Commodity Markets

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest

Commodity - Definition

A commodity is any good or service produced by human labour and offered as a product for general sale on the market

- Karl Max

Characteristics• Commodity is anything movable (a good) that has

following characteristics • Fungible, i.e. the same no matter who produces it• Derivatives, i.e. involves further processing into

number of products• Economic cost, i.e. production of it involves some cost

Wheat in your bread

Petrol in your vehicle

Coffee on your table

Sugar in your sweets

Chana in your chhole

Gold in your necklace

……… and so on …….

Commodities are everywhere

Commodities – in Real Life

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest Commodities

Commodity – As Asset Class

In financial parlance, assets are economic resources that is capable of being owned or controlled to produce value

Commodity too has gained importance currently as independent asset class

Commodity, being the natural goods are independent of other asset classes

Assets Classes

Equities : Performer during economic expansion & an out performer over very long term…

Fixed Income : Performs at the later stage of recession…

Real Estate : Performs during early expansion…

Commodities : Performance spread evenly over the economic cycle…

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest

Commodity – Unique points of diversification

1. Seasonality A major force in the commodities markets

2. Correlation Unlike other asset class,

commodities are positively and negatively correlated within & outside the group which is unique to commodities only

3. Weather No other asset class are so much influenced by weather patterns

4. Hedge Provides natural hedge against war, inflation, other asset

portfolios, recessions etc. example -GOLD

Commodity – Performance

Returns Over Different Asset Classes in 4 Yrs.

69.5173.72 75.95

88.46

31.55

-1.44-10

0

10

20

30

40

50

60

70

80

90

100

SENSEX NIFTY CNX 500 NCDEXAGRI INDEX

INR MCXMETALINDEXSource:Bloomberg,Way2Wealth Research

Commodity – Performance

Various Asset Classes Performance

60

80

100

120

140

160

180

200

220

240

260

Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09

NCDEX Ag Index Nifty USDINR MCX Metal Index

Indian Share in Global Commodity Market

91%

9%

Global India

Contribution in global landscape

Global Vs. India

Global commodity has relatively long history

Size is 9 times larger than India

India

Commodity futures, though active since 19th century was banned later in 1970’s

Commodity volumes shoots up significantly after re-launch in 2003

MCX emerged as world’s Sixth largest exchange

Volumes on Indian exchanges are increasing at CAGR of 73.7 percent

2009 2008Global 14831317 11712611India 1469673 1067984

Source:FMC,Way2Wealth Research

Commodity Trading ( Value in Million USD)

Global growth in Commodities 2004-09

Global Commodity F&O -2009

65%

23%

12%

America Asia Europe+MESource : WEF

Global Commodity F&O -2004

20%

68%

12%

America Asia Europe+MESource : WEF

Share of Asia has jumped more than 5 times

Global growth in Commodities 2008-09

Exchangewise Volume Share Commodity F&O -2009

33%

18%

9%

9%

6%

20%

5%

DCE CME SHFE ZCE ICE MCX LME

Source: WFE

Exchangewise Volume Share Commodity F&O -2008

18%

38%8%

13%

11%

5%7%

DCE CME SHFE ZCE ICE MCX LME

Source: WFE

Chinese exchanges has seen

two fold increase in volume

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest Commodities

Classification of Commodities

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest Commodities

Commodity – Indian Structure

20 Other Regional Exchanges

NMCE

Commodity Exchanges

MCX

National Exchanges

Regional Exchanges

FMC – The Regulator

NBOTNCDEX

Leadership position with >90% share

Indian Growth so far

0

100

200

300

400

500

600

700

2007 2008 2009 2010 2011 2012 2013MCX NCDEX TOTAL

Source:FMC,Way2Wealth Research

Bullion and other metals 31.5 36.1 57.9 64.6 56.7 40.8Other than bullion metals

- - - -- 23.2

Agriculture 68.2 55.3 35.8 23.1 11.9 15.7Energy 0.3 8.4 6.3 12.3

-20.3

Others 0.0 0.1 0.0 0.0 31.4 0.0

Segment wise % Share of Commodities

Significant rise in volume since

launch of exchanges in 2013

MCX Leader in Metals & Energy

NCDEX Leader in Agri

> 65% CAGR Growth

Volume Growth in Indian Exchanges

Returns in Indian commoditiesReturns Across Various Commodities in 5 Yrs.

92.8662.54

3.83

-12.36-45.21

9.25

87.12

22.25 4.96 9.6551.16

142.80

94.21

485.86

23.60

-100

0

100

200

300

400

500

600

Gold

Silv

er

Cru

de o

il

Copper

Zin

c

Alu

min

ium

Lead

Guar

Seed

Guar

Gum

Soy O

il

Soybean

Pepper

Jeera

Turm

eric

Menth

a O

il

Source:Bloomberg,Way2Wealth Research

Almost 45 commodities are available for trading in both NCDEX & MCX Though few have been de-listed during high inflation times, re-listing also has happened Bullion, Base metals, energy & Agri are the major contributors in terms of volumes

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest Commodities

Commodity provides true diversification in financial portfolio

Commodity act as hedge against risks involved in business

Rising income will ensure Inflation which in turn will ensure bull market in commodites

Explosion of population and shriking agricultural land would leave commodity scarce

Returns chasing funds & investors (traders, investor &HNI) will make it vibrant

Consumption / Spending in infrastructure / GDP growth will lead to depletion of metals

Secular bull market in commodities is likely to continue

Why Invest in Commodities

Hedgers : Risk Managemento Consumers – Refineries, food processing

companieso Traders, exporters, importerso Producers – farmers, Integrated producers

Speculators: High Volatility Higher Leverageo Retail investors, Commodity spot tradero Institutional, Corporate & proprietary traders

Arbitrageurs : Safe Opportunisto Spot future arbitrageo Spread Strategieso Intra and inter market arbitrage

Investors: Portfolio diversifiero Individuals, Pension & Mutual Fundso Corporate bodies

Who Can Invest

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest Commodities @ Way2Wealth

How to Invest

Procedure for Trading in Commodities

• Open Demat & Trading A/C

Filling KYC (Know Your Customer)

Documents required : Pan Card, Address Proof, Networth, Cancelled cheque (MICR), Photo etc

• To get familiar with this asset class, start reading research reports and monitor advisory and execution

• Acquire full knowledge of risk involved in futures

Mark to Market Daily Pay-in & pay-out Margin requirements Contract expiry & rollover Leverage, profit & loss etc

Index

Definition Commodity – As Asset Class Commodity – Uniqueness Classification of Commodities Indian Commodity Market Size Commodities Offered for Trading Why Commodities How to Invest Commodities

Methodology - Analysis

Fundamental• Supply-n-demand, crop survey, climatic changes, policies, logistics,

specifications, delivery stocks, physical market linkages, Cartel move, etc

Technical• Chart patterns, indicators etc

Derivative• Volume and Open Interest Change, Contract duration, rollover, Relative

analysis with other markets etc

Statistical• Arima modelling, Correlation & regression study, Deviation, Time series,

Seasonality, Ratio study etc.

Research @ Way2Wealth

Products

Strategies• Arbitrage / Spreads• Hedging – All commodities• Trading / Investment advisory

Reports• Daily• Weekly• Special• Events• Commodity Profiles

Special Support Need based special coverage of non futures commodities like Coal,

Chemicals, Naptha, Freight, Carbon credits etc. (on cost basis)

Research Products @ Way2Wealth

Trading Products

• Based on Fundamental / Technical / Derivatives & Algorithm

• Plain vanilla Trading• Customised Trading

Investing Products

• Algorithm or statistical based

• Trend chasing, Money management principle, premium brokerage• Strong execution skills

Products @ Way2Wealth

Thank you