task.

This study focuses on studying the price movement of various commodities before

recession, during recession, and after recession in India as well as world.


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July 1980. The two longest recessions during this period lasted 16 months each, one extending

from November 1973 to March 1975, and the other from July 1981 to November 1982. There

was a noticeable decline in real GDP in both of these periods. The shortest expansion period

from the mid-1940s until 2007 lasted only 24 months, from April 1958 to April 1960. The

longest expansion continued from March 1991 to March 2001, setting a record of 120

consecutive months of growth. As luck would have it, United States has experienced only two

relatively mild recessions and extended periods of expansion over the past 25 years.

(Recession, its cause and effects, article base, December 11, 2008)

With the help of historical data, we can see that what happened in the 1929 crash and its

aftermath tells a similar story. For example, in 1929, corn prices were dragged down by

approximately 80% from its peak due to a crash in the market. However, in 1937, it made a

new high, higher than the 1929 peak. We can see a similar trend during 2009 to 2010, as

supply is shrinking in almost all commodities. With the Fed gambling with the US dollar,

commodities still have legs, commodities perform better amidst a weak dollar. Due to the

essential nature of commodities for human lives, investors shift their funds into commodities

during war and financial crisis. The historical risk premium, during the 1959 to 2004 period, on

commodity futures has been positive at about 5 percent, supporting the fact that commoditiesget continuous and somewhat definite returns in times of crisis as well. Commodity prices rise

even during recession. Currently, many commodities are moving up on the hope of

improvement in demand. Nowadays, all metals, energy and agricultural products are in the

headlines due to their eye catching upside movements in prices. Most people are talking about

a more than 60% fall in crude oil prices, which is now on the path of recovery. The fall in oil

prices is not the ideal sign of recession, as in the last nine years, oil prices have declined three

times by more than 50% and each time it was not the end of the bull market. During the tough

time from 1959 to 2004, commodities offered better returns to investors and proved less risky

as compared to stocks. (Commodities: opportunities during recession, www.seeking

alpha.com ,may 4, 2009)

A dollar appreciation (depreciation), due to dollar shortage, has depressed (ignited)

commodities prices. Transmission of US dollar movements to commodities prices works

through many channels. These include price and real cash balances (Pigou effect) effects for

non dollar currencies, and credit channel whereby borrowing in US dollars becomes more

(less) attractive in case of US dollar depreciation (appreciation), fueling thus higher (lower)

demand and speculation in commodities markets. Moreover, as exchange rate is an asset price,

its changes can be related to money supply. Lower (higher) US dollar could be attributed to

rising (declining) US money supply or higher (lower) dollar velocity. A form of quantity

theory (i.e., long-run proportionality) may therefore prevail between US money supply and

commodities prices. If commodities prices were to be priced in gold, and given very slow

increase in world gold stock, then commodities prices might turn out to be stable in terms of

gold. (IMF International Financial Statistics)


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Commodities have been going through a bottoming process and with the supply cutbacks,

when demand returns in a big way probably fourth quarter of 2009 or in beginning of 2010

we may see a return to strong gains in commodity prices. There is a light at the end of the

tunnel. We hope that this tunnel should not much longer than people are

anticipating.(Commodities: opportunities during recession, www.seeking alpha.com,

may 4, 2009)

The recent efforts to promote globalization have caused the worlds bigger financial &

investment markets and economies to work in solidarity. Hence, the regional markets and

economies have to create their developmental strategies according to these markets. The

declaration of the US mortgage crisis has led bankruptcy and mergers between the big financial

and investment players. (Global :Impact of Financial Crisis on GCC Oil & Gas Projects,

November 28, 2008)

The recession will continue at least until December. It will probably rank with the 1957-58

and 1973-75 declines, the worst of the ten U.S. recessions since World WarII. It will be global

as exports sold to U.S. consumers shrink, thus slashing the primary growth source for the rest

of the world.With global recession, demand for industrial commodities and oil will fade.Copper can be a proxy for global industrial production. (Copper meltdown,Vol. 4 Issue 4,p19-19,Shilling, A. Gary)

Mike Burninck, the editor of global market investor says that- Probably over the next few

months well see some downside volatility in oil and in gold because of the concerns about

global growth. Energy more so than gold because the dynamic behind gold has more to do with

the declining U.S. dollar and worries about inflation. (Commodity Crash: How US

recession will affect the commodities super cycle, Today financial news, January 26,

2008)

Recession has become a buzzword, everybody is losing confidence but it is well said that crisis

generates opportunity and one should know how to turn crisis into opportunity. Commodity is

the field which generated opportunity in every phase of business cycles. Two dimensions could

be attributed to these higher prices after during recession. First, production cut due to lack of

demand and liquidity and secondly, various monetary steps to revive the economy, viz; interest

rate cut, relief packages, tax cut etc. With the gambling of Fed with US dollar, commodity still

have legs that commodity performs better amid weak dollar. Due to its essential nature of

commodities for human lives, investors shift their funds into commodities during war and

financial crisis. The historical risk premium, during the 1959-2004 period, on commodity

futures has been positive at about 5 percent, is supporting the fact that commodities get

continuous and somewhat definite returns in time of crisis as well. Commodity prices rise even

during recession, currently many commodities moving up on the hope of improvement in

demand. Now a day, all metals, energy and agro products are in headlines due to their eye

catching upside movements in the prices. Most of the people talking about more than 60% fall

in crude oil prices, which is now on the path of recovery. Fall in oil prices are not the ideal sign

of recession, as in last nine years, three times oil prices have declined by more than 50% and


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each time it was not the end of the bull market. From 1959 to 2004, during the tough time

commodities offered better return to the investors and proved less risky as compare to stocks.

(Encash the opputunity during recession in commodity, Vandana Bharti, Delhi, April

28, 2009)


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CHAPTER 2

INDUSTRY PROFILE


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INDUSTRY PROFILE

India has a long history of commodity derivative trading, spanning over 130 years. The

commodity derivative exchanges witnessed several ups and downs for the past 13 decades,

with a booming phase of unbridled free futures trading in as many as 300 markets during the

pre-independence era, followed by a ban on such trading for almost a decade after the outbreak

of the SecondWorld War in 1939. Subsequent to independence in 1947, the then Governmentof Bombay enacted the Bombay Forward Contracts Act and permitted futures trading in cotton

and oilseeds under the auspices of the recognized associations. Outside Bombay Presidency,

commodity futures trading was also revived, but remained free and unregulated except by the

exchanges organizing such trading. With the Constitution of India coming into force on

January 26, 1949, the subject of futures trading came under the Union List. As a result, the

Government of India brought on the Statute Book the Forward Contracts (Regulation) Act,

1952 (FCRA), and established the Forward Markets Commission (FMC) in 1953. Under the

FCRA, futures trading came to be allowed in select agricultural commodities and their

products under the auspices of associations recognized by the Government of India. By mid-

1960s, around 30 associations were recognized for trading in about a score of commodities.Trading was subject to severe regulatory measures. But no sooner the markets began to bloom

with some activity, the government turned volte-face, and proscribed futures trading in almost

all major food crops in the fond hope of restraining the raging inflation in the economy.

Following the launch of economic reforms in the early 1990s, and especially after India signed

the General Agreement on Trade and Tariffs (GATT) to enter the World Trade Organization

(WTO), the World Bank and UNCTAD submitted a joint report to the Government of India

recommending revival of futures trading in farm commodities and their products to render

trade in such commodities competitive in the world markets after the envisaged removal of

trade and non-trade barriers. As a result, futures trading were revived, after a lapse of nearly

three and a half decades, towards the close of the 20th century. The onset of the new

millennium thereafter witnessed the setting up of three new national commodity exchanges,

which were permitted to trade in commodities of their choice, unlike the traditional regional

and single commodity exchanges that traded in one or few closely related commodities only.

At present, there are almost two dozen commodity exchanges, including three national

exchanges, trading in as many as 100 commodities together. The new national commodity

exchanges marked a distinct transfer scene on the commodity derivative trading landscape in

the country. In contrast with the conventional 3 commodity exchanges, in which prevailed the

long established floor-based open outcry trading system, the new national exchanges organized

derivative trading on screen-based anonymous automated electronic system. The national

exchanges also guaranteed the performance of the contracts, eliminating thereby the

counterparty risks, whereas the old exchanges did not provide any such guarantee, but

distributed the losses arising from any defaults among the members entitled to receive

payments from the defaulting member. Incidentally, while trading volumes in several non-

agricultural commodities, especially metals and energy products, has been quite high, the

major agric-commodities have failed to take off. To be sure, as much as around 80% of the

trading turnover in commodity exchanges is confined to half a dozen non-farm goods, whereas


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the rest is widely dispersed among a wide spectrum of agricultural commodities and their

products. Despite a long history of commodity futures trading in the country, futures markets

are still viewed with suspicion by many in both the academic and official circles. The recent

deflation in the values of various assets underlying the different derivatives, including

commodity derivatives, following the global meltdown, have provoked even more doubts

about the much acclaimed economic utility of futures trading for price discovery and risk

management. As a result, its support for futures business in many commodities

notwithstanding, the authorities have still not permitted such trading in several food grains like

rice and millets, and some major pulses, too. The government also continues to suspend futures

trading in commodities as soon as it suspects that such trading may affect adversely the prices

of those commodities to the detriment of one or the other class of society. Even in USA, which

has the most active commodity exchanges in the world, the new administration of President

Obama is not merely rewriting the rules of regulation, but even investigating the role of

commodity futures trading in the steep rise in prices of wheat and crude oil in 2007-08,

regardless of the fact that commodities as an asset class have revealed the resoluteness and

resilience in the face of global financial crisis.

Role of Commodity Derivative Markets in the Global MeltdownIn the context of the global financial meltdown that brought down precipitously the asset

values of both movables and immovable, and tangibles and intangibles, affecting adversely the

real economy with receding, and even negative, growths in almost all sectors of the economy,

and raising in the process unemployment rates to record levels, commodity markets have

shown an amazing resilience and steadfastness, despite the initial setbacks in base metals and

energy. Commodity exchanges the world over, including those in India, have been surprisingly

registering record turnovers in the face of a crisis that shook the entire financial ambit of the

world economy. It appears that commodities have emerged as a new asset class for safe and

secured investments. Money has been moving from other traditional asset classes to

commodity derivatives. In the absence of alternative avenues of investments, the new investingclasses like hedge funds, pension funds, index funds, sovereign funds, endowments, banks, and

other institutional investors are entering commodity exchanges in droves with their huge fund

flows to invest in index futures and commodity swaps. It seems that the traditional historical

pattern of commodity futures markets is undergoing a sea-change. Hitherto, commodity futures

markets were viewed as essentially hedging markets, to use its familiar description by

HolbrookWorking, who pioneered the studies in economics of commodity futures trading

before the Great Depression of 1929. Traders in the markets were classified as hedgers and

speculators; the line of distinction between the two was quite thin, though. The CFTC too was

all along classifying commodity futures market traders as hedgers and speculators, and

monitoring their positions accordingly while regulating the markets. Of late, however, it has

changed the classification into commercial and non-commercial traders. Institutions trading in

commodity futures, index futures, and commodity swaps are grouped along with the physical

commodity market functionaries, since many of the institutions to hold physical stocks of

commodities. As a result, investment trading in various commodity futures and their

derivatives are also being treated on par with hedge trading. The commodity futures markets

have, as a result, acquired a new dimension altogether.


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Introduction

Commodity markets are markets where raw or primary products are exchanged. These raw

commodities are traded on regulated commodities exchanges, in which they are bought and

sold in standardized contracts.

A commodity is some good for which there demand is, but which is supplied without

qualitative differentiation across a market. It is a product that is the same no matter whoproduces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The

price of copper is universal, and fluctuates daily based on global supply and demand. Stereo

systems, on the other hand, have many levels of quality. And, the better a stereo is [perceived

to be], the more it will cost.

One of the characteristics of a commodity good is that its price is determined as a function of

its market as a whole. Well-established physical commodities have actively traded spot and

derivative markets. Generally, these are basic resources and agricultural products such as iron

ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, copper, and rice,

wheat, gold, silver and platinum. Soft commodities are goods that are grown, while hard

commodities are the ones that are extracted through mining.

Commoditization occurs as a goods or services market loses differentiation across its supply

base, often by the diffusion of the intellectual capital necessary to acquire or produce it

efficiently. As such, goods that formerly carried premium margins for market participants have

become commodities, such as generic pharmaceuticals and silicon chips.

Size of the market

The trading of commodities consists of direct physical trading and derivatives trading. The

commodities markets have seen an upturn in the volume of trading in recent years. In the five

years up to 2007, the value of global physical exports of commodities increased by 17% whilethe notional value outstanding of commodity OTC derivatives increased more than 500% and

commodity derivative trading on exchanges more than 200%.

The notional value outstanding of banks OTC commodities derivatives contracts increased

27% in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in gold and

silver. Overall, precious metals accounted for 8% of OTC commodities derivatives trading in

2007, down from their 55% share a decade earlier as trading in energy derivatives rose.

Global physical and derivative trading of commodities on exchanges increased more than a

third in 2007 to reach 1,684 million contracts. Agricultural contracts trading grew by 32% in

2007, energy 29% and industrial metals by 30%. Precious metals trading grew by 3%, withhigher volume in New York being partially offset by declining volume in Tokyo. Over 40% of

commodities trading on exchanges was conducted on US exchanges and a quarter in China.

Trading on exchanges in China and India has gained in importance in recent years due to their

emergence as significant commodities consumers and producers.


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Commodity Trading in India started long time back, but the commodity trading in the country

gained its momentum after removal of certain restrictions by the Indian Government.

Governments approval for setting up four national level commodity exchanges, which would

involve multi-commodity trading, has further strengthened the commodity trading market of

India.

History of Commodity Trading in India

The Commodity Trading Market of established itself in India as a dominant market form much

before the 1970s. In fact, in the last phase of 1970s, the commodity trading market of India

started to lose its vibrancy. This happened because, from the late 1970s, numerous regulations

and restrictions started to be introduced in the commodity market of India and these restrictions

were acting as obstacles in the path of smooth functioning of the commodity trading market.

In the recent years, many restrictions, which were negatively affecting commodity trading

market, have been removed. So, now the commodity trading market of India has again started

to grow in a fast pace.

In order to promote the commodity futures trading in India, Forward Markets Commission

has been formed. This Forward Markets Commission actually regulates the futures trade in

commodities.

In India, there are 21 commodity exchanges, which enhance the efficiency and competitiveness

of the commodity trading market. Many of these commodity exchanges are regional, while

many of them are commodity specific. Some of these 21 commodity exchanges provide online

commodity trading facility.

Government Initiatives for promoting Commodity Trading

In the year 2003, the Indian Government approved the establishment plan of fourcommodity exchanges of national level. These national commodity exchanges would

operate futures trading contracts for multiple commodities. The Indian Government has

included more commodities in the list of permitted commodities, constructed under the

Forward Contracts (Regulation) Act.

Earlier there was a rule that every spot market transaction has to be completed within11 days. In order to promote commodity trading, the Government of India has removed

this restriction. Indian Government has removed NTSD (Non-Transferable Specific

Delivery Contract) option from the Forward Contracts (Regulation) Act.

History

The opening of the sea route to India (once the name given to all of Indonesia, Malaya and the

rest of south-east Asia) by the mariner Dom Vasco da Gama in 1499 established the colonial

power of Portugal in the Indian Ocean. During the following 100 years, some 200 voyages

were made around the Cape of Good Hope to the east. The spice trade was the main motivation


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at first, but around 1,600 other commodities were discovered and these then took a more

prominent role. But only around half of all the ships sent out by the Portuguese and the Dutch

ever came back. That risk has been eliminated, although transport is still a bottleneck. The

expeditions were constantly at risk from other nations and pirates, who blocked access to the

eastern Mediterranean area. They were also the cause of subsequent alliances and East India

Companies.

The first cartel

In 1580 the two great sea-faring nations, Spain and Portugal united. This combination ensured

that the sea route to Asia remained closed to other European nations (today, this abuse of

market power would be known as a cartel). Trade in Asian spices, and above all pepper, was

subject to contracts set up by the crown with fixed prices that had to be followed by the traders

(contradores).

They then sold on the goods to retailers such as the Dutch trading house Cunertorf & Snel in

Lisbon, which in turn supplied the north European market through trading agencies in

Antwerp.

The price volatility we see in markets today is nothing new. The term tulip mania originally

came from a period in Dutch history when demands for tulip bulbs reached such a peak that

enormous price were charged for a single bulb. At one point, people paid more for a single

tulip bulb than for a house in the centre of Amsterdam. Today the phrase is a synonym for

speculation in the financial markets. Towards the end of the 16th

century, Dutch traders from

various towns decided to take charge of spice imports from Asia. In order to finance the ships

and equipment, companies were formed, which in turn merged. Within a few years these

companies had equipped 65 ships spread across 15 fleets, of which around 50 returned packed

with goods.

National merger

They fought the Portuguese, the English and each other. The result was a dramatic fall in the

price of spices. Thus it was largely economic motives that forced the Dutch merchants to co-

operate and organize a national merger. The new company, VOC, received a state charter

which granted it sovereign rights, and this would be of great significance for its future

development (the contemporary equivalent would be some of the national oil companies).

VOC was the first, and soon became the largest, worldwide company to dominate trading. It

displayed the basic attributes of a modern joint-stock company and initiated future economic

and financial history. The original paid up share capital was 6,424,588 guilders. The key tosuccess in raising capital was the decision taken by the owners to open up access to the public

and accept shareholders as part-owners. The shares sold rapidly and were tradable, as any

Dutchman could buy and sell them. Importantly, the share price was not set by the government,

but by an independent joint-stock corporation interested in profit. The company shareholders

(the term came into use in around 1606) had to produce the subscribed capital in four part

payments that were called up by the VOC between 1603 and 1606. The shareholder received a


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receipt (Part) for the payment to the nominal value of the share. A share certificate

documenting payment and ownership such as we know today was not issued but was instead

entered in the companys share register. Not so dissimilar to the way things are undertaken

today.

COMMODITY EXCHANGES IN INDIA

Multi commodity exchange of India (MCX)

Multi Commodity Exchange of India Ltd is a demutualised nationwide electronic commodity

futures exchange set up by Financial Technologies (India) Ltd. With permanent recognition

from Government of India for facilitating online trading, clearing & settlement operations for

futures market across the country. The exchange started operations in November 2003.

MCX has achieved three ISO certifications including ISO 9001:2000 for quality management,

ISO 27001:2005 for information security management systems and ISO 14001:2004 for

environment management systems. MCX offers futures trading in more than 40 commodities

from various market segments including bullion, energy, ferrous and non-ferrous metals, oil

and oil seeds, cereal, pulses, plantation, spices, plastic and fiber. The exchange strives to be atthe forefront of developments in the commodities futures industry and has forged strategic

alliances with various leading International Exchanges, including Tokyo Commodity

Exchange, Chicago Climate Exchange, London Metal Exchange, New York Mercantile

Exchange, Bursa Malaysia Derivatives, Berhad and others.

Key shareholders

Promoted by Financial Technologies (India) Ltd, MCX enjoys the confidence of blue chips in

the Indian and international financial sectors. MCXs broad based strategic equity partners

include, NYSE Euro next, State Bank of India and its associates (SBI), National Bank for

Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.(NSE), SBI Life Insurance Co. Ltd., Bank of India (BOI) , Bank of Baroda (BOB), Union

Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Fid Fund (Mauritius) Ltd. an

affiliate of Fidelity International, ICICI Ventures, IL&FS, Kotak group, Citi Group and Merrill

Lynch.

NCDEX

National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed

on-line multi commodity exchange. The shareholders of NCDEX comprises of large national

level institutions, large public sector bank and companies.

Promoter shareholders

ICICI Bank Limited (ICICI), Life Insurance Corporation of India (LIC), National Bank for

Agriculture and Rural Development (NABARD) and National Stock Exchange of India

Limited (NSE).


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Other shareholders

Canara Bank, Punjab National Bank (PNB), CRISIL Limited, Indian Farmers Fertiliser

Cooperative Limited (IFFCO), Goldman Sachs, Intercontinental Exchange (ICE) and Shree

Renuka Sugars Limited.

NCDEX is the only commodity exchange in the country promoted by national level

institutions. This unique parentage enables it to offer a bouquet of benefits, which are currentlyin short supply in the commodity markets. The institutional promoters and shareholders of

NCDEX are prominent players in their respective fields and bring with them institutional

building experience, trust, nationwide reach, technology and risk management skills.

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act,

1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It

commenced its operations on December 15, 2003.

NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with

an independent Board of Directors and professional management both not having any vested

interest in commodity markets. It is committed to provide a world-class commodity exchangeplatform for market participants to trade in a wide spectrum of commodity derivatives driven

by best global practices, professionalism and transparency.

NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws

of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract

Act and various other legislations. NCDEX headquarters are located in Mumbai and offers

facilities to its members from the centers located throughout India.

In May 2000, Intercontinental Exchange (ICE) was established, with its founding shareholders

who represented some of the worlds largest energy traders. In June, 2001, in a bid to

strengthen its business into futures trading, ICE acquired the International Petroleum Exchange(IPE), now ICE Futures, which operated Europes leading open-outcry energy futures

exchange.

Intercontinental Exchange (NYSE: ICE) is currently the leading global, electronic exchange

for trading both futures and OTC energy contracts and some soft commodities. ICE offers

contracts in energy crude oil and refined products, natural gas, power and emissions; soft

commodities including cocoa, coffee, cotton, ethanol, orange juice, wood pulp and sugar;

currency and index futures and options.

ICE conducts its energy futures markets through its U.K. regulated London-based subsidiary,

ICE Futures, one of the leading energy exchanges in Europe. ICE Futures, offers liquid

markets in two of the globally benchmarked crude oil futures Brent Crude futures and West

Texas Intermediate (WTI). Nearly half of the worlds global crude futures (by volume) are

traded on ICE. ICE conducts trading on its soft commodity futures and options through its U.S.

regulated subsidiary the New York Board of Trade, which it took over in January, 2007.


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MAJOR PRODUCTS OF COMMODITY MARKET

Gold

Gold is the oldest precious metal known to man and for thousands of years it has been valued

as a global currency, a commodity, an investment and simply an object of beauty.

Major Characteristics

y Gold is unique as it is both a commodity and a monetary asset.y Its stability and high value makes it virtually indestructible and ensures that it is

almost always recovered and recycled.

y There is no true consumption of gold in the economic sense as the stock of goldremains essentially constant while ownership shifts from one party to another.

y Although gold mine production is relatively inelastic, recycled gold (or scrap) ensuresthere is a potential source of easily traded supply when needed, and this helps to

stabilize gold price.

y Economic forces that determine the price of gold are different from, and in manycases opposed to the forces that influence most financial assets.

Global Supply Demand Scenario

y The total above ground stocks of gold is estimated to be around 1,63,000 tonnes byGold Fields Minerals Services (GFMS) as on end of 2008

y Out of this total stock, 51% is estimated to be present as jewellery, 18% as officialreserves, 17% held as investment, 12% used for industrial purposes and 2% is

unaccounted for.

y Jewellery accounts for almost two-thirds of annual gold demand with investment andindustry being the other main drivers. The total annual global demand for gold has

averaged 3530 tonnes in the last three years (2005 2008). However, it is expected to

dip slightly in 2009, owing to the sharp rise in prices.y Five countries, viz., India, China, USA, Turkey, Saudi Arabia and UAE account for

above 60% of gold demand, with each market driven by a different set of socio-

economic and cultural factors.

y The total global mine production is relatively stable, averaging approximately 2,455tonnes per year over the last three years. Recycling of old gold scrap and official

sector sales are the other major sources of supply, which have averaged 1084 tonnes

and 378 tonnes in the last three years.

y South Africa has been a major gold producer since 1880s and it is estimated thatabout 50% of all gold ever produced has come from this nation. While, during the

early 1980s it produced about 1000 tonnes, the output in 2007 dropped to just 272tonnes.

y China with a production of 276 tonnes, overtook South Africa as the worlds largestgold producer in 2007 for the first time since 1905 that South Africa has not been the

largest. The other major producers are USA, Australia, Russia and Peru.


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World Gold Markets

OTC markets at London (LBMA), New York and Zurich

Gold derivative exchanges at New York CME (COMEX), Tokyo (TOCOM), Mumbai

(MCX) Istanbul, Dubai, Hong Kong and Singapore are doorways to important consuming

regions.

India in World Gold Industry

(Rounded Figures) India (In Tons)World (In Tons) % Share

(Rounded Figures) India (In Tons) World (In Tons) % Share

Total Stocks 15000 160000 9

Central Bank holding 558 30,100 2

Annual Production 3 2450 0

Annual Recycling 250 1100 23

Annual Demand 700 3550 20

Annual Imports 600 --- ---

Annual Exports 60 --- ---

Indian Gold Market

y India is the worlds largest consumer of gold. Indians normally buy about 25 per centof the worlds gold, purchasing around 700 750 tonnes of gold every year.

y However, the sharp price increase in 2008 and 2009 has impacted demand with totaldemand in 2008 dipping to 660 tonnes. It is further expected to shrink in 2009 with

demand in first three quarters of 2009 totaling only around 265 tonnes against 553.5

tonnes in the same period of the previous year.

y As Indias domestic primary production of gold is very less, at around 2-3 tonnes ayear, the country imports most of its domestic requirement.

y Thus, India is also the largest importer of the yellow metal and has averaged importsof around 600 tonnes a year. However, 2008 imports dipped to around 400 tonnes o

gold and it is further expected to dip to around 200-220 tonnes in 2009 owing to high

prices.

y Indias gold demand is firmly embedded in cultural and religious traditions. It is alsovalued in India as a savings and investment vehicle and is the second preferred

investment after bank deposits.

y Gold hoarding tendency is well engrained in the Indian society and unofficial stocksheld by Indians is estimated to be well above 15,000 tonnes, which is around 9% othe total global gold stocks.

y Domestic consumption is dictated by monsoon, harvest and marriage season. Indianjewellery offtake is sensitive to price increases and even more so to volatility.

y In the cities gold is facing competition from the stock market and a wide range ofconsumer goods.


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y Facilities for refining, assaying, making them into standard bars, coins in India, ascompared to the rest of the world, are insignificant, both qualitatively and

quantitatively.

y In July 1997 the RBI authorized the commercial banks to import gold for sale or loanto oners and exporters. At present, 13 banks are active in the import of gold.

This reduced the disparity between international and domestic prices of gold from 57

percent during 1986 to 1991 to 8.5 percent in 2001.

Market Moving Factors

y Indian gold prices are highly correlated with international prices. However, thefluctuations in the INR-US Dollar impact domestic gold prices and have to be closely

followed.

y The global prices are driven by a host of factors with macro-economic factors likestrength of the economy, rising importance of emerging markets, currency

movements, interest rates being major influencing factors.

y Supply-demand is a major influencer, amid rising global investor demand and almoststable supplies.

y Shifts in official gold reserves, reports of sales/purchases by central banks act asmajor price influencing factors, whenever such reports surface.

y The investment in gold is influenced by comparative returns from other markets likestock markets, real estate other commodities like crude oil.

y Domestically, demand and consequently prices to some extent are influenced byseasonal factors like marriages. The rural demand is influenced by monsoon,

agricultural output and health of the rural economy.

Aluminium

Characteristics Of Aluminiumy Aluminium is the third most abundant element in the Earths crust. In nature

however it only exists in very stable combinations with other materials

(particularly as silicates and oxides) and it was not until 1808 that its existence was

first established.

y Aluminum is light. Its density is only one third that of steel. Aluminum is resistantto weather, common atmospheric gases and a wide range of liquids. Aluminum has

a high reflectivity, and therefore finds more decorative uses. Aluminum has high

elasticity, which is an advantage in structures under shock loads.

y Aluminium keeps its toughness down to very low temperatures, without becoming brittle like carbon steels. It is easily worked and formed. Aluminium conductselectricity and heat nearly as well as copper.

Supply and Demand

Global Scenario

y Aluminium ore, most commonly bauxite, is plentiful and occurs mainly in tropical


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and sub-tropical areas Africa, West Indies, South America and Australia. There

are also some deposits in Europe

y The leading producing countries include the United States, Russia, Canada, theEuropean Union, China, Australia, Brazil, Norway, South Africa, Venezuela, the

Gulf States (Bahrain and United Arab Emirates), India and New Zealand; together

they represent more than 90 percent of the world primary aluminium production.

y The largest aluminium markets are North America, Europe and East Asia.y The global production of aluminium is about 27.7 and 28.9 million tons in 2003

and 2004 respectively.

y China, Russia, Canada and United States produced about 6.1, 3.6, 2.64 and 2.5million tons of aluminium in year 2004 respectively.

Indian Scenario

y India is considered the fifth largest producer of aluminium in the world.y It is estimated at about 3037 million one for all categories of bauxite (proved,

probable and possible).With the present level of consumption of aluminum, the

identified reserves would have an estimated life of over 350 years. Indias reserves

are estimated to be 7.5 per cent of the total deposits and installed capacity is about

3 per cent of the world.

y In terms of demand and supply, the situation is not only self-sufficient, but it alsohas export potential on a competitive basis. Indias annual export of aluminium is

about 82,000 tonnes.

y Indias annual consumption of Aluminum is around 6.18 lakh tons and is projectedto increase to 7.8 lakh tones by 2007.

y About a decade back, the primary Indian aluminium producers were BALCO, NALCO, INDAL, HINDALCO and MALCO. Of the five, two (BALCO and

NALCO) were in the public sector while the other three were in the private sector

y As a result of the process of liberalization of trade in aluminium, India hasemerged as a net exporter of aluminium, on competitive terms. Governmentmonopoly, in terms of aluminium production, removal of price and distribution

control over aluminium, has been diluted in favor of private sector. The ownership

pattern in private sector has undergone changes. With the takeover of INDAL by

the HINDALCO, it has emerged as the major producer of aluminium in the

country.

Cotton M Staple

General Characteristics

y Cotton is the most important of all natural fibers, it accounts for half of all theworld fibers used by the textile industry. Known also as

White Gold Cotton

enjoys a predominant position amonst all cash crops in India.

y Kapas (also known as raw cotton or seed cotton) is unginned cotton or a whitefibrous substance (lint) covering the seed that is obtained from the cotton plant

(Genus Gossypium).

y Ginning is a process, which separates the lint (about 1/3rd in weight) from the seed(about 2/3

rdin weight). Lint, which is commonly known as rui in Hindi. Lint is


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pressed and bound in a bale form. Each bale weighs around 165-170 kg each. Bale

cotton is the raw material for making cotton yarn or thread, which is further woven

to make fabrics.

Global Scenario

y The world cotton area and production are estimated at around 30-31 millionhectares and 20 million tons respectively.

y The biggest cultivators of cotton are America, India, China, Egypt, Pakistan,Sudan and Eastern Europe, with China, US and India being the three largest

producers of cotton.

y US has a considerable share in world exports. India and China both fall short oftheir domestic requirement and are net importers.

y Among the consumers China leads the way being followed by India, Pakistan, USand Turkey.

World Cotton Supply And Distribution

World Cotton Production and Consumption Million Bales

Year Beginning August 1 2005-06 2006-07 2007-08 2008-09 2009-10

Production 24.97 26.74 26.17 23.5 23.5

Consumption 24.91 26.64 26.13 23.0 23.4

Exports 9.76 8.12 8.36 6.2 6.5

Ending Stocks 12.70 12.70 12.35 12.9 12.9

Cotlook A Index 56.15 59.15 72.90 60 56

Indian Scenario

y The northern region of India is the primary producer of short and medium staplecotton, while the southern states primarily grow long staples. The central region

grows long and medium staples.y India with an annual production of 30 million bales (1 bale=170 kg) is the Worlds

second largest cotton producer. India also has the largest area under cotton. India

produces around 20% of the worlds cotton from 25% of the area.

y Despite having the largest area under cotton in the world, India ranks third inworld output of cotton due to its abysmally low average yield of 550 kg against a

world average of 787 kg per hectare.

y Although cotton is cultivated in almost all the states in the country, the 9 states ofMaharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Punjab, Haryana,

Rajasthan, Tamil Nadu and Karnataka account for more than 95% of the area

under and output.y In India cotton is sown during March to September and harvested during

September to April. The peak marketing season for the crop is during November to

March. Indian textile and apparel industry is one of the largest in the world with

US$ 19 billion of export and US$ 30 billion of domestic textile and apparel during

2006-07 (P). It accounts for nearly 14% of the total national industrial production,

4% of the GDP contribution. It provides direct employment to about 35 million


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people and another 56 million are engaged in allied activities. Cotton is the most

important raw material for textile industry.

y Cotton accounts for more than 75% of the total fibre that is converted into yarn bythe spinning mills in India and 58% of the total textile fabric materials produced in

the country.

Crude Oil


y Crude oil is a mixture of hydrocarbons that exists in a liquid phase in naturalunderground reservoirs. Oil and gas account for about 60 per cent of the total

worlds primary energy consumption.

y Almost all industries including agriculture are dependent on oil in one way orother. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides,

paints, perfumes, etc. are largely and directly affected by the oil prices.

y Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil,residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke,

asphalt and other products are obtained from the processing of crude and other

hydrocarbon compounds.

y The prices of crude are highly volatile. High oil prices lead to inflation that in turnincreases input costs; reduces non-oil demand and lower investment in net oil

importing countries.

Categories of Crude oil

y West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is39.6 degrees (making it a light crude oil), and it contains only about 0.24 percent

of sulphur (making a sweet crude oil). WTI is generally priced at about a $2-4

per-barrel premium to OPEC Basket price and about $1-2 per barrel premium to

Brent, although on a daily basis the pricing relationships between these can very

greatly.

y Brent Crude Oil stands as a benchmark for Europe.y India is very much reliant on oil from the Middle East (High Sulphur). The OPEC

has identified China & India as their main buyers of oil in Asia for several years to

come.

Crude Oil Units (average gravity)

y 1 US barrel = 42 US gallons.y 1 US barrel = 158.98 litres.y 1 tonne = 7.33 barrels .y 1 short ton = 6.65 barrels .y Note: barrels per one vary from origin to origin.

Global Scenario

y Oil accounts for 40 per cent of the worlds total energy demand.


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y The world consumes about 76 million bbl/day of oil.y United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan

(5.4 million bbl/d) are the top oil consuming countries.

y Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002),of which OPEC was 112 billion tones.

OPEC fact sheet

OPEC stands for Organization of Petroleum Exporting Countries. It is an organization of

eleven developing countries that are heavily dependent on oil revenues as their main

source of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,

Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

y OPEC controls almost 40 percent of the worlds crude oil.y It accounts for about 75 per cent of the worlds proven oil reserves.y Its exports represent 55 per cent of the oil traded internationally.

Indian Scenario

y India ranks among the top 10 largest oil-consuming countries.y Oil accounts for about 30 per cent of Indias total energy consumption. The

countrys total oil consumption is about 2.2 million barrels per day. India imports

about 70 per cent of its total oil consumption and it makes no exports.

y India faces a large supply deficit, as domestic oil production is unlikely to keeppace with demand. Indias rough production was only 0.8 million barrels per day.

y The oil reserves of the country (about 5.4 billion barrels) are located primarily inMumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.

y Balance recoverable reserve was about 733 million tones (in 2003) of whichoffshore was 394 million tones and on shore was 339 million tones.

y India had a total of 2.1 million barrels per day in refining capacity.y Government has permitted foreign participation in oil exploration, an activity

restricted earlier to state owned entities.

y Indian government in 2002 officially ended the Administered Pricing Mechanism(APM). Now crude price is having a high correlation with the international market

price. As on date, even the prices of crude bi-products are allowed to vary +/- 10%

keeping in line with international crude price, subject to certain government laid

down norms/ formulae.

y Disinvestment/restructuring of public sector units and complete deregulation oIndian retail petroleum products sector is under way.

Prevailing Duties & Levies on Crude Oil

Particulars Rates

Basic Customs Duty 10%

Cess Rs.1800 per metric tonne


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NCCD* Rs.50 per metric tonne

Education cess 2%

Octroi 3%

War fedge Rs.57 per metric tonne

Market Influencing Factors

y OPEC output and supply.y Terrorism, Weather/storms, War and any other unforeseen geopolitical factors that

causes supply disruptions.

y Global demand particularly from emerging nations.y Dollar fluctuations.y DOE / API imports and stocks.y Refinery fires & funds buying.

Copper

Characteristics Of Copper

y Copper ranks third in world metal consumption after steel and aluminum. It isa product whose fortunes directly reflect the state of the worlds economy.

y Copper is the best non-precious metal conductor of electricity. The metalsexceptional strength, ductility, and resistance to creeping and corrosion, makes it

the preferred and safest conductor for building wiring. Copper is also used in

power cables, either insulated or un insulated, for high, medium and low voltage

applications. Copper is an essential component of energy efficient motors and

transformers and automobiles.

Supply and Demand

Global Scenarioy Economic, technological and societal factors influence the supply and demand of

copper. As societys need for copper increases, new mines and plants are

introduced and existing ones expanded.

y Land-based resources are estimated at 1.6 billion tons of copper, and resources indeep-sea nodules are estimated at 0.7 billion tons.

y The global production of refined copper is around 15 million tons.y The major copper-consuming nations are Western Europe (28.5%), the United

States (19.1%), Japan (14%), and China (5.3%).

y Copper and copper alloy scrap composes a significant share of the worlds supply.y The largest international sources for scrap are the United States and Europe. Chile,

Indonesia, Canada and Australia are the major exporters and Japan, Spain, China,

Germany and Philippines are the major importers.

Indian Scenario

y The size of Indian Copper Industry is around 4 lakh tons, which as percentage ofworld copper market is 3 %.


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y Birla Copper, Sterilite Industries are two major private producers and HindustanCopper Ltd the public sector producers.

y India is emerging as net exporter of copper from the status of net importer onaccount of rise in production by three companies.

y Copper goes into various usages such as Building, Cabling for power andtelecommunications, Automobiles etc. Two major states owned

telecommunications service providers; BSNL and MTNL consume 10% of

countrys copper production. Growth in the building construction and automobile

sector would keep demand of copper high.

Silver


y Silvers unique properties make it a very useful Industrial Commodity, despite itbeing classed as a precious metal.

y Demand for silver is built on three main pillars; industrial uses, photography andJewellery & silverware accounting for 342, 205 and 259 million ounces

respectively in 2002.

y Just over half of mined silver comes from Mexico, Peru and United States,respectively, the first, second and fourth largest producing countries. The third

largest is Australia.

y Primary mines produce about 27 percent of world silver, while around 73 percentcomes as a by-product of gold, copper, lead, and zinc mining.

y The price of silver is not only a function of its primary output but more a functionof the price of other metals also, as world mine production is more a function of

the prices of other metals.

y The tie between silver and economic activity is strong, given that around two-thirds of total silver fabrication is in the industrial and photographic sectors.

y Often a faster growth in demand against supply leads to drop in stocks withgovernment and investors.

y Economically viable primary silver mine is a function of the world silver pricelevel.

World Silver Supply from Above-ground Stocks

Million Ounces

2001 2002

Implied Net Disinvestment -9.5 20.9

Producer Hedging 18.9 -24.8

Net Government Sales 87.2 71.3Sub-total Bullion 96.6 67.4

Scrap 182.7 184.9

Total 279.3 252.3

Indian Scenario

y Silver imports into India for domestic consumption in 2002 was 3,400 tons down


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25 % from record 4,540 tons in 2001.

y Open General License (OGL) imports are the only significant source of supply tothe Indian market.

y Non-duty paid silver for the export sector rose sharply in 2002, up by close to200% year-on-year to 150 tons.

y Around 50% of Indias silver requirements last year were met through imports ofChinese silver and other important sources of supply being UK, CIS, Australia and

Dubai.

y Indian industrial demand in 2002 is estimated at 1375 tons down by 13 % from1,579 tons in 2001. In spite of this fall, India is still one of the largest users of

silver in the world, ranking alongside Industrial giants like Japan and the United

States.

y By contrast with United States and Japan, Indian industrial off take for fabricationin 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 Jewellery and silverware and jari.

y In India silver price volatility is also an important determinant of silver demand asit is for gold.


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Commodity Derivatives Market in India: Development, Regulation and

Future Prospects

Organized commodity derivatives in India started as early as 1875, barely about a decade after

they started in Chicago. However, many feared that derivatives fuelled unnecessary

speculation and were detrimental to the healthy functioning of the markets for the underlying

commodities. As a result, after independence, commodity options trading and cash settlementof commodity futures were banned in 1952. A further blow came in 1960s when, following

several years of severe draughts that forced many farmers to default on forward contracts (and

even caused some suicides), forward trading was banned in many commodities considered

primary or essential. Consequently, the commodities derivative markets dismantled and

remained dormant for about four decades until the new millennium when the Government, in a

complete change in policy, started actively encouraging the commodity derivatives market.

Since 2002, the commodities futures market in India has experienced an unprecedented boom

in terms of the number of modern exchanges, number of commodities allowed for derivatives

trading as well as the value of futures trading in commodities, which might cross the $ 1

Trillion mark in 2006. However, there are several impediments to be overcome and issues to be decided for sustainable development of the market. After Independence, the Parliament

passed Forward Contracts (Regulation) Act, 1952 which regulated forward contracts in

commodities all over India. The Act applies to goods, which are defined as any movable

property other than security, currency and actionable claims. The Act prohibited options

trading in goods along with cash settlements of forward trades, rendering a crushing blow to

the commodity derivatives market. Under the Act, only those associations/exchanges, which

are granted recognition by the Government, are allowed to organize forward trading in

regulated commodities. The Act envisages three-tier regulation: (i) The Exchange which

organizes forward trading in commodities can regulate trading on a day-to-day basis; (ii) the

Forward Markets Commission provides regulatory oversight under the powers delegated to it

by the central Government, and (iii) the Central Government Department of Consumer

Affairs, Ministry of Consumer Affairs, Food and Public Distribution is the ultimate

regulatory authority. The already shaken commodity derivatives market got a crushing blow

when in 1960s, following several years of severe draughts that forced many farmers to default

on forward contracts (and even caused some suicides), forward trading was banned in many

commodities considered primary or essential. As a result, commodities derivative markets

dismantled and went underground where to some extent they continued as OTC contracts at

negligible volumes. Much later, in 1970s and 1980s the Government relaxed forward trading

rules for some commodities, but the market could never regain the lost volumes.

Change in Government PolicyAfter the Indian economy embarked upon the process of liberalization and globalization in

1990, the Government set up a Committee in 1993 to examine the role of futures trading. The

Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17

commodity groups. It also recommended strengthening of the Forward Markets Commission,

and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing

options trading in goods and registration of brokers with Forward Markets Commission. The


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Government accepted most of these recommendations and futures trading were permitted in all

recommended commodities. Commodity futures trading in India remained in a state of

hibernation for nearly four decades, mainly due to doubts about the benefits of derivatives.

Finally a realization that derivatives do perform a role in risk management led the government

to change its stance. The policy changes favoring commodity derivatives were also facilitated

by the enhanced role assigned to free market forces under the new liberalization policy of the

Government.

Unresolved Issues and Future Prospects

Even though the commodity derivatives market has made good progress in the last few years,

the real issues facing the future of the market have not been resolved. Agreed, the number of

commodities allowed for derivative trading have increased, the volume and the value of

business has zoomed, but the objectives of setting up commodity derivative exchanges may not

be achieved and the growth rates witnessed may not be sustainable unless these real issues are

sorted out as soon as possible. Some of the main unresolved issues are discussed below.

Commodity Options

Trading in commodity options contracts has been banned since 1952. The market for

commodity derivatives cannot be called complete without the presence of this important

derivative. Both futures and options are necessary for the healthy growth of the market. While

futures contracts help a participant (say a farmer) to hedge against downside price movements,

it does not allow him to reap the benefits of an increase in prices. No doubt there is an

immediate need to bring about the necessary legal and regulatory changes to introduce

commodity options trading in the country. The matter is said to be under the active

consideration of the Government and the options trading may be introduced in the near future.

The Warehousing and Standardization

For commodity derivatives market to work efficiently, it is necessary to have a sophisticated,

cost-effective, reliable and convenient warehousing system in the country. The Habibullah

(2003) task force admitted, A sophisticated warehousing industry has yet to come about.

Further, independent labs or quality testing centers should be set up in each region to certify

the quality, grade and quantity of commodities so that they are appropriately standardized and

there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses

also need to be conveniently located. Central Warehousing Corporation of India (CWC:

www.fieo.com) is operating 500Warehouses across the country with a storage capacity of 10.4

million tones. This is obviously not adequate for a vast country. To resolve the problem, a

Gramin Bhandaran Yojana (Rural Warehousing Plan) has been introduced to construct new

and expand the existing rural godowns. Large scale privatization of state warehouses is also

being examined.

Cash versus Physical Settlement

It is probably due to the inefficiencies in the present warehousing system that only about 1%

to 5% of the total commodity derivatives trades in the country are settled in physical delivery.

Therefore the warehousing problem obviously has to be handled on a war footing, as a good

delivery system is the backbone of any commodity trade. A particularly difficult problem in

cash settlement of commodity derivative contracts is that at present, under the Forward


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Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not

allowed. In other words, all outstanding contracts at maturity should be settled in physical

delivery. To avoid this, participants square off their positions before maturity. So, in practice,

most contracts are settled in cash but before maturity. There is a need to modify the law to

bring it closer to the widespread practice and save the participants from unnecessary hassles.

The Regulator

As the market activity pick-up and the volumes rise, the market will definitely need a strong

and independent regular; similar to the Securities and Exchange Board of India (SEBI) that

regulates the securities markets. Unlike SEBI which is an independent body, the Forwards

Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of

Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative

that the Government should grant more powers to the FMC to ensure an orderly development

of the commodity markets. The SEBI and FMC also need to work closely with each other due

to the inter-relationship between the two markets.

Lack of Economy of Scale

There are too many (3 national level and 21 regional) commodity exchanges. Though over 80commodities are allowed for derivatives trading, in practice derivatives are popular for only a

few commodities. Again, most of the trade takes place only on a few exchanges. All this splits

volumes and makes some exchanges unviable. This problem can possibly be addressed by

consolidating some exchanges. Also, the question of convergence of securities and

commodities derivatives markets has been debated for a long time now. The Government of

India has announced its intention to integrate the two markets. It is felt that convergence of

these derivative markets would bring in economies of scale and scope without having to

duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It

would also help in resolving some of the issues concerning regulation of the derivative

markets. However, this would necessitate complete coordination among various regulatingauthorities such as Reserve Bank of India, Forward Markets commission, the Securities and

Exchange Board of India, and the Department of Company affairs etc.

Tax and Legal bottlenecks

There are at present restrictions on the movement of certain goods from one state to another.

These need to be removed so that a truly national market could develop for commodities and

derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales

taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly

implemented by all states.

Recent Inflationary Trends in World Commodities Markets

World economy featured recently robust real economic growth, averaging about 4.5-5.5

percent per year during 200307. However, inflationary pressures re-emerged. Commodities

markets experienced highest inflation rates in post-war period with all commodities price index

increasing at 23 percent per year during 200307.2 Crude oil prices hit US$119/barrel in April

2008 and might accelerate to dramatic levels. Parallel to commodities markets, real estate

markets experienced phenomenal speculative price increases. In the same vein, the exchange


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rate of the U.S. dollar has depreciated considerably during 200208, plummeting to US$1.6

per Euro in April 2008, and might fall further. Financial markets face high uncertainty

stemming from rising inflationary expectations, credit risks, and depreciating currencies.

Moreover, many vulnerable countries were recently shaken by food riots and may face

alarming food crisis arising from exorbitant food prices. The strong economic growth and

accompanying inflationary trends were brought about by overly expansionary monetary

policies in leading industrial countries, particularly during 200204, with central banks forcing

interest rates to record low, and in some instances, nearing the zero bound. Credit to economy

has expanded at fast pace in many countries, including major industrial countries, at the

expense of creditworthiness and credit quality, contributing to rapid increase in aggregate

demand for real assets, goods and services. Credit expansion contributed to high speculation in

many assets and commodities markets. While there is no bound to expanding demand for

goods and services through credit expansion and unlimited money creation, supply of these

goods is, however, constrained by fixed factors, such as cultivable land or existing plants,

climatic conditions, availability of oil and other raw materials, entrepreneurship, and may not

follow the expansion of demand; excess demand results in high pressure on prices. Most

striking, consumer price indices (CPIs) in many industrial countries, a leading indicator for the

conduct of monetary policy, were not sensitive to high increases in commodities or housing

prices. In spite of fast rise in housing, energy, and food prices, CPIs continued to show small

increase, by about 23 percent in industrial countries during 200307, indicating puzzling price

stability and almost no inflation. Such was not the case during the seventies, when CPIs were

highly sensitive to oil shocks and rapid increase in energy prices. Insensitivity of CPIs to

commodities prices and to low nominal interest rates may lead policymakers to downplay the

risk of inflation while there is ongoing abnormally high asset and commodities price inflation.

With monetary policy remaining accommodative and real interest rates being eroded by

inflation, commodities price inflationary trends might not subside. Acceleration of inflation

rates will certainly slowdown economic growth, and will aggravate financial instability by

eroding rapidly real value of financial assets, and deteriorating the quality of loans. Thefinancial crisis in the subprime market could be easily traced to lax monetary policy and could

have serious financial and economic implications. Similar financial crisis can be easily

predicted in future as a consequence of overly expansionary monetary policy. Accelerating

inflation may disrupt commodities supplies, and, as seen recently, may cause widespread food

riots. To bring inflationary trends under control, central banks will have to strictly reduce

money supply as strongly prescribed by Friedman and proponents of the quantity theory of

money.3 Such policy will imply significant temporary increase in interest rates and will

necessarily cause recession and major debt crisis, owing to monumental outstanding loans

accumulated during monetary expansion and low creditworthiness, as reflected recently by the

subprime market; its merit, however, would be to extricate inflationary dynamics. Monetaryauthorities will face political conflicts stemming from debtors pressure to keep inflating the

economy in order to increase their wealth and lower their debt burden, and public pressure to

rein inflation, considered as public enemy number one, and avoid its severe economic and

financial dislocation.4 Commodities prices, along other asset prices, such us exchange rates,

are instantly and accurately observed. Their evolution, along other indicators, should be fully


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taken into account for sound policy making and stable world economy growth. Neglecting

information from commodities prices may lead to maintaining unsustainable monetary policies


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CHAPTER -3

RESEARCH METHODOLOGY

Exploratory research design is used to determine the effect of the recession on commodity

price movement as well as on commodity market. One of the most important users of research

methodology is that it helps in identifying the problem, collecting, analyzing the required

information data and providing an alternative solution to the problem.

Data Collection

Data used in the study is secondary data. The secondary data has been collected through

various journals, magazines, news papers and websites. Important sites of data collection are

MCX website, SEBI website, NCDEX website, Zen money website, Money control, London

commodity market, Index mundi website and many more.

Data is divided into three parts

Pre recession period data from December 2006 to November 2007. Recession period data from December 2007 to February 2009. Post recession period data from March 2009 to November 2009.

Four commodities are used for study purpose:

Gold Crude oil Aluminium Copper

Three sets of data have been collected Commodity price movement in that period Traded value of commodity in MCX. Traded volume of commodity in MCX.

Analysis

Microsoft excel is used for the trend analysis purpose. The study is done with the help of line

graphs.

Limitations of the study

Data for only a short period is taken that is for three years. Research is based only on secondary data.


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CHAPTER 4

DATA ANALYSIS AND INTERPRETATION


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DATA ANALYSIS AND INTERPRETATION

Crude oil

Crude oil price movement

Crude Oil (petroleum) Monthly Price

Commodity Prices

Month Value

Dec-06 61

Jan-07 53.4

Feb-07 57.58

Mar-07 60.6

Apr-07 65.1

May-07 65.1

Jun-07 68.19

Jul-07 73.67

Aug-07 70.13

Sep-07 76.91Oct-07 82.15

Nov-07 91.27

Dec-07 89.43

Jan-08 90.82

Feb-08 93.75

Mar-08 101.84

Apr-08 109.05

May-08 122.77

Jun-08 131.52

Jul-08 132.55

Aug-08 114.57

Sep-08 99.29

Oct-08 72.69

Nov-08 54.04

Dec-08 41.53

Jan-09 43.91

Feb-09 41.76

Mar-09 46.95

Apr-09 50.28

May-09 58.1

Jun-09 69.13Jul-09 64.65

Aug-09 71.63

Sep-09 68.38

Oct-09 74.08

Nov-09 77.56


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Interpretation

From the graph it is clear that, crude oil price increased during recession period. In post

recession period it decreased and then attained nearly a less fluctuating level in the last half of

year 2009.

Crude oil traded value

Month Value (Rs. In

Lakhs)

Dec-06 1640493

Jan-07 2529212

Feb-07 2730830

Mar-07 3325370

Apr-07 2538790

May-07 2444850

Jun-07 2791854

Jul-07 3512485

Aug-07 4071387

Sep-07 3176323

Oct-07 4684781

Nov-075

154

108

Dec-07 5153277

Jan-08 4671822

Feb-08 4468045

Mar-08 5275426

Apr-08 5446577

May-08 9230304


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Jun-08 11287931

Jul-08 10822279

Aug-08 7502892

Sep-08 8953859

Oct-08 6138823

Nov-08 5377675

Dec-08 6771616

Jan-09 7938402

Feb-09 6849426

Mar-09 10782771

Apr-09 9238346

May-09 9712547

Jun-09 11477869

Jul-09 12887544

Aug-09 11608057

Sep-09 9671082

Oct-09 10850630

Nov-09 10801599

Interpretation

Crude oil traded value in the market in last three years was continuously fluctuating. Butduring recession period it was severely affected. During the period Jun 2008 to February, 2009,

it decreased continuously.


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Interpretation

Crude oil traded volume was not affected by recession. It grow slowly but constantly during

recession period also.

Gold price movement

months gold price per ounce

Dec-06 629.79

Jan-07 631.17

Feb-07 664.75

Mar-07 654.9

Apr-07 679.37May-07 666.86

Jun-07 655.49

Jul-07 665.3

Aug-07 665.41

Sep-07 712.65

Oct-07 754.6

Nov-07 806.25

Dec-07 803.2

Jan-08 889.6

Feb-08 922.3

Mar-08 968.43

Apr-08 909.7

May-08 888.66

Jun-08 889.49

Jul-08 939.77

Aug-08 839.02


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Sep-08 829.93

Oct-08 806.62

Nov-08 760.86

Dec-08 816.09

Jan-09 858.69

Feb-09 943.16

Mar-09 924.2

Apr-09 890.66

May-09 928.64

Jun-09 945.67

Jul-09 934.23

Aug-09 949.38

Sep-09 996.59

Oct-09 1043.16

Nov-09 1127.04

Interpretation

Gold prices had not been affected by the recession. Even in recession period also they were

continuously increasing.

Gold traded value

Goldtradedvalue

Month Value(Rs. In Lakhs)

Dec-06 4680552

Jan-07 5460044

Feb-07 6032850

Mar-07 6659343


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Apr-07 4253189

May-07 5192200

Jun-07 4532595

Jul-07 4660228

Aug-07 4095761

Sep-07 5633572

Oct-07 8034309

Nov-07 10026539

Dec-07 7397031

Jan-08 15979120

Feb-08 13659712

Mar-08 13303710

Apr-08 9783637

May-08 10057080

Jun-08 12407210

Jul-08 18939267

Aug-08 15149049

Sep-08 19956929Oct-08 15051936

Nov-08 12313028

Dec-08 14873513

Jan-09 18612360

Feb-09 20429157

Mar-09 24137358

Apr-09 13914323

May-09 13139779

Jun-09 12430826

Jul-09 10072292

Aug-09 8105615

Sep-09 12607367

Oct-09 12519294

Nov-09 17474644


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Oct-08 1181828

Nov-08 1018935

Dec-08 1158620

Jan-09 1381281

Feb-09 1369977

Mar-09 1582115

Apr-09 962913

May-09 903509

Jun-09 849566

Jul-09 685993

Aug-09 543199

Sep-09 803479

Oct-09 789597

Nov-09 1021794

Interpretation

Gold trade volume also shows severe fluctuation in the recession period. These fluctuations are

very high in comparison to pre and post recession era.

Copper price movement

Copper, grade A cathode Monthly Price Commodity PricesMonth Value

Dec-06 6,680.97

Jan-07 5,689.34

Feb-07 5,718.15

Mar-07 6,465.30

Apr-07 7,753.34


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May-07 7,677.95

Jun-07 7,514.24

Jul-07 7,980.93

Aug-07 7,500.21

Sep-07 7,671.35

Oct-07 8,020.59

Nov-07 6,957.43

Dec-07 6,630.74

Jan-08 7,078.91

Feb-08 7,941.14

Mar-08 8,434.32

Apr-08 8,714.18

May-08 8,356.13

Jun-08 8,292.00

Jul-08 8,407.02

Aug-08 7,633.80

Sep-08 6,975.11

Oct-08 4,894.89Nov-08 3,729.19

Dec-08 3,105.10

Jan-09 3,260.36

Feb-09 3,328.41

Mar-09 3,770.88

Apr-09 4,436.93

May-09 4,594.90

Jun-09 5,013.30

Jul-09 5,240.83

Aug-09 6,176.88

Sep-09 6,195.75

Oct-09 6,305.99

Nov-09 6,682.44


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Interpretation

Copper prices increased during recession period. After that they decreased in post recession

period.

Copper traded value

copper traded value


Dec-06 1941185

Jan-07 3109797

Feb-07 3145449

Mar-07 3682018Apr-07 5188834

May-07 5253177

Jun-07 4903242

Jul-07 3906874

Aug-07 4457746

Sep-07 3075008

Oct-07 3207587

Nov-07 3175309

Dec-07 2433187

Jan-08 3576213

Feb-08 4312335

Mar-08 3387137

Apr-08 3551767

May-08 3098724

Jun-08 2682308

Jul-08 3236470


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Aug-08 2988560

Sep-08 3291336

Oct-08 4018916

Nov-08 3495672

Dec-08 2388656

Jan-09 3479377

Feb-09 3106712

Mar-09 4247624

Apr-09 6053345

May-09 6042842

Jun-09 7611567

Jul-09 7502574

Aug-09 9371734

Sep-09 7741091

Oct-09 6855829

Nov-09 6687494

Interpretation

Copper traded value decreased during recession period. February 2008 to august 2008, shows

heavy decline in traded value of copper.

Copper traded value

COPPER TRADED VOLUME

Month Quantity(In 000s Kgms)

Dec-06 636579

Jan-07 1205754

Feb-07 1223224

Mar-07 1280007


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Interpretation

Traded volume of the copper in commodity market also declined in recession period. It again

increased in the second half of the year 2009, which is in post recession period.

Aluminium price movement

Aluminum Monthly Price Commodity Prices

Month Value

Dec-06 2,823.67

Jan-07 2,799.06

Feb-07 2,839.05

Mar-07 2,757.08

Apr-07 2,817.05

May-07 2,804.61

Jun-07 2,681.31

Jul-07 2,738.09

Aug-07 2,512.60

Sep-07 2,394.96

Oct-07 2,444.53

Nov-07 2,507.15

Dec-07 2,382.83

Jan-08 2,456.13

Feb-08 2,784.89

Mar-08

3

,012

.05

Apr-08 2,968.03

May-08 2,908.28

Jun-08 2,967.87

Jul-08 3,067.46

Aug-08 2,762.56

Sep-08 2,524.15


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Oct-08 2,122.03

Nov-08 1,857.13

Dec-08 1,504.42

Jan-09 1,420.36

Feb-09 1,338.06

Mar-09 1,338.08

Apr-09 1,431.81

May-09 1,464.42

Jun-09 1,586.34

Jul-09 1,674.33

Aug-09 1,927.64

Sep-09 1,835.60

Oct-09 1,875.66

Nov-09 1,956.55

Interpretation

The effect of recession on aluminium price movement is not very much clear. The price

increased in the beginning of the recession that is from December 2007 to August 2008. After

that price declined, even in recession period also.

Aluminum Traded value

Aluminiumtradedvalue


Dec-06 40687.59

Jan-07 61318.54

Feb-07 76538

Mar-07 182755.6

Apr-07 66965.74


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May-07 76146.14

Jun-07 54846.54

Jul-07 33742.67

Aug-07 29986.36

Sep-07 43924.31

Oct-07 41902.21

Nov-07 28000.55

Dec-07 10941.87

Jan-08 46541.1

Feb-08 70600.64

Mar-08 84508.58

Apr-08 25307.66

May-08 42332.84

Jun-08 34271.16

Jul-08 105884.1

Aug-08 41504.24

Sep-08 38458.57

Oct-08 26694.17Nov-08 26175.94

Dec-08 45653.98

Jan-09 45683.56

Feb-09 30122.09

Mar-09 43722.28

Apr-09 70063.12

May-09 71753.49

Jun-09 263663

Jul-09 276706.8

Aug-09 592556.5

Sep-09 322638.7

Oct-09 295053.1

Nov-09 207078.8


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Interpretation

In pre recession and recession period, the trading value of the Aluminium is very low. But it

increased extensively in post recession period. The effect of recession on Aluminium traded

value is not so much clear.

Aluminum tr

swati final report

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