Commodity

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2

Agenda
     

Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX

3

Role of an Exchange


Anonymous auction for price discovery  Neutrality - conflict of interest avoided  Transparent real time price dissemination


Benchmark reference price  Liquidity to participants


Risk Management in a volatile market


Robust Clearing & Settlement systems - counter party credit risk mitigated  Fair, safe, orderly market - rigorous financial standards and surveillance procedures

4

Benefits of trade on Futures Market


Risk transfer platform from actual users to traders / speculators


Helps hedgers concentrate on core activity



Long term price signals help


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



A good investment option


5

Myths about commodity exchanges


Commodity exchanges are speculative markets not meant for actual users


Speculators infuse liquidity to enable hedgers to transfer their price risk



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
6

Myths about commodity exchanges


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
7

Evolution of Commodity markets in India
 

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 India’s GDP

8

Regulatory Structure in India
Ministry of Finance Ministry of Consumer Affairs

National Housing Bank

Insurance Regulatory Pension Funds Regulatory Development Authority Development Authority (PFRDA) (IRDA)

Company Law Board

FMC

Housing Finance Companies

Insurance

Pension Funds

Corporates

Commodity Exchanges

SIDBI

RBI

SEBI

NABARD

State Financial Institutions

Banking / NBFCs

Capital Markets

Co-operative Banks & Regional Rural Banks

10

Structure of Indian Commodity Futures Exchanges

FMC
Commodity Exchanges

National exchanges

Regional exchanges

NCDEX

NMCE

MCX

NBOT

20 Other Regional Exchanges

11

Growth in volumes of Indian Commodity Exchanges
Rs Crores
6 0 0 ,0 0 0 5 0 0 ,0 0 0 4 0 0 ,0 0 0 3 0 0 ,0 0 0 2 0 0 ,0 0 0 1 2 9 ,4 0 0 1 0 0 ,0 0 0 0 4 ,5 0 0 2001-02 2002-03 2003-04 2004-05 6 6 ,5 0 0 5 7 1 ,0 0 0

Impressive growth of 341 % between 2003-04 to 2004-05
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Volumes of Indian Commodity Exchanges
Rs Crores
M arket T rad e Value M CX , 157246, 28%

Others, 87418, 15% NBOT , 50875, 9% NM CE, 9001, 2%

NCDEX , 266460, 46%

NCDEX

NM CE

NBOT

Others

M CX

13

Agenda
     

Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX

14

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

15

Arbitrage Opportunities
Annualized Returns on Contract over Spot (in %)
June Grade A parboiled Rice Gram Urad Sugar Raw Jute Guar Seed Gold Silver Copper
16

July 88 84 28 13 85 25 12 57 19 3 68 15 5.8 7.3 29.5

August 2.5 46 9 5 48 13 8.3 5.9 18.3

N.A. 8.5 N.A.

Agenda
     

Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX

17

Raw material intensive industry
Industry Ratio of Raw materials/Net sales 92.2 89.6 88.0 86.2 85.8 85.5 84.9 76.7 73.7

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

Steel: Need for hedging mechanism


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

Seller‟s hedge - assumptions

  

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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Seller‟s Hedge
FY00 FY01 FY02 FY03 FY04

Saleable Steel Prices (Rs/Ton)
Quantity Sold
(„000 tonnes)

16500
2668 1291

18500
2446 1507

16600 (10%)
2731 1179

20300
3448 2208

24500
3473 3548

PBDIT
(Rs Crore)

(22%)

(* Saleable steel constitutes approx. 72% of sales)

If hedged completely, could have made incremental profits of Rs 518 crores, 44% higher

21

Buyer‟s Hedge - assumptions
  

Prices increase by 17% in FY04 Prices hedged at FY03 prices Decrease in PBDIT is solely because of increase in raw material component

22

Case Study-Buyers Hedge
FY00 HR Coils Prices (Rs/Ton) Quantity purchased 13728 FY01 15736 FY02 13115 FY03 16776 FY04 19626 (17%) 340996

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

23

Effect of Price shock
Rs crores

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

Increase of 5 % in raw materials -280 -357 -358 -1991

6103.1 9620.7 8462.7 73074

5600 7143 7150 39830

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

24

Agenda
     

Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX

25

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

26

NCDEX Agri vs. NSE-Nifty
1350.00 2500

1300.00 2000 1250.00 1500

1200.00

1150.00

1000

1100.00 500 1050.00

1000.00 16-Dec-02 05-May-03 22-Sep-03 09-Feb-04 28-Jun-04 15-Nov-04

0 04-Apr-05

NCDEX Index

NSENIfty

Correlation coefficient is 0.02
27

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

Benefit of diversification can be seen from the Risk Adjusted Returns
28

Volatility comparison – 1997-05
Average annual volatility  Sensex or Nifty - 25-30%  Govt Sec Index - 5-10%  Gold - 12-18%  Silver - 15-20%  Cotton - 10-12%  Oil seeds - 15-20%


Commodities are less volatile compared to equity market, but more volatile as compared to G-Sec‟s

29

Portfolio diversification & value investing




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

30

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
31

Ab s Cumulative Returns

73.70% 47.80% 48.30%

Risk of Risk Adjusted portfolio Return 3.017 24.43% 3.326
14.37%

3.634
13.29%

21.80% 22.90% 25.20% 23.50% 24.00%

7.92% 8.79% 6.58%

2.001 1.742 3.182 2.673 3.647

Agenda
     

Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX

32

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

Exchange Traded Options Trading on Commodity Indices

33

Banks - Present Scenario


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 March’04
34

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


Role similar to the role of RBI for stabilization of dollar prices



Banks as dealers in commodity markets

35

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

36

Involvement of Mutual Funds
  

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

37

Options and indices


Options


Provides benefit of upside  Substitute MSP of government  Not allowed under FCRA  Need for changes in the Act


Indices


Weather indices  Regulatory changes needed

38

Agenda
     

Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX

39

NCDEX – Current shareholders

NABARD 15%

NSE 15%

IFFCO 12%

CRISIL 12%

ICICI Bank 15%

LIC 15%

Canara Bank 8%

PNB 8%

-Only institutions are our shareholders -NCDEX fully compliant with shareholding guidelines
40

Independent Board of Directors
Name
Shri U. S. Awasthi Shri R.N. Bharadwaj Shri B.V. Bhargava Shri S.H. Bhojani Shri Dileep Choksi Shri D. S. Kolamkar Smt Ranjana Kumar Shri Ravi Narain Shri Lamon Rutten Shri Ravi Mohan Dr. Ajay Shah Shri H.N. Sinor Shri P. H. Ravikumar
41

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

Jan – May 2005
Gur, Rice, Maize, Raw silk, Cocoon, Jeera, Chilli, Steel, Cashew, Cottonseed oilcake, Sesame seed, Tur, Arabica & Robusta Coffee, Copper Cathode

In pipeline
Other base Metals, Energy Products, More Agricultural products

Each product is selected after an in-depth research & market feedback
42

Average daily volumes
Rs cr
2500 2231 2015 2000 2095

Peak Volume for a single day Rs. 4271 cr on Mar 30 ‘05
1619 1444 1231 1229

1500

1000 691 500 55
Q2 2004 Q3 2004 Oct -N ov 04 D e c - '0 4 J a n '0 5 Fe b '0 5 M a r '0 5 A p r '0 5 M a y '0 5

21 0
Q1 2004

Impressive growth of NCDEX with 85% volume contribution from agriculture
43

Robust Deliveries - 2005
TOTA L D ELIVERIES (in m et ric t onnes)
50000 44904 40000 30000 20000 10000 0 4686 J an-05 Feb-05 M ar-05 A pr-05 M ay -05 J un-05 22904 15624 36352.35 28301

TOTA L DELIVERIES

Deliveries of over 1,10,000 MT in first quarter 2005-06

44

Deliveries to Open Interest – June 2005
June deliverables in Metric tonnes 2697 7990 1270 940 110 12810 756 9779 36352 Deliveries to Open Interest 99% 98% 88% 87% 85% 84% 83%

COMMODITY 1 2 3 4 5 6 7 JEERA URAD CASTOR SEED GUARGUM SUGAR S SUGAR M PEPPER Others Total quantity for delivery

Open Interest 2721 8160 1450 1085 130 15260 910

Deliveries in over 18 commodities
45

Architecture for Price Discovery
610
6600

Spot Price polling
70,000 daily trades

members

terminals
490 centres

155,0000 daily orders

37 commodities
250 Awareness Programmes
46

80% agri volume 100 delivery centres
Monthly Deliveries of 40-45000 tt

Price dissemination: Choose your crop
Radio TV Channels E-chaupals

N-logue

News agencies PCOs

Newspapers & journals Kisan call centres AGMARKNET
IFFCO, HAFED Warehouses

Bank branches

47

NCDEX‟s integrated financial solution for farmers

48

Pre-harvest
Price hedging

NCDEX

Aggregator

Farmers

Insurance

Bank

Finance

Buffering yourself from nature’s vicissitudes
49

Post Harvest Scenario
Farmer sees NCDEX spot and futures prices
Sells futures On NCDEX

Approaches mandi of choice
Lodges goods in NCDEX/NCMSL warehouse

90
WAREHOUSES

Goods assayed by approved assayers

Working with all leading assayers NCMSL arranges credit
50

Warehouse Receipt

in electronic form
Bank finance against WR

Grading and Standards: Improve your prospects

IARI
Grading in rice, wheat maize CIRCOT Grading in cotton Quality standards

51

Impact of NCDEX on Prices
Guar Seed Price (Rs/qtl) FY 02 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 823 821 698 758 FY 03 840 1575 1434 1439 FY 04 1217 847 978 958 FY 05 1082 1625 1669 1534 1st Qtr Raw Jute Price (Rs qtl) FY 02 1146 FY 03 1008 FY 04 842 FY 05 1056

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.
52

Thank You

53

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