Commodity Marketing

S.Veena Prashanth S.Marina Priyadarshini

15-Jun-2012

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Introduction

A commodity may be defined as an article, a product or material that is bought and sold .
Commodities are basically the products of the primary sector of an economy The primary sector of an economy is concerned with agriculture and extraction of raw materials such as metals, energy which serve as basic inputs for the secondary sector of the economy . A commodity exchange is an association or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

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History of Commodity Market

The concept of organized trading in commodities evolved in Chicago, in 1848. The first commodity to be traded in a commodity market was Wheat.

Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for futures trading evolved.
Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. A regulatory body called Chicago Board of Trade (CBOT) was established in 1848 to supervise these contracts.

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COMMODITY MARKET IN INDIA

In India, it was started in 1875 through the establishment of Cotton Trade Association which organized the trading of Cotton in futures. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). But people later feared that because of futures trading it may lead unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities.

So the parliament passed the Forward Contracts (Regulation) Act, 1952 which banned the commodity trading in derivatives.
But by 1993 due to globalisation policy Prof K.N.Kabra committee recommended allowing futures trading in 17 commodity groups and some amendments to Forward Contracts (Regulation) Act, 1952 which was accepted by government and futures trading was allowed for the recommended commodities.

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COMMODITIES TRADED IN INDIA

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INDIAN COMMODITY MARKET STRUCTURE

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Global Commodity Exchanges

NYMEX : New York Mercantile Exchange

LME : London Metal Exchanges

CBOT : Chicago Board of trade SICOM : Singapore Commodity Exchanges Kansas Board of trade Winnipeg Commodity Exchange, Manitoba Dalian Commodity Exchange, China Bursa Malaysia Derivatives exchange

Singapore Commodity Exchange (SICOM)

Chicago Mercantile Exchange (CME), US

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Commodity Exchanges in India

National Commodity Exchanges
NCDEX National Commodity & Derivative

MCX - Multi Commodity Exchange

NMCEIL - National Multi Commodity Exchange India Ltd ICEX Indian Commodity Exchange

Regional Commodity Exchanges

Bombay Commodity Exchange Kanpur Commodity Exchange Ahmedabad Commodity Exchange

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The product must not have gone through any complicated manufacturing activity, except some basic processing like mining and cropping etc. The product has to be fairly standardized, which means there cannot be much differentiation in a product based on quality. The product must have adequate shelf life since the delivery of the commodity through futures contract

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Market Participants

Hedgers. Speculators. Arbitrageurs

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Hedgers :
They are generally the commercial producers and consumers of the traded commodities.

They participate in the market to manage their spot market price risk.
Commodity prices are volatile and their participation in the futures market allows them to hedge or protect themselves against the risk of losses from fluctuating prices.

For e.g. a copper smelter will hedge by selling copper futures, since it is exposed to the risk of falling copper prices.

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Speculators :
They are traders who speculate on the direction of the futures prices with the intention of making money.

Thus, for the speculators, trading in commodity futures is an investment option.

Most Speculators do not prefer to make or accept deliveries of the actual commodities.

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Arbitrageurs :
They are traders who buy and sell to make money on price differentials across different markets.

Arbitrage involves simultaneous sale and purchase of the same commodities in different markets.
Arbitrage keeps the prices in different markets in line with each other. Usually such transactions are risk free.

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Analysis

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Factors Determining the Price of Gold :

US Currency : Risk of international politics and monetary system: Demand and supply in the market : Jewelry Sector. Manufacturing and Medical Industry. Investment.

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Predicted Prize of Gold for the next 9 Years

Speculative Prize of Gold in USD / Ounce

S.NO
1 2

Year
2012 2013

Speculative Prize USD / Ounce

$1,820.00 $2,447.00
Price in USD

$70,000.00

$60,000.00

$50,000.00

3
4 5 6 7 8 9

2014
2015 2016 2017 2018 2019 2020

$3,394.00
$4,874.00 $7,280.00 $11,373.00

$40,000.00

$30,000.00

$20,000.00

$10,000.00

$18,696.00
$0.00

$32,584.00 $60,732.00

2012 2013 2014 2015 2016 2017 2018 2019 2020 Year Speculative Prize USD / Ounce

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2012 Price Outlook :

Investment will remain the major driver of prices in 2012. Overall supply is forecast to rise this year, with continued growth in mine production and a lift in scrap. Gold fabrication demand, excluding coins, is forecast to fall this year under the pressure of high prices and slowdown in global GDP growth. However, we continue to expect a sufficiently supportive macroeconomic environment for gold investment to push prices further up this year, although periods of price weakness are also to be expected

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Investment Analysis for 2012

Environment for gold investment will generally remain supportive : Slowdown in world GDP growth; downturn in both developed world and most emerging market countries. Implication of this is a loosening of monetary policy globally. Euro zone debt crisis continues in 2012, with only slow progress towards resolution.

Inflation expectations are raised by central banks monetary easing and debt monetization.

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THOMSON REUTERS GFMS GOLD PRICE FORECAST FOR 2012

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Steel
Rank Production of Steel by 2011 Production of Steel by 2010

1.
2. 3. 4. 5.

China
Japan United States India Russia

683.9 Mt
107.6 Mt 86.4 Mt 71.3 Mt 68.9 Mt

China
Japan United States India Russia

637.4 Mt
109.6 Mt 80.5 Mt 68.3 Mt 66.9 Mt

Source : World Steel Association

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Stainless Steel Price Forecast :

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Factors Determining the Price of Steel :

Chinese Imports. Economic Sustainability.

Threat from Substitutes.

Raw material Trends.

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THE FUTURE CONTRACT

A future contract is an agreement for buying or selling a commodity for a predetermined delivery price at as specific future time.

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THE FORWARD CONTRACT

A buyer and a seller agree to a specific price/quantity exchange sometime in the future. Forward contracts are done between individuals (no intermediary), so all financial risk is born by those in the contract, which may result in some sort of risk premium factor being included.

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FORWARD CONTRACT VS FUTURE CONTRACT

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OPTION CONTRACT
An option contract is an agreement between two parties to buy/sell an asset (stock or futures contract as an example) at a fixed price and fixed date in the future. Here the buyer is not obliged to carry out transaction. Types: Call Option: Gives the buyer the right to buy the underlying asset. Put Option: Gives the Seller the right to sell the underlying asset.

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COPPER
Copper is one of the world's most widely used industrial metals and been in existence and used by the people 10000 years ago. Copper is one of the commodities that is more sensitive to the economic growth because of its broad usage spread all over the place from the living rooms to the huge industrial units

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Factors Determining the Price of Copper :

Supply and Demand Inventory Stocks Supply Disruptions Low Quality of Ore

Economic Data from China and US

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Copper Forecast Price Chart

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