COMMODITY MARKETS

GROUP 4

AGENDA

Introduction to Commodities
Agriculture Products Oil Gold

Minerals & Metals

Famous Commodity Exchanges Carbon Credit Market

COMMODITIES

A commodity is a product that has commercial value, which can be produced, bought, sold, and consumed
Commodities are products of primary sector of an economy

Primary sector comprises of agriculture, extraction of raw materials, etc.

Serve as basic inputs for the secondary sector of the economy

TOP TRADED COMMODITIES

Rank 1 2 Commodity Mineral fuels, oils, distillation products, etc. Electrical, electronic equipment Machinery, nuclear reactors, boilers, etc. Vehicles other than railway, tramway Plastics and articles thereof Optical, photo, technical, medical, etc. apparatus Pharmaceutical products Iron and steel Organic chemicals Pearls, precious stones, metals, coins, etc. Value in US$('000) $2,183,079,941 $1,833,534,414

3
4 5 6 7 8 9 10

$1,763,371,813
$1,076,830,856 $470,226,676 $465,101,524 $443,596,577 $379,113,147 $377,462,088 $348,155,369

COMMODITY MARKETS

A market where commodities are traded is referred to as a commodity market

A vibrant, active, liquid, and transparent commodity market is a sign of development of an economy Cash Market: A place which results in immediate delivery of commodities Forwards & Futures Markets: Agreements are made to receive the commodities at a later date in future for a pre-determined consideration

DEPENDENCE ON SINGLE AGRICULTURAL COMMODITY EXPORTS

In many developing countries relatively few commodities account for a large share of total export earnings
Examples
Sri Lanka Tea, Cuba Sugar, Malaysia Rubber, Brazil Coffee, etc.

Two features that dominate these markets : relatively high price volatility generally declining trend of real prices
Recurring supply/demand imbalances result in volatile prices This calls for a need to implement proper risk management mechanism to deal with the adverse price movements

AGRI PRODUCTS

TEA

Sri Lanka, once the worlds largest producer of tea in 1980s, now fell to fourth position
Tea exports (US$ 1.8 billion, 2012) generate 65% of export agriculture revenue With 2 Million employed directly & indirectly 10% of the population of Sri Lanka depends on the industry Challenges faced by the industry:

rising cost of production, declining productivity and an acute labour shortage

Lost Opportunity of becoming world tea blending hub due to aversion towards foreign investors

Sri Lanka Exports

Sri Lanka must diversify its exports beyond garments and tea for a prosperous economy

COFFEE

Approx trade worth US$ 16.5 billion in calendar year 2010 Some 70 countries produce coffee. Three countries alone have in recent years produced around 55% of the worlds coffee: Brazil (32%34%), Vietnam (12%13%) and Colombia (8%9%).
Leading producers of coffee
Production(in thousand bag) 1. 2. 3. 4. 5. 6. Brazil Vietnam Indonesia Columbia Ethiopia Peru 43,484 24,058 8,620 7,653 6,008 5,581 % of world total share 32.4% 17.9% 6.4% 5.7% 4.5% 4.2%

Source : ICO report

PRICING

Day-to-day physical coffee prices are determined by supply and demand. ICO indicator prices, published daily by the International Coffee Organization in London, represent and track the four main types of coffee available in the international market: (i)Colombian mild arabicas, (ii) Other mild arabicas, (iii) Brazilian and other natural arabicas, and (iv) Robustas.
Price Differential Colombian mild arabicas mild arabicas
54.23

Brazilian and other natural arabicas

25.29

Robustas

2008-09

28.94

31.52

2009-10
2010-11 2011-12

33.44
12.77 16.18

71.73
44.5 27.18

38.29
31.73 11.00

64.32
129.47 93.37

FUTURE MARKET

Coffee futures represent coffee that will become available at some point in the future, based on standard contracts to deliver or accept a pre-determined quantity and quality of coffee at one of a known range of delivery ports.
Annual turnover in futures compared with gross world imports, 20052010 (millions of tons)
Year 2005 New York 67.8 London 16.3 Total Futures 84.1 World Imports 7.0

2006
2007 2008 2009 2010

75.0
84.6 92.6 72.4 93.9

17.8
22.2 21.9 25.2 27.9

92.8
106.8 114.5 97.6 121.8

7.3
7.6 7.8 7.6 7.9

BRAZILs DEPENDENCE ON COFFEE

Facts :

GDP : US$ 2.45 trillion Total exports : US$242 billion Export Commodities : transport equipment, iron ore, soybeans, footwear, coffee, autos Brazil has 2.7 million hectares planted with coffee % of exports = 3.4% % of GDP= 0.35%

Note: Even though the contribution of coffee in Brazils GDP has decreased in the recent years, still it remains as the largest producer of the world since 150 years.

Share of major Brazilian exports of total exports 1821 1850 (%)

Sugar 1821-1830 1831-1840 1841-1850 Source: Bethell 30.1 24.0 26.7 Cotton 20.6 10.8 7.5 Coffee 18.4 43.6 41.4 Others 30.9 21.4 24.4

Post 1880 Overproduction had decreased the price of coffee and to protect the coffee industry In the 1920s, Brazil was a nearly monopolist of the international coffee market and supplied 80% of the world's coffee Since the 1950s, the country's market share steadily declined due to increased global production 1990s deregulation(breakdown of monopoly)

CRUDE OIL THE BLACK GOLD

Crude oil is used in the production of numerous chemical products such as plastics, fertilisers and solvents and is essential in maintaining our modern lifestyles. As a result, despite concerns about oil being a non-renewable resource many countries depend heavily upon it. The main five countries that produce amounts of oil are: Saudi Arabia 10.6m bbl per day Russia 6.7m bbl per day United States 8.3m bbl per day Iran 4.2m bbl per day China 3.9m bbl per day In total, the world consumes about 63m bbl per day of oil. The five key countries that consume the most oil are: USA 19.5m bbl per day China 7.8m bbl per day Japan 4.8m bbl per day India 2.9m bbl per day Russia 2.9m bbl per day

 Growth in oil consumption in emerging economies, particularly for transport in China, India and the Middle East, more than outweighs reduced demand in the OECD, pushing global oil use steadily higher. Iraq makes the largest contribution by far to global oil supply growth

Iraq stands to gain almost $5 trillion in revenue from oil exports over the period to 2035, an annual average of $200 billion, and an opportunity to transform the countrys prospects
The United States is projected to become the largest global oil producer before 2020, exceeding Saudi Arabia until the mid2020s.

ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC)

A cartel whose mission is to coordinate the policies of the oilproducing countries. The goal is to secure a steady income to the member states and to secure supply of oil to the consumers Produces about 33,327,700 bbl/day

Together, these 12 nations are responsible for 40 percent of the world's oil production and hold the majority of the world's oil reserves
OPEC being the worlds largest cartel is not only recognized as a legal entity, its protected by U.S. foreign trade laws.

Country Algeria Angola Ecuador Iran Iraq Kuwait Libya Nigeria Qatar

Region Africa Africa South America Middle East Middle East Middle East Africa Africa Middle East

Production(bbl/day) 2,125,000 1,948,000 485,700 4,172,000 3,200,000 2,494,000 2,210,000 2,211,000 1,213,000

Saudi Arabia United Arab Emirates

Venezuela

Middle East Middle East

South America

8,800,000 2,798,000
2,472,000

MANIPULATION OF PRICES BY OPEC

Crude oil prices (Nominal and Real) $/barrel

INDIAN SCENARIO

India has total reserves of 760 million metric tonnes of crude oil and 1330 billion cubic metres of natural gas as on 1.4.2012. Indias daily crude oil requirement is upto 3426 barrels per day i.e 408516 litres approx. India covers nearly 35.3% share of its total imports through Mineral Fuels, Mineral Oils And Products Of Their Distillation etc which comes out to be around 82,796,567.80 lakh Rs

GOLD

Gold Price Movement

Traditionally, Gold has been used to serve as a hedge against inflation.

Demand Factors : demand demand

Jewellery

Investment

Technological demand
Central

banks

Supply Factors : Production

Mine

Recycled Gold

INDIAN JEWELLERY INDUSTRY

Jewellery consumption in India has been traditionally driven by the strong cultural affinity for gold, with it being the preferred form of jewellery worn.
Indian gold jewellery industry is the largest globally, valued at 40 billion$ driven by a gamut of cultural, social and demographic factors. Contribution of organized retail to total jewellery consumed in India has grown to 18% from less than 5%

 Rising quality awareness of customers has also provided a fillip to the organized retail segment, which is banking on its reliability and quality to compete against the highly fragmented unorganized jewellers. Gems & Jewellery is the second largest foreign exchange earner in the country surpassing even the US $ 22 billion earned by the textile and apparel sector. Exports of gems and jewellery from India have grown at a CAGR of 19.02% over the past ten years

INDIAN JEWELLERY INDUSTRY

Export Drivers Competitive Edge Government Initiatives Post Liberalization Recent RBI measures

When the total CAD for FY 13 stood at $87.8 billion, the gold imports alone accounted for $53.8 billion of the total imports. Government of India announced slew of measures to curb the gold imports including hike in customs duty on gold from 2% last year to 8% currently, in multiple steps. This was followed by RBI tightening the import and funding norms for gold. Also, the RBI has asked banks and credit card companies to discontinue the EMI option for online jewelry purchase which is expected to hit online jewellery purchases.

 All nominated banks/nominated agencies to ensure that at least one fifth of every lot of import of gold is exclusively made available for the purpose of export. Required to retain 20 per cent of the imported quantity in the customs bonded warehouses . Entities/units in the SEZ and EoUs, Premier and Star trading houses are permitted to import gold exclusively for the purpose of exports only.

INDIAN JEWELLERY INDUSTRY

Impact of RBI regulations : Organized retailers with higher export composition to benefit. Investment Demand for Gold would take a hit. Organized Retailers to Focus on Overseas Expansion Inadequate supply to put pressure on gold price

Funding Concerns subside

Organized Players : Sizeable revenue from exports, can maintain 80:20 Ability to charge premium, can sell more diamond jewellery Unorganized Players : No or very limited exposure to exports Have to source gold at premium or from grey market Outright purchase of gold, increased inventory risk and funding concerns

GOLD PRICE CORRECTION

After touching a peak of 1900$ per ounce in August 2011, gold prices have collapsed and are currently trading around the 1250-1300$ range. Factors attributed to the fall:

End of QE Low risks of Inflation Strong Dollar Safe haven status diminished Shift from Gold ETFs to equities Physical demand unable to sustain price

MINERALS & METALS

DEFINITION

As per WTO report of the economic research and statistics division,

References to mineral commodities typically refer to solids that must be mined. Eg. The energy minerals coal and uranium are mined Coal is crushed and washed and iron is upgraded and lumped into iron ore. These processed materials, called ores and concentrates in the standard international trade classification (SITC), that are traded.

AUSTRALIA :THE MINING HUB

Mining in Australia is a significant primary industry and contributor to the Australian economy.
Australia is the world's leading coal exporter. Australia contains 23% of the world's proven estimated uranium reserves. Coal is mined in every state of Australia. A number of large multinational mining companies including BHP Billiton, Newcrest, Rio Tinto, Alcoa, Chalco, Shenhua (a Chinese mining company), Alcan and Xstrata operate in Australia. There are also a lot of small mining and mineral exploration companies listed on the Australian Stock Exchange (ASX). Overall, the resources sector represents almost 20% of the ASX market by capitalisation, and almost one third of the companies listed.

FACTS ABOUT AUSTRALIAN MINING INDUSTRY

Mining contributes about 5.6% of Australia's Gross Domestic Product.

Australia is the world's largest exporter of coal (35% of international trade), iron ore, lead, diamonds, rutile, zinc and zirconium, second largest of gold and uranium, and third largest of aluminium. By comparison, in the United States mining represents only about 1.6% of GDP. In contrast, mineral exports contribute around 35% of Australia's exports. Despite its export importance, the mining sector employs only a small proportion of the workforce roughly 129,000 Australians, representing only about 2.2% of the total labour force.

FUTURE OF MINING INDUSTRY

According to PwC's 10th annual global report, Mine: A Confidence Crisis:

The global mining outlook is deeply troubled as profits decline, cost pressures increase and planned capital expenditures weaken, Profits for the world's 40 largest miners fell 49 per cent in 2012, according to the report, erasing the previous six years of profit growth, while costs rose nine per cent, return on investments hit a 10-year low and planned capital expenditure fell 21 per cent from the year previous. The global mining sector's performance through the global financial crisis helped commodity-driven economies such as Australia and Canada escape the worst of the economic downturn.

Miners have largely sought to reassure investors by pledging to maintain or boost dividends. The top 40 miners boosted their dividends nine per cent higher in 2012 to a record $US38 billion on a payout ratio that rose from 25 per cent in 2011 to 60 per cent in 2012.

CHINA: STEEL PRODUCTION

From 2000 to 2009, China captured all of the worlds growth in steel production.
During that period, Chinese steel production increased by 346 percent, while steel production in the rest of the world decreased by 10 percent. Today, Chinas total steel production is more than 630 million metric tons per year, accounting for more than 45 percent of global steel production.

FACTS ABOUT CHINESE STEEL INDUSTRY

By the end of 2009, eight of the 10 largest Chinese steel groups were 100percent owned and controlled by the Chinese government, while 16 of the top 20 steel groups were 100-percent owned and controlled by the government.
China is now pursuing its Going Abroad strategy, deploying its massive national champions overseas to further the governments objectives, which include exploiting natural resources and raw materials, obtaining technology and expertise, and increasing Chinas economic and political influence on a global scale. According to MOFCOM, China invested $43.3 billion overseas in 2009, which is almost 20 times more than the average $2.4 billion per year that China invested abroad between 1990 and 2000.

GLOBAL STEEL INDUSTRY: THE ROAD AHEAD

The Chinese steel industry in its current form is the creation of the Chinese government.
Chinese steel producers continue to benefit from massive direct and indirect subsidies, many of which violate Chinas WTO commitments. Moreover, despite its WTO obligations regarding market reforms, the Chinese government continues to increase its ownership and control of the steel industry, allowing the government to direct virtually all aspects of the industry. China is now deploying its steel-producing units overseas to compete in private markets, further distorting global steel markets and causing additional harm to market-based steel companies and their workers.

As a result, the United States, the EU and other trading partners are increasing efforts to ensure Chinas compliance with its WTO commitments and international legal obligations.

COMMODITY EXCHANGES

 Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them Commodity price risk and the need for standardization has led to the evolution of commodities exchanges A commodities exchange is an exchange where various commodities and related derivatives products are traded These contracts can include spot, forwards, futures and options on futures. Two of the oldest exchanges in the world: 1. The New York Cotton Exchange established in 1842 and 2. Chicago Board of Trade(CBOT) in 1848

Characteristics of an exchange contract

The important aspects of the contract: Price, amount, quality and delivery deadlines Examples: ICE Futures U.S. 1 contract = 37,500 lbs (ca. 17,010 kg) of Arabica in US-$cents per lb (= pound, Am.) for March, May, July, September and December NYSE LIFFE 1 contract = 10,000 kg of Robusta in US$ per metric ton (= 1,000 kg) for January, March, May, July, September and November MCX 1 contract = 10,000 kg of Soyabean In Rs per 100 kg For January to december

Example of typical commodities futures deals Case A plantation-owning coffee export company needs a bank loan to cover its running costs. The harvest is due in 3 months, and no buyer has yet been found for this harvest. The seller therefore does not yet know the price that this harvest will bring, and the bank regards the loan as too risky. Current price levels would safeguard the eventual income however, and bring in a profit.

The solution Sell 3 month coffee futures on the exchange at current market price say 160 cents/lb As the price and proceeds are now known, the bank now finances the harvest. The harvest goes as per schedule and after 3 months, the exporter can either: 1. disburse off the coffee via the exchange (Physical delivery) at the pre-determined price (or) 2. Buy back the future contract from the exchange at current price and deliver the coffee to a new buyer at an attractive price.

If the price of corn drops in this period, the farmer is protected from losses thereby reducing risk.

CHICAGO BOARD OF TRADE (CBOT)

Established in 1848, is the world's oldest futures and options exchange. The CBOT originally traded only agricultural commodities but now it trades both financial and commodities contracts. On 12 July 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form the CME Group, a CME/Chicago Board of Trade Company

The London Metal Market and Exchange Company was founded in 1877, but the market traces its origins back to 1571 . The LME is the futures exchange with the world's largest market in options, and futures contracts on base and other metals. Along with cash trading, the LME offers contracts with daily expiry dates of up to three months from trade date, along with longer-dated contracts up to 123 months In July 2012, LME's shareholders voted to sell the exchange to Hong Kong Exchanges and Clearing for 1.4 billion.

Various types of Contracts Include : Futures , Options , TAPOs , LMESwaps , LMEMinis and LMEX

It was established in 2003 and is based in Mumbai The regulatory body is Forward Markets Commission (FMC) which was set up in 1953.

MCX is India's No. 1 commodity exchange with 83% market share

Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures trading. The highest traded item in MCX is gold. MCX COMDEX is India's first and only composite commodity futures price index

Other Major Exchanges in India are

National Commodity and Derivatives Exchange (NCDEX) National Multi-Commodity exchange(NMCE) Indian Commodity Exchange (ICEX) National Spot Exchange Limited (NSEL)

CARBON CREDITS MARKET

KYOTO PROTCOL
The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change, which commits its Parties by setting internationally binding emission reduction targets The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. The detailed rules for the implementation of the Protocol were adopted at COP 7 in Marrakesh, Morocco, in 2001, and are referred to as the "Marrakesh Accords Greenhouse gas Carbon Dioxide Methane Nitrous Oxide Hydrofluorocarb ons Perflurorocarbon s Sulphur hexafluoride Chemical symbol CO2 CH4 N20 HFC PFC SF6

country (Annex B to the Kyoto Protocol) EU-15, Bulgaria, Czech Republic, Estonia, Latvia,Liechtenstein, Lithuania, Monaco, Romania,Slovakia,Slovenia, Switzerland Canada, Hungary, Japan, Poland Croatia

Phase 1 Emission reductions targets -8%

-6% -5%

New Zealand, Russian Federation, Ukraine

Norway Australia Iceland

0
+1% +8% +10%

Countries which have taken on emissions targets - commitments to reduce their emissions by a certain percentage, relative to a baseline, typically set in 1990, over the first phase of the Kyoto commitment which runs from 2008 to 2012

CARBON CREDITS
CARBON CREDITS

COMPLIANCE MARKET(CERs)

VOLUNTARY MARKET (VERs)

In the compliance market, carbon credits are generated by projects that operate under one of the United Nations Framework Convention on Climate Change (UNFCCC) approved mechanisms such as the Clean Development Mechanism (CDM).Credits generated under this mechanism are known as Certified Emissions Reductions (CERs) In the voluntary market, carbon credits are generated by projects that are accredited to independent international standards such as the Verified Carbon Standard (VCS). These credits are known as Verified Emission Reductions (VERs). Carbon Trade Exchange supports the trading of both voluntary and compliance credits

Carbon credits can be generated from various types of projects including: Renewable energy: a switch from fossil fuels to a clean energy e.g. wind and solar energy

Forestation and Afforestation: The planting of new trees as trees sequester and store CO2 e.g. forest regeneration
Energy efficiency: reducing emissions though an increase in energy efficiency e.g. installation of energy-efficient machinery Methane capture: avoiding methane emissions through capture and burning to create energy e.g. landfill methane capture

TRADING OF CARBON CREDITS

For trading purposes, one allowance or CER is considered equivalent to one metric ton of CO2 emissions.

CLIMATE EXCHANGES
European Climate Exchange NASDAQ OMX Commodities Europe

These allowances can be sold privately or in the international market at the prevailing market price. These trade and settle internationally and hence allow allowances to be transferred between countries. Each international transfer is validated by the UNFCCC

PowerNext

Climate exchanges have been established to provide a spot market in allowances, as well as futures and options market to help discover a market price and maintain liquidity

Commodity Exchange Bratislava

European Energy Exchange

Carbon prices are primarily influenced by fundamental factors known from the electricity market like weather, coal, gas and oil prices.

the price of EUA is also strongly influenced by political decisions made by the EU concerning the total amount of allocated allowances (EU cap).

THANK YOU

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