Get Education for Commodity Market

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

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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