Commodity Market Overview & Prospects of an Arbitrage


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Commodity Market Overview & Prospects of an Arbitrage

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