Commodities

Commodity "futures" are contracts to buy or sell certain goods at set prices at a predetermined time in the future.

Futures trading plays a key role in the marketing of a number of important agricultural and nonagricultural commodities as it provides the industrial and farming communities with a transparent price discovery platform, which also enables them to hedge their price risk and price volatility. The growth of Indian commodities futures trading towards an efficient, transparent and well-organized market has thrown open a window of benefits and opportunities to Indian producers and traders. Besides the primary benefits of its twin economic functions of price discovery and price risk management, commodity futures trading has also played an instrumental role in integrating various fragmented components of the commodity ecosystem, thus developing the overall infrastructure of agricultural commodities marketing in the country.

At  present,  24  commodity  futures  exchanges  are  operational in India, which include 21 regional bourses and the three national-level players, with another three proposed exchanges on  the cards. With the state-of the-art technology-powered secure and efficient operational infrastructure, these national exchanges are creating a near-perfect market situation with a much wider participation from the ecosystem stakeholders in a large number of domestic and global commodities during local and international timings.

While  the  trade  in  non-agricultural  commodities, especially bullion and crude, has increased in the past two financial years, the same in agricultural commodities  has  declined.  The share of  agricultural  commodities almost halved during 2008-09, due to the continued ban on several commodities.

Hedgers vs. Speculators

Commodities traders fall into two broad categories: hedgers and speculators. Hedgers are business firms, farmers, or individuals that enter into commodity contracts to be assured access to a commodity, or the ability to sell it, at a guaranteed price. They use futures to protect themselves against unanticipated fluctuations in the commodity's price. On the other hand, speculators are lured to commodity trading by the prospect of making huge profits on small margins (futures contracts, like many stocks, are traded on margin, typically as low as 10 to 20 percent on the value of the contract). 

Gold

As the oldest precious metal known to man, gold has served as a global currency and commodity for thousands of years. Gold is unique as it is both a commodity as well as a financial asset. It is also widely considered as a hedge against inflation. The total above ground stocks of gold is estimated to be around 1,63,000 tonnes by Gold Fields Minerals Services (GFMS) as on end of 2008. Out of this total stock, 51% is estimated to be present as jewellery, 18% as official reserves, 17% held as investment, 12% used for industrial purposes and 2% is unaccounted for. India is the world's largest consumer of gold. Indians normally buy about 25 per cent of the world's gold, purchasing around 700 - 750 tons of gold every year.

What influences gold prices?

? Indian gold prices are highly correlated with international prices. However, the fluctuations in the INR-US Dollar exchange rate impacts domestic gold prices and have to be closely followed. The global gold prices are driven by a host of factors such as macro-economic factors like strength of the economy, rising importance of emerging markets, currency movements, and interest rates being the major influencing factors. Supply-demand is also a major influencer, amid rising global investor demand and almost stable supplies. Shifts in official gold reserves, reports of sales/purchases by central banks act as major price influencing factors, whenever such reports appear. The investment in gold is also influenced by comparative returns from other markets like stock markets, real estate other commodities like crude oil. Domestically, demand and consequently prices to some extent are influenced by seasonal factors like marriages. The rural demand is influenced by monsoon, agricultural output and health of the rural economy.

Silver

Silver's unique properties make it a very useful 'Industrial Commodity', despite it being classed as a precious metal. Demand for silver is built on three main pillars; industrial uses, photography and Jewellery & silverware accounting for 342, 205 and 259 million ounces respectively in 2002.
Just over half of mined silver comes from Mexico, Peru and United States, respectively, the first, second and fourth largest producing countries. The third largest is Australia. Primary mines produce about 27 percent of world silver, while around 73 percent comes as a by-product of gold, copper, lead, and zinc mining.

What influences silver prices?

The price of silver is not only a function of its primary output but more a function of the price of other metals also, as world mine production is more a function of the prices of other metals. The tie between silver and economic activity is strong, given that around two-thirds of total silver fabrication is in the industrial and photographic sectors. Often a faster growth in demand against supply leads to drop in stocks with government and investors. Economically viable primary silver mine is a function of the world silver price level.

Copper

Copper ranks third in world metal consumption after steel and aluminum. It is a product whose fortunes directly reflect the state of the world's economy. Copper is the best non-precious metal conductor of electricity. The metal's exceptional strength, ductility, and resistance to creeping and corrosion, makes it the preferred and safest conductor for building wiring. Copper is also used in power cables, either insulated or uninsulated, for high, medium and low voltage applications. Copper is an essential component of energy efficient motors and transformers and automobiles.

What influences copper prices?

Copper prices in India are fixed on the basis of the rates that rule on LME the preceding day. The world copper production through exploration of new mines and expansion of existing mines also influence copper prices. Price of copper is also heavily influenced by the economic growth and demand in major consuming countries such as China, Japan, Germany etc.

Zinc

Zinc is the fourth most widely used metal after steel, aluminum and copper in the world. Due to its resistance to non-acidic atmospheric corrosion zinc is instrumental in extending the life of buildings, vehicles, ships and steel goods and structures of every kind./p>

What influences zinc prices?

Factors Influencing Zinc Market are changes in inventory level at LME warehouses. Demand for zinc is closely correlated to the economic growth rate of major consuming countries and major consuming industries. The prices of alternative metals also influence zinc prices.

Crude Oil

Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total world's primary energy consumption. Almost all industries including agriculture are dependent on oil in one way or other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides, paints, perfumes, etc. are largely and directly affected by the oil prices./p>
The prices of crude oil are highly volatile. High oil prices lead to inflation that in turn increases input costs; reduces non-oil demand and lower investment in net oil importing countries.

What influences crude oil prices?

The primary determinant is the output and supply from OPEC. Weather/storms, war, and geopolitical factors that cause supply disruptions also heavily influence crude oil prices. Other important factors are the demand from emerging nations (especially China), the fluctuations in the dollar exchange rate, inventory levels of crude in major consuming nations, refinery outages and disruptions, and the buying of crude oil futures by major investment funds.

Natural Gas

Natural gas is quickly emerging as a cheaper and environment friendly energy source. It is used as a fuel source for power generation, cooking, heating and as a feed source for fertilizer manufacture. Compressed Natural Gas (CNG) is widely used as an alternative automobile fuel. The other fractions obtained in natural gas processing like butane and propane are used in manufacture of LPG (LIquified Petroleum Gas)

What influences Natural Gas prices?

Natural gas prices, too like that of any other commodity are a function of market supply and demand.

As there are limited alternatives for changing consumption or production in the short run, changes in supply or demand over a short period often result in large price movements. Strength of economy, weather and crude oil prices are the major demand-side factors influencing price. Severe winter in developed countries can increase demand for domestic and commercial heating and is a major influencing factor. The supply side factors influencing prices are variations in natural gas production, imports and storage levels. Hurricanes and severe weather can disrupt supply. Macro-economic factors like exchange rates, interest rates and other economical indicators do influence natural gas prices.

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