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Commodity Exchanges - Northern India Regional Council of ICAI by pengxiang

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    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
           A good investment option
                Arbitrage opportunities



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
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       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


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       Regulatory Structure in India
            Ministry of Finance                                                          Ministry of Consumer
                                                                                                 Affairs




   National           Insurance Regulatory Pension Funds Regulatory   Company
                                                                                                  FMC
 Housing Bank         Development Authority Development Authority     Law Board
                             (IRDA)                (PFRDA)


                                                                                              Commodity
Housing Finance                                Pension
                           Insurance                                  Corporates              Exchanges
  Companies                                     Funds




                     SIDBI                  RBI                  SEBI              NABARD



                  State Financial         Banking /             Capital            Co-operative Banks &
                    Institutions           NBFCs                Markets            Regional Rural Banks



  10
     Structure of Indian Commodity Futures Exchanges


                       FMC

                Commodity Exchanges


         National                    Regional
        exchanges                   exchanges



NCDEX      NMCE     MCX      NBOT     20 Other Regional
                                         Exchanges

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     Growth in volumes of Indian Commodity Exchanges


                                                     Rs Crores




          Impressive growth of 341 % between 2003-04 to 2004-05


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     Volumes of Indian Commodity Exchanges

                                             Rs Crores




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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         July         August
     Grade A                    88           12             2.5
     parboiled Rice
     Gram                       84           57             46
     Urad                       28           19              9
     Sugar                      13            3              5
     Raw Jute                   85           68             48
     Guar Seed                  25           15             13
     Gold                    N.A.            5.8            8.3
     Silver                     8.5          7.3            5.9
     Copper                  N.A.        29.5           18.3

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     Agenda

           Overview
           Arbitrage Opportunities
           Hedging Opportunities
           Investment Opportunities
           Institutional Participation
           NCDEX




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     Raw material intensive industry
        Industry                   Ratio of Raw
                                   materials/Net
                                           sales
        Soyabean products                  92.2
        Vanaspati                          89.6
        Vegetable oils                     88.0
        Refinery products                  86.2
        Petroleum products                 85.8
        Steel wires                        85.5
        Gems and jewellery                 84.9
        Textile products                   76.7
        Bakery and milling                 73.7
        Aluminium products                 73.8
        Polymers                           70.0
        Automobiles                        68.3    Source: CMIE

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     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




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     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            16500        18500         16600    20300   24500
      Prices (Rs/Ton)                                      (10%)
      Quantity Sold               2668         2446         2731     3448    3473
      („000 tonnes)

      PBDIT                       1291         1507         1179     2208    3548
      (Rs Crore)                                           (22%)

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



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


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     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




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       Case Study-Buyers Hedge

                        FY00        FY01          FY02        FY03        FY04

     HR Coils            13728        15736         13115       16776      19626
     Prices (Rs/Ton)                                                       (17%)

     Quantity          299927       261118         265973     350807      340996
     purchased
     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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     Effect of Price shock
                                                               Rs crores




      Source: CMIE




     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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     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                                                                                    0
           16-Dec-02   05-May-03   22-Sep-03        09-Feb-04    28-Jun-04   15-Nov-04   04-Apr-05

                                               NCDEX Index      NSENIfty


                       Correlation coefficient is 0.02

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     Correlation: 1997-05




      Data: LBMA bullion prices, NSE Nifty, NSE G-Sec Index




     Benefit of diversification can be seen from the
                      Risk Adjusted Returns

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     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



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     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




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     Agenda

           Overview
           Arbitrage Opportunities
           Hedging Opportunities
           Investment Opportunities
           Institutional Participation
           NCDEX




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       Regulatory Facilitation

Institutional Participation   Pool the retail money to the
  Banks,MFs, PFs, FIIs        market, boost liquidity & volume

     Exchange Traded               Benefit of ‘upside’ for
          Options                     value-investing

        Trading on
                                 Benchmarking the market
     Commodity Indices




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       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

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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
            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                 Concentration and
               Broaden and                  control over prices of
                 deepen markets              crucial commodities
            Help in the utilization        Physical delivery
             of capital                     Withdrawal from the
            Global experiences              country
            Research
            Best practices




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     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




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         NCDEX – Current shareholders



          NABARD                 NSE               IFFCO     CRISIL
            15%                  15%                12%       12%




          ICICI Bank             LIC           Canara Bank    PNB
             15%                 15%               8%          8%


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

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     Independent Board of Directors
Name                   Organisation                         Expertise in

Shri U. S. Awasthi     MD, IFFCO                            Agriculture

Shri R.N. Bharadwaj    Chairman, LIC                        Insurance

Shri B.V. Bhargava     Chairman, CRISIL                     Credit rating/finance

Shri S.H. Bhojani      Partner, Amarchand Mangaldas & Co.   Legal

Shri Dileep Choksi     Sr. Partner, C.C Choksi & Co.        Accounting

Shri D. S. Kolamkar    Director, FMC                        Market Regulation

Smt Ranjana Kumar      Chairperson, NABARD                  Rural finance/Banking

Shri Ravi Narain       MD & CEO, NSE                        Exchange operation

Shri Lamon Rutten      Chief - Finance & Energy, UNCTAD     Finance & Energy

Shri Ravi Mohan        MD, CRISIL                           Credit rating

Dr. Ajay Shah          Consultant, Ministry of Finance      Economics & Finance

Shri H.N. Sinor        CEO & Secretary, IBA                 Banking & Finance

Shri P. H. Ravikumar   MD, NCDEX                            Banking & Finance

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       Product Calendar
                       Apr-Dec            Jan – May
Dec 2003                2004                2005               In pipeline


Gold, Silver,        Guar seed,            Gur, Rice,          Other base
Crude Palm           Jute                  Maize, Raw          Metals,
oil, RBD             sacking,              silk,               Energy
Palmolein,           Chana,                Cocoon,             Products,
Cotton,              Rubber,               Jeera,              More
Mustard              Pepper,               Chilli, Steel,      Agricultural
seed,                Wheat,                Cashew,             products
Mustard oil          Castor                Cottonseed
Soybean,             seed, Guar            oilcake,
Refined soy          gum, Raw              Sesame
oil                  jute, Urad,           seed, Tur,
                     Yellow                Arabica &
                     peas,                 Robusta
                     Sugar,                Coffee,
                     Turmeric,             Copper
                     Soymeal               Cathode

     Each product is selected after an in-depth research & market feedback
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     Average daily volumes
                                                            Rs cr


      Peak Volume for a single day
        Rs. 4271 cr on Mar 30 ‘05




 Impressive growth of NCDEX with 85% volume contribution from agriculture
43
     Robust Deliveries - 2005




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



44
     Deliveries to Open Interest – June 2005

                                                                                    Deliveries to
                                       June deliverables                                Open
          COMMODITY                       in Metric tonnes    Open Interest             Interest

     1    JEERA                                        2697              2721                 99%

     2    URAD                                         7990              8160                 98%

     3    CASTOR SEED                                  1270              1450                 88%

     4    GUARGUM                                       940              1085                 87%

     5    SUGAR S                                       110                   130             85%

     6    SUGAR M                                     12810             15260                 84%

     7    PEPPER                                        756                   910             83%

          Others                                       9779

         Total quantity for delivery                  36352



                                Deliveries in over 18 commodities

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        Architecture for Price Discovery
                              610            Spot Price
                            members                               70,000
               6600                            polling
                                                                   daily
           terminals                                              trades

         490
                                                                           155,0000
        centres
                                                                             daily
                                                                            orders

         37
                                                                           80% agri
     commodities
                                                                            volume

                   250                                     Monthly
                                    100 delivery
                Awareness                                 Deliveries of
               Programmes
                                      centres
                                                          40-45000 tt

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         Price dissemination: Choose your crop

                                 Radio
             TV Channels                       E-chaupals
                                                 N-logue


     News agencies
                                                            PCOs


 Newspapers &
                                                          Kisan call
      journals
                                                           centres

                           IFFCO, HAFED
            AGMARKNET                     Bank branches
                            Warehouses


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
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     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           Warehouse Receipt
              assayers
                                     in electronic form
          NCMSL
          arranges               Bank finance against WR
           credit
50
     Grading and Standards: Improve your
     prospects


             IARI
                                                  Quality
     Grading in rice, wheat
                                                  standards
             maize

                                  CIRCOT
                              Grading in cotton




51
         Impact of NCDEX on Prices
               Guar Seed Price (Rs/qtl)                                  Raw Jute Price (Rs qtl)

               FY 02   FY 03        FY 04     FY 05                    FY 02     FY 03     FY 04         FY 05

     1st Qtr     823       840        1217        1082      1st Qtr       1146     1008            842    1056

     2nd Qtr     821      1575         847        1625      2nd Qtr       1042      857            823    1405
     3rd Qtr     698      1434         978        1669      3rd Qtr       1042      827            784    1557
     4th Qtr     758      1439         958        1534      4th Qtr       1167      804            794    1303


                                     Castor Seed price (Rs/20 kgs)
                                       FY 02       FY 03    FY 04     FY 05
                          1st Qtr           197       247      375      304
                          2nd Qtr           224       263      287      357
                          3rd Qtr           211       297      292      348
                          4th Qtr           211       363      300      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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