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Concept of Commodity Market and Future

The process of trading commodities is also known as futures trading. Unlike other kinds of investments, such as stocks and bonds, when you trade futures, you do not actually buy anything or own anything

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Concept of Commodity Market and Future

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  1. Commodity Market Overview & Prospects of Arbitrage

  2. WHAT COMPRISES COMMODITY MARKET? Commodity markets Precious Metals Other Metals Agriculture Power

  3. CONCEPT • Commodity futures are tool used to hedge the price risk of underlying commodity. • Helps in price discovery of underlying commodity • Helps in stabilizing the price of commodity for longer term.

  4. Reduce the price disparity over two geographical locations and bridge the demand/supply position over two locations and manage the regional distortion •  Bring out the information about the commodity indicating the price trend.

  5. CURRENT ISSUES FOR GROWTH OF MARKET • Lack of education and awareness of exchange amongst the marks of Investors, Traders (resulting low liquidity) •  Low participation of Indian Corporate (Again due to the above) •  Common delivery system for all exchange in demat form, which would ensure automatically the product standards

  6. Delay in formations of Regulation for Institutional Investor, which are in pipeline. •   The differential Sales Tax & Local Tax requires an early introduction of Value added Tax System. • The delivery center of commodity should be in multiple locations as presently in one location for one product in most of commodities.

  7. COMMODITY MARKET IN INDIAN SCENARIO • Bullion • qMarket • üLargest consumer (Rs. 400 bn) – traditional form of investment • üLarge stock of unaccounted metal • üSkills in hand made jewellery qPotential • üUse it as monetary unit to boost rural economy • üEffective instrument for investment diversification • üBoost jewellery exports • qImpediments • üDifferences in sales tax, octroi & stamp duty among states • üLack of good assaying practices – difficult to liquidate • üLittle avenue to hedge price risk of jewellery exporters

  8. Other metals • qMarket • 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 • qPotential • Increased scope for aluminum & steel exports (as against alumina and iron ore) üStable metal prices can fuel boom in downstream industries üRival China as preferred manufacturing location üGrowth in manufacturing to equal that in services qImpediments • üNo organised exchange in India – price discovery difficult • Significant PSU participation

  9. Agriculture • qMarket • üAgricultural share in GDP – 26% (Rs. 5000 bn) • üLarge producer of cotton, cereals, sugar, fruits, spices etc • üCurrent exports of about USD 4 bn • üSpecific commodity based exchanges – not very successful • qPotential • üDiverse gene pool and climatic conditions • üIncrease in agricultural exports – sugar, cereals • üIncrease in processed foods production & consumption • qImpediments • üRestrictions on inter state movement • üPoor transport & warehousing – 30% wastage in cereals • üMember controlled exchanges – transparency issues

  10. Power • qMarket • üLarge requirement and trading in Power units • üExports and imports of excessive units. • üSpecific commodity based exchanges – not very successful • qPotential • üDiverse climatic conditions • üIncrease in demand. • üIncrease in disinvestments among PSU’s involved in trading. • qImpediments • üRestrictions on inter state movement • üPoor transport mechanism • üNo organised exchange in India – price discovery difficult • Significant PSU participation

  11. Trade Potential

  12. ADVANTAGE THE ORGANIZED SECTOR OFFERS • Facilitate high quality intermediation • Foster professionalism and transparency • Nation-wide reach and consistent offering • Provide impetus to commodity market and generate higher volumes

  13. Inculcate international best practices • Demutualisation • Technology platforms • Information dissemination without noise • Low cost solutions

  14. FUTURE PROSPECTS • The prospect of commodity exchange in India store a bundle of opportunities in term of following: • In term of volume, as many of market player would tend to participate for their ask management which would ensure liquidity for the lines to come.

  15. FUTURE PROSPECTS contd. • Since the exchange would play like a nationwide common market, it would reduce the dis-equilibrium of price/demand supply • Creation of employment opportunities. • The participation of institutional Investor, like Files, Mutual Funds, would with distinct emails and provide further depth to the market.

  16. Volume of Existing Exchanges

  17. 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.

  18. WHY ARBITRAGE OPPORTUNITIES EXITS • Different in perception of different investors; • Demand and supply over market or over location • Market inefficiency

  19. ADVANTAGES OF ARBITRAGE • Reduces market inefficiency • Provide liquidity to the market • Act like a market equalizer tool • Ensure risk free profit

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