Aditya Birla Money

Commodities An Attractive Proposition

Aditya Birla Money Limited

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Commodities The Great Indian Story

MCX, largest commodity exchange in India (87% market share in FY09), was ranked World No.1 for Silver & No.2 for Gold / Copper / Natural Gas & No.3 for Crude Oil in terms of number of contracts traded in 2009. MCX is the leader in International Commodities (Precious Metals / Base Metals & Energy) whereas NCDEX is the leader in Agri Commodities. Major Commodities Traded (i) Gold (ii) Silver (iii) Crude (iv) Copper (v) Soybean (vi) Soy Oil (vii) Chana (viii) Guarseed (ix) Jeera (x) Pepper. Commodity exchanges volumes have gone up from Rs.250 crores per day in 2004 to Rs.27250 crores as in 2009, 109 fold increase over past 6 years. (Currently daily volumes average Rs.38,000 crores as of October 2010). Commodities form 45% of Indias GDP, the physical market in India is pegged at US$350bn USD$450bn. Further, with India being a dominant producer of key agricultural commodities, trading of agriculture alone is a US$200bn annual market.
Aditya Birla Money Limited
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Domestic Markets - Snapshot

Daily Exch. Turnover (Crs)
10,900 13,700 19,700 27,250

Year
2006 2007 2008 2009

% Growth
26.00 44.00 38.00

Commodity exchanges volumes have gone up from Rs.250 crores per day in 2004 to Rs.27250 crores as in 2009, 109 fold increase over past 6 years. (Currently, daily average volumes are Rs.38,000 crores as of October 2010). CAGR of 38% over past 3 years

Daily MCX Turnover in 2009

Commodity
Gold Silver Crude Oil Copper Natural Gas Sub Total Others Grand Total

Daily NCDEX Turnover in 2009

Commodity
Guarseed Soya Bean Chana Turmeric Soya Refined Mustard Seed Sub Total Others Grand Total

Exchange (%)
35.00 17.00 20.00 12.50 4.50 89.00 11.00 100.00

Rs. In Crs
8355 4155 4880 3015 1105 21510 2500 24010

Exchange (%) Rs. In Crs.

25.00 12.00 11.00 10.00 15.00 10.00 83.00 17.00 100.00 805 380 350 330 485 310 2660 550 3210

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Why Commodities ?
Portfolio Diversification - Commodities dont move exactly the same way & at the same time as equities do, for example, if equity falls on one day, commodities may not necessarily fall that day as factors affecting both these markets are different. For example, buying Infosys & buying Copper both are completely unrelated. Commodities are less related with each other as fundamentals driving each commodity is different. Unlike stocks, which are affected by global & domestic overall sentiments. Global in Nature hence there is less risk for manipulation (explained later) Low Volatility over Equities (explained in later slide) Leverage Effect (explained in later slide)

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Why Commodities An Example

For example, if you Buy 1 contract of Gold (a 1 kg contract); Say, current price of Gold for MCX October Contract = Rs.19,000/-10 grams Value of 1 Kg Contract = Rs.19 lacs Margin Required for Buying 1 Contract = 4% i.e. Rs.76,000/Gold Prices move up to Rs.19,100/10 grams You make a profit = Rs.l9,100 Rs.19,000 = Rs.100 * 100 = Rs.10,000/- on an investment of Rs.76,000/-; a return of 13.5% (This return can be in a single day also). Note: It is advised to trade with strict stop-loss in commodities markets as it is a purely leveraged product.

(Allocating 10% - 15% of a securities portfolio to commodities, investor can vastly improve performance in hostile markets.)
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Commodities A Diversification Tool

1. Commodities dont move exactly as per equities markets. Hence risk can be reduced by investing part of your portfolio in commodities. 2. Factors effecting commodity markets may not necessarily affect equity markets. Like a strike in copper mine in Chile may lead to copper price rise but may not at all affect the Indian equity markets. 3. Looking at the chart, we see that Gold prices touched a high in October 08 when Sensex marked its low during same period. 4. If an investor had kept a percentage of his portfolio in commodities also, instead of entire investment in equities at that time, his losses would have been reduced. (explained later).
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21000 19500 18000 16500 15000 13500 12000 10500 9000 7500 6000 4500 3000 1500 0
10/23/2005 10/23/2006 10/23/2007 10/23/2008 10/23/2009 1/23/2006 4/23/2006 7/23/2006 1/23/2007 4/23/2007 7/23/2007 1/23/2008 4/23/2008 7/23/2008 1/23/2009 4/23/2009 7/23/2009 1/23/2010 4/23/2010 7/23/2010

gold prices touched its previous high of gold prices touched 14300 in of 08 their highOct14300 while 08 while Nifty in Oct Sensex fell to its to its 08 low fell08 low 7700 in Oct 7700 in Oct

Nifty

Gold

Source: Bloomberg,, Aditya Birla Money Commodities Research

Commodities - Lowering Risk in Portfolio

Asset Class Sensex Gold Sensex 2004 Sep 2010 % Returns 5900 19350 228 5800 19000 228 Yr. 2008 Yr. 2008 21200(Jan) 7700(Oct) -63.68 43.00 -63.68 -42.34

Gold 10000(Jan)14300(Oct) 100% investment in Sensex 80% in Sensex and 20% in Gold

The above table shows Sensex and gold prices during 2008. After the Sensex hit a high in Jan 08, it hit a low by the end of the year while gold rose. The above table clearly indicates that if an investors had invested 100% of his portfolio in equities he would have incurred a loss of 63% on his total investment during 2008. While 20% of portfolio diversified into gold would have reduced his losses by around 33%.
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Commodities- Less Related with each other

1. Commodities are less related not only with other asset classes like stock, real estate, etc but have a lower relation with each other as well. For example a fire in crude refinery unit may lead to increase in crude oil prices, but may not impact other commodities like gold, copper etc. Similarly the arrival of festival season may be bullish for precious metals but not for crude oil or copper or rubber. Hence each commodity has its own unique fundamental price drivers. This allows investors to take positions in various commodities simultaneously as one factor/event will not affect all commodities equally, leading to diversified lower risk trading in commodities.

2.

3.

4. 5.

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Seasonal Pattern of Different Commodities Is Different

Gold Seasonal Chart is different from copper as factors affecting both metals are different. Hence investors get an opportunity to invest any time during the year in various commodities since the price trend of different commodities differs from each other during a particular period. Like copper is normally bullish during 1st quarter of a year while gold peaks during last quarter of a year. Copper Seasonal Chart Gold Seasonal Chart

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Commodities A Global Proposition

Entire world trades in commodities. All industry sectors, Governmental organizations, Central Banks, Commodity funds to the common man, are affected by commodity in their daily lives. Due to their global nature, manipulation is difficult in commodities unlike equities where a set of investors can move a stock; like KP 10 Stocks during Ketan Parikh heydays. Commodity movements can be explained unlike equity movements where it is difficult to site a proper reason for a stock movement. For example, if Satyam stock moves by 5% in a day, exact reason would be difficult to find. But it is easier to give a proper logical reason for most of the international commodities like gold, copper, crude etc.
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Gold Prices
20000

19000

18000

17000

16000

15000

Purchase of 200 MT of gold by the Reserve Bank of India led to sharp price rise in Nov.'09

14000

13000 1-Sep-09 16-Sep-09 1-Oct-09 16-Oct-09 31-Oct-09 15-Nov-09 30-Nov-09 15-Dec-09 30-Dec-09 14-Jan-10 29-Jan-10 13-Feb-10 28-Feb-10 15-Mar-10 30-Mar-10 14-Apr-10 29-Apr-10 14-May-10 29-May-10 13-Jun-10 28-Jun-10 13-Jul-10 28-Jul-10 12-Aug-10 27-Aug-10

Commodities Low on Volatility over Equities

Historically commodities have been less volatile compared with equity markets. Hence commodities as a part of portfolio will give a balance affect to the overall risk adjusted returns. Low volatility means lower margins, hence higher leverage in Commodities. Average Annual Volatility
35% 30% 25% 20% 15% 10% 5% 0%

Sensex

Govt Sec Index

Gold

Silver

Cotton

Oilseeds

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Leverage Effect
Commodities provides investors an option to trade in a contract by paying only low margin amounts. The effect is known as leverage effect. As mentioned below by paying Rs.75760, an investor can buy gold lot worth Rs.19 lacs. While the same amount will buy approximately 3 lot of Nifty worth Rs.9 lacs. (as of Sep 2010) Price of one lot of % of Money Reqd. Margin Money Prices Quoted Commodity Contractprovides (Rs) degree of exposure with lower amount. (Rs) required Hence commodity at MCX higher as Margin Gold Regular Gold Mini Copper Silver Silver M Crude 18,94,000/1kg 1,89,400/100 gm 3,50,000/MT 9,08,790/30kg 1,51,465/5kg 3,48,500/100 barrel 4% 4% 5% 5% 5% 5% 75760 7575 17500 45440 7575 17425 18940/10gm 18940/10gm 350/kg 30293/kg 30293/kg 3485/barrel

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Commodities Unique Trading Advantages

Commodities provide unique advantages of trading late night which is not possible in other markets. An investor thus has the option to trade even from home and after his work hours. Attend office during the day and trade during night. Updating oneself on commodities is easy as factors affecting prices are few when compared to stocks. Few commodities to trade, hence tracking makes easy. Further, commodities are clubbed in categories : Bullion Gold / Silver; Base Metals Copper / Zinc / Nickel / Aluminium / Lead / Tin; Energy Crude Oil / Natural Gas. This makes further analysis easy.

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Commodities Segment wise (MCX & NCDEX) COMMODITIES

Metals
Gold Silver Steel Copper Zinc Nickel Lead & Aluminium

Edible Oils
Soy Oil Mustard Oil Crude Palm Oil

Energy
Crude Oil Brent crude Furnace oil Natural gas

Softs
Cotton Gur

Agri. Comm.
Pepper Guar Seed Soy Bean Jeera Mustard Chilli Etc..

Aditya Birla Money Limited

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Market Participants
Hedgers, Speculators, Investors, Arbitragers Producers Farmers , Manufacturer, Corporate Consumers Refiners, Food Processing Companies, Jewelers, Textile Mills, Exporters & Importers, Manufacturing Sector Institutions, Banks, Mutual Funds (These are currently not permitted in Indian Commodities Exchanges).

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Trading Strategies
Pure Trading
Speculators in the futures market can use different strategies to take advantage of rising and declining prices. The most common are known as Going Long, Going Short

As an Investment
Investors can build and Diversify their Portfolio

Alternative Ideas
Calendar Spread trading
Spreads involve taking advantage of the price difference between two different contracts of the same commodity

Arbitrage Opportunities
Inter Exchange (NCDEX & MCX) Spot -to- Futures

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Commodities Key Details

Commodity Quotation Unit Gold Silver Copper Zinc Lead Nickel Crude Natural Gas Rs/10 grams Rs/Kg Rs/kg Rs/Kg Rs/Kg Rs/Kg Rs/barrel Rs/mmBTU Contract Size Mini - 100 grams & Regular Gold - 1 kg Mini - 5 Kg & Regular Silver - 30 kg 1000 kgs 5 tonnes 5 tonnes 250 Kgs 100 barrels 1250 mmBTU Loss/Gain per Rupee Mini - Rs.10/rupee movement & Regular - Rs.100/rupee movement Mini - Rs.5/rupee movement & Regular - Rs.30/rupee movement Rs.1000/Rupee movement Rs.5000/Rupee movement Rs.5000/Rupee movement Rs.250/Rupee movement Rs100/Rupee movement Rs.1250/Rupee movement

Margins vary between 4% - 10% depending on the volatility Expiry dates are different for most commodities.

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Fundamentals Influencing Commodities

Demand & Supply Seasonal patterns Global & Indian economic data / policies Weather conditions Import / export parity and government policies Forex / currency movement Global political / economic events and data Global Hedge / Commodity Fund Activity US / Euro-Zone / China / Japan Key Data Releases & Central Banks Statements

Aditya Birla Money Limited

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General Concerns of Investors

Higher Leverage generally attracts the trader to take extremely high leverage positions. Any adverse price movement will have a significant impact on portfolio. While at the same time, any positive price movement will lead to a windfall. For example, if copper prices fall by Rs.5 per kg, it will give a multiplier effect of total loss of Rs.5000 per contract. So if any investor is holding 10 long position, he will incur a Rs.50,000 loss. This could lead to wiping of margins if an investor holds his position without stop loss & market continues to move against him. Hence investors feel jittery thinking that commodities lead to losses without realizing the effect of leverage. The same is applicable while trading equities as well. Disciplined trading by putting stop losses on positions is the way to trade profitably.

Aditya Birla Money Limited

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Golden Rules of Trading

1. Always trade with Strict Stop-loss

2. Dont risk more than 5% of corpus on any one trade 3. Never average losers 4. Trade with the TREND 5. Do not trade on HOPE. Hope is good for in life but not in markets 6. Taking small profits and letting losses run is based on fear and hope. This every trader will have to find a way to deal with 7. Do not increase your commitment with success. Overconfidence can be very dangerous in markets

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Untapped Potential
India is the 2nd fastest growing economy in the world after China. We are amongst the top producers in Sugar/Wheat and other agri commodities, and the largest consumer of gold. We anticipate commodity derivatives business in India to grow at the rate of +30% per annum over the next 3 years A Rs.75,000 crore per day market by 2013.

Aditya Birla Money Limited

Copyright Aditya Birla Nuvo Limited 2008

Our Research Capabilities

Daily Fundamental & Technical Reports covering major commodities analyzing global trends, major news events; key data releases and a technical perspective as well.

Provide intraday and positional trading calls with a strike rate of 65%-70% on major commodities such as gold / silver / copper / crude / soybean / guarseed / chana, to name a few.

Publish indepth special monthly reports on Gold / Silver aimed at educating the investors on global happenings, to help them take advantage of price moves.

Aditya Birla Money Limited

Copyright Aditya Birla Nuvo Limited 2008

Commodities Trading Calls Strike Rate

Total Number of Calls Issued Profitable Trades
Sr.No InitiationDate Commodity Exchange

32 21

Losing Trades Strike Rate (%)

Contract Strategy

11 66
Trade Type

Total Profit (Rs.)

70460

Initiation Price

Target

SL

Result

Realised P/L

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

30-Aug-10 30-Aug-10 31-Aug-10 31-Aug-10 01-Sep-10 01-Sep-10 01-Sep-10 02-Sep-10 02-Sep-10 03-Sep-10 03-Sep-10 06-Sep-10 07-Sep-10 08-Sep-10 08-Sep-10 08-Sep-10 08-Sep-10 09-Sep-10 09-Sep-10 13-Sep-10 14-Sep-10 14-Sep-10 15-Sep-10 16-Sep-10 20-Sep-10 21-Sep-10 01-Oct-10 04-Oct-10 04-Oct-10 05-Oct-10 06-Oct-10 07-Oct-10

Nickel Gold Silver Copper Gold Chana Crude Oil Silver Mentha Oil Zinc Soyabeen Chana Copper Gold Pepper Nickel Copper Lead Silver Crude Oil Nickel Crude Oil Crude Oil Nickel Silver Silver Silver Aluminium Crude Copper Copper Nickel

MCX MCX MCX MCX MCX NCDEX MCX MCX MCX MCX NCDEX NCDEX MCX MCX NCDEX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX MCX

September October September November October September September September September September September September November October September September November September December September September September September September September September December October October November November October

Buy Buy Buy Buy Buy Sell Sell Buy Buy Buy Sell Sell Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy

Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Positional Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday Intraday

1006 18885 30320 350.15 19110-19115 2235 3420 30780 784 100.25 2038 2206-2210 358.2 19175 20780 1033 356.6 101.15-101.20 31425-31440 3584-3587 1063-1064 3572-3575 3545-3550 1068-1070 32305-32320 32000-32012 33085-33 104.35-104.40 3632-3640 361.45-361.55 368.40-368.50 1103-1104

1016 19050 30590 356 19180 2180 3380 31100 791 101.9 2010 2164 361.3 19224 21240 1044 362 103.4 31225 3609 1086 3595 3592 1082 32630 32230 33400 105.5 3690 365 372 1135

1001 18815 30110 347.5 19073 2265 3437 30540 780 99.25 2055 2231 356.25 19152 20535 1029 352 99.6 31750 3572 1052 3560 3517 1056 32085 31880 32880 103.4 3597 360.35 365.8 1090

Booked profit at 1014 Target Achieved Target Achieved Target Achieved Profits booked at 19150 Booked profit at 2207 SL Triggered Target Achieved SL Triggered Booked profit at 101.25 SL Triggered Target Achieved SL Triggered SL Triggered Booked profit at 21100 Target Achieved Booked Profit at 360 Booked Profit at 102 SL Triggered Target Achieved Booked profit at 1080 SL Triggered SL Triggered Target Achieved SL Triggered Booked profit at 32150 Profits Booked at 33225 Profits booked at 104.80 Profits Booked at 3675 Target Achieved Sl Triggered Sl Triggered

2500 16500 8100 5850 4000 2800 -1700 9600 -1440 5000 -1700 4400 -2000 -2300 3200 2750 3400 4000 -6000 3400 4000 -1300 -3000 3250 -6750 4500 4200 2250 5300 3500 -2600 -3250

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Thank You For further details on research, you can reach us at [email protected] 022-42333480/022-42333484

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