Professional Documents
Culture Documents
Commodity
Commodity
Agenda
Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX
Role of an Exchange
Anonymous auction for price discovery Neutrality - conflict of interest avoided Transparent real time price dissemination
Robust Clearing & Settlement systems - counter party credit risk mitigated Fair, safe, orderly market - rigorous financial standards and surveillance procedures
Farmers to decide cropping pattern Corporate managers to take investment / capital expenditure decisions
Cover sales and raw materials risk Cost of Capital reduced Arbitrage opportunities
Commodity exchanges are speculative markets not meant for actual users
If commodity exchanges do not enable physical delivery, they are then only for speculators
Exchanges are meant for price discovery and physical delivery is only incidental
As Exchanges gain liquidity actual users will separate hedging from physical delivery
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How can trading volume be greater than actual production in that commodity? Open Interest is the only true indicator of the depth of the market E.g.: Trading volume in Infosys / Reliance in the Capital markets is a multiple of the outstanding shares Can an Exchange have a price view? Exchange is a platform for price discovery It is only the thermometer of the price movements and is not responsible for the price movements
NCDEX rigorously monitors & controls level of and composition of Open interest in any commodity
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Ban in forward trading in mid-sixties Emergence of national level online multi-commodity exchanges 3 National level and 21 regional Trade in 60 commodities compared with just 8 in 2000 Volumes of Rs 571,000 crores in 2004-05 Volume first two months of 2005-06 reached 1,90,000 crores (800 % growth over 25,000 crores in 2004-05)
Traded volume in 2004-05 around 20% of Indias GDP
Insurance Regulatory Pension Funds Regulatory Development Authority Development Authority (PFRDA) (IRDA)
FMC
Insurance
Pension Funds
Corporates
Commodity Exchanges
SIDBI
RBI
SEBI
NABARD
Banking / NBFCs
Capital Markets
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FMC
Commodity Exchanges
National exchanges
Regional exchanges
NCDEX
NMCE
MCX
NBOT
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NCDEX
NM CE
NBOT
Others
M CX
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Agenda
Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX
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Arbitrage opportunities
Law of One Price a commodity cannot command two different prices in two different markets Arbitrage opportunities emerge out of pricing inefficiencies
Between the cash & derivatives market Between two futures contracts with different expiry dates Between two or more exchanges
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Arbitrage Opportunities
Annualized Returns on Contract over Spot (in %)
June Grade A parboiled Rice Gram Urad Sugar Raw Jute Guar Seed Gold Silver Copper
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Agenda
Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX
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Soyabean products Vanaspati Vegetable oils Refinery products Petroleum products Steel wires Gems and jewellery Textile products Bakery and milling
Aluminium products
Polymers Automobiles
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73.8
70.0 68.3 Source: CMIE
Characterized by high volatility during the last 2 years Steel market expected to remain volatile Participants need a mechanism to reduce price risk Steel futures can help mitigate price risk Steel futures will give an indication of future trend in steel prices
19
Price of saleable steel falls by 10% in FY02 Steel hedged at FY01 prices Decrease in PBDIT solely due to fall in price of saleable steel
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Sellers Hedge
FY00 FY01 FY02 FY03 FY04
16500
2668 1291
18500
2446 1507
16600 (10%)
2731 1179
20300
3448 2208
24500
3473 3548
PBDIT
(Rs Crore)
(22%)
If hedged completely, could have made incremental profits of Rs 518 crores, 44% higher
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Prices increase by 17% in FY04 Prices hedged at FY03 prices Decrease in PBDIT is solely because of increase in raw material component
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299927
261118
265973
350807
PBDIT
183.39
240.23
160.15
637.74
635.56
(1%)
The company could have saved the loss of around Rs 97 crores by hedging, i.e. 15% higher profits
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Ratio of RM Net Sales RM Cost to Net Sales Soy Bean products Sugar Gems & Jewllery (Gold) Steel
Source: CMIE
PBT 98 66 99 6134
92 74 84 54
Even an increase of 5 % in cost of raw materials could wipe out the profits of a raw material intensive commodity
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Agenda
Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX
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Conducive drivers
Beginning of the Bull phase after 20 years of Bear market Escalating commodities demand from Asia, especially China Depreciating dollar shift to hard currencies like Gold Inflationary pressures build-up Surging energy prices leading to energy crisis Rise in commodity demand with economic recovery
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1200.00
1150.00
1000
0 04-Apr-05
NCDEX Index
NSENIfty
Correlation: 1997-05
Correlation Coefficients in Indian m arkets Gold Silver Stocks Bonds Gold 1 0.55 -0.09 -0.076 Silver 1 -0.06 -0.015 Stocks 1 0.112 Bonds 1
Data: LBMA bullion prices, NSE Nifty, NSE G-Sec Index
Commodities are less volatile compared to equity market, but more volatile as compared to G-Secs
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Low co-relation between stocks/bonds and the commodities market Better diversification of portfolio Commodity markets are less risky compared with stock market. Reduces risks in a diversified portfolio
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Risk-Adjusted Returns:1997-05
Portfolio structure 100% Stock Portfolio Stocks (50% ) & Gold (50% ) Portfolio Stocks (50% ) & Silver (50% ) Portfolio 100% Gold Portfolio 100% Silver Portfolio 100% Bonds Portfolio Bonds (50% ) & Gold (50% ) Portfolio Bonds (50% ) & Silver (50% ) Portfolio
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Ab s Cumulative Returns
3.634
13.29%
Agenda
Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX
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Regulatory Facilitation
Institutional Participation Banks,MFs, PFs, FIIs
Pool the retail money to the market, boost liquidity & volume Benefit of upside for value-investing Benchmarking the market
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Not allowed to trade on commodity exchange Not allowed to do margin financing against commodities Bank lending to commodities remained very low Commodity a sensitive sector Not under priority sector lending Credibility of Warehouse receipts Reliability of the warehouse Hedging not possible
Bank lending against commodities was only Rs 9,952 cr out of Rs 8,64,143 cr i.e. 1.1% as on March04
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Involvement of Banks
Banks as aggregators
Institutions with good rural presence and sufficient financial expertise and infrastructure
Banks can hedge their agri and corporate loans Banks as market makers for price stabilization
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FII presence
Benefits
Issues involved
More liquidity Broaden and deepen markets Help in the utilization of capital Global experiences Research Best practices
Concentration and control over prices of crucial commodities Physical delivery Withdrawal from the country
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Mutual Funds can bring liquidity and professional skill in the commodity market Mutual Funds can mobilize small savings and invest in commodities and commodity derivatives Easiest route for retail investment
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Options
Provides benefit of upside Substitute MSP of government Not allowed under FCRA Need for changes in the Act
Indices
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Agenda
Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX
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NABARD 15%
NSE 15%
IFFCO 12%
CRISIL 12%
LIC 15%
Canara Bank 8%
PNB 8%
-Only institutions are our shareholders -NCDEX fully compliant with shareholding guidelines
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Organisation
MD, IFFCO Chairman, LIC Chairman, CRISIL Partner, Amarchand Mangaldas & Co. Sr. Partner, C.C Choksi & Co. Director, FMC Chairperson, NABARD MD & CEO, NSE Chief - Finance & Energy, UNCTAD MD, CRISIL Consultant, Ministry of Finance CEO & Secretary, IBA MD, NCDEX
Expertise in
Agriculture Insurance Credit rating/finance Legal Accounting Market Regulation Rural finance/Banking Exchange operation Finance & Energy Credit rating Economics & Finance Banking & Finance Banking & Finance
Product Calendar
Dec 2003
Gold, Silver, Crude Palm oil, RBD Palmolein, Cotton, Mustard seed, Mustard oil Soybean, Refined soy oil
Apr-Dec 2004
Guar seed, Jute sacking, Chana, Rubber, Pepper, Wheat, Castor seed, Guar gum, Raw jute, Urad, Yellow peas, Sugar, Turmeric, Soymeal
In pipeline
Other base Metals, Energy Products, More Agricultural products
1500
21 0
Q1 2004
TOTA L DELIVERIES
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COMMODITY 1 2 3 4 5 6 7 JEERA URAD CASTOR SEED GUARGUM SUGAR S SUGAR M PEPPER Others Total quantity for delivery
members
terminals
490 centres
37 commodities
250 Awareness Programmes
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N-logue
Bank branches
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Pre-harvest
Price hedging
NCDEX
Aggregator
Farmers
Insurance
Bank
Finance
90
WAREHOUSES
Warehouse Receipt
in electronic form
Bank finance against WR
IARI
Grading in rice, wheat maize CIRCOT Grading in cotton Quality standards
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2nd Qtr
3rd Qtr 4th Qtr
1042
1042 1167
857
827 804
823
784 794
1405
1557 1303
Castor Seed price (Rs/20 kgs) FY 02 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 197 224 211 211 FY 03 247 263 297 363 FY 04 375 287 292 300 FY 05 304 357 348 305
Prices are those received by the farmers after adjusting for the taxes and other incidentals. The Prices are from the following mandis: Bikaner, Calcutta and Ahmedabad. Numbers marked in red pertain to Prices after trading was enabled on NCDEX.
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Thank You
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