Commodity Market Overview & Prospects of Arbitrage
WHAT COMPRISES COMMODITY MARKET? Commodity marketsPrecious Other Metals Metals Agriculture Power
CONCEPT Commodity futures are tool used to hedgethe price risk of underlying commodity. Helps in price discovery of underlyingcommodity Helps in stabilizing the price ofcommodity for longer term.
Reduce the price disparity over twogeographical locations and bridge thedemand/supply position over twolocations and manage the regionaldistortion Bring out the information about thecommodity indicating the price trend.
CURRENT ISSUES FOR GROWTH OF MARKET Lack of education and awareness ofexchange amongst the marks of Investors,Traders (resulting low liquidity) Low participation of Indian Corporate(Again due to the above) Common delivery system for all exchangein demat form, which would ensureautomatically the product standards
Delay in formations of Regulation forInstitutional Investor, which are inpipeline. The differential Sales Tax & Local Taxrequires an early introduction of Valueadded Tax System. The delivery center of commodityshould be in multiple locations as presentlyin one location for one product inmost of commodities.
COMMODITY MARKET IN INDIAN SCENARIOBullion 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 3 time 5 time trade multiple multiple (Rs. in bn) (Rs. in bn) (Rs. in bn)Bullion 400 1,200 2,000Metals 600 1,800 3,000Agriculture 5,000 15,000 25,000Energy 5,000 15,000 25,000Total 11,000 33,000 55,000
ADVANTAGE THE ORGANIZED SECTOR OFFERS Facilitate high quality intermediation Foster professionalism and transparency Nation-wide reach and consistent offering Provide impetus to commodity marketand generate higher volumes
Inculcate international best practices Demutualisation Technology platforms Information dissemination without noise Low cost solutions
FUTURE PROSPECTS The prospect of commodity exchange inIndia store a bundle of opportunities interm of following: In term of volume, as many of marketplayer would tend to participate for theirask management which would ensureliquidity for the lines to come.
FUTURE PROSPECTS contd. Since the exchange would play like anationwide common market, it wouldreduce the dis-equilibrium ofprice/demand supply Creation of employment opportunities. The participation of institutionalInvestor, like Files, Mutual Funds, wouldwith distinct emails and provide furtherdepth to the market.
V o lu m e o f E x is t in g E x c h a n g e sCommodity Exchange Products Approx Annual Vol. (Rs. Crore)NBoT, Indore Soya, Mustard 80,000NMCE, Ahmedabad Multiple 40,000Ahmedabad Commodity Exch. Castor, Cotton seed 3,500Rajdhani Oil & OilSeeds Mustard 3,500Vijai Beopar Ch., Gur 2,500MuzzaffarnagarRajkot Seeds Oil & Bullion Castor, Groundnut 2,500IPSTA, Cochin Pepper 2,500Chamber of Commerce, Hapur Gur, Mustard 2,500Bhatinda Om and Oil & Gur 1,500OilseedsOthers (mostly inactive) 1,500TOTAL 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 in perception of differentinvestors; Demand and supply over market or overlocation Market inefficiency
ADVANTAGES OF ARBITRAGE Reduces market inefficiency Provide liquidity to the market Act like a market equalizer tool Ensure risk free profit