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Commodity Market WHAT IS COMMODITY?

Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines goods as every kind of movable property other than actionable claims, money and securities. In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc. For the former, commodity is a largely homogeneous product, traded solely on the basis of price, whereas for the latter, it refers to wares offered for exchange. In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer are considered equivalent. It is the contract and this underlying standard that define the commodity, not any quality inherent in the product. One can reasonably say that food commodities, for example, are defined by the fact that they substitute for each other in recipes, and that one can use the food without having to look at it too closely. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. The national commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities. Page 1

Commodity Market CHARATERISTICS OF COMMODITY In Marx's theory, a commodity has value, which represents a quantity of human labor. The fact that it has value implies straightaway that people try to economies its use. A commodity also has a use value, an exchange value and a price. It has a use value because, by its intrinsic characteristics, it can satisfy some human need or want, physical or ideal. By nature this is a social use value, i.e. the object is useful not just to the producer but has a use for others generally. It has an exchange value, meaning that a commodity can be traded for other commodities, and thus gives its owner the benefit of others' labor (the labor done to produce the purchased commodity). Price is then the monetary expression of exchange-value (but exchange value could also be expressed as a direct trading ratio between two commodities without using money).

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Commodity Market ABOUT COMMODITY MARKET The process of economic liberalization in India began in 1991. As part of this process, several capital market reforms were carried out by the capital market regulator Securities and Exchange Board of India. One such measure was to allow trading in equities-based derivatives on stock exchanges in 2000. This step proved to be a shot in the arm of the capital market and volumes soared within three years. The success of the capital market reforms motivated the government and the Forward Market Commission (the commodities market regulator) to kick off similar reforms in the commodities market. Thus almost all the commodities were allowed to be traded in the futures market from April 2003. To make trading in commodity futures more transparent and successful, multi-commodity exchanges at national level were also conceived and these next generation exchanges were allowed to start futures trading in commodities on-line. Commodities exchanges have seen a surge in commodity futures volumes in the last few years. This rise in volumes has been led by bullion (gold and silver) trading. Today a whole lot of commodities are available for trading in futures and the list is getting bigger by the day. No wonder then that the commodity futures market is being viewed as a significant business segment by many businessmen, investors, institutions, brokers, banks etc. Of course there are still millions of Indians who are not aware that commodities other than gold and silver can also be traded in on commodity exchanges like equity. Fewer still know that commodities can be traded on-line! In this part of project I tried to cover every aspect of commodity trading and have been written in a language that is simple and lucid. I am certain that this will help me a long way in generating awareness about commodity trading for me. The various money-making trading strategies for the commodities market discussed here it will also be of immense help to those billion investors who are already trading in commodities. What is a commodity exchange? A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

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Commodity Market What is Commodity Futures? A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons: 1] Consumer Preferences: - In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance. 2] Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. The objectives of Commodity futures: Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading Page 4

Commodity Market commodities. This would make funding easier and less stringent for banks to commodity market players.

Benefits of Commodity Futures Markets:The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly. 1] Price Discovery:Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal. 2] Price Risk Management:Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc. 3] Import- Export competitiveness:The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till Page 5

Commodity Market the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions. 4] Predictable Pricing:The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments. 5] Benefits for farmers/Agriculturalists:Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions. 6] Credit accessibility:The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to pay back the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending. Page 6

Commodity Market 7] Improved product quality:The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.

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Commodity Market HISTORY OF EVOLUTION OF COMMODITY MARKETS Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice. These were known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19th century Chicago in United States had emerged as a major commercial hub. So that wheat producers from Midwest attracted here to sell their produce to dealers & distributors. Due to lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmers and dealers to transact in spot grain to deliver wheat and receive cash in return. Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for futures trading evolved. Whereby the producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way producer was aware of what price he would fetch for his produce and dealer would know about his cost involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is not interested in taking delivery of the produce, he could sell his contract to someone who needs the same. Similarly producer who not intended to deliver his produce to dealer could pass on the same responsibility to someone else. The price of such contract would dependent on the price movements in the wheat market. Latter on by making some modifications these contracts transformed in to an instrument to protect involved parties against adverse factors such as unexpected price movements and unfavorable climatic factors. This promoted traders entry in futures market, which had no intentions to buy or sell wheat but would purely speculate on price movements in market to earn profit. Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. This created a platform for establishment of a body to regulate and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Agricultural commodities were mostly traded but as long as there are buyers and Page 8

Commodity Market sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was established in New York through the merger of four small exchanges the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.

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Commodity Market HISTORY OF COMMODITY MARKET IN INDIA The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market. Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisages three tire regulations: (i) Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in a policy, started actively encouraging commodity market. After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities.

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Commodity Market Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone elses lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. Since 2002, the commodities future market in India has experienced an unexpected boom in terms of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually nonexistent, except some negligible activities on OTC basis. In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi- Commodity Exchange of India Limited (NMCEIL) Ahmadabad. There are other regional commodity exchanges situated in different parts of India.

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Commodity Market LEGAL FRAMEWORK FOR REGULATING COMMODITY FUTURES IN INDIA The commodity futures traded in commodity exchanges are regulated by the Government under the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator for the commodities trading is the Forward Markets Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution Forward Markets Commission (FMC) It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952. Commission consists of minimum two and maximum four members appointed by Central Govt. Out of these members there is one nominated chairman. All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit Rating Information Service of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in the country promoted by national level institutions. NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national level technology driven on line Commodity Exchange with an independent Board of Directors and professionals not having any vested interest in Commodity Markets. It is committed to provide a world class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts Regulation Act and various other legislations. NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers throughout India. NCDEX currently facilitates trading of 57 commodities. Page 12

Commodity Market Commodities Traded at NCDEX 1] Bullion Gold KG, Silver, Brent 2] Minerals Electrolytic Copper Cathode, Aluminum Ingot, Nickel Cathode, Zinc Metal Ingot, Mild steel Ingots 3] Oil and Oil seeds Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell), Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM seed oil cake, Refined soya oil, Rape seeds, Mustard seeds, Caster seed, Yellow soybean, Meal 4] Pulses Urad, Yellow peas, Chana, Tur, Masoor, 5] Grain Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow red maize 6] Spices Jeera, Turmeric, Pepper 7] Plantation Cashew, Coffee Arabica, Coffee Robusta 8] Fibers and other Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28 mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium Staple, Mulberry, Green Cottons, , , Potato, Raw Jute, Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334 9] Energy Crude Oil, Furnace oil Page 13

Commodity Market Multi Commodity Exchange of India Limited (MCX) Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized exchange with permanent reorganization from Government of India, having Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures market across the country. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses Importers Association and Shetkari Sanghatana. MCX deals with about 100 commodities. Commodities Traded at MCX 1] Bullion Gold, Silver, Silver Coins, 2] Minerals Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead 3] Oil and Oil seeds Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil, 4] Pulses Chana, Masur, Tur, Urad, Yellow peas 5] Grains Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley, 6] Spices Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove, Ginger,

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Commodity Market 7] Plantation Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut, Coffee, 8] Fiber and others Kapas, Kapas Khalli, Cotton (long staple, medium staple, short staple), Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute Sacking, 9] Petrochemicals High Density Polyethylene (HDPE), Polypropylene (PP), Poly Vinyl Chloride (PVC) 10] Energy Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil, Natural Gas National Multi Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited. (NMCEIL) is the first de-mutualised Electronic Multi Commodity Exchange in India. On 25th July 2001 it was granted approval by Government to organize trading in edible oil complex. It is being supported by Central warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmadabad.

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Futures trading is a result of solution to a problem related to the maintenance of a year round supply of commodities/ products that are seasonal as is the case of agricultural produce. The United States, Japan, United Kingdom, Brazil, Australia, Singapore are homes to leading commodity futures exchanges in the world. 1] The New York Mercantile Exchange (NYMEX) The New York Mercantile Exchange is the worlds biggest exchange for trading in physical commodity futures. It is a primary trading forum for energy products and precious metals. The exchange is in existence since last 132 years and performs trades trough two divisions, the NYMEX division, which deals in energy and platinum and the COMEX division, which trades in all the other metals. Commodities traded - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.

2] London Metal Exchange The London Metal Exchange (LME) is the worlds premier non-ferrous market, with highly liquid contracts. The exchange was formed in 1877 as a direct consequence of the industrial revolution witnessed in the 19th century. The primary focus of LME is in providing a market for participants from non-ferrous based metals related industry to safeguard against risk due to movement in base metal prices and also arrive at a price that sets the benchmark globally. The exchange trades 24 hours a day through an inter office telephone market and also through a electronic trading platform. It is famous for its open-outcry trading between ring dealing members that takes place on the market floor.

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Commodity Market Commodities traded - Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy, North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density Polyethylene, etc.

3] The Chicago Board of Trade The first commodity exchange established in the world was the Chicago Board of Trade (CBOT) during 1848 by group of Chicago merchants who were keen to establish a central market place for trade. Presently, the Chicago Board of Trade is one of the leading exchanges in the world for trading futures and options. More than 50 contracts on futures and options are being offered by CBOT currently through open outcry and/or electronically. CBOT initially dealt only in Agricultural commodities like corn, wheat, non storable agricultural commodities and non-agricultural products like gold and silver. Commodities Traded - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol, Rough Rice, Gold, Silver etc.

4] Tokyo Commodity Exchange (TOCOM) The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures exchange in the world. It trades in to metals and energy contracts. It has made rapid advancement in commodity trading globally since its inception 20 years back. One of the biggest reasons for that is the initiative TOCOM took towards establishing Asia as the benchmark for price discovery and risk management in commodities like the Middle East Crude Oil. TOCOMs recent tie up with the MCX to explore cooperation and business opportunities is seen as one of the steps towards providing platform for futures price discovery in Asia for Asian players in Crude Oil since the demand-supply situation in U.S. that drives NYMEX is different from demand-supply situation in Asia. In Jan 2003, in a major overhaul of its computerized trading system, TOCOM fortified its clearing system in June by being first commodity exchange in Japan to introduce an in-house clearing system. TOCOM launched options on gold futures, the first option contract in Japanese market, in May 2004. Commodities traded - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Aluminum, Rubber, etc Page 17

Commodity Market 5] Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) is the largest futures exchange in the US and the largest futures clearing house in the world for futures and options trading. Formed in 1898 primarily to trade in Agricultural commodities, the CME introduced the worlds first financial futures more than 30 years ago. Today it trades heavily in interest rates futures, stock indices and foreign exchange futures. Its products often serves as a financial benchmark and witnesses the largest open interest in futures profile of CME consists of livestock, dairy and forest products and enables small family farms to large Agribusiness to manage their price risks. Trading in CME can be done either through pit trading or electronically. Commodities Traded - Butter milk, Diammonium phosphate, Feeder cattle, frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc

6] Dubai Gold & Commodity Exchange (DGCX) Dubai Gold & Commodity Exchange (DGCX) was formed in Dubai. It is developed jointly by Dubai government as well as MCX and FTIL. At the moment it is trading in Gold but plans to trade in others also. Dubai has an advantage of its location of serving all time zones.

7] Sydney Futures Exchange Sydney Futures Exchange deals in interest rates, equities, currencies and commodities. A wool and cattle future is its specialty.

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Commodity Market HOW COMMODITY MARKET WORKS? There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse? But someone trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities. Following diagram gives a fair idea about working of the Commodity market.

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Commodity Market Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots. The commodity trading system consists of certain prescribed steps or stages as follows:

I] Trading: - At this stage the following is the system implemented- Order receiving - Execution - Matching - Reporting - Surveillance - Price limits - Position limits

II] Clearing: - This stage has following system in place- Matching - Registration - Clearing - Clearing limits - Notation - Margining - Price limits - Position limits - Clearing house.

III] Settlement: - This stage has following system followed as follows- Marking to market - Receipts and payments - Reporting - Delivery upon expiration or maturity.

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1] With whom investor can transact a business? An investor can transact a business with the approved clearing member of previously mentioned Commodity Exchanges. The investor can ask for the details from the Commodity Exchanges about the list of approved members. 2] What is Identity Proof? When investor approaches Clearing Member, the member will ask for identity proof. For which Xerox copy of any one of the following can be given a) PAN card Number b) Driving License c) Vote ID d) Passport 3] What statements should be given for Bank Proof? The front page of Bank Pass Book and a canceled cheque of a concerned bank. Otherwise the Bank Statement containing details can be given. 4] What are the particulars to be given for address proof? In order to ascertain the address of investor, the clearing member will insist on Xerox copy of Ration card or the Pass Book/ Bank Statement where the address of investor is given.

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Commodity Market 5] What are the other forms to be signed by the investor? The clearing member will ask the client to sign a) Know your client form b) Risk Discloser Document The above things are only procedure in character and the risk involved and only after understanding the business, he wants to transact business. 6] What aspects should be considered while selecting a commodity broker? While selecting a commodity broker investor should ideally keep certain aspects in mind to ensure that they are not being missed in any which way. These factors include Net worth of the broker of brokerage firm. The clientele. The number of franchises/branches. The market credibility. The references. The kind of service provided- back office functioning being most important. Credit facility. The research team.

These are amongst the most important factors to calculate the credibility of commodity broker. Broker:The Broker is essentially a person of firm that liaisons between individual traders and the commodity exchange. In other words the Commodity Broker is the member of Commodity Exchange, having direct connection with the exchange to carry out all trades legally. He is also known as the authorized dealer. 7] How to become a Commodity Trader/Broker of Commodity Exchange? To become a commodity trader one needs to complete certain legal and binding obligations. There is routine process followed, which is stated by a unit of Government that lays down the

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Commodity Market laws and acts with regards to commodity trading. A broker of Commodities is also required to meet certain obligations to gain such a membership in exchange. To become a member of Commodity Exchange the broker of brokerage firm should have net worth amounting to Rs. 50 Lakh. This sum has been determined by Multi Commodity Exchange. 8] How to become a Member of Commodity Exchange? To become member of Commodity Exchange the person should comply with the following Eligibility Criteria. 1. He should be Citizen of India. 2. He should have completed 21 years of his age. 3. He should be Graduate or having equivalent qualification. 4. He should not be bankrupt. 5. He has not been debarred from trading in Commodities by statutory/regulatory authority,

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Commodity Market TYPES OF MEMBERSHIPS OF COMMODITY EXCHANGES There are following three types of Memberships of Commodity Exchanges. 1] Trading-cum-Clearing Member (TCM) A TCM is entitled to trade on his own account as well as on account of his clients, and clear and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu Undivided Family (HUF), a corporate entity, a cooperative society, a public sector organization or any other Government or non-Government entity can become a TCM. There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to transferable non-deposit based membership and TCM-2 refers to non-transferable deposit based membership. A person desired to register as TCM is required to submit an application as per the format prescribed under the business rules, along with all enclosures, fee and other documents specified therein. He is required to go through interview by Membership Admission Committee and committee is also empowered to frame rules or criteria relating to selection or rejection of a member. 2] Institutional Trading-cum-clearing Member (ITCM) Only an Institution/ Corporate can be admitted by the Exchange as a member, conferring upon them the right to trade and clear through the clearing house of exchange as an Institutional trading-cum- clearing Member (ITCM). The member may be allowed to make deals for himself as well as on behalf of his clients and clear and settle such deals. ITCMs can also appoint sub-brokers, authorized persons and Trading Members who would be registered as trading members. 3] Professional Clearing Member (PCM) A PCM entitled to clear and settle trades executed by other members of the exchange. A corporate entity and an institution only can apply for PCM. The member would be allowed to clear and settle trades of such members of the Exchange who choose to clear and settle their trades through such PCM.

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Need of Commodity Derivatives for India India is among top 5 producers of most of the Commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives.

Trends in volume contribution on the three National Exchanges:-

Pattern on Multi Commodity Exchange (MCX) MCX is currently largest commodity exchange in the country in terms of trade volumes, further it has even become the third largest in bullion and second largest in silver future trading in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the futures trends of these commodities are mainly driven by international futures prices rather than the changes in domestic demand-supply and hence, the price signals largely reflect International scenario. Among Agricultural commodities major volume contributors include Gur, Urad, and Mentha Oil etc. Whose market sizes are considerably small making then vulnerable to manipulations?

Pattern on National Commodity & Derivatives Exchange (NCDEX) NCDEX is the second largest commodity exchange in the country after MCX. However the major volume contributors on NCDEX are agricultural commodities. But, most of them have common inherent problem of small market size, which is making them vulnerable to market manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by FMC).

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Commodity Market Pattern on National Multi Commodity Exchange (NMCE) -

NMCE is third national level futures exchange that has been largely trading in Agricultural Commodities. Trade on NMCE had considerable proportion of commodities with big market size as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards commodities with small market size or narrow commodities. Analysis of volume contributions on three major national commodity exchanges reveled the following pattern, Major volume contributors - Majority of trade has been concentrated in few commodities that are Non Agricultural Commodities (bullion, metals and energy) Agricultural commodities with small market size (or narrow commodities) like guar, Urad, Mentha etc. Trade strategy It appears that speculators or operators choose commodities or contracts where the market could be influenced and extreme speculations possible. In view of extreme volatilities, the FMC directs the exchanges to impose restrictions on positions and raise margins on those commodities. Consequently, the operators/speculators chose another commodity and start operating in a similar pattern. When FMC brings restrictions on those commodities, the operators once again move to the other commodities. Likewise, the speculators are moving from one commodity to other (from methane to Urad to guar etc) where the market could be influenced either individually or with a group. Beneficiaries - So far the beneficiaries from the current nature of trading are Exchangers: making profit from mounting volumes Arbitragers Operators

In order to understand the extent of progress the trading the trading in Commodity Derivatives has made towards its specified objectives (price discovery and price risk management), the current trends are juxtaposed against the specification Page 26

Commodity Market

Process Commodities

Trade Strategy

Aught to be There should be large demand for and supply of the commodity- no individual or a group of persons acting in concert should be in a position to influence the demand or supply, and consequently the price substantially Towards this, the major Produced or consumed Commodities in the Country such as wheat, rice, jute etc. and India is the top first or second producer of these Commodities. Hedging together with Moderate speculation to Smoothen the price Fluctuations. Farmers/producers,, Consumers and traders Either through direct Participation or through Price signals.

Actual Largely Traded are Bullion, Metals and Commodities with small market size (or narrow Commodities) like guar, Burmese Urad, Mentha etc.

Over speculation and Manipulation leading to wide Fluctuations.



Price Discovery

Risk Management

So far exchangers, arbitrageurs, Operators etc., Further there were instances of Wrong price signals accruing losses to farmers in case of menthe, and to traders in case Of imported pulses. Pure replication of International trends not Taking in account of Domestic D-S in case of Non-agril. Commodities Wide fluctuations from Over speculation and Manipulation in case of Largely traded agril. commodities No such evidences and contrarily, the extreme volatilities in certain commodities are making futures More risky for participants Page 27

Commodity Market Thus it is evident that the realization of specified objectives is still a distinct destination. It is further, evident from the nature of the commodities largely traded on national exchanges that the factors driving the current pattern of futures trade are purely speculative. Reasons for prevailing trade pattern No wide spread participation of all stake holders of commodity markets. The actual benefits may be realized only when all the stake holders in commodity market including producers, traders, consumers etc trade actively in all major commodities like rice, wheat, cotton etc. Some Suggestions to make futures market as a level playing field for all stake holders Creation of awareness among farmers and other rural participants to use the futures trading platform for risk mitigation. Contract specifications should have wider coverage, so that a large number of varieties produced across the country could be included. Development of warehousing and facilities to use the warehouse receipt as a financial instrument to encourage participation farmers. Development of physical market through uniform grading and standardization and more transparent price mechanisms. Delivery system of exchanges is not good enough to attract investors. E.g.- In many commodities NCDEX forces the delivery on people with long position and when they tend to give back the delivery in next month contract the exchange simply refuses to accept the delivery on pretext of quality difference and also auctions the product. The traders have to take a delivery or book losses at settlement as there are huge differences between two contracts and also sometimes few contracts are not available for trading for no reason at all. Contract sizes should have an adequate range so that smaller traders can participate and can avoid control of trading by few big parties. Setting of state level or district level commodities trading helpdesk run by independent organization such as reputed NGO for educating farmers. Warehousing and logistics management structure also needs to be created at state or area level whenever commodity production is above a certain share of national level. Though over 100 commodities are allowed for Derivatives trading, in practice only a few commodities derivatives are popular for trading. Again most of the trade takes Page 28

Commodity Market place only on few exchanges. This problem can possibly solved by consolidating some exchanges. Only about 1% to 5% of total commodity derivatives traded in country are settled in physical delivery due to insufficiencies in present warehousing system. As good delivery system is the back bone of any Commodity trade, warehousing problem has to be handled on a war footing. At present there are restrictions in movement of certain goods from one state to another. These needs to be removed so that a truly national market could develop for commodities and derivatives. Regulatory changes are required to bring about uniformity in Octri and sales tax etc. VAT has been introduced in country in 2005, but, has not yet been uniformly implemented by all states. A difficult problem in Cash settlement of Commodities Derivatives contract is that, under Forward Contracts Regulation Act 1952 cash settlement of outstanding contracts at maturity is not allowed. That means outstanding contracts at maturity should be settled in physical delivery. To avoid this participants square off their their positions before maturity. So in practice contracts are settled in Cash but before maturity. There is need to modify the law to bring it closer to the wide spread practice and save participants from unnecessary hassle.

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1] Pepper Botanical name - Piper nigrum L. Family name - Piperaceae Commercial part - Fruit Indigenous to India, pepper, rightly called the King of Spices, is one of the oldest and bestknown spices in the world. India has always reigned supreme in the production and export of this most exotic and sought-after spice. Indian pepper had a profound influence on the European economy of the Middle Ages. Many western countries owed their prosperity to this spice which fetched them a very high price. Easily the finest in quality anywhere, Indian pepper is grown in the monsoon forests along the Malabar coast in South India. Here, a combination of natural advantages and organic techniques produces bigger, better-shaped, more aromatic and flavorful berries. Two of the most celebrated trade varieties of Indian black pepper are 'Malabar Garbled' and 'Tellichery Extra Bold'. India also offers green pepper in several processed forms - frozen, dehydrated, freeze-dried and packed in brine. Pepper is a perennial climber requiring the support of live or dead standards. 2] Cumin seed (Jeera) Botanical name - Cuminum cyminum L. Family name - Apiaceae Page 30

Commodity Market Commercial part - Fruit The dried fruit of a small herbaceous plant, cumin was quite popular even during the Biblical times as an efficient digestive and as a food flavor for ceremonial feasting. Though native to Egypt and the Mediterranean, cumin is now mostly produced in India. Cumin has an intensely strong flavor, much similar to caraway. Indian cumin finds worldwide use in foods, beverages, liquors, medicines, toiletries and perfumery. Indian cumin grows abundantly in the mild, equable climate of Gujarat, Rajasthan and Uttar Pradesh where rich, well-drained, sandy, loamy soil and the sunny, conducive environment are available. Indian cumin is exported in its natural as well as powdered form, besides as essential oil. Exports are mostly to USA, Singapore, Japan, UK and North Africa. 3] Red Chilly Botanical name - Capsicum annum L., Capsicum frutescens L. Family name - Solanaceae Commercial part - Green as well as ripe and dried pod (fruit) Chilly is the universal spice of India. It is cultivated in all the States and Union Territories of the country. The important States growing chilly are Andhra Pradesh, Orissa, Maharashtra, West Bengal, Karnataka, Rajasthan and Tamil Nadu. Andhra Pradesh alone commands 46% of the chilli production in India. As per the latest statistics, India produced 8, 00,100 tones of dry chilli from an area of 9, 30, 000 hectare. Chilli has two important commercial qualities. If some varieties are famous for red color because of the pigment capsanthin, others are known for biting pungency attributed by capsaicin. India is the only country rich in many varieties with different quality factors. While consumption of chilli is the highest in India, maximum export is also from this country. India made the record export of 51,900 tonnes of dry chilli in 1996-97. Oleoresin of chilli with low, medium or high pungency is also exported in large quantities. Chilli powder is another important item of export. Indian chilli and its products are brought by a number of countries. Important among them are Sri Lanka, Bangladesh, South Korea and USA for dry chilli and USA, Germany, Japan, UK and France for oleoresin. India can supply chilli in whole, crushed, powder or oleoresin forms in consistent colour and required pungency. Page 31

Commodity Market 4] Turmeric Botanical name - Curcuma longa L. Family name - Zingiberaceae Commercial part - Rhizome or underground stem The dried rhizome of a herbaceous plant, turmeric is closely related to ginger. The spice is also sometimes called 'Indian saffron' thanks to its brilliant yellow colour. Indian turmeric has been known to the world since ancient times. Several unique properties of Indian turmeric make it the ideal choice as a food flavour, an effective ingredient in medicines and cosmetics, and as a natural colorant. With its rich curcumin content, which imparts the distinctive yellow colour, and other inherent qualities, Indian turmeric is considered the best in the world. India is today the largest exporter of turmeric to discerning countries like the Middle East, the UK, USA and Japan. Some of the well-accepted varieties are: 'Alleppey Finger' and 'Erode turmeric' (from Tamil Nadu), 'Rajapore' and 'Sangli turmeric' (from Maharashtra) and 'Nizamabad Bulb' (from Andhra Pradesh). India also exports turmeric in powder form and as oleoresin.

5] Steel General Characteristics: Steel is an alloy of iron and carbon, containing less than 2% carbon, 1% manganese and small amount of silicon, phosphorus, sulphur and oxygen. Steel is most important engineering and construction material in the world. It is most important, multi functional and the most adaptable of materials. Steel production is 20 times higher a compared to production of all non-ferrous metals put together. Steel compared to other materials of its type has low production costs. The energy required for extracting iron from ore is about 25% of what is needed for extracting aluminum. There are altogether about 2000 grades of steel developed of which 1500 grades are highgrade steels. The large number of grades gives steel the characteristics of basic production material.

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Commodity Market Categories of Steel: Steel market is primarily divided in to two main categories flat and long. A flat carbon steel product is a plate product or a (hot or cold) rolled strip product. Plate products vary in dimensions from 10 mm to 200 mm and thin flat rolled products from 1 mm to 10 mm. Plate products are used for ship building, construction, large diameter welded pipes and boiler applications. Thin flat products find end user applications in automotive body panels, domestic white goods products, tin cans and the whole host of other products from office furniture to heart pacemakers. Plates, HR coils and HR Sheet, CR Sheet and CR coils, GP/GC (galvanized plates and coils) pipes etc. are included in this category. A long steel product is a road or a bar. Typical rod product are the reinforcing rods made from sponge iron for concrete, ingots, billets, engineering products, gears, tools, etc. Wiredrawn products and seamless pipes are also part of the long products group. Bars, rods, structures, railway materials, etc are included in this category. Sponge Iron/ Direct reduced iron (DRI): This is a high quality product produced by reducing iron ore in a solid state and is primarily used as an iron input in electric arc furnace (EAF) steel making process. This industry is an integral part of the steel sector. India is one of the leading countries in terms of sponge iron production. There are a number of coal-based sponge iron/DRI plants (in the eastern and central region) and also three natural gas based plants (in western part of the country) in the country. Global Scenario: The total output of the word crude steel in 2006 stood at 945 million tons, resulting in a growth of 6.7% over the previous year. China is the worlds largest crude steel producer in the year 2006 with around 220.12 million tons of steel production, followed by Japan and USA. USA was largest importer of steel products, both finished and semi finished, in 2005, followed by China and Germany. The words largest exporter of semi-finished and finished steel was Japan in 2005, followed by Russia and Ukraine. China is the largest consumer now and consumption of steel by China is estimated to increase by 12-13% in 2007.

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Commodity Market Indian Scenario: India is the 8th largest producer of the steel with an annual production of 36.193 million tons, while the consumption is around 30 million tons. Iron & steel can be freely exported and imported from India. India is a net exporter of steel. The Government of India has taken a number of policy measures, such as removal of iron & steel industry from the list of industries reserved for public sector, deregulation of price and distribution of iron & steel and lowering import duty on capital goods and raw materials, since liberalization for the growth and development of Indian iron & steel industry. After liberalization India has seen huge scale addition to its steel making capacity. The country faces shortage of iron and steel materials. Factors Influencing Demand & Supply of Steel Long and Steel Flat: The demand for steel is dependent on the overall health of the economy and the in fracture development activities being undertaken. The steel prices in the Indian market primarily depend on the domestic demand and supply conditions, and international prices. Government and different producer and consumer associations regularly monitor steel prices. The duty imposed on import of steel and its fractions also have an impact on steel prices. The price trend in steel in Indian markets has been a function of Worlds economic activity. Prices of input materials of iron and steel such as power tariff, fright rates and coal prices, also contribute to the rise in the input costs for steel making. Contract specifications of Steel Flat Symbol Description Trading Period Trading session STEELFLAT STEELFLATMMMYY Mondays through Saturdays Monday to Friday: 1st session: 10.00 am to 5.00 pm 2nd session: 5.30 pm to 8.00 pm Saturday: 10.00 am to 2.00 pm No. of contracts a year Contact Duration Trading 12 4 Months

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Commodity Market Trading unit Price Quote 25 MT Rs./ton, Ex-Taloj Kalambo (excluding execise duty and sales tax). Maximum order size Tick size (minimum Price movement) Daily price limits Initial margin Special margin 4% 5% In case of additional volatility, a special margin of 2% or such other percentage, as deemed fit, will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next three days, after which the special margin will be relaxed. Maximum Allowable Open Position For individual clients: 1,00,000 MT For a member collectively for all clients: 25% of open market position. Delivery Delivery unit 25 MT with tolerance limit Between 23.5 MT to 26.5 MT Delivery Center(s) Quality Specifications HR coil conforming to the following specification: Thickness 2 mm Width either 1250mm or 910 mm at sellers option. It should confirm to IS 11513 Grade D/SAE 1008 (International equivalent) Delivery is acceptable only in coil form. Delivery Center(s) 200 MT Rs. 10

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Commodity Market Contract specifications of Steel Long Symbol Description Trading Period Trading session STEELLONG STEELLONGMMMYY Mondays through Saturdays Monday to Friday: 1st session: 10.00 am to 5.00 pm 2nd session: 5.30 pm to 8.00 pm Saturday: 10.00 am to 2.00 pm No. of contracts a year Contact Duration Trading Trading unit Price Quote 15 MT Rs./ton, Ex- Mandi Gobindgarh (including excise duty but excluding sales tax). Maximum order size Tick size (minimum Price movement) Daily price limits Initial margin Special margin 4% 5% In case of additional volatility, a special margin of 2% or such other percentage, as deemed fit, will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next three days, after which the special margin will be relaxed. Maximum Allowable Open Position For individual clients: 1,00,000 MT For a member collectively for all clients: 25% of open market position. Delivery Delivery unit 15 MT with tolerance limit Between 13.5 MT to 16.5 MT Delivery Center(s) Warehouses at Mandi Gobindgarh Page 36 300 MT Rs. 10 12 4 Months

Commodity Market Quality Specifications Mild steels ingots 3 * 4 inch Carbon composition: Below 0.25% Manganese: Above 0.45% Material should be physically sound. It should have no hollowness, no piping no rising. Its surface should be plain.

Quality Specifications Sponge Iron Futures Sponge Iron Lumps Chemical Properties (only Magnetic Portion) Degree of Metallization: 88 +/- 2%. Total Iron: 91%. Carbon: 0.2% to 0.3%. Sulphur: 0.05% Max. Phosphorus: 0.06 Max. Sio2 + Al2o3: 6% or Max. Char & other process Contaminants: 1% Max. Size: 3 to 20 mm Undersize arising during tailings (-3mm): 5% Max

Steel Flat HR Coil confirming to the following specification: Thickness 2mm Width either 1250 mm or 910 mm at sellers option. It should confirm to IS 11513 Grade D/ SALE 1008 (international equivalent) Delivery is acceptable only in coil form.

Steel Long (Bhavnagar) Mild steel ingots 3 * 4 inch. Page 37

Commodity Market Carbon composition: Below 0.25% Manganese: Above 0.45% Material should be physically sound. It should have no hollowness, no piping and no rising. Its surface should be plain.

Steel Long (Govindgarh) Mild steel ingots 3 * 4 inch. Carbon composition: Below 0.25% Manganese: Above 0.45% Material should be physically sound. It should have no hollowness, no piping and no rising. Its surface should be plain.

6] Wheat Wheat is cereal grain and consumed worldwide. Wheat is more popular than any other cereal grain for use in baked goods. Its popularity stems from the gluten that forms when lour is mixes with water. Wheat is the most widely grown cereal grain in the world. Global and Indian Scenario: The world wheat production in the recent years has been observed to be hovering between 555 million tons to 625 million tons a year. The biggest cultivators of wheat are EU 25, China, India, USA, Russia, Australia, Canada, Pakistan, Turkey and Argentina. EU 25, China, India and US are the four largest producers account for around 60% of total global production. Worlds wheat consumption is continuously growing with growth in a population, as it is one of the major staple foods across the world. The major consuming countries of wheat are EU, China, India, Russia, USA and Pakistan. India has largest area in the world under wheat. However, in terms of production, India is second largest behind China. In India, Wheat is sown during October to December and harvested during March to May. The wheat marketing season in India is assumed to begin from April every year. The major wheat producing states in India are Utter Pradesh, Punjab, Haryana, Madhya Pradesh, Rajasthan and Bihar. Which together account for around 93% of total production. In terms of productivity, Punjab stands first followed by Haryana, Rajasthan, UP, Gujarat, Bihar and MP. Indian wheat is largely Page 38

Commodity Market soft/medium hard, medium protein, bread wheat. India is also produces around 1.5 million tons of durum wheat, mostly in central and western India, which is not segregated and marketed separately. India consumes around 72-74 million tons of Wheat every year. There are around 1000 large flourmills in India, with a milling capacity of around 15 million tons. The total procurement of wheat by Government agencies during last 15 years from 8 to 20 million tons, accounting for only 15-20% of the total production. India exported around 5 million tons subsidized by Government in 2004-05, as a result of surplus stock. Recently Govt. took decision to import wheat in view of, declining stocks and increasing demand. Key market moving Factors: Price tends to be lower as harvesting progresses and produce starts coming in to the market. At the time sowing and before harvesting price tend to rise in a view of tight supply situation. Weather has profound influence on wheat production. Temperature plays crucial role towards maturity of wheat and productivity. Change in Minimum Support Price (MSP) by Govt. and the stock available with Food Corporation of India and the release from official stock influence of the price. Though, international trade is limited, the ups and downs in the production and consumption at all the major/minor producing and consuming nation dose influence the long term price trend. Contract specifications of Wheat Contract Period Trading Period Trading session Five Months Mondays through Saturdays Monday to Friday: 10.00 am to 5.00 pm Saturday: 10.00 am to 2.00 pm Trading Trading unit Quotation based value Maximum order size Tick size (minimum Price movement) Price Quotation Ex-warehouse Delhi (including all taxes, levies and sales tax/ VAT, as the case may be) Page 39 10 MT 1 Quintal 500 MT 10 Paise

Commodity Market Daily price limits Initial margin Special margin 4% 5% In case of additional volatility, a special margin at such other percentage, as deemed fit will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next 2 days, after which the special margin will be relaxed. Maximum Allowable Open Position Clientwise- 20000 MT, Member wise-80000 MT or 20% of open position, whichever is higher. Delivery Delivery unit Delivery Margin Delivery Center(s) Quality Specifications Wheat of Standard Mill variety confirming to the following quality standards will be deliverable. The material will be tested using a 3mm sieve. 10 MT with tolerance limit of 5% 25% Warehouses at Delhi

Defects (a) Foreign Matter (organic/inorganic) (b) Damaged Kernels 2.0% (Max) 2.00 (Max) provided that infestation

damaged not to exceed 1 per 100 kernels (c) Shrunken Shriveled & broken grains Total defects (a+b+c) Acceptable up to Rejected total defect is Teat weight up to 76 kg/hl 3.00% (Max) Below 6% 8% With rebate on 1:1 basis Above 8% 76kg/hl. Min. acceptable with rebate of 150 grams per kg/hl or pro-rata variance in hector liter weight deducted per quintal Below 74 kg/hl Page 40

Commodity Market Rejected Moisture Acceptable Reject able Below 74 kg/hl 11% (Max)13% With rebate 1:1 Above 13%

Quality Specifications Wheat of Standard Mill variety conforming to the following quality standards will be deliverable; The material will be tested by using 3 mm sieve. Defects: 1. Foreign Matter (organic/inorganic) 2. Damaged Kernel 3. Sunken, Shriveled and Broken grains Total Defects (a+b+c) Acceptable Rejected if total defects Total Weight Up to 74 kg/hl Below 74 kg/hl 2.0% (maximum) 2.0% (maximum) provided that infestation damaged not exceed 1 Per 100 kernels. 3.00% (maximum) Below 6% Up to 8% with rebate on 1:1 basis Above 8% 76 kg/hl. (minimum) Acceptable with rebate of 150 grams per kg/hl or pro-rata variance in hector liter weight deducted per quintal weight delivered. Rejected Moisture Acceptable Reject able Packing 11% (maximum) Up to 13% with rebate 1:1 Above 135 Packing should be in B Twill once used 100kg jute bags, the tare weight deduction per bag for net weight calculation shall be 1 kg per quintal of gross weight.

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Commodity Market ARTICLES

NSEL scam derailed commodity market in 2013 NEW DELHI: Commodity futures market's dream run came to a halt in 2013 as a Rs 5,600 crore scam in Jignesh Shah-led spot exchange NSEL and imposition of transaction tax on non-farm items hampered the growth of business, with turnover estimated to dip by 30 per cent to Rs 125 lakh crore. The year began with Finance Minister P Chidambaram imposing 0.01 per cent commodity transaction tax (CTT) in Budget on non-agri products and processed food items, a development that did not go well with the industry. The tax that came into force from July 1, affected the trading volume in 21 commodity futures exchanges including the two largest bourses MCX and NCDEX. July was also eventful as a big scam at the unregulated National Spot Exchange Ltd (NSEL) came in the public glare during this month tarnishing the image of decade-old futures market. The Centre, which had issued a show-cause notice to the NSEL last year for running a forward contracts in violation of law, finally suspended trading at the spot exchange that unearthed a fraud of mammoth nearly Rs 5,600 crore -- even bigger than Harshad Mehta security market scam. As many as 24 NSEL members (buyers) owe this amount to 13,000 investors with no stock in warehouses as collateral. So far, about Rs 265 crore has been paid to investors with NSEL defaulting for the 18th time in a row in its weekly payment. Series of events that unfolded after the ban shook the investors confidence in the commodity markets as multi- agencies probe found out irregularities at NSEL leading to arrest of top officials including its MD and CEO Anjani Sinha. Nature and magnitude of scam was such that the Consumer Affairs Ministry did not have wherewithal to probe this matter and regulator Forward Market Commission (FMC) was transfered to the finance ministry for overseeing the enquiry. Jignesh Shah, who was on a high at the start of this year with government's permission to start stock exchange, could not escape responsibility for this huge payment crisis and had to resign from two exchanges -MCX and MCX-SX -- that he founded and nurtured. Page 42

Commodity Market He has virtually lost control over both these bourses with regulators FMC and SEBI appointing their nominees on board. At the far end of the year, Shah received another jolt when FMC declared him and his firm FTIL unfit to run any exchange in the country. Facing charge of being the 'highest beneficiary' in the scam, Shah has challenged this order in the Bombay High Court, which will hear the matter early next year.

Vote on account 2014: Way forward to make commodities market buzz Commodity markets in India have shown tremendous growth in a pretty short span of time. As far as a commodity exchange is concerned, its main objective is to provide a platform for risk hedging and fair price discovery. Though many steps have been taken by the exchanges and FMC, the regulator, to make the commodity market more transparent and efficient; but to take it to the next level a lot of things need to be done. In order to initiate active participation by farmers in the commodity future markets, integration of both spot market and commodity futures market should be done. There are certain key priorities to build an efficient commodity market in India. These include deepening and widening the participation in commodity markets by making it easier for stakeholders, farmers, traders and investors to participate more proactively. Further, to make the Indian commodity market more efficient, the next step should be improving and upgrading support services such as warehousing infrastructure, testing facilities, grading system, credit finance and demat trading; all of which are integral to the holistic development of the commodity market. The FCRA amendment bill should be passed at the earliest which will bring a stronger regulatory environment as well as innovations such as options and indices. Focus should be given on commodities that are crucial to the Indian economy as well on increasing the participation of hedgers, mainly those with genuine exposure to the underlying commodity such as producers, processors, industrial consumers, exporters, importers and traders. There is a large scope of launching new agricultural commodities future contracts in order to initiate active participation by farmers. The government at the state and national level should incentivize the usage of hedging measures by both farmers and others in the value chain by keeping transaction costs low for risk hedgers in the commodity market. The commodities

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Commodity Market transaction tax is proving counterproductive and it should be withdrawn or be reduced substantially. The exchanges should take various initiatives to systematically develop markets through continuous innovation, education and research focused on spreading awareness about the modern trading mechanisms facilitated by commodity exchanges. To widen and deepen the commodities market, policymakers need to strengthen the institutional infrastructure through market-friendly policies on taxation. Moreover, banks and mutual funds should be permitted to participate in the commodity futures market. These would fructify as and when the Forward Contracts (Regulation) Act, 1952, under which the commodity futures market operates, is amended by Parliament. Although India has to cover a long distance to harness the potential in many commodities, it has substantial opportunities to develop consumer demand and uncover latent consumption. Despite having significant benefits, commodity trading has been mostly limited to large corporate, trading houses and high net worth individuals (HNIs).

Actually, lack of familiarity discourages retail investors from actively participating in commodities trading. So, appropriate steps must be taken to create awareness among retail investors. It has been nearly a year since the Cabinet approved the Forwards Contracts Regulation Amendment Bill. It now is waiting for Parliament nod.

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Commodity Market CONCLUSION This decade is termed as Decade of Commodities. Prices of all commodities are heading northwards due to rapid increase in demand for commodities. Developing countries like China are voraciously consuming the commodities. Thats why globally commodity market is bigger than the stock market. India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. Interestingly, this has happened only after the Government protection was removed from a number of Commodities, and market force was allowed to play their role. This should act as a major lesson for policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. The management of price risk is going to assume even greater importance in future with the promotion of free trade and removal of trade barriers in the world. As majority of Indian investors are not aware of organized commodity market; their perception about is of risky to very risky investment. Many of them have wrong impression about commodity market in their minds. It makes them specious towards commodity market. Concerned authorities have to take initiative to make commodity trading process easy and simple. Along with Government efforts NGOs should come forward to educate the people about commodity markets and to encourage them to invest in to it. There is no doubt that in near future commodity market will become Hot spot for Indian farmers rather than spot market. And producers, traders as well as consumers will be benefited from it. But for this to happen one has to take initiative to standardize and popularize the Commodity Market.

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Commodity Market BIBLIOGRAPHY

A Trader's First Book on Commodities Carley Garner Dow Jones-Irwin Guide to Commodities Trading Bruce G Gould

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