Commodity Market Overview & Prospects of Arbitrage
WHAT COMPRISES COMMODITY MARKET?
Commodity markets Precious Metals Agriculture
Other Metals Power
CONCEPT Commodity futures are tool used to hedge the price risk of underlying commodity. Helps in price discovery of underlying commodity Helps in stabilizing commodity for longer term.
the
price
of
Reduce the price disparity over two geographical locations and bridge the demand/supply position over two locations and manage the regional distortion Bring out the information about the commodity indicating the price trend.
CURRENT ISSUES FOR GROWTH OF MARKET Lack of education and awareness of exchange amongst the marks of Investors, Traders (resulting low liquidity) Low participation of Indian Corporate (Again due to the above) Common delivery system for all exchange in demat form, which would ensure automatically the product standards
Delay in formations of Regulation for Institutional Investor, which are in pipeline. The differential Sales Tax & Local Tax requires an early introduction of Value added Tax System. The delivery center of commodity should be in multiple locations as presently in one location for one product in most of commodities.
COMMODITY MARKET IN INDIAN SCENARIO Bullion Market Largest consumer (Rs. 400 bn) – traditional form of investment Large stock of unaccounted metal Skills in hand made jewellery Potential Use it as monetary unit to boost rural economy Effective instrument for investment diversification Boost jewellery exports Impediments Differences in sales tax, octroi & stamp duty among states Lack of good assaying practices – difficult to liquidate Little avenue to hedge price risk of jewellery exporters
Other metals Market Indian Production (Al, Cu & steel) – Rs. 600 bn Largest exporter of iron ore and alumina Large importer of copper Current trade by negotiation / price setting by producers Potential Increased scope for aluminum & steel exports (as against alumina and iron ore) Stable metal prices can fuel boom in downstream industries Rival China as preferred manufacturing location Growth in manufacturing to equal that in services Impediments No organised exchange in India – price discovery difficult
Significant PSU participation
Agriculture Market Agricultural share in GDP – 26% (Rs. 5000 bn) Large producer of cotton, cereals, sugar, fruits, spices etc Current exports of about USD 4 bn Specific commodity based exchanges – not very successful Potential Diverse gene pool and climatic conditions Increase in agricultural exports – sugar, cereals Increase in processed foods production & consumption Impediments Restrictions on inter state movement Poor transport & warehousing – 30% wastage in cereals Member controlled exchanges – transparency issues
Power Market Large requirement and trading in Power units Exports and imports of excessive units. Specific commodity based exchanges – not very successful Potential Diverse climatic conditions Increase in demand. Increase in disinvestments among PSU’s involved in trading. Impediments Restrictions on inter state movement Poor transport mechanism No organised exchange in India – price discovery difficult
Significant PSU participation
Trade Potential Physical trade (Rs. in bn)
3 time 5 time multiple multiple (Rs. in bn) (Rs. in bn)
Bullion
400
1,200
2,000
Metals
600
1,800
3,000
Agriculture
5,000
15,000
25,000
Energy
5,000
15,000
25,000
11,000
33,000
55,000
Total
ADVANTAGE THE ORGANIZED SECTOR OFFERS Facilitate high quality intermediation Foster professionalism and transparency Nation-wide reach and consistent offering Provide impetus to commodity market and generate higher volumes
Inculcate international best practices Demutualisation Technology platforms Information dissemination without noise Low cost solutions
FUTURE PROSPECTS The prospect of commodity exchange in India store a bundle of opportunities in term of following: In term of volume, as many of market player would tend to participate for their ask management which would ensure liquidity for the lines to come.
FUTURE PROSPECTS contd. Since the exchange would play like a nationwide common market, it would reduce the dis-equilibrium of price/demand supply Creation of employment opportunities. The participation of institutional Investor, like Files, Mutual Funds, would with distinct emails and provide further depth to the market.
Volume of Existing Exchanges Commodity Exchange
NBoT, Indore NMCE, Ahmedabad Ahmedabad Commodity Exch. Rajdhani Oil & OilSeeds Vijai Beopar Ch., Muzzaffarnagar Rajkot Seeds Oil & Bullion IPSTA, Cochin Chamber of Commerce, Hapur Bhatinda Om and Oil & Oilseeds Others (mostly inactive) TOTAL
Products
Approx Annual Vol. (Rs. Crore)
Soya, Mustard
80,000
Multiple
40,000
Castor, Cotton seed
3,500
Mustard
3,500
Gur
2,500
Castor, Groundnut
2,500
Pepper
2,500
Gur, Mustard
2,500
Gur
1,500 1,500 140,000
ARBITRAGE IN COMMODITY EXCHANGE Arbitrage can be in the following ways: Cash (Spot market Vs. future market) Future Vs Future (Intra Exchange) Domestic Vs International.
WHY ARBITRAGE OPPORTUNITIES EXITS Different investors;
in
perception
of
different
Demand and supply over market or over location Market inefficiency
ADVANTAGES OF ARBITRAGE Reduces market inefficiency Provide liquidity to the market Act like a market equalizer tool Ensure risk free profit