understanding commodities

8/11/2019 Understanding Commodities

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Commodity Basics


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1. Classification of Commodities

2. Which are the commodities in which one can trade?

Commodities can be classified into 5 key sectors as shownin the table below:

Commodity Sectors Constituents

a. Agriculture G r a i n s , V e g e t a b l e o i l s ,Fert i l izers, Crop protection,Genomics

b. Metals & Materials Base Metals : A luminum,Copper, Nickel, Zinc, Tin

Bulk Commodities: Iron Ore,Coking Coal, Bauxite, Steel

Others: Soda Ash, Chemicals,Rare Earth Metals

c. Precious Metals & G o l d , S i l v e r , P l a t i n u m ,Materials Palladium

d. Energy C r u d e O i l , N a t u r a l G a s ,Refining, Integrated, Energy,Thermal Coal, Alternate Energy

e. Services Oil Services, Mining Servicesand Others

One can trade in a host of commodities includingbullion, spices, metals, energy, etc.

a. Bullion Gold and Silver

b. Oil & Oilseeds Castor Seeds, Soy Seeds,Castor Oil, Refined Soy Oil, Soymeal, Crude Palm Oil,Groundnut Oil, Mustard Seed,

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Mustard Seed Oil, CottonseedOilcake, Cottonseed.

c. Spices Pepper, Red Chi l l i , Jeera,Turmeric, Cardamom

d. Metals Steel Long, Steel Flat, Copper,Nickel, Tin, Steel, AluminumZinc ingots

e. Fibre Kappa's, Long Staple Cotton,Medium Staple Cotton

f. Pulses Chana, Urad, Yellow Peas, Tur,

Yellow Peasg. Grains Rice, Basmati Rice, Wheat,

Maize, Sarbati Rice, Jeera

h. Energy Crude Oil, Natural Gas, BrentCrude

i. Others Rubber, Guar Seed, Guar gum,

Cashew, Cashew Kernel, Sugar,Gur, Coffee, Silk, Sugar

Australia, Brazil, Hong Kong, Indonesia, Malaysia,Philippines, Singapore and Thailand are the countries with

sizeable commodity resources.

Spot price is that price in the cash market where one buysand sells goods 'on the spot', while future prices are pricesof the same commodity at a future date. Therefore, if thespot price of gold is Rs. 14,700 per 10 gms today, the1month future price could be Rs. 14,800, while the

3. Which are the countries with sizeable commodityresources?

4. What are spot and future prices in commodities?

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2 months future price could be Rs. 14,950. The differencebetween spot and futures prices is the cost of carry i.e.interest cost, storing, insurance, etc. Normally futuresprices are higher than spot prices. The exception is whenthe futures prices are lower than the spot price, which is

called 'backwardation'. This situation is more common incase of agriculture commodities where due to the arrival ofcrop on certain future dates; the futures prices would belower than the current spot price.

A commodity futures contract is an agreement between two

parties to buy or sell the commodity at a future date attoday's future price. Futures contracts differ from forwardcontracts in the sense that they are standardized andexchange traded. In other words, the parties to thecontracts do not decide the terms of futures contracts; butthey merely accept terms standardized by the Exchange.

Commodity Exchanges are institutions which provide aplatform for trading in 'commodity futures'just as how stockmarkets provide space for trading in equities and theirderivatives. They thus play a critical role in robust pricediscovery where several buyers and sellers interact anddetermine the most efficient price for the product. IndianCommodity Exchanges offer trading in 'commodity futures'

in a number of commodities. Presently, the regulator,Forward Markets Commission, allows futures trading inover 120 commodities. There are two types of CommodityExchanges in the country of which three are electronicnational level exchanges. The rest are regional CommodityExchanges.

5. What are Commodity futures?

6. What are Commodity Exchanges?

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7. What does Commodity Exchange Traded Fund (ETF)mean?

8. Which was the first Commodity Exchange set up in the

world?

9. Which are the leading Commodity Exchanges in theworld?

Exchange Traded Funds that invest in physicalcommodities such as agricultural goods, natural resources

and precious metals. A commodity ETF may be focused ona single commodity and hold it in physical storage or mayinvest in futures contracts. Other commodity ETFs look totrack the performance of a commodity index that includesdozens of individual commodities through a combination ofphysical storage and derivatives positions.

The first commodity exchange established in the world wasthe Chicago Board of Trade (CBOT) in the year 1848 by agroup of Chicago merchants. These merchants were keento establish a central market place for trade which wassituated in the premises of a flour store during its first fouryears. Prior to this, farmers too often found no buyers for the

grain they had transported to Chicago. Given the hightransport costs, they had been left with little choice but todump the unsold produce in the nearby lake.

The worlds major Commodity Exchanges are based on thenumber of contracts traded in commodity futures. They are

as follows:New York Metal Exchange (NYMEX)

Chicago Board of Trade (CBOT)

Tokyo Commodity Exchange (TOCOM)

London Metal Exchange (LME)

Shanghai Futures Exchange (SHFE)

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Intercontinental Exchange (ICE)

Central Japan Commodity Exchange (C-COM)

New York Board of Trade (NYBOT)

Tokyo Grain Exchange (TGE)Zhengzhou Commodity Exchange (ZCE)

Source: Bloomberg, Data as on Nov 24, 2009

India has 22 commodity exchanges which have been set upunder the overall control of Forward Market Commission(FMC), Government of India of which the primaryexchanges are:

Multi Commodity Exchange of India Ltd., Mumbai (MCX)

National Commodity & Derivatives Exchange Ltd.,Mumbai (NCDEX)

National Multi Commodity Exchange of India Limited.,Ahmedabad

The Commodity Exchanges are regulated by theGovernment of India under the Forward Contracts(Regulation) Act, 1952. The regulator is the Forward

Markets Commission (FMC) situated at Mumbai,functioning under the Ministry of Consumer Affairs, Food,and Public Distribution of the Central government.

The trading of commodities consists of direct physical

trading and derivatives trading. The commodities markets

10. Which Commodity Exchanges are operational in India?

11. What is the statutory framework for regulatingCommodity Exchanges in India?

12. What is current size of commodity investments globally,% of total investments?

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have seen an upturn in the volume of trading in recent years.In the five years up to 2007, the value of global physicalexports of commodities increased by 17% while thenotional value outstanding of commodity OTC derivativesincreased more than 500% and commodity derivative

trading on exchanges more than 200%. The notional valueoutstanding of banks 'OTC commodities' derivativescontracts increased 27% in 2007 to $9.0 trillion. Globalphysical and derivative trading of commodities onexchanges increased more than a third in 2007 to reach1,684 million contracts. Over 40% of commodities tradingon exchanges was conducted on US exchanges and a

quarter in China. Trading on exchanges in China and Indiahas gained in importance in recent years due to theiremergence as significant commodity consumers andproducers.

Commodities' market facilitates trades in real assets unlikevirtual assets in conventional markets. There are numerousbenchmarks available to track commodity investmentsglobally. Some of the prominent benchmarks include:

S&P Goldman Sachs Commodity Index (GSCI)

Dow Jones Commodity Index (DJCI)

Rogers International Commodity Index (RICI)The S&P GSCI (formerly the Goldman Sachs CommodityIndex) serves as a benchmark for investment in thecommodity markets and as a measure of commodityperformance over time. The index currently comprises 24commodities from diverse commodity sectors - energyproducts, industrial metals, agricultural products, livestock

products and precious metals, etc.

13. What Bench Mark Indices are available to track returnsfrom commodity investments?

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The Dow Jones - AIG Commodity Index is designed to be ahighly liquid and diversified benchmark for the commodityfutures market. The Index is composed of futures contractson 19 physical commodities.

The Rogers International Commodity Index (RICI) is acomposite, USD based, total return index, designed by JimRogers in 1996-97. The index was designed to meet theneed for consistent investing in commodities through abroad-based international vehicle. The index is perhaps themost diverse commodity index and is calculated from 36commodities from 11 international exchanges.

Commodities display a low correlation with asset classeslike equity as shown in the table below (correlation ofcommodities with BSE Sensex)

Correlation 1999 2000 2001 2002 2003 2004

Coefficientvs. BSE -0.04 -0.08 -0.16 0.06 0.00 -0.08Sensex

Correlation 2005 2006 2007 2008 YTDCoefficient

vs. BSE 0.13 0.21 0.09 0.18 0.20Sensex

Source: Bloomberg, Note: Correlation Coefficient of RICIIndex (Commodity) with BSE Sensex (Equity), Data as on31 Dec 2009.

14. What is the correlation of commodities with other assetclasses?

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15

.Whathasbeentheperformanceo

fcommoditiesasaninvestmentclas

scompared

tootherassets?

-34.55%

-52

.48%

-21.00%

73.74%

20.05%

18.72%

Commoditiesasanassetclasshaveoutperformed

othersacrossmarketphases

(includingbearm

arket,flatmarkets).Thetablebelow

givesthereturnsofRICIIndex

comparedtootherindicesincluding

Sensex,MSCIEme

rgingmarkets,MSC

IWorldetc.

Indices

Falling

Flat

Rising

Since1999

Market

Market

(2000-

2008

2002

(2003-

2009

(1999-

2001)

2007)

tilldate)

BSESensex

4.04%

MSCIEmerging

-28.06%

-43

.48%

-8.55%

2

49.98%

66.19%

262.62%

Markets

MSCIAsiaPacific

-27.57%

-42

.34%

-8.12%

1

81.81%

60.42%

161.89%

exJapan

MSCIWORLD

-22.13%

-30

.28%

25.49%

RICIINDEX

1

09.90%

297.06%

Mark

et

Market

4

90.68%

76.35%

470.68%

13.50%

-27

.57%

33.26%

BestPerform

ingIndex

WorstPerformingIndex

Source:Bloomberg

,Dataason31Dec20

09

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16. What is the benefit for retail investors in taking exposureto commodities as an asset class?

17. What is Mirae Asset Global Commodity Stocks Fund(MAGCSF)?

Investors can benefit in several by investing in this asset class:

Portfolio Diversification: As evident from thecorrelation table, commodities have a very lowcorrelation with equities. As such, investors can benefitfrom diversification across multiple asset classes andthereby reduce their investment risk

Hedge against inflation:Commodity prices tend to bepositively correlated with inflation compared to equitieswhich tend to under-perform during periods of highinflation. As such in a scenario of increasing inflation,rising commodity prices can help investors offset rise ofinflation

Optimizing Portfolio Returns: A right mix ofcommodities and equity in your portfolio can help youbenefit from attractive returns while reducing the risks

component.

MAGCSF is an open ended equity fund, investing in equityand equity related securities of companies that areengaged in commodity and commodities related sectors /sub sectors / industries, with at least 65% of the corpusinvested overseas in Asia Pacific and Emerging Markets.While the fund invests predominantly in commodity sectorslike Agriculture, Metals & Materials, Energy etc, it could alsoinvest in stocks of commodity related industries whichprovide support / services to companies engaged incommodity businesses.

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18. Where does MAGCSF invest?

MAGSCF offers access to investors to commodities sectorby investing into commodity stocks of companies in AsiaPacific and Emerging Markets, involved directly or indirectly

with the commodities business in categories like agriculture,metals and materials, precious metals, materials, energy,services, etc. Along with varied sectoral exposures in thecommodity space, the fund also offers investors exposure toa wide range international companies in commodity relatedindustries for, e.g. oil producers, metal producers and alsoancillary companies which provide support/services tocompanies engaged in commodity business.

Investment Objective: Mirae Asset Global Commodity Stocks Fund (An open-ended equity fund): To generate long term capital appreciation through anactively managed portfolio investing in equity and equity related securities ofcompanies that are engaged in commodity and commodities relatedsectors/sub sectors/industries, with at least 65% of the corpus investedoverseas in Asia Pacific and Emerging Markets. There is no assurance or

guarantee of returns. Load Structure: Entry Load: NIL. In terms of SEBIcircular no. SEBI/IMD/CIR No.4 / 168230/09 dated June 30, 2009, no entry loadwill be charged by the Scheme to the investor effective August 1, 2009. Upfrontcommission shall be paid directly by the investor to the AMFI registeredDistributors based on the investorsassessment of various factors including theservice rendered by the distributor. Exit Load: a. Redemption within 1 year (365days) from the date of allotment (including SIP/STP/SWP): 1.00%, b.Redemption after 1 year (365 days) from the date of allotment - NIL. Asset

Allocation: (1) Asia Pacific and/or Emerging Markets Equities and EquityRelated Securities (excluding Indian equities and equities related securities) ofcompanies that are engaged in commodity and commodities relatedsectors/sub sectors / industries: 65% to 100%. (2) Indian Equities and EquityRelated Securities, including but not limited to those that are engaged incommodity and commodities related sectors/sub sectors / industries: 0% to35%. (3) Money Market Instruments / Debt Securities Instruments (Includingupto 25% of corpus in securitized debt): 0% to 35%. Statutory Details:

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Mirae Asset Global Investments (India) Private LimitedthUnit No. 606, 6 Floor, Windsor Building, Off C. S. T. Road,

Kalina, Santacruz - (East), Mumbai - 400 098.

[email protected]

1800 1020 777 (Toll free)

www.miraeassetmf.co.in

Sponsor: Mirae Asset Investments Company Limited. Trustee:Mirae AssetTrustee Company Private Limited; Investment Manager:Mirae Asset GlobalInvestments (India) Private Limited; Transparency:The NAV will be calculatedat the close of every working day and shall be published in two dailynewspapers and on the website of the AMC. Risk Factors: Mutual Fund

investments are subject to market risks and there is no assurance or guaranteethat the objectives of the scheme will be achieved. As with any investment insecurities, the Net Asset Value (NAV) of the units issued under the Schemes cango up or down depending on the factors and forces affecting the capitalmarkets. Past performance of the Sponsor does not indicate the futureperformance of the Schemes of Mirae Asset Mutual Fund. The sponsors are notliable or responsible for any loss resulting from the operation of the fund beyondthe initial contribution made by them of an aggregate amount of Rupees OneLakh towards setting up of the fund. Mirae Asset Global Commodity Stocks

Fund is only the name of the scheme and does not in any manner indicate eitherthe quality of the scheme or its future prospects or returns. Investors in thescheme are not being offered any guaranteed / indicative / assured returns.Please see "Risk Factors", "Scheme Specific Risk Factors and SpecialConsideration" and "Right to limit redemptions" in the scheme InformationDocument. Please read the Scheme Information Document/ Statement ofAdditional Information carefully before investing. Scheme InformationDocument / Key Information Memorandum cum Application form are available

at AMC offices / AMC web-site www.miraeassetmf.co.in / Investor ServiceCentre / Distributors on request.

understanding commodities

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