A

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Joint Endeavour

Joint Endeavour

Multi Commodity Exchange of India Ltd.

Exchange Square, CTS No. 255, Suren Road, Chakala, Andheri (East), Mumbai 400 093 (India)
Tel: +91-22-6731 8888; Fax: +91-22-6649 4151
Website: www.mcxindia.com

Commodity Insights Yearbook 2011

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2nd Floor, 252, Veer Savarkar Marg, Shivaji Park, Dadar, Mumbai 400 028 (India)
Phone: +91-22-6669 1000; Fax: +91-22-6654 7800
Website: www.pwc.corn

Commodity Insights
Yearbook 2011

A bank of exclusive knowledge and

information on commodities ecosystem

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MARKET
COMMENTRY
PROLOGUE
INTRODUCTION

EXPERTS' VIEWS

INDIAN ECONOMY

About Commodity Insights

The idea behind Commodity Insights, a bank of exclusive knowledge and information on
the commodities ecosystem, jointly published by the Multi Commodity Exchange of India Ltd
and PricewaterhouseCoopers, is to provide economic stakeholders like traders, processors,
consumers, financial institutions, policymakers, analysts, industry observers, academicians,
and students with rare insights into the commodities ecosystem. This is our third consecutive
humble step in making the Yearbook a benchmark resource by spreading market intelligence
through easy-to-access useful data and a rich repertoire of analytical articles to portray an
all-inclusive, up-to-date and lucid exposition of a range of issues and concerns that are of
paramount importance to a healthy development of the entire ecosystem.
The focal point of Commodity Insights Yearbook 2011 is Commodity Economy during
Recession and Recovery. To achieve this goal, we have sought to achieve keen and intense
engagement of internationally acclaimed experts who are prolific authors in their own domain,
especially when it comes to ideation and providing leads for informed decision-making on
the policy front. In this edition, our value-adds include rare granular-level data on the Indian
economy, time series data giving a broad span temporal perspective to the commodity
economy, etc. The Yearbook, we believe, will prove to be truly useful and a fascinating read
for the stakeholders as a one-stop, ready-reference material for the years ahead.

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DATABANK - NON-AGRI COMMODITIES

DATABANK - AGRI COMMODITIES

About PwC

About MCX

PwC (www.pwc.com) firms help organisations and individuals

create the value they are looking for. PwC has a network of
firms in 158 countries with close to 169,000 people committed
to delivering quality in assurance, tax and advisory services.
In India, PwC (www.pwc.com/India) offers a comprehensive
portfolio of advisory and tax & regulatory services, each of which
presents a basket of finely defined deliverables. Indian network
of PwC firms also provide services in Assurance, as per the
relevant rules and regulations in India. Providing organisations
with the advice they need, wherever they may be located,
PwCs highly qualified, experienced professionals, who have
sound knowledge of the Indian business environment, listen
to different points of view to help organisations solve their
business issues and identify and maximise the opportunities
they seek. PwCs industry specialisation allows help its clients
co-create solutions for their sector of interest.
In India, PwC is located in Ahmedabad, Bangalore,
Bhubaneshwar, Chennai, Delhi NCR, Hyderabad, Kolkata,
Mumbai and Pune.

Multi Commodity Exchange of India Ltd. (MCX) is Indias

leading commodity exchange based on the value of commodity
futures contracts traded. The demutualised Exchange has
permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operations
for commodity futures across the country. It offers trading in
over 40 commodity futures based on contract specifications,
from a diverse range of classes including bullion, ferrous and
non-ferrous metals, energy and agriculture. The same underlying physical asset traded under different contract specifications is regarded as a separate commodity future. A majority
of these commodities are significant in the Indian and global
context, and are also traded on international exchanges. MCX
(www.mcxindia.com) was the 5th largest* commodity futures
exchange globally in terms of the number of contracts traded.
The Exchange was also the worlds largest* exchange in silver,
the second largest* in gold, copper and natural gas, and
the third largest* in crude oil, with respect to the number of
futures contracts traded.

* Source: Data published for the period between January 1 and June 30, 2011
on the websites of the exchanges, use of Market Data and FIA volume survey,
September2011.
Disclaimer: Multi Commodity Exchange of India Limited is proposing, subject to
market conditions and other considerations, a public offer of equity shares by way
of an offer for sale and has filed a Draft Red Herring Prospectus (DRHP) with the
SEBI. The DRHP is available on the websites of SEBI at www.sebi.gov.in and the book
running lead managers at www.edelweissfin.com, http://www.online.citibank.co.in/
rhtm/citigroupglobalscreen1.htm and www.morganstanley.com/indiaofferdocuments.
Investors should note that investment in equity shares involves a high degree of risk
and for details in relation to risk factors, please see the section titled Risk Factors
in the DRHP. This advertisement may not be published or distributed in the U.S.,
Canada or Japan and is not an offer or solicitation of an offer for sale of securities
in the U.S. These securities have not been and will not be registered under the U.S.
Securities Act of 1933, as amended, and may not be offered or sold in the U.S.
absent registration or an exemption from registration under such act.

www.mcxindia.com / www.pwc.com/in/en

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EXPERTS' VIEWS

INDIAN ECONOMY

Contents
Message......................................................................................................................05
Foreword ...................................................................................................................07
Prologue.....................................................................................................................08
Experts' Views:
Commodity price movements: Understanding causes and consequences
John Baffes, Senior Economist, World Bank .............................................................................14
Business cycles and their relationship with the commodity economy
Stephan Pfaffenzeller, Lecturer Economics, University of Liverpool ...................................18
Can the commodity economy be decoupled from the financial sector?
Adam Gross, Director of Strategy Bourse Africa........................................................................ 22
Recent trends in global commodity prices and regulatory responses: Which way now?
Partha Ray, Professor of Economics, Indian Institute of Management - Calcutta ..................28
Commodity cycles : Follow or cause economic cycles
Robin Roy, Associate Director, and Sanjoy Majumder, Senior Consultant, Financial Services, PwC ..... 36
Chinas pre-eminence in the global gold market
Jeffrey M. Christian, Managing Director, CPM Group .........................................................................40
Re-writing the rules of the game: evolving contours of global regulatory regimes to
govern derivatives
Michael Greenberger, Law School Professor, and Michael Vesely, JD, University of Maryland ....44
Market as a bail-out institution: Commodity exchanges in liberalised trade regime
Nilanjan Ghosh, Head Research & Strategy, MCX............................................................................ 50

Market Data for Ready Reference:

Indian Economy An Overview....................................................................................................... 54
Non-Agricultural Commodities........................................................................................................74
Agricultural Commodities ...............................................................................................................178
Every effort has been made to ensure high quality and accuracy of contents in the Yearbook. Under no circumstances, MCX and/or PwC
shall be liable to any user for unintended/accidental errors. The opinions/views expressed and shared by domain experts/authors in all
documented materials are their own and do not necessarily reect those of the organisations/companies/institutions they bear allegiance
to, MCX, or PwC. Sources of information/statements in Experts Views may be found in the references, as indicated by the authors. Users/
readers may carry out due diligence before using any data/information herein; neither MCX nor PwC will be responsible for any discrepancies/
disputes arising out of such use.
All rights reserved. No part of this publication may be reproduced, or transmitted in any form, or by any means electronic, mechanical,
photocopying, recording, scanning, or otherwise without explicit prior permission of MCX or PwC.

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2/8/2012 3:36:40 PM

PROLOGUE

EXPERTS' VIEWS

INDIAN ECONOMY

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PROLOGUE

EXPERTS' VIEWS

INDIAN ECONOMY

Has commodity economy

really decoupled?

While the jury is out on the linkages between the commodity economy and the
financial sector, what has emerged as a clear message from the recent turmoil is the
strength of well-regulated exchange-traded derivatives as a safe risk-mitigating tool
one that ensures rather than disturbs economic stability.

he clouds of a prolonged recession that first

gathered on the global economic horizon
with the sub-prime crisis in the American
housing market in 2007, and thickened
after the collapse of the Lehman Brothers in 2008,
stubbornly refuses to dissipate. The weak spots in
economic systems have been exposed, while whole
societies are witnessing unprecedented turmoil
owing to vulnerabilities created as a result. Thus,
near-total freeze of trade credit shook the otherwise

solid foundation of Asian economies at the height

of the economic downturn in 2009, while an overtly
liberal fiscal agenda followed by European nations
for years has made them pile unsustainable levels
of debt, leading to a potential crisis. Consequently,
large sections of the world economy are staring at a
seemingly unending period of economic stagnation
with apprehensions of deep social unrest.
While commenters and scholars have been
analyzing threadbare all relevant strands during the

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DATABANK - NON-AGRI COMMODITIES

www.mcxindia.com / www.pwc.com/in/en

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DATABANK - AGRI COMMODITIES

A PwC & MCX Joint Endeavour

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PROLOGUE

EXPERTS' VIEWS

Hedging against
commodity price gyrations
has become a sine-quanon for healthy corporate
bottomlines, as much for
farmers profitability.
current instability in global financial markets, an
aspect that has been left less examined and, as such,
deserves an inquisition is the impact that the recent
economic downturn has had on commodity markets.
The interrelations among the real sector, the financial
sector and the commodity economy have grown both
in depth and in complexity over the past decade so
that the developments in one have immediate impact
on other sectors. More importantly, the manners
in which these interrelations play out and manifest
have undergone some visible changes themselves,
thanks to the rising complexity just mentioned. For
instance, some observers have commented that
for a few commodities that have an unambiguously
positive and strong correlation with economic cycles,
the decline in prices during the recent downturn has
been muted compared to previous cycles. For some
commodities, there has been no discernible impact
at all.
These stylized facts raise the important question:
To what extent has the oft-talked-about decoupling
of the commodity sector actually taken place? On the
other hand, it is also possible that as against earlier
downturns, the timing and force of counter-cyclical
policy interventions have been of higher order during
the present downturn. Such expansionist policies,
aimed at arresting economic contractions, could have
worked their way into asset markets lifting prices
across asset classes, including commodities. Proliferation of financial instruments that have commodities as the underlying could also have contributed
to this linkage between counter-cyclical policies and
commodity prices. However, it is still far from being
clear as to what extent this factor would have been at
play and what reasons can be attributed to the differential impact on different commodities.
The other significant development in the last
decade has been the unprecedented growth of a
number of large economies, generally referred to as
the emerging economies, whose growth has been

INDIAN ECONOMY

associated with concomitant huge demands placed

on natural resources. During the financial crisis of
2008 and after, these emerging economies remained
largely unscathed and experienced only a slowdown
while most developed economies were reeling under
recession. It is, therefore, possible that the forces
of demand and supply of multiple commodities
have appeared to act during the recent downturn in
manners different from those in the earlier recessions.
The macro changes observed in the commodity
economy during the recent global economic downturn
have had several and severe effects at the micro
level too. Corporate bottomlines, especially of firms
majorly exposed to commodities and those involved
in international trade, have been affected significantly
by commodity price volatility. These developments
have made firms look out for hedging devices and
practices to protect their bottomlines. While many of
them found commodity futures as a safe platform to
hedge their risks, it was time they needed to cast a
relook at their existing hedging strategies in light of
the changing paradigm of downturn in all markets they
have stakes in and the interconnectedness among
them. For instance, the prices of most commodities
attached to global markets are found to be impacted
thrice by economic events such as the recent one.
First, by the economic event itself; second, by the
demand-supply fundamentals, which are affected by
the event; and third, by the movements in the markets
of those currencies in which global commodities are
mostly denominated in.
Thus, hedging against commodity price gyrations
has become a sine-qua-non for healthy corporate
bottomlines, as much for farmers profitability. In this
context, the role of exchange-traded commodity derivatives, vis--vis over-the-counter (OTC) derivatives, has
been receiving renewed attention in recent years. This
attention is a direct offshoot of the failure of loosely
regulated off-exchange derivative products in the US
and other developed markets that led to the crisis in
world financial markets in 2008-2009. Indeed, the
global crisis was, in many ways, a crisis of market
regulation. It is for this reason that the US, the EU
and many other countries are currently going about
tightening the regulatory frameworks that govern their
financial and commodity markets. The crisis was also
one of trust, which myriad OTC products that proliferated before the crisis bred but eventually killed
in the developed markets. The noticeable growth of
the transparent exchange-traded commodity deriva-

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DATABANK - NON-AGRI COMMODITIES

DATABANK - AGRI COMMODITIES

tives market, even as the OTC market is shrinking,

is the result of both these factors. According to Bank
of International Settlements (BIS) data, the gross
market value of OTC commodity contracts crashed by
80 percent in just two years, from US $2,213 billion
in June 2008 to $457 billion in June 2010. Yet, the
number of exchange-traded contracts increased by
38 percent to 2,830 million in 2010 from 2,042
million in 2009. The benefits of transparent and wellregulated exchange-traded commodity derivatives are
indeed becoming visible to market players and, no
doubt, more so in the wake of the recent downturn.
In view of all the above factors, it is pertinent
that research agenda either in the commodity sector
or in economic cycles include various facets of
inter-relationships between them, especially during
periods of turbulence in either. This is important
for at least two objectives: one, to explore the
possibility of using commodity price behaviour as a
useful tool for predicting economic cycles. Two, and
more importantly, to investigate the degree to which
current efforts directed at global economic recovery
can be influenced by commodity price movements.
The latter is a particularly critical objective to keep
in view when formulating effective anti-cyclical
policies. Indeed, the exploratory journey to test the
inter-linkages among commodity and other financial
www.mcxindia.com / www.pwc.com/in/en

001-011_CIYB_2011_Prologue.indd 11

markets will throw its biggest benefits to public policy

and enable policymakers to tread the careful path
in avoiding policies aimed at buoying some markets
that often have unintended ramifications for others.
As observed above, what has emerged as a clear
message from the recent turmoil is the strength of
well-regulated exchange-traded derivatives as a safe
risk-mitigating tool one that ensures rather than
disturbs economic stability.
Keeping in tune with these issues of high contemporary relevance, the 2011 edition of Commodity
Insights very aptly focuses on the theme Commodity
Economy during Recession and Recovery. Accordingly, the Yearbook attempts to scrutinize some
of these critical issues and ask questions on the
interconnectedness of markets designing appropriate ahead-of-the-curve policy actions, and whether
commodity cycles will follow or cause business cycles,
going forward. The Experts Opinions, substantiated
by Data for Ready Reference, are an endeavour to
investigate and flag these critical issues and seek
to delve deep into them. Indeed, the mission of the
Insights will be achieved if readers are sufficiently
invigorated and triggered by the commentaries inside
to embark upon a deeper probe, on their own, into the
dynamics of inter-linkages among markets and their
policy implications.
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