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Project Report

  2. 2. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET1. INTRODUCTION“Organized futures markets in India are now 134 years old, with the first such organization –the Bombay Cotton Trade Association Ltd. – been set up in 1875. While India was graduallybecoming the largest consumer of gold in the world, a position it still enjoys, futuresmarkets in bullion were inevitable and began to emerge in Mumbai in 1920.”The vast geographical extent of India and her huge population is aptly complemented by thesize of her market. The broadest classification of the Indian Market can be made in terms ofthe commodity market and the bond market.The commodity market in India comprises of all palpable markets that we come across inour daily lives. Such markets are social institutions that facilitate exchange of goods formoney. The cost of goods is estimated in terms of domestic currency. India CommodityMarket can be subdivided into the following two categories: WHOLESALE MARKET RETAIL MARKETConsidering the present growth rate, the total valuation of the Indian Retail Market isestimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely tobecome four times by 2010 than what it was in 2009.1.1: Market:A market is conventionally defined as a place where buyers and sellers meet to exchangegoods or services for a consideration. This consideration is usually money. In an InformationTechnology-enabled environment, buyers and sellers from different locations can transactbusiness in an electronic marketplace. Hence the physical marketplace is not necessary forthe exchange of goods or services for a consideration. Electronic trading and settlement oftransactions has created a revolution in global financial and commodity markets. Page 2
  3. 3. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET1.2: Commodity:A commodity is a product that has commercial value, which can be produced, bought, sold,and consumed. Commodities are basically the products of the primary sector of aneconomy. The primary sector of an economy is concernedwith agriculture and extraction of raw materials such as metals, energy (crude oil, naturalgas), etc., which serve as basic inputs for the secondary sector of the economy.1.3: Commodity Exchange:A commodity exchange is an association or a company or any other body corporateorganizing futures trading in commodities for which license has been granted by regulatingauthority. Page 3
  4. 4. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET1.4: International Commodity Markets:Some of the exchanges of the world are: S. No. Global Commodity Exchanges 1 New York Mercantile Exchange (NYMEX) 2 London Metal Exchange (LME) 3 Chicago Board of Trade (CBOT) 4 New York Board of Trade (NYBOT) 5 Kansas Board of Trade 6 Winnipeg Commodity Exchange, Manitoba 7 Dalian Commodity Exchange, China 8 Bursa Malaysia Derivatives exchange 9 Singapore Commodity Exchange (SICOM) 10 Chicago Mercantile Exchange (CME), US 11 London Metal Exchange 12 Tokyo Commodity Exchange (TOCOM) 13 Shanghai Futures Exchange 14 Sydney Futures Exchange 15 London International Financial Futures and Options Exchange (LIFFE) 16 Dubai Gold & Commodity Exchange (DGCX) Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and 17 the New York Mercantile Exchange (NYMEX)) Page 4
  5. 5. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET2: INDIA AND COMMODITY MARKET2.1: History of Commodity Market in IndiaThe history of organized commodity derivatives in India goes back to the nineteenth centurywhen Cotton Trade Association started futures trading in 1875, about a decade after theystarted in Chicago. Over the time derivatives market developed in several commodities inIndia. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw juteand jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).However many feared that derivatives fuelled unnecessary speculation and weredetrimental to the healthy functioning of the market for the underlying commodities,resulting in to banning of commodity options trading and cash settlement of commoditiesfutures after independence in 1952. The parliament passed the Forward Contracts(Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The actprohibited options trading in Goods along with cash settlement of forward trades, renderinga crushing blow to the commodity derivatives market. Under the act only thoseassociations/exchanges, which are granted reorganization from the Government, areallowed to organize forward trading in regulated commodities.The act envisages three tire regulations: Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. Page 5
  6. 6. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETAfter Liberalization and Globalization in 1990, the Government set up a committee (1993) toexamine the role of futures trading. The Committee (headed by Prof. K.N. Kabra)recommended allowing futures trading in 17 commodity groups. It also recommendedstrengthening Forward Markets Commission, and certain amendments to Forward Contracts(Regulation) Act 1952, particularly allowing option trading in goods and registration ofbrokers with Forward Markets Commission. The Government accepted most of theserecommendations and futures‟ trading was permitted in all recommended commodities. Itis timely decision since internationally the commodity cycle is on upswing and the nextdecade being touched as the decade of Commodities. Commodity Exchange Market in India plays an important role where the prices ofany commodity are not fixed, in an organized way.2.2: Present Commodity Market in IndiaToday, commodity exchanges are purely speculative in nature. Before discovering the price,they reach to the producers, end-users, and even the retail investors, at a grassroots level. Itbrings a price transparency and risk management in the vital market. By Exchange rules andby law, no one can bid under a higher bid, and no one can offer to sell higher than someoneelse’s lower offer. That keeps the market as efficient as possible, and keeps the traders ontheir toes to make sure no one gets the purchase or sale before they do. Since 2002, thecommodities future market in India has experienced an unexpected boom in terms ofmodern exchanges, number of commodities allowed for derivatives trading as well as thevalue of futures trading in commodities, which crossed $ 1 trillion mark in 2006.In India there are 25 recognized future exchanges, of which there are four national levelmulti-commodity exchanges. After a gap of almost three decades, Government of India hasallowed forward transactions in commodities through Online Commodity Exchanges, amodification of traditional business known as Adhat and Vayda Vyapar to facilitate betterrisk coverage and delivery of commodities. Page 6
  7. 7. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETTHE FOUR EXCHANGES ARE:(i) National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai,(ii) Multi Commodity Exchange of India Limited (MCX) Mumbai and(iii) National Multi- Commodity Exchange of India Limited (NMCEIL) Ahmedabad.(iv) Indian Commodity Exchange Limited (ICEX), GurgaonThere are other regional commodity exchanges situated in different parts of India.2.3: Structure of Indian Commodity Market:National Exchanges• Compulsory online trading• Transparent trading• Exchanges to be de-mutualised• Exchange recognised on permanent basis• Multi commodity exchange• Large expanding volumes Page 7
  8. 8. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETRegional Exchanges• Online trading not compulsory• De-mutualisation not mandatory• Recognition given for fixed period after which it could be given for re-regulation• Generally, these are single commodity exchanges. Exchanges have to apply fortradingeach commodity.• Low volumes in niche marketsForward Markets Commission (FMC):-It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952.Commission consists of minimum two and maximum four members appointed by CentralGovt. Out of these members there is one nominated chairman. All the exchanges have beenset up under overall control of Forward Market Commission (FMC) of Government of India.NMCE (National Multi Commodity Exchange of India Ltd.)NMCE is the first demutualized electronic commodity exchange of India granted theNational exchange on Govt. of India and operational since 26th Nov, 2002. Promoters ofNMCE are, Central warehousing corporation (CWC), National Agricultural CooperativeMarketing Federation of India (NAFED), National Institute of Agricultural Marketing (NIAM)and Neptune Overseas Ltd. (NOL). Main equity holders are PNB. The Head Office of NMCE islocated in Ahmedabad. There are various commodity trades on NMCE Platform includingAgro and non-agro commodities.NCDEX (National Commodity & Derivatives Exchange Ltd.)NCDEX is a public limited co. incorporated on April 2003 under the Companies Act 1956, Itobtained its certificate for commencement of Business on May 9, 2003. It commenced itsoperational on Dec 15, 2003. Promoters shareholders are: Life Insurance Corporation ofIndia (LIC), National Bank for Agriculture and Rural Development (NABARD) and NationalStock Exchange of India (NSE) other shareholder of NCDEX are: Canara Bank, CRISIL limited,Goldman Sachs, Intercontinental Exchange (ICE), Indian farmers Fertilizer Corporation Ltd(IFFCO) and Punjab National Bank (PNB). NCDEX is located in Mumbai and currentlyfacilitates trading in 57 commodities mainly in Agro product. Page 8
  9. 9. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETMCX (Multi Commodity Exchange of India Ltd.)Headquartered in Mumbai, MCX is a demutualised nationwide electronic commodity futureexchange. Set up by Financial Technologies (India) Ltd. permanent recognition fromgovernment of India for facilitating online trading, clearing and settlement operations forfuture market across the country. The exchange started operation in Nov, 2003.MCX equity partners include, NYSE Euronext,, State Bank of India and it’s associated,NABARD NSE, SBI Life Insurance Co. Ltd., Bank of India, Bank of Baroda, Union Bank of India,Corporation Bank, Canara Bank, HDFC Bank, etc. MCX is well known for bullion and metaltrading platform.ICEX (Indian Commodity Exchange Ltd.)ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is jointlypromote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has Indian Potash Ltd.KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon(Haryana). BSE is also planning to set up a Commodity exchange.2.4: Unique Features Of National Level Commodity Exchanges  They are demutualized, meaning thereby that they are run professionally and there is separation of management from ownership. The independent management does not have any trading interest in the commodities dealt with on the exchange.  They provide online platforms or screen based trading as distinct from the open outcry systems (ring trading) seen on conventional exchanges. This ensures transparency in operations as everyone has access to the same information.  They allow trading in a number of commodities and are hence multi-commodity exchanges.  They are national level exchanges which facilitate trading from anywhere in the country. This corollary of being an online exchange. Page 9
  10. 10. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3. MAJOR COMMODITES3.1: What is “Commodity”?Any product that can be used for commerce or an article of commerce which is traded on anauthorized commodity exchange is known as commodity. The article should be movable ofvalue, something which is bought or sold and which is produced or used as the subject orbarter r sale. In short commodity includes all kinds of goods. Indian Forward Contracts(Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property otherthan actionable claims, money and securities”.3.2: Basic Characteristics Qualifying As A Commodity For Futures Trading:  The product must not have gone through any complicated manufacturing activity, except for certain basic processing such as mining, cropping, etc. In other words, the product must be in a basic, raw, unprocessed state. There are of course some exceptions to this rule. For example, metals, which are refined from metal ores, and sugar, which is processed from sugarcane.  The product has to be fairly standardized, which This would ensure a fair representation of the commodity for futures trading. This would also ensure adequate liquidity for the commodity futures being traded, thus ensuring price discovery mechanism.  A major consideration while buying the product is its price. Fundamental forces of market demand and supply for the commodity determine the commodity prices.  Usually, many competing sellers of the product will be there in the market. Their presence is required to ensure widespread trading activity in the physical commodity market.  The product should have adequate shelf life since the delivery of a commodity through a futures contract is usually deferred to a later date (also known as expiry of the futures contract). Page 10
  13. 13. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.4: GoldGold is the oldest precious metal known to man and for thousands of years it has beenvalued as a global currency, a commodity, an investment and simply an object of beauty.Major Characteristics  Gold (Chemical Symbol-Au) is primarily a monetary asset and partly a commodity.  Gold is the worlds oldest international currency.  Gold is an important element of global monetary reserves.  With regards to investment value, more than two-thirds of golds total accumulated holdings is with central banks reserves, private players, and held in the form of high- karat jewellery.  Less than one-third of golds total accumulated holdings are used as “commodity” for jewellery in the western markets and industry.Value ChainDemandandSupply Scenario  China was the worlds largest gold producer with 340.88 tonnes in 2010, followed by the United States and South Africa.  In 2010, India was the worlds largest gold consumer with an annual demand of 963 tonnes.  The total supply of gold coming onto the market in 2010 reached 4,108 tonnes, a rise of 2% from 2009 levels. Page 13
  14. 14. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET  Gold demand in 2010 reached a 10-year high of 3,812.2 tonnes, worth US$150billon, as a result of; strong growth in jewellery demand; the revival of the Indian market; strong momentum in Chinese gold demand and  a paradigm shift in the official sector, where central banks became net purchasers of gold for the first time in 21 years.Global Scenario  London is the world’s biggest clearing house.  Mumbai is under Indias liberalised gold regime.  New York is the home of gold futures trading.  Zurich is a physical turntable.  Istanbul, Dubai, Singapore, and Hong Kong are doorways to important consuming regions.  Tokyo, where TOCOM sets the mood of Japan.Indian Scenario  India is the largest market for gold jewellery in the world. 2010 was a record year for Indian jewellery demand; at 745.7 tonnes, annual demand was 13% above the previous peak in 1998. In local currency terms, Indian jewellery demand more than doubled in 2010.  A 20% rise in the rupee price of gold combined with a 69% rise in the volume of demand, pushed up the value of gold demand by 101% to 1,342 billion. This compares with 2009 demand of 669 billon.  The rising price of gold, particularly in the latter half of 2010, created a virtuous circle of higher price expectations among Indian consumers, which fuelled purchases, thereby further driving up local prices. Page 14
  15. 15. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETFactors Influencing the Market  Above ground supply of gold from central banks sale, reclaimed scrap, and official gold loans.  Hedging interest of producers/miners.  World macroeconomic factors such as the US Dollar and interest rate, and economic events.  Commodity-specific events such as the construction of new production facilities or processes, unexpected mine or plant closures, or industry restructuring, all affect metal prices.  In India, gold demand is also determined to a large extent by its price level and volatility.Measurement Weight Conversion TableTo convert from To Multiply byTroy ounces Grams 31.1035Million ounces Tonnes 31.1035Grams Troy ounces 0.0321507Kilograms Troy ounces 32.1507Tonnes Troy ounces 32,150.70Kilograms Tolas 85.755Kilograms Taels 26.7172Kilograms Bahts 68.41Troy ounces Grains 480.00Troy ounces Avoirdupois ounces 1.09714Troy ounces Penny weights 20.00Avoirdupois ounces Troy ounces 0.911458Short tonne Metric tonne 0.9072PurityGold purity is measured in terms of karat and fineness:Karat: pure gold is defined as 24 karatFineness: parts per thousandThus, 18 karat = 18/24 of 1,000 parts = 750 fineness3.5: Silver Page 15
  16. 16. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETMajor Characteristics  Silver (Chemical Symbol-Ag) is a brilliant grey-white metal that is soft and malleable.  Silver has unique properties such as its strength, malleability, ductility, electrical and thermal conductivity, sensitivity, high reflectance of light, and reactivity.  The main source of silver is in lead ore, although it can also be found associated with copper, zinc and gold and produced as a by-product of base metal mining activities.  Secondary silver sources include coin melt, scrap recovery, and dis-hoarding from countries where export is restricted. Secondary sources are price sensitive.  Silver is unique amongst metals due to the fact that it can be classified as both a precious metal and an industrial metal.  Today, silver is sought as a valuable and practical industrial commodity and as an investment.  Silver is an important element of global monetary reserves.  It is an effective portfolio diversifier.Demand and Supply Scenario  Silverware achieved an increase of 4.6%, owing to stock-related gains in India.  Demand for coins and medals surged yet higher from 2008, rising by 20.7% to reach a new record high of 78.7 Moz (2,447 t) in 2009 on the back of strong investment demand.  In 2009, implied net investment soared to 136.9 Moz (4,258 t), buoyed by safe haven concerns, which led to strong inflows into both ETFs and physical investment.  Scrap supply continued to decrease in 2009 by almost 6% to 165.7 Moz, despite a strong recovery in prices over the year.  Most notable increases were seen in Bolivia and Argentina (both +6.8 Moz) with by largest single decline coming from Australia (-9.4 Moz).  Net government sales fell by just over one half to 13.7 Moz (426t) in 2009, primarily driven by lowest stock sales from Russia, coupled with the continued absence of any disposal from China and India. Page 16
  17. 17. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETValue ChainGlobal Scenario  Silver is predominantly traded on the London Bullion Market Association (LBMA) and COMEX in New York.  LBMA, as the global hub of over-the-counter (OTC) trading in silver, is its main physical market. Comex is a futures and options exchange, where most fund activity is focused.  Silver is invariably quoted in the US dollars per troy ounce. Indian Scenario  Indias silver demand averages 2500 tonnes per year, whereas the countrys production was around 206.95 tonnes in 2010.  Nearly 60% of Indias silver demand comes from farmers and rural India, who store their savings in silver bangles and coins. Page 17
  18. 18. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET Factors Influencing the Market  Economic events such as national industrial growth, global financial crisis, recession, and inflation affect metal prices.  Commodity-specific events such as the construction of new production facilities or processes, unexpected mine or plant closures, or industry restructuring, all affect metal prices.  Governments set trade policy (implementation or suspension of taxes, penalties, and quotas) that affect supply by regulating (restricting or encouraging) material flow.  Geopolitical events involving governments or economic paradigms and armed conflict can cause major changes.  A faster growth in demand against supply often leads to a drop in stocks with the government and investors.  Silver demand is underpinned by the demand from jewellery and silverware, industrial applications, and overall industrial growth.  In India, the real industrial demand occupies a small share in the total industrial demand of silver. This is in sharp contrast to most developed economies.  In India, silver demand is also determined to a large extent by its price level and volatility.MeasurementWeight Conversion TableTo convert from To Multiply by1 Moz Metric tons 31.1031 Ton Troy ounces 32,5111 Ton Grams 1,000,000 Page 18
  19. 19. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.6: ATF (Aviation Turbine Fuel)Major Characteristics  Aviation Turbine Fuel (ATF) or jet fuel is a specialized type of petroleum-based fuel used for powering jet and turbo-prop engined aircraft. ATF is clear to straw coloured blend of hydrocarbons and also contains additives such as antioxidants, metal deactivators, anit-static agensts, corrosion inhibitors etc.  In crude oil refining, it is classified as a middle-distillate along with diesel and kerosene. Jet fuel is actually a highly refined grade of kerosene.  Jet A-1 and Jet A are two main grades of turbine fuel used in civil commercial aviation. Both of them are kerosene type fuels and are produced to an internationally standardized set of specifications.  Jet A, which is mainly used in the United States, must have a freeze point of -40ºC or below, while Jet A-1 used in almost all other countries must have a freeze point of - 47ºC or below. The only other jet fuel, commonly used in civilian turbine engine- powered aviation is called Jet B, which is a fuel in the naphtha-kerosene region and is used for its enhanced cold-weather performance.  The other aviation fuels include military jet fuels (predominantly JP-4, JP-5 and JP-8), which too are kerosene type fuels. Aviation gasoline is used in spark-ignition aviation engines.  Aviation fuels are derived from crude oil and its price shows high correlation with crude oil prices (96% in 2008). Airline industry and crude oil refineries are two largest sectors facing huge price risk owing to the high volatility in prices.  The global airline industrys fuel bill is estimated to total US$114 billion in 2009 (accounting for 25% of operating expenses at US$61.8/barrel Brent of oil).Global Scenario  The total global production of aviation fuels in 2007 is estimated to be 1765 million barrels in 2007, which is 6.3% of total global production of refinery products in 2007.  It is estimated that in 2007, global consumption of jet fuel was around 5.1 million barrels a day. U.S. consumers are estimated to have utilized approximately 1.63 million barrels per day. Page 19
  20. 20. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET  However, Asia-Pacific region is showing the most growth currently. The International Air Transport Association (IATA) estimates that in 2009 Asia-Pacific travelers totaled 647 million against 638 million who travelled within North America (including domestic markets). By 2013 an additional 217 million travelers are expected to take to the skies within Asia-Pacific.  US is the largest refiner of crude oil holding 20% of the total world refining capacity of 87,700 kilo barrels per calendar day, followed by China (8.9%), Former Soviet Union (8.8%), Japan (5.3%) and India (4.1%).  World Kerosene Markets: Tokyo Commodity Exchange (TOCOM) and C-COMIndian Scenario  The growth of the Indian economy, rising incomes of the countrys middle class and entry of private players in Indias aviation industry has lead to a sharp increase in domestic consumption of ATF in recent years. Despite the rising demand, the country is self-sufficient and even exports a significant quantity of ATF.  Indias production of all petroleum products has shown a sharp improvement in the previous two decades, aided by the setting up of new refineries and increased capacity utilization. The production of ATF in 2008-09 is estimated at 59.2 million barrels.  Indias consumption of ATF in 2008-09 is estimated to be 32.6 million barrels in 2008-09, which is sharply up by 58% from 2004-05 consumption of 20.6 million barrels.  ATF exports from India have also been rising, with it increasing from 20.7 million barrels in 2005-06 to 25.6 million barrels in 2008-09.  In India, kerosene is sold through three channels - public distribution system (PDS) for domestic use, industrial kerosene and as ATF. The prices of industrial kerosene and ATF are revised dynamically by domestic refiners in tandem with international prices. Thus, volatility in crude oil prices spills over to domestic ATF prices. Page 20
  21. 21. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETMarket Influencing Factors  Globally, ATF prices are highly correlated with crude oil prices as it is produced by distilling crude oil. Thus, all factors influencing crude oil prices have a profound influence on ATF prices too. These factors include, supply-demand, global economic scenario, natural disasters, currency fluctuations, geo-political tensions, interest rates, prices of other assets, commodities etc.  The demand from the aviation industry is the next important influencing factor. Growth in air traffic - passengers / cargo, global economic scenario, global industrial production, international trade, improvement in aircraft fuel-burning efficiency and a variety of other variables influences the demand from aviation sector.  Disruptions in production due to extreme weather or other unforeseen events can lead to prices picking up.Measurement1 US Barrel = 42 US Gallons1 US Barrel = 158.98 litres1 MT = 7.33 barrelsNote: Measurement of barrels per tonne vary from origin to origin Page 21
  22. 22. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.7: Brent Crude OilGeneral Characteristics  Brent crude oil is a light sweet crude oil from North Sea.  It has API (American Petroleum Institute) gravity between 38-39 and has higher sulphur content than the other well-known benchmark, WTI crude oil.  Brent crude oil is a global benchmark for other grades and is widely used to determine crude oil prices in Europe and in other parts of the world.  Brent is typically refined in Northwest Europe, but a major portion is been exported to the US Gulf and East Coasts, and also to parts of Mediterranean.  It is more expensive than the Organization of Petroleum Exporting Countries (OPEC) basket, but lesser than West Texas Intermediate (WTI) because of higher sulphur content than the WTI crude.Categories of Brent Crude oil  West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6 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.  Brent Crude Oil stands as a benchmark for Europe.  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.Value Chain Page 22
  23. 23. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETGlobalScenario  Oil accounts for 40 per cent of the worlds total energy demand.  The world consumes about 76 million bbl/day of oil.  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.  Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002), of which OPEC was 112 billion tones.OPEC fact sheetOPEC stands for Organization of Petroleum Exporting Countries. It is an organization ofeleven developing countries that are heavily dependent on oil revenues as their main sourceof income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.  OPEC controls almost 40 percent of the worlds crude oil.  It accounts for about 75 per cent of the worlds proven oil reserves.  Its exports represent 55 per cent of the oil traded internationally.Indian Scenario  India ranks among the top 10 largest oil-consuming countries.  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.  India faces a large supply deficit, as domestic oil production is unlikely to keep pace with demand. Indias rough production was only 0.8 million barrels per day.  The oil reserves of the country (about 5.4 billion barrels) are located primarily in Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.  Balance recoverable reserve was about 733 million tones (in 2003) of which offshore was 394 million tones and on shore was 339 million tones.  India had a total of 2.1 million barrels per day in refining capacity. Page 23
  24. 24. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET  Government has permitted foreign participation in oil exploration, an activity restricted earlier to state owned entities.  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.  Disinvestment/restructuring of public sector units and complete deregulation of Indian retail petroleum products sector is under way.Market Influencing Factors  OPEC output and supply.  Terrorism, Weather/storms, War and any other unforeseen geopolitical factors that causes supply disruptions.  Global demand particularly from emerging nations.  Dollar fluctuations.  DOE / API imports and stocks.  Refinery fires & funds buying.Exchanges dealing in Crude Futures  The New York Mercantile Exchange (NYMEX) .  The International Petroleum Exchange of London (IPE).  The Tokyo Commodity Exchange (TOCOM).  Crude Oil Units (average gravity)  1 US barrel = 42 US gallons.  1 US barrel = 158.98 litres.  1 tonne = 7.33 barrels .  1 short ton = 6.65 barrels .  Note: barrels per tonne vary from origin to origin. Page 24
  25. 25. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.8: Crude OilGeneral Characteristics  Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total worlds primary energy consumption.  Almost all industries including agriculture are dependent on oil in one way or other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides, paints, perfumes, etc. are largely and directly affected by the oil prices.  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.  The prices of crude are highly volatile. High oil prices lead to inflation that in turn increases input costs; reduces non-oil demand and lower investment in net oil importing countries.Categories of Crude oil  West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6 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.  Brent Crude Oil stands as a benchmark for Europe.  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. Page 25
  26. 26. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETValue ChainGlobal Scenario  Oil accounts for 40 per cent of the worlds total energy demand.  The world consumes about 76 million bbl/day of oil.  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.  Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002), of which OPEC was 112 billion tones.OPEC fact sheetOPEC stands for Organization of Petroleum Exporting Countries. It is an organization ofeleven developing countries that are heavily dependent on oil revenues as their main sourceof income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.  OPEC controls almost 40 percent of the worlds crude oil.  It accounts for about 75 per cent of the worlds proven oil reserves.  Its exports represent 55 per cent of the oil traded internationally. Page 26
  27. 27. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETIndian Scenario  India ranks among the top 10 largest oil-consuming countries.  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.  India faces a large supply deficit, as domestic oil production is unlikely to keep pace with demand. Indias rough production was only 0.8 million barrels per day.  The oil reserves of the country (about 5.4 billion barrels) are located primarily in Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.  Balance recoverable reserve was about 733 million tones (in 2003) of which offshore was 394 million tones and on shore was 339 million tones.  India had a total of 2.1 million barrels per day in refining capacity.  Government has permitted foreign participation in oil exploration, an activity restricted earlier to state owned entities.  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.  Disinvestment/restructuring of public sector units and complete deregulation of Indian retail petroleum products sector is under way.Crude Oil Units (average gravity)  1 US barrel = 42 US gallons.  1 US barrel = 158.98 litres.  1 tonne = 7.33 barrels .  1 short ton = 6.65 barrels .  Note: barrels per tonne vary from origin to origin. Page 27
  28. 28. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.9: WheatGeneral Characteristics  Wheat is one of the worlds three most important cereal crops along with maize and rice. It is reported to be grown domestically from atleast as early as 9000 BC and is now grown in almost all parts of the world.  Wheat is a globally important source of dietary carbohydrate (starch) and protein (gluten). Its grain is a staple food used to make flour for leavened, flat and steamed breads, biscuits, cookies, cakes, breakfast cereal, pasta, noodles etc and for fermentation to make beer, alcohol, vodka, or biofuel. It is also used for feeding animals to a limited extent.  Different varieties of wheat are grown across the world. The three principal types of wheat used in modern food production are: Triticum vulgare (soft wheat), Triticum durum (hard wheat) and Triticum compactumGlobal Scenario  The annual global wheat production has been in the range of 600-630 tonnes in the recent years. However, in 2008-09 it is estimated to have risen sharply to 689 million tonnes. The combined production of all cereals in 2008-09 is estimated to be 2525 million tonnes.  EU-27, China, India, USA and Russia are the five major producers of wheat accounting for close to 70% of the total global production, with 2008-09 production in these regions being 151, 112.5, 78.6, 68 and 63.8 million tonnes respectively.  Wheat is the most important cereal traded in the world market. The global trade in wheat during 2008-09 was sharply up at around 140 million tonnes in 2008-09 from an average of around 110 - 115 million tonnes in the recent previous years.  While US (25 - 35 million tonnes), EU-27 (15-25 million tonnes), Canada (15-20 million tonnes), Australia (8-18 million tonnes) and Argentina (6 - 12 million tonnes) are major exporters, there are a large number of countries importing wheat with maximum demand emanating from developing nations. The major importing regions are Middle-east Asia, South-east Asia and North-west Africa. Egypt, Brazil, Indonesia, Algeria are the most important importing nations. Page 28
  29. 29. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETImportant World Wheat Markets  Derivatives exchanges - Chicago Mercantile Exchange, which acquired Chicago Board of Trade, Kansas City Board of Trade, Zhenghzhou Commodity Exchange, South African Futures Exchange, MCX, NCDEX  US FOB and EU (France) FOB prices determine the physical pricesIndian Scenario  India has the largest area in the world under wheat cultivation. However, due to low productivity it is only the third largest producer after EU-27 and China.  Indias annual production of wheat has been around 75-79 million tonnes from 2006- 07, with production in 2008-09 estimated to be around 78.6 million tonnes. Wheat accounts for around 30-35% of Indias total foodgrain production of around 220 million tonnes. Indias annual wheat consumption is estimated to be around 72 million tonnes currently.  Green revolution and increased focus by Government on wheat has helped wheat production to surge sharply from around 6 million tonnes at time of independence to current levels. Close to 90% of the area under wheat is irrigated, which too has supported the rise in output over the years.  Uttar Pradesh (34%), Punjab (20%), Haryana (13%), Rajasthan (10%) and Madhya Pradesh (10%) are the main wheat producing states of India.  Wheat is cultivated as a rabi crop in India, with sowing being undertaken from October to December and harvesting from March to May. The official marketing season of wheat in India is assumed to commence from April.  Government plays a major role in the wheat value chain in India as the cereal is very important for the countrys food security. The Central Govt. sets the Minimum Support Price (MSP) every year, which sets the mood for the upcoming season. As govt. agencies have been recently procuring close to 25-30% of annual production, open market prices too do not generally fall below this price. Historically, the procurement has been around 15-20%. Page 29
  30. 30. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET  The procured wheat is used to maintain a minimum buffer stock for meeting unforeseen exigencies, for providing foodgrains required for Public Distribution System (PDS) and the other foodgrain based welfare programmes of the Government. In addition, the grain is also sold at pre-determined prices to the open market.  Though, India is not a major player in global markets India has resorted to imports, whenever there is a supply tightness. India has also exported around 5 million tonnes of wheat in 2003-04. Govt. agencies take the decision to bring in imports and the current policies are not in favour of exports.Market Influencing Factors  Wheat is an annual, seasonal crop and prices usually tend to rise during the cultivation period, i.e. December to March due to scarcity in the market and dip during the peak arrival period (April and May).  Weather has a profound influence on production, especially in Haryana and Punjab as temperature plays a crucial role in determining the yield.  The Govt. policies with regard to MSP, buffer stocks, PDS sales, Open Market Sales, imports / exports are very important influencing factor with regards to Indian wheat prices.  Despite international trade being limited, the several variations in production or consumption at various major or minor producing or consuming country, which influence global prices, are reflected in the domestic long-term price trend. However, in the short-term normally there is no significant relation with international prices.  Several international agencies like US Dept. of Agriculture, International Grains Council, Food and Agricultural Organisation release regular, periodic reports on global supply-demand situation, which is widely looked upon by the global players. Page 30
  31. 31. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.10: CottonGeneral Characteristics  Cotton is essentially grown for its fibre, which is used the world-over to make textile.  Cotton fibre is one of the most important textile fibres, accounting for around 35% of the worlds total textile fibre used.  Cottons strength, absorbency, and capacity to be washed and dyed also make it adaptable to a considerable variety of textile products.  Cotton is used for thousands of things, including clothes, space suits for astronauts and ingredients in the food we eat.  Cotton is classified according to the staple, grade and character of each bale—staple refers to the fibre length; grade ranges from coarse to premium and is a function of colour, brightness and purity; and character refers to the fibres strength and uniformity.Global Scenario  Cotton production and trade is widely spread across the world, with more than 80 nations cultivating the crop. However, its production, consumption and trade are dominated by a few nations.  The world cotton production in 2010-11 marketing year (July – August) is forecasted to be 24.95 million tonnes (million MT) (147.7 million bales of 170 kg each) as against 22.1 million MT (129.7 million bales of 170 kg each) in 2009-10 marketing year.  The worlds four largest cotton-producing countries are China, India, the USA and Pakistan, which together account for nearly 79% of the world production. Other major producers include Brazil, Uzbekistan and Turkey.  The top three consumers of cotton are China, India, and Pakistan, which together account for two-thirds of the world consumption (est. 24.5 million MT). Turkey, Brazil and the USA are the next largest consumers.  The global trade in cotton in recent years has been around 7-8 million MT.  The USA is the largest exporter of cotton, accounting for over one-third of global trade in raw cotton, which is estimated to be 7.7 million MT in 2010-11. While China is the largest importer of cotton. Page 31
  32. 32. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETIndian Scenario  Indias annual production of cotton has been showing a steady increase in the recent years supported by a rise in acreage, better GM seeds and improved practices.  India is estimated to have produced 31.2 million bales of cotton from an acreage of 11.16 million hectares and a yield of 475 kg/ha in 2010-11 (October – September), as against a production of 29.5 million bales, acreage of 10.3 million ha and yield of 486 kg/ha in 2009-10.  Interestingly, while India has the largest area in the world under cotton cultivation, its yield is one of the lowest at around 500 kg/ha as against the world average yield of 740 kg/ha.  In India, cotton is a predominantly a monsoon-season crop. It is planted from the end of April through0 September, and harvested from October to January, based on the time of sowing.  Cotton is produced in three zones, the Northern zone comprising the states of Punjab, Haryana and Rajasthan, the Central zone comprising the states of Maharashtra, Madhya Pradesh and Gujarat and the Southern zone comprising the states of Andhra Pradesh, Karnataka and Tamil Nadu. Cotton cultivation is also gaining momentum in the state of Odisha.  The states of Gujarat, Maharashtra and Andhra Pradesh are the major producers of cotton, accounting for about 75% of the total production.  India has been a major exporter of cotton, since 2005-06. It is currently, the worlds second largest exporter. It exported 5.5 million bales of cotton in 2010-11.  India mostly imports Long and Extra Long Staple (ELS) cotton from the US, Egypt, and West Africa. Page 32
  33. 33. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETMarket Influencing Factors  The domestic demand supply scenario, inter-crop price parity, cost of production and international price situation are the major factors that influence prices in the market.  Weather, pests, diseases and other risk factors associated with agricultural crops are also important for cotton.  Government policies with relation to import, export and Minimum Support Price are significant influencers.  Cotton yarn accounts for around 70% of the total yarn production in India. Thus, price of cotton is a very important factor influencing the health of India’s textile industry. And Government usually considers both these sectors (cotton & the Textile industry)while deciding on its polices.  Cotton yarn prices at different markets across the country show a high correlation of above 90% with India’s raw cotton prices.  Global trade is particularly important for cotton. In addition to around 30% of global cotton fibre production being traded, it is also traded indirectly as yarn, fabric and clothing.  As cotton is used primarily in manufacturing products such as clothing and home furnishings, the overall health of associated industries and economic well-being of the final consumer are important.  New developments in the textile industry, with regard to development and adoption of new technology, fibres, mechanisation, and so forth impact cotton prices in the long run. Page 33
  34. 34. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.11: ChanaGeneral Characteristics  Chana belongs to leguminasae family and there are two main types - Desi and Kabuli. Desi chickpeas is the main type grown in India  Indias chana production fluctuates between 4-7 million tons and is normally 40% of Indias total pulse production of 12-15 million tons Indias chana production in 2003- 04, chana production is 5.33 million tons out of a total pulse production of 15.23 million tons.  The major producing states are Madhya Pradesh (1.5-2.5 million tons, Uttar Pradesh (0.7-0.85 million tons), Rajasthan (0.5-2.5 million tons) and Maharashtra (0.5-0.7 million tons).  Chana is a rabi crop and is sown from nov to december and harvested from Feb to March. The peak arrival period begins from March-April at the major trading centers of the country.  India accounts for 2/3rd of the worlds chickpea production. India imports around 3- 4 lakh tons of chickpeas annually. The major countries from where India imports chickpeas is Canada, Australia, Iran and Myanmar.  Indian chana markets are highly fragmented, with very long value chain. The major players in the value chain are commission agents, brokers, stockists, wholesale traders, dal mills, wholesalers (dal) and retail outlets. The information flow between these participants is restricted and very slow.Major Trading Centers  Indore, Bhopal, Vidisha in Madhya Pradesh.  Jalgaon, Latur, Mumbai, Akola in Maharashtra.  Jaipur, Bikaner, Kota, Jodhpur, Sriganaganagar, Hanumangarh in Rajasthan.  Other major centers are Delhi, Chennai, Kanpur, Hapur, Hyderabad, Vijayawada, Gulbarga, Sirsa, Jalandhar, Ludhiana, Sangrur. Page 34
  35. 35. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETMarket Influencing Factors  Chana can withstand moisture stress to a certain extent. However, the production highly fluctuates between years, depending on the rains received and the moisture availability in the soil.  The sentiments of traders play a significant role currently, as a consequence of the lack of free-flow of information.  Stocks present with stockists and the stocks-to-consumption ratio.  Imports and the crop situation in the countries from where imports originate, viz., Canada, Australia, Myanmar.  There is high substitutability between pulses in India among the consumers. So the price of other major pulses like tur, yellow peas, green peas etc also influence the prices of chana. Page 35
  36. 36. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.12: PotatoGeneral CharacteristicsPotato is the worlds fourth important food crop after wheat, rice and maize owing to itsgreat yield potential and high nutritive value and accounts for nearly half of the worldsannual output of all root and tuber crops. Thus, with an annual global production of about300 million tonnes, potato is an economically important staple crop in both developed anddeveloping countries.Value ChainSupply Demand Scenario  India is ranked 5th in potato production after China, Russian Federation, Poland and Ukraine. However, potato productivity in India is merely 16-19 tonnes/ha vis-à-vis that of European countries and USA, i.e 30-40 tonnes/ha.  The potatoes in India are cultivated under highly diversified agro-climatic conditions ranging from sea level to snowline and up to three crops are raised per year.  Summer crop- March- April…………………… August-September  Autumn crop- August-September………… December- January  Spring crop- January – February………………… May-June  Potato is mainly rabi crop and is grown mainly in UP, Punjab, Haryana, West Bengal, Madhya Pradesh, Bihar, Andhra Pradesh, Tamil Nadu and Gujarat. Page 36
  37. 37. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET  During 2004-05, 24.15million ton potato was produced in the country while production figure for 2003-04 is 23.27 million ton. According to the ministry of agriculture advance estimate potato production during 2005-06 will be 24.65 million tons.  Average acreage under potato varies between 12 to 15 lakh hectares depending on the weather condition during sowing period.Major Trading CentresThere are four-potato export zone in India viz. in UP, Punjab, MP and West Bengal. Themajor potato markets in UP are Agra, Hathras, Kanpur, Meerut, Farrukkhabad; Jalandhar,Ludhiana, Phul and Patiala in Punjab; Ujjain, Indore and Dewas in MP and Hoogly, Burdwanand Howrah in West BengalMarket Influencing Factors  Variations in potato domestic acreage based on yield and price realization  Crop development based on weather progress in key growing regions particularly cold wave and heavy rains during tuber formation  Comparative price with other vegetables in the domestic market,  Upcountry demand of potato from the major cities and food processing industries  The potato price tends to firm up during the planting period and eases down during the harvesting period.  Transportation charges have also profound impact on prices  Potato growers and traders hoard the commodity before selling in expectation of better prices. Potato can be kept in cold storages without spoilage for 5-6 months. Page 37
  38. 38. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET3.13: Gaur SeedGeneral Characteristics  Guar, or clusterbean, (Cyamopsis tetragonoloba (L.) Taub), is the source of a natural hydrocolloid, which is cold water soluble forming thick solutions at low concentrations.  The guar seed consists of three parts: the germ, the endosperm, and the husk. It is from the endosperm that guar gum is derived. 100 Kilos of beans, minus their bean pods yields roughly 29 kilos of endosperm; 29 kilos of Guar powder.  Industrially it is used in mining, petroleum drilling and textile manufacturing.  In food it is used as a thickener and as a mean of preventing ice crystal formation in frozen desserts.Supply Scenario  India is the major producer of Guar Seed followed by Pakistan and US. Indias guarseed production fluctuates between years and has been around 2-6 lakh tons in the recent years. Indias guar production in 2003, is estimated at around 6 lakh tons.  India accounts for 80% of the total guar produced in the world. 70% of Indias production comes from Rajasthan. The other producers are Gujarat, Haryana, Punjab, Uttar Pradesh and Madhya Pradesh.  Taking the US, Australian, African crop the total world supply of Guar Split is around 4-5 lakh tons in a normal year. It may even increase to 8 lakh tons as has been visible in 2003-04.  Guar is a crop of semi-arid - sub tropical areas spread over the north and north west of India and east and south east of Pakistan. It is grown in arid zones of Rajasthan, some parts of Gujarat, Haryana, Madhya Pradesh. The main guar-growing region in India is Rajasthan.  Guar is a rain fed monsoon crop, which requires 8-15 inch of rain in 3-4 spells and is harvested in October - November. It is sown immediately after first showers say in July and harvested around November each year. The crop yield is directly related to the monsoon. It requires a relative long growing season of 20-25 weeks. Page 38
  39. 39. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETDemand scenario  World market for guar gum is estimated to be around 150,000 tons/year, 70% of which is produced by India and Pakistan.  US consumption is estimated to be around 40,000 tons/year.  The export from India is around 115,000 tons and the domestic market is of around 25,000 tons.  India exported 33000 tons of guar gum refined split and 84000 tons of guar gum treated and pulverized in 2002-03, which together accounts for an export of 117000 tons of guargum exports valued above Rs. 300 crores.  The main demand of guar seed originates from the US petroleum industry and also the oil fields of Middle East.Market influencing factors  The production is directly related to monsoon. In Rajasthan, the rainfall fluctuates between years and thus results in high volatility in production and consequently on prices.  While the demand is almost constant over the years, supply varies largely between years.  The physical market of the commodity involves speculators and stockists. The commodity is subjected to a long storage period based on demand and market prices..  There are no Government rules and regulations governing the production, distribution, marketing, exports or imports of the commodity and the market forces determine the prices. Page 39
  40. 40. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET4. COMMODITY FUTURE MARKET4.1: What is a commodity Market?Commodity markets are markets where raw or primary products are exchanged. These rawcommodities are traded on regulated commodities exchanges, in which they are bought andsold in standardized contracts.Commodity market is an important constituent of the financial markets of any country. It isthe market where a wide range of products, viz., precious metals, base metals, crude oil,energy and soft commodities like palm oil, coffee etc. are traded. It is important to developa vibrant, active and liquid commodity market. This would help investors hedge theircommodity risk, take speculative positions in commodities and exploit arbitrageopportunities in the market.4.2: What is Commodity Futures?A Commodity futures is an agreement between two parties to buy or sell a specified andstandardized quantity of a commodity at a certain time in future at a price agreed upon atthe time of entering into the contract on the commodity futures exchange.The need for a futures market arises mainly due to the hedging function that it can perform.Commodity markets, like any other financial instrument, involve risk associated withfrequent price volatility. The loss due to price volatility can be attributed to the followingreasons:  Consumer Preferences: - In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance.  Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. Page 40
  41. 41. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET4.3: Objectives of Commodity FuturesHedging with the objective of transferring risk related to the possession of physical assetsthrough any adverse moments in price. Liquidity and Price discovery to ensure baseminimum volume in trading of a commodity through market information and demandsupply factors that facilitates a regular and authentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.4.4: Benefits of Commodity Futures MarketsThe primary objectives of any futures exchange are authentic price discovery and anefficient price risk management. The beneficiaries include those who trade in thecommodities being offered in the exchange as well as those who have nothing to do withfutures trading. It is because of price discovery and risk management through the existenceof futures exchanges that a lot of businesses and services are able to function smoothly. Page 41
  42. 42. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET1. Price Discovery:-Based on inputs regarding specific market information, the demand andsupply equilibrium, weather forecasts, expert views and comments, inflation rates,Government policies, market dynamics, hopes and fears, buyers and sellers conduct tradingat futures exchanges. This transforms in to continuous price discovery mechanism. Theexecution of trade between buyers and sellers leads to assessment of fair value of aparticular commodity that is immediately disseminated on the trading terminal.2. Price Risk Management: - Hedging is the most common method of price riskmanagement. It is strategy of offering price risk that is inherent in spot market by taking anequal but opposite position in the futures market. Futures markets are used as a mode byhedgers to protect their business from adverse price change. This could dent theprofitability of their business. Hedging benefits who are involved in trading of commoditieslike farmers, processors, merchandisers, manufacturers, exporters, importers etc.3. Import- Export competitiveness: - The exporters can hedge their price risk and improvetheir competitiveness by making use of futures market. A majority of traders which areinvolved in physical trade internationally intend to buy forwards. The purchases made fromthe physical market might expose them to the risk of price risk resulting to losses. Theexistence of futures market would allow the exporters to hedge their proposed purchase bytemporarily substituting for actual purchase till the time is ripe to buy in physical market. Inthe absence of futures market it will be meticulous, time consuming and costly physicaltransactions.4. Predictable Pricing: - The demand for certain commodities is highly price elastic. Themanufacturers have to ensure that the prices should be stable in order to protect theirmarket share with the free entry of imports. Futures contracts will enable predictability indomestic prices. The manufacturers can, as a result, smooth out the influence of changes intheir input prices very easily. With no futures market, the manufacturer can be caughtbetween severe short-term price movements of oils and necessity to maintain pricestability, which could only be possible through sufficient financial reserves that couldotherwise be utilized for making other profitable investments. Page 42
  43. 43. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers inthe absence of futures market. There would be no need to have large reserves to coveragainst unfavourable price fluctuations. This would reduce the risk premiums associatedwith the marketing or processing margins enabling more returns on produce. Storing moreand being more active in the markets. The price information accessible to the farmersdetermines the extent to which traders/processors increase price to them. Since one of theobjectives of futures exchange is to make available these prices as far as possible, it is verylikely to benefit the farmers. Also, due to the time lag between planning and production, themarket-determined price information disseminated by futures exchanges would be crucialfor their production decisions.6. Credit accessibility: - The absence of proper risk management tools would attract themarketing and processing of commodities to high-risk exposure making it risky businessactivity to fund. Even a small movement in prices can eat up a huge proportion of capitalowned by traders, at times making it virtually impossible to pay back the loan. There is ahigh degree of reluctance among banks to fund commodity traders, especially those who donot manage price risks. If in case they do, the interest rate is likely to be high and terms andconditions very stringent. This possesses a huge obstacle in the smooth functioning andcompetition of commodities market. Hedging, which is possible through futures markets,would cut down the discount rate in commodity lending.7. Improved product quality: - The existence of warehouses for facilitating delivery withgrading facilities along with other related benefits provides a very strong reason to upgradeand enhance the quality of the commodity to grade that is acceptable by the exchange. Itensures uniform standardization of commodity trade, including the terms of qualitystandard: the quality certificates that are issued by the exchange-certified warehouses havethe potential to become the norm for physical trade. Page 43
  44. 44. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET4.5: What Makes Commodity Trading Attractive? A good low-risk portfolio diversifier. A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate. Less volatile, compared with, equities and bonds. Investors can leverage their investments and multiply potential earnings. Better risk-adjusted returns. A good hedge against any downturn in equities or bonds as there is Little correlation with equity and bond markets. High co-relation with changes in inflation. No securities transaction tax levied. Page 44
  45. 45. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET5. INSTRUMENTS AVAILABLE FOR TRADINGIn recent years, derivatives have become increasingly popular due to their applications forhedging, speculation and arbitrage. While futures and options are now actively traded onmany exchanges, forward contracts are popular on the OTC market. While at the momentonly commodity futures trade on the NCDEX, eventually, as the market grows, we also havecommodity options being traded.5.1 Forward ContractsA forward contract is an agreement to buy or sell an asset on a specified date for aspecified price.One of the parties to the contract assumes a long position and agrees to buy the underlyingasset on a certain specified future date for a certain specified price. The other partyassumes a short position and agrees to sell the asset on the same date for the same price.Other contract details like delivery date, price and quantity are negotiated bilaterally by theparties to the contract. The forward contracts are normally traded outside the exchanges.The salient features of forward contracts are:  They are bilateral contracts and hence exposed to counter-party risk.  Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.  The contract price is generally not available in public domain.  On the expiration date, the contract has to be settled by delivery of the asset.  If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged.However forward contracts in certain markets have become very standardised, as in thecase of foreign exchange, thereby reducing transaction costs and increasing transactionsvolume. This process of standardisation reaches its limit in the organised futures market. Page 45
  46. 46. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET5.2 Futures MarketFutures markets were designed to solve the problems that exist in forward markets. Afutures contract is an agreement between two parties to buy or sell an asset at a certaintime in the future at a certain price. But unlike forward contracts, the futures contracts arestandardized and exchange traded. To facilitate liquidity in the futures contracts, theexchange species certain standard features of the contract. It is a standardized contract withstandard underlying instrument, a standard quantity and quality of the underlyinginstrument that can be delivered, (or which can be used for reference purposes insettlement) and a standard timing of such settlement. A futures contract may be offset priorto maturity by entering into an equal and opposite transaction. More than 99% of futurestransactions are offset this way.The standardized items in a futures contract are:  Quantity of the underlying  Quality of the underlying  The date and the month of delivery  The units of price quotation and minimum price change  Location of settlement  Spot price: The price at which an asset trades in the spot market.  Futures price: The price at which the futures contract trades in the futures market. Page 46
  47. 47. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET5.3: Margin RequirementsINITIAL MARGINThe amount that must be deposited in the margin account at the time a futures contract isfirst entered into is known as initial margin.Initial margin based on “Value at Risk” Model (VaR) to estimate worst loss that can happenfor a time horizon 99% confidence level SPAN® is the system used for margin calculation.Volatility is one of the inputs to the SPAN calculations EWMA/ J.P.Morgan Risk Metricsmethodology for calculation of volatility will be adopted. Similar procedure is followed inmost international exchanges like CBOT, CME, NYMEX, NYBOT, TOCOM, LME, LIFFE.MARKING- TO- MARKET MARGINIn the futures market, at the end of each trading day, the margin account is adjusted toreflect the investors gain or loss depending upon the futures closing price. This is calledmarking-to-market.All open positions will be marked-to-market at the daily settlement price at the end of theday Client has to bring mark-to-market (MTM) margin to be through funds transfer the nextday.MAINTENANCE MARGINThis is somewhat lower than the initial margin. This is set to ensure that the balance in themargin account never becomes negative. If the balance in the margin account falls belowthe maintenance margin, the investor receives a margin call and is expected to top up themargin account to the initial margin level before trading commences on the next day. Page 47
  48. 48. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET5.4: OptionsOptions are fundamentally different from forward and futures contracts. An option givesthe holder of the option the right to do something. The holder does not have to exercise thisright. In contrast, in a forward or futures contract, the two parties have committedthemselves to doing something.Whereas it costs nothing (except margin requirements) to enter into a futures contract, thepurchase of an option requires an up-front payment.There are two basic types of options, call options and put options.CALL OPTION: A call option gives the holder the right but not the obligation to buy an assetby a certain date for a certain price.PUT OPTION: A put option gives the holder the right but not the obligation to sell an assetby a certain date for a certain price. Page 48
  49. 49. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET6. PARTICIPANTS FOR COMMODITY MARKETParticipants who trade in the derivatives market can be classified under the following threebroad categories:1. Hedgers2. Speculators3. Arbitragers6.1: HedgersA Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys or sells inthe futures market to secure the future price of a commodity intended to be sold at a laterdate in the cash market. This helps protect against price risks.The holders of the long position in futures contracts (buyers of the commodity), are trying tosecure as low a price as possible. The short holders of the contract ( sellers of thecommodity) will want to secure as high a price as possible. The commodity contract,however, provides a definite price certainty for both parties, which reduces the risksassociated with price volatility. By means of futures contracts, Hedging can also be used as ameans to lock in an acceptable price margin between the cost of the raw material and theretail cost of the final product sold.Someone going long in a securities future contract now can hedge against rising equityprices in three months. If at the time of the contracts expiration the equity price has risen,the investors contract can be closed out at the higher price. The opposite could happen aswell: a hedger could go short in a contract today to hedge against declining stock prices inthe future. Page 49
  50. 50. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET6.2: SpeculatorsOther commodity market participants, however, do not aim to minimize risk but rather tobenefit from the inherently risky nature of the commodity market. These are thespeculators, and they aim to profit from the very price change that hedgers are protectingthemselves against. A hedger would want to minimize their risk no matter what theyreinvesting in, while speculators want to increase their risk and therefore maximize theirprofits. In the commodity market, a speculator buying a contract low in order to sell high inthe future would most likely be buying that contract from a hedger selling a contract low inanticipation of declining prices in the future.Unlike the hedger, the speculator does not actually seek to own the commodity in question.Rather, he or she will enter the market seeking profits by offsetting rising and decliningprices through the buying and selling of contracts. LONG SHORT Secure a price now to Secure a price now to protect protect against future rising against future declining prices HEDGER prices Secure a price now in Secure a price now in anticipation of rising prices anticipation of declining SPECULATOR prices Page 50
  51. 51. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKET6.3: ArbitragersA central idea in modern economics is the law of one price. This states that in a competitivemarket, if two assets are equivalent from the point of view of risk and return, they shouldsell at the same price. If the price of the same asset is different in two markets, there will beoperators who will buy in the market where the asset sells cheap and sell in the marketwhere it is costly. This activity termed as arbitrage, involves the simultaneous purchase andsale of the same or essentially similar security in two different markets for advantageouslydifferent prices. The buying cheap and selling expensive continues till prices in the twomarkets reach equilibrium. Hence, arbitrage helps to equalize prices and restore marketefficiency.Since the cash and futures price tend to move in the same direction as they both react tothe same supply/demand factors, the difference between the underlying price and futuresprice is called as basis. Basis is more stable and predictable than the movement of the pricesof the underlying or the Futures price. Thus, arbitrageur would predict the basis andaccordingly take positions in the cash and future markets. PARTICIPANTS OF COMMODITY MARKET • Producers - farmers HEDGERS • Consumers –refineries, food processing companies • Brokerage houses SPECULATORS • Retail investors • People involved in commodity spot trading • Brokerage houses ARBITRAGEURS • People trading in commodity spot markets • Warehousing companies Page 51
  53. 53. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETNEED OF THE STUDYThe need of the study arises due to lack of knowledge about the commodity market becausenow-a-days, commodity trading has become an important investment avenue and most ofthe investors are still unaware about its advantages and shortcomings. Huge amount ofinvestment is required for trading in commodity market. To know the impact of othermarkets on commodity market, it became necessary to understand the trading ofcommodity market.So commodity trading covers the meaning of commodity market, its trading, clearing andsettlement, the various commodities being traded on NCDEX and MCX. It further includesthe various market participators in commodity market and instruments available for tradinglike future contracts, forward contracts and options. Page 53
  55. 55. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETSCOPE OF THE STUDYThis project on ‘Investors Perception Regarding Commodity Trading’ has a wide scope and isindeed a great help in understanding the core concept of trading in various commodities.The scope of my study was confirmed to current time period.A limited sample was selected to fulfil the various objectives of the study. Scope was relatedto have a general view of the investors towards the commodity trading.OBJECTIVES OF THE STUDY  To know about the commodity in which the investors mostly trade.  To know about the Commodity Exchanges preferred by investors.  To know the purpose of investment in commodity market.  To find out the problems regarding trading in commodity market.  To understand the modus operandi of commodity exchanges  To understand the awareness of Commodity Market in India  How investors reach to decision of investment in particular commodity?  Individual perception regarding overall Commodity Market. Page 55
  57. 57. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETResearch methodologyResearch methodology is a way to systematically solve the research problem. Theresearchmethodology includes the various methods and techniques for conducting aresearch. “MarketingResearch is the systematic design, collection analysis and reporting ofdata and finding relevantsolution to a specific marketing situation or problem.” D. Slesingerand M. Stephenson in the encyclopaedia of social sciences define Research as “themanipulation of things, concept orsymbols for the purpose of generalizing to extend, corrector verify knowledge, whether thatknowledge aid n construction of theory and practice of anart.Research is thus an original contribution to the existing stock of knowledge making foritsadvancement. The purpose of research is to discover the answers to the questionsthrough theapplication of scientific procedures.Defining the Research Problem and Objectives:It is said, “A problem well defined ishalfsolved”. The first step in research methodology is to define the problem and decidingtheresearch objective. The objective of the study is to know about the Investor perceptionregardingCommodity TradingResearch Design: Research Design is a blueprint or framework for conducting theresearchproject. It specifies the details of the procedures necessary for obtaining theinformation needed to structure and solve research problem. The research design used inpresent study is descriptiveresearch.Sampling design:Sampling can be defined as the section of some part of an aggregateortotality on the basis of which judgment or an inference about aggregate or totality ismade. Thesteps involved in sampling design are as follows:Universe:Universe refers to the total of the units in field of inquiry. Universe of thepresentstudy is all the investors who trading in Commodity market Page 57
  58. 58. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETSampling unit:Sampling unit of the present study is Investors of Commodity Market andpotential investors of same. (As I did online survey so exact location cannot be determined)Sampling size:Sampling size is the total no. of units which we covered in the study. Inpresent study sample size is 35.Sampling Technique:Sampling Technique used in the study is Convenient Sampling.Convenient sampling:It is that type of sampling where the researcher selects thesampleaccording to his or her convenience.Data Collection and Analysis:Data can be collected in two ways Primary data: Primary data are those, which are collected afresh and for the first time,and thus happen to be original in character. It is the backbone of any study. Secondary data: Secondary data are those which have already been collected bysomeone else and which have already been passed through the statistical process. In thiscase one is not confronted with the problems that are usually associated with thecollection of original data. Secondary data either is published data or unpublished data.Source of data: Source of the present research is both primary and secondary data.Primarydata is obtained from respondents with the help of widely used and well-knownmethod ofSurvey, Through a well-structured questionnaire. And the secondary data is collected fromthe public domain.Research instrument: Research instrument is that with the help of which the researchercollect the data from respondents. The questionnaire of the present research consists ofclose ended and Likert Scale. Page 58
  59. 59. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETTools of Analysis: In present study pie charts, graphs and percentage use to analyse thecollected data. Page 59
  61. 61. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETLimitations of the StudyAlthough the sincere efforts have been done to collect authentic and relevant information,the study may have the following limitations -: Hard Enough to Fetch Information: It was not an easy task to get information from investors who invest in commodity. The investors were not always open and forthcoming with their views, even agitated and not disclosing. The Major contribution in Commodity market is by wholesalers and big companies they were not sharing their strategies they use in share market. Hence information is restricted to individual investors. Limited Scope: Scope of study is limited potential Investors and Individual Investors only and because of limited time and money, the results of study may not be generalized for India as a whole. Results may be Inaccurate: This study is based on the assumption that perceptions are true and factual although at times that may not be the case. Existence of Biases: Though every care has been taken to eliminate such biases, but considering the human factor the possibility of small bias having come up cannot be ruled out altogether. Investor Behaviour: Investor behaviour is dynamic in nature and thus over the time, finding today may become invalid tomorrow. Small Sample Size: The sample size taken is small and may not be sufficient to predict the result with 100% accuracy and hence findings may not be generalized. Page 61
  63. 63. INVESTORS PERCEPTION REGARDING INDIAN COMMODITY MARKETDATA ANALYSIS AND INTERPRETATIONWhere do you prefer to invest your savings? Real Estate Govt. Bonds 5% 4% Gold / Silver 15% Equity Market 11% Insurance 13% Other IPO 3% Post Office 26% 8% Mutual Fund Bank 13% 28%For Tabular format data check Annexure 1Analysis:28% of the Investors prefer to invest in Banks only. 10% of Investors still preferin invest in Post office saving schemes. 24% of investor prefers to invest inGold/Silver, Government Bonds and Real Estate. 27% of investors prefer toinvest in Stock markets like Equity Market, IPO and Mutual Fund.Interpretation: Still People prefer to invest in Banks products like Saving account, fixed deposits and all.Some of the investors still invest their amount in traditional savings schemes of Post-Offices According to investors Gold/Silver and Real Estate are good investments because they have physical evidence. Approx. 27% investors only prefer Stock markets Page 63