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8/6/2019 Part Introduction
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Global ProductsGlobal Practices
Spss
A bAnk of ExCLuSIvE knowLEdgE AndInforMAtIon on CoMModItIES ECoSyStEM
CommoditY insightsYearbook 2010
Ji Eea
A
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introduction
The idea behind Commodity Insights, a bankof exclusive knowledge and information oncommodities ecosystem jointly published by theMulti Commodity Exchange of India and Price-waterhouseCoopers, is to provide readers/users(economic stakeholders like traders, processors,consumers, financial institutions, policymakers,analysts, industry observers, academicians, andstudents) with rare insights into the commodities
ecosystem. This is our small second step in mak-ing this yearbook a benchmark resource spreadingknowledge and providing very useful marketinformation in one place in a novel way: present-ing useful data related to commodity markets in aneasy-to-use way and a rich repertoire of analyticalarticles to portray an all-inclusive, up-to-date andlucid exposition of a range of issues and concernsthat are of paramount importance to healthydevelopment of the entire ecosystem.
The focal point of the second edition, Com-
modity Insights Yearbook 2010, is GlobalProducts, Global Practices. Towards this goal, wehave sought to achieve keen involvement of inter-nationally acclaimed authors who all are experts aswell as prolific writers in their respective domain,especially in the areas of policymaking and ide-ation. Besides, our value-adds this year will includespecific case studies on oil hedging and metals pricerisk management, data on BRIC economies, datagiving a broad perspective global economy, etc.
The yearbook, we promise, will be truly useful to
all stakeholders as a year-long, one-stop referencematerial. A fascinating and engaging read too!
About Commodity Insights
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PwC refers to the network of member firms ofPricewaterhouseCoopers International Limited, eachof which is a separate and independent legal entitycommitted to working together to consistently provideclients seamless services of high standards, givingPwC a competitive edge. More than 161,000 people(over 6,000 in India) in 154 countries across the PwCnetwork share their thoughts, experience and solutionsto develop fresh perspectives and practical advice. The130-year old Indian firm PricewaterhouseCoopers Pvt.
Ltd. (www.pwc.com/India) is the oldest and largestprofessional services firm that offers a comprehensiveportfolio of Advisory and Tax & Regulatory services,each presenting a basket of finely defined deliverables.
With a global outlook and local knowledge of culture,laws and business needs, PwC through its solutions tothe challenges of globalization helps clients in Indiamake the most of the changing market scenario. InIndia, PwC has offices in nine cities Ahmedabad,Bangalore, Bhubaneshwar, Chennai, Delhi NCR,Hyderabad, Kolkata, Mumbai, and Pune.
Multi Commodity Exchange of India (MCX) is ademutualised commodity exchange with permanent
recognition from the Government of India to facilitateonline trading, clearing and settlement operations forcommodity futures markets across the country. Sinceits inception in November 2003, millions of smalland medium enterprises, corporate houses, export-ers, importers and traders have benefitted from thisnationwide electronic trading platform through itsefficient and transparent price discovery and price riskmanagement. MCX is the sixth largest commodityexchange in the world and ranks No. 1 in silver, No. 2in gold and natural gas, and No. 3 in crude oil and zinc
futures trading (by the number of contracts traded),according to FIA and data on exchanges websites.
About PwC
About MCX
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CntentsForeword....................................................................................07
From the Editorial Desk ................................................... 08
Market Commentary:
Cmmdity Markets Pised t unlck value r the
stakehlders ...............................................................................10
Experts Views:
Cmmdity Exchanges: Rle in a Glbalising Ecnmy
- Jeffrey M. Christian .................................................................18
Lessns rm the Crisis: Future Financial Regulatin
and Glbal Imbalances - Partha Ray .................................22
Mumbai as an IFC Rle Cmmdity Exchanges
- Ashima Goyal ..........................................................................30
Inter-Relatin between Dierent Markets Lessns r
Cmmdities - Adam Gross...................................................38
Price Risk Management Instruments in Agriculture
- Panos Varangis ........................................................................ 46
Cmmdity Expsures Best Practice Treatment r
Hedge Accunting - Blaik Wilson........................................52
Carbn Markets: The Pst-Cpenhagen Scenari
- Pamposh Bhat ..........................................................................60
Every ert has been made t ensure the high quality and accuracy the cntent the Yearbk. Under n circumstances, MCX and/rPwC shall nt be liable t any user r unintended/accidental errrs. The pinins/views expressed and shared by dmain experts/authrs
in all dcumented materials are their wn and d nt necessarily refect thse the rganisatins/institutins they bear allegiance t,MCX, r PwC (the views shared by Jerey M. Christian, MD and Funder - CPM Grup, are bth his and the Grups). Users/readers maycarry ut due diligence bere using any data/inrmatin herein; neither MCX nr PwC will be respnsible r any discrepancies/disputesarising ut such use.
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Weather Derivatives: A Key Tl r Mitigating the
Impact Climate Change Rajas Parchure ................... 64
Metal Price Risks A New Reality - Jeffrey Bollebakker &
Arnab Ghosh ................................................................................70
Gas Pricing in India Changing Cnturs
- Deepak Mahurkar....................................................................78
Emerging Cmmdities Managing Price Risks r
India Inc - Pankaj Chandak.....................................................86
Special Feature:
Currency Futures - A Key t Managing Exchange
Rate Risk .....................................................................................58
Market Data or Ready Reerence:
Indian Ecnmy - An verview ...........................................92
Nn-Agricultural Cmmdities .........................................132
Agricultural Cmmdities ................................................. 226
All rights reserved. N part this publicatin may be reprduced, r transmitted in any rm r by any means, electrnic, mechanical,phtcpying, recrding, scanning, r therwise, withut explicit prir permissin MCX r PwC.
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Dated 5th August, 2010
Foreword
Currently, in the wake of the global financial crisis, markets in most economies around the world are undergoing
a makeover primarily in terms of the much needed transparency and robust flow of information a rigorous
exercise towards appropriate oversight and regulations. In this context, Indian markets find themselves in a much
safer and solid ground largely on the back of the prudence demonstrated by our policymakers through their
strategy of gradual and phased policy of liberalisation and globalisation over the years.
In sync with our governments vision of enabling domestic markets to graduate to the stature of price setters
in the international marketplace and the countrys economy to emerge as a powerhouse on the global economic
canvas, domestic markets have witnessed a phenomenal growth in their new pan-economic, electronic and demu-
tualised form during the past six years.
Our governments vision and policy approach found strong support in the form of enormous catalytic efforts
undertaken by the market regulator, intermediaries, and the national online multi-commodity exchanges as they
embarked upon a slew of initiatives to augment financial literacy through frequent awareness-generation and
outreach programmes. This, along with trading of innovative commodity derivative products on these exchanges
globally-competitive, efficient platforms made this remarkably fast growth possible. As a result, the total value of
commodities traded on domestic futures exchanges has over the past six years witnessed 60-fold jump to Rs.77.65lakh crore as it stands today. In volume terms, the trade has surged at a CAGR of 97.9% in the same period.
If, as per the stated vision, our domestic markets are to catapult India to the stature of a price setter at the inter-
national level from its current position of price taker and our economy to the hallowed position in the global
economic landscape it deserves, then our markets must have both an efficient price discovery and an effective risk
management mechanism in place. Again, efficiency of price discovery and effectiveness of risk management in the
marketplace are the function of a uniform and transparent flow of appropriate information on the fundamentals
and other price-moving factors of commodities through wide participation of ecosystem-wide heterogeneous
players. This in turn calls for continuous promotion of market research and efforts aimed at dynamic collation
and secure maintenance of data and information.
In this context, the joint endeavour of the Multi Commodity Exchange of India (MCX) and PricewaterhouseCoo-
pers (PwC) aimed at promoting market research and information-building processes in the countrys commodityecosystem in the form of a commodity yearbook is an extremely laudable effort indeed.
I congratulate both MCX and PwC on the release of the second edition of the compendium, which, I am sure,
would contribute its bit towards achieving the lofty objective that we all as the stakeholders of this strongly
emerging economy aspire for.
I wish Commodity Insights 2010 a grand success.
Rajiv Agarwal
Secretary (CA)
Yeejle mejkeejGHeYeeskelee ceeceues, Keee SJeb meeJe&peefveke efJelejCe ceb$eeuee
GHeYeeskelee ceeceues efJeYeeieke=ef
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Standing (from left to right): Mr. Niteen Jain, Mr. Sujan Bhattacharyya, Ms. Vidya Shintre, Ms. Dhwani Mehta, Mr. Nazir Ahmed Moulvi, and Mr. Debojyoti Dey.Seated (from left to right): Dr. Kiran Karande, Ms. Carol Daver, and Dr. V. Shunmugam
from the EDIToRIAL DESK
Reaching Outto enrich the Ecosystem
In our continued commitment toenriching the commodity mar-kets ecosystem, it is our pleasureto have joined hands once again
to bring out the second edition of
Commodities Insights Yearbook.
In line with the Multi Commodity
Exchanges stated focus on global
commodities and global practices,
we have reached out to some inter-
national experts, specialists in their
respective domains, to contribute
to the first part of the yearbook
dedicated to continuous knowledge
sharing and enrichment. The resultof this knowledge delivery process
is inside for all stakeholders to
read and benefit from. The experts
contributions cover multiple dimen-
sions of commodity markets, from
risk management in commodities/
verticals to global best practices in
markets and among their hetero-
geneous stakeholders to the role
commodity exchanges can play in
making Mumbai an International
Financial Centre.
Thanks to the warm response vari-
ous ecosystem stakeholders and the
users of this yearly compendium
have extended to our endeavour
with their candid feedback, we have
taken sincere efforts to provide an
increased number of useful data
sets on commodities and improve
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V. Shunmugam
Chief Economist
Multi Commodity Exchange of India
Kumar Dasgupta
Partner
Price Waterhouse
.
A PwC & MCX Jint Endeavur| 9
the overall quality of the book
based on their feedback.
Having won several credentials
in its journey to becoming Indias
largest and the worlds sixth larg-
est commodity exchange, driven
by its strategic partnerships with
various ecosystem players, it was
time for MCX to focus on creating
a global benchmark platform with
worldwide-traded commodities,
which would follow global bench-
mark practices to provide domestic
economic stakeholders with a cost-effective platform to mitigate the
forces of international commodity
fundamentals in Indian time zone.
PwC, which services clients the
world over in their efforts towards
price risk management of globally-
traded commodities, becomes
MCXs natural partner in this joint
endeavour aimed at enlightening
market participants, academicians,
corporations, and policymakerswith prices and the fundamentals
that shape them. We firmly believe
that this effort of ours will help
all these stakeholders with appro-
like to thank Sujan Bhattacharyya,
Niteen Jain, Nazir Moulvi, Dhwani
Mehta and Debojyoti Dey, all fromMCX, and Dr. Kiran Karande from
Price Waterhouse for their relentless
efforts, day in and day out, without
which our idea would not have
taken the shape of this book. It is our
pleasure to acknowledge the work
of summer interns from SCMHRD,
Pune Ms. Arshika Mishra, Mr.
Ankit Dua and Mr. L. Deepak on
updating the data sets published in
the 2009 edition. And finally, thismessage from the editorial desk will
not be complete without thanking
Ms. Carol Daver and Ms. Vidya
Shintre who helped gather financial
support for packaging this idea of
ours in a most presentable manner.
You may share your views,
thoughts, and suggestions with
us at [email protected], or at the
email addresses provided below;
this surely will help us enrichCommodity Insights even further
in future attempts.
Hope, you find this edition worth
referring to, time and again.
priate guidance in their future
decisions ranging from personal
consumption to national economicpolicymaking.
In our bid to reach out to a wider
base of stakeholders and give them
access to the yearbook than the
limitation of a printed edition allows
us to, we have already hosted the
electronic version of the first edition
of Commodity Insights on the
exchange website, www.mcxindia.
com. It draws an average of 411 visi-
tors everyday and has attracted nearly56,680 hits since it was uploaded in
May-end. To inform those who are
new to this joint endeavour of MCX
and PwC, the first issue was released
on October 14, 2009.
We would like to thank Mr. Jignesh
Shah, Vice Chairman MCX;
Mr. Lamon Rutten, MD and CEO
MCX; Mr. Parveen Singhal, DMD
MCX; and Mr. Kumar Dasgupta,
Partner Price Waterhouse; for theircontinuous encouragement and
support without which this initia-
tive of ours would have remained
unaccomplished. We also would
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With gradual realisation and acceptance by
economic stakeholders that in order to take
necessary commercial decisions, they have to
actor in global (not just domestic) availability
and prices o commodities, there has also been
a tacit recognition o the necessity o protecting
commercial operations rom the risks posed by
high price volatility at the international level. An
Ernst and Young survey in 2008 ound that there
has been an overwhelming recognition o risks
stemming rom commodity price uctuations
and, thus, o the importance o hedging o inputs
at pre-fxed prices as a risk-mitigating strategy.
However, our markets, which are mature enough
to unlock values or the stakeholders, nowneed an enabling environment that is based on
imaginative and bold policy agenda.
Commodity Markets Poised to unlock valuefor the stakeholders
For reasons with multipleimplications, commoditieshave been in the news for much
of the period since Commodities
Insights made its appearance last
autumn. Although much water
has flown since then, commodities
with their varied economic dimen-
sions have come to visit us moreoften, at times with a greater force
than before. With globalisation of
the Indian economy, nearly all
its players from tractor-driving
farmers to jet-flying corporates
are getting exposed to the vagaries
of international fundamentals
affecting commodities that they
are concerned with. Whether
the Indian economy is truly de-
coupled from the forces drivingeconomies elsewhere in the world
or not, particularly during a crisis
scenario like the current one, our
10| Cmmdity Insights Yearbk 2010
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domestic commodity markets,
undeniably, are linked to theglobal fundamentals of demand,
supply, policy actions and market
expectations much more now than
ever before.
New global risks andincreasing recognitiono hedging
With gradual realisation and accep-
tance by the countrys economic
stakeholders that both global avail-ability and prices of international
commodities have to be factored
in, to take the necessary production
and other commercial decisions,
there is also a tacit recognition
of the necessity of shielding their
commercial operations from risks
posed by commodity price volatil-
ity at the international level. A
2008 survey by Ernst and Young
(E&Y) across a broad range ofIndian companies found that there
has been overwhelming recognition
of the risks arising out of commod-
ity price fluctuations and, thus,
that of the importance of hedging
of inputs at pre-fixed prices as a
risk-mitigating strategy as per the
responses of most of the surveyed
lot. Yet, protection against adverse
commodity price movements is
viewed more as a tactical measure
than as a strategic device to man-age risks.
The effect of price volatility of vari-
ous commodities on corporate bot-
tom lines was amply demonstrated
by a recent study carried out by a
prominent Indian business daily.
The study used quarterly results
of over 1,500 manufacturing firms,
which indicated that expenses on
raw material had increasingly
eaten away a higher share of the
otherwise healthy performance of
their sales.
As the table shows, raw mate-
rial expenses, which had, in fact,declined by 3.19% in December
2009, increased by 59% in March
2010 and 28 percent in June 2010
for this large sample of companies.
The expenses also consistently
accounted for more than half the
sales since March 2010. Conse-
quently, net profits of these compa-
nies have been falling consistently
over the past three quarters. And
this is despite their net sales suc-
cessfully weathering adverse worldeconomic conditions to post robust
year-on-year growth.
Perhaps the companies could do
pretty little to reduce their raw
material bill. But what they could
have definitely done is to arrest
institutional environment that
could promote risk managementculture among them.
A similar survey of 1,100 compa-
nies, after their March 2010 quarter
results were announced, was con-
ducted by another publication. The
combined net profits of these com-
panies showed a marked increase
of 28.5%, year on year. However, if
the commodity companies (merely
155 in all) were left out, the net
profits of the rest fell by morethan 9 percentage points to 19.8%!
Conversely, the quarterly profits of
these 155 commodity companies
grew by more than 103%, Y-o-Y, in
March 2010, proving the dichoto-
mous effect of commodity prices
on corporate bottom lines.
the impact of commodity price
volatility and, by extension, the
volatility in their net profits. As
the table shows, increases in netprofits gyrated wildly from 67.40%
to 11.48% during the last three
quarters. Evidently, a robust risk
management tool like commodity
futures trading to hedge against
such volatility could have enabled
them to lock in input costs at pre-
determined levels. This, sadly, was
not done to the desired extent by
these companies, a result of failure
to take risk management fromtactical to strategic levels by their
management. What also added to
their woes is lack of a policy and
For an economy trying to wither
the effects of the recent financial
crisis on its foreign trade prospects,
commodity price volatility hasbeen a double whammy for its
agriculture sector in the past one
year. Such high volatility is, again,
a result of Indian agricultural
markets responding to signals ema-
nating from international markets
in an increasingly globalised world
where rapid strides in information
and communication technology
(ICT) mean that the smallest news
of relevance in the remotest partof the world can have its profound
effect felt within domestic markets
and that there remains a structural
e y ps p bls
Heads June 10 March 10 December 09
Rs. /crore % change Rs. /crore % change Rs. /crore % changeover over over
June 09 March 09 Dec. 08
Net sales 418,814 23.07 448,346 30.09 401,200 19.18
Raw Mat. Expense 210,731 27.63 235,468 58.94 159,284 (-)3.19
Raw Mat to sales (%) 50.32 1.80 52.52 9.53 39.70 (-)9.17
Net Proft 43,419 11.48 47,649 40.92 48,218 67.40
Source: Capitaline
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products has scarcely been able to
match their ability and needs. Thereason, as has been elucidated in
several fora by several constituen-
cies in recent years, is the slow pace
of policy and institutional reforms
for nurturing the use of commod-
ity derivatives by the stakeholders
in India.
Healthy market growth in need o policy
initiativesMarkets facilitating the trade incommodity-based derivatives in
India are regulated under the For-
correction of prices pending for
long. The double whammy is due
to volatility adversely impacting
food prices and input costs and,
thus, the bottom lines of industries
using them as raw materials. The
state machinery often tries to
intervene in the market to cushion
both sides of the market by absorb-
ing such volatility often at the costof the exchequer.
The moot point is that risks associ-
ated with commodity price spikes
and volatility have, in recent times,
risen considerably and affected
more and more economic entities
that are being exposed to risks
associated with increasing volatil-
ity while being ever more aware of
the impact of this exposure on theireconomic pursuits. While they
seek to cover these risks through
hedging against commodity price
movements, how attractive does
the market they approach appear.
The E&Y survey found nearly all
respondents to hedge through
recourse to plain vanilla products
alone. Significantly, about 68% of
them had a hedging horizon of less
than three months, indicating that
they could not explore possibilities
of long-term hedging to protectlong-term business cash flows.
Clearly, there is a demand for
safe hedging through a variety of
hedging instruments, many more
than what the market currently
provides. While OTC forward
contracts can fulfil the demand
for customised hedging products,
they lack the kind of liquidity
and safety that exchange-traded
and exchange-cleared derivativesprovide. The market for the lat-
ter, unfortunately, seems to have
run into a wall as the supply of
A PwC & MCX Jint Endeavur| 13
67.4%To 11.5% Companiesnet profits gyrated, as
wildly as this, in the past 3quarters. Surely, a robust risk
management tool like commodityfutures could have helped
lock in input costs atpredetermined
levels.
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ward Contracts (Regulation) Act,
1952, an Act enacted in the backdrop
of wartime shortages. Evidently, amarket which has grown by nearly
40% in the past four years to become
one of the largest in the world
(implying its enormous importance
for the economy) and its products
are reckoned as an investible asset
class in the league of stocks and
fixed income instruments, needs
to function under the ambit of a
market-enabling regime than this
Act allows. The intended amend-ment to the Act is yet to see the
light of day, despite being at various
stages of review by legislators for
close to four years. As a result, not
only is market development, incom-
mensurate to the level of economic
requirement being impossible to be
taken up under the existing law but
also that integration of the com-
modity futures market with the
physical ecosystem has been left
incomplete. The reluctance of bothcapital and money market regula-
tors to let their regulated entities
enter the commodity futures market
appears to be for two broad reasons:
the lack of clear policy guidelines
and the absence of an autonomous
regulator for this market. Similarly,
denying products such as options
and intangibles, which could fulfil
the hedging demand of a very large
number of stakeholders not theleast of who are from the farming
community is tantamount to
keeping these stakeholders away
from an effective risk-mitigating
device.
That economic stakeholders are
more prone to commodity price
risks under effect of global forces
has been well recognized by now.
This has been the biggest contribu-
tor to the creation of the demandside of the commodities derivatives
market. What has been less appreci-
ated is the tremendous potential
those that promote futures trading
in commodities but also remove the
hurdles on the way towards forma-tion of a pan-India physical market
for commodities setting up a solid
platform for national commodity
derivative markets.
Today, as we stand at the cusp of
history and a generation witnesses
the transition of India from a
poverty-stricken country to one
of prosperity and economic might,
the visages of control that inhibit
this transition have to be identifiedand removed. Cynics argue against
liberalising commodity markets for
a range of imaginary fears, ranging
from stoking fires of inflation to
securing supplies of key inter-
mediaries. But as our experience
with liberalisation (together with
similar actions of the other emerg-
ing superpower, China) has clearly
demonstrated, there is much more
to gain through liberalisation ofmarkets and economy than to give
into what the phantoms of imagi-
nation would lead us to believe.
After all, the Indian economy has
proven to be robust enough to
withstand and emerge successfully
from transitions and crises; and
markets, under leadership-provid-
ing regulators, mature enough to
unlock values for the economic
stakeholders. What is needed now
is only an enabling environment,created by an imaginative and bold
policy agenda, so that these values
are reaped by all stakeholders to
their fullest extent. As American
writer Ambrose Redmoon once
famously said, Courage is not
the absence of fear, but rather the
judgment that something else is
more important than fear, only
some boldness in policymaking and
a commitment towards furtherliberalisation of economic forces
can catapult us to the next level
of growth
that a fast-growing large economy
like India holds in the world of
commodities market to get backits ancient price-setting power.
Given the size of its population and
nature and growth potential of its
economy, India is one of the larg-
est producers and/or consumers of
most commodities. With liberalised
markets both physical and futures
- and an accommodative policy
regime that promotes new products
and market participation from India
and abroad, the commodity deriva-tives market in India can set global
benchmarks not only in terms of
prices discovered in its markets
but also in terms of products and
practices. Already, despite being
under a relatively restrictive market,
the countrys largest commodity
futures exchange is the sixth largest
in the world, occupying the top
position in silver and second posi-
tion in gold and natural gas. With
an accommodative policy, Indiacan definitely be the price-maker
rather than a passive price-taker
for most commodities in the world
market, especially the ones that the
stakeholders actively trade in. Such
policies would not only include
Courage is notthe absence oear, but ratherthe judgmentthat somethingelse is moreimportantthan ear
Ambrose Redmoon
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PiceaehseCpes P. L.2nd Floor, 252, Veer Savarkar Marg, Shivaji Park, Dadar, Mumbai 400 028 (India)
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