I

ndians, like their counterparts in other parts of the world, also love to invest in, trade and speculate in commodities – on or off the exchange. And, believe it or not, they love to do so even on an international holiday…!!!  

Crazy is the only word one can think of for both the exchanges that offer trading platform and their members who utilize this platform even on an international holiday. What about the regulator Forward Markets Commission (FMC)..? At best we can say they would have been busy and happy like other normal not-so-crazy people partying while a small number of `boys’ made merry at the Indian commodity exchanges, especially in the evening trade from 5.00 pm to 11.55 pm – just five minutes short of the New Year the next day. 

This year the Happy New Year day, January 1, 2008 was on Tuesday. Normally, as per the usual custom the world over, this is one of the few days that is an international holiday and people – including traders of all hues and shades – think of just one word – ENJOY!! So, this year January 1, 2008 too was an international holiday, people across the globe enjoyed possibly to their best – sort of. Sort of, because in India and also overseas, a section of traders, punters and speculators in commodity markets preferred instead to push trade till hold your breath …till late in the mid-night up to 11.55 pm IST!! 

It will be interesting and revealing to see how Indian commodity traders traded what on two of the three nationwide multi commodity exchanges (NMCEs) – the Multi Commodity Exchange (MCX) and the National Commodity & Derivatives Exchange (NCDEX) on January 1, 2008: 

Number of traders logged in declined as the day turned into night …By 11 am 2,284 members had logged in, by 1 pm – 1,971, by 5 pm – 1,772, by 6.30 pm – 697, by 8 pm – 387, by 10 pm – 248 and by 11.55 pm only 109 traders were logged in.

And they pushed in more trades in the evening session…By 11 am – 6,514 trades were put in by the members who had logged in, by 1 pm this number jumped to 16,641 trades, by 3 pm number of trades climbed further to 23,683 trades; 5.00 pm – number of trades jumps to 39,689 trades, 6.30 pm – to 39,749; by 8.00 pm – 39,785; 10 pm – 39,816 and by 11.55 pm – 39,844 trades were introduced. See how the number of trades is relatively constant at around 39,600-39,800 after 5 pm!! 

Value of these trades was relatively constant in evening trades… 11.00 am – Rs 192 cr, by 1.00 pm – 507 cr, by 3.00 pm – 728 cr, by 5.00 pm – 1,242 cr, by 6.30 pm – 1,248 cr, by 8.00 pm – 1,251 cr, by 10.00 pm – 1,253 cr and by 11.55 pm – 1,255 cr!

What is more interesting, on January 1, 2008, Indian commodity traders were trading merrily in just four commodities – Gold, silver, Brent crude / crude oil and copper – that are known in India as international commodities.  

So, on an international holiday on January 1, 2008 Indian commodity traders were busy trading with their counterparts in overseas exchanges in just four international commodities!! Interestingly, majority of these trades as can be seen below were traded during the evening trading session on the MCX where the volume of trades in all the four commodities was (1) almost double that of the day trading, (2) relatively constant among small number of around 100 traders… at around 2,300-2,800 kg in gold; around 72,000-80,000 kg in silver; 1,200-1,600 in copper but the trading in Brent crude / Crude oil almost tripled in the evening trades on MCX to 327,500 barrels!! 

Gold (kg)          NCDEX / MCX

11.00 am          90 / 751

1.00 pm –          165 / 1478

3.00 pm            271 / 1876

5.00 pm            426 / 2165

6.30 pm            473 / 2,383

8 .00 pm           496 / 2,583

10.00 pm          506 / 2,734

11.55 pm          514 / 2,849 

Silver (kg)        NCDEX / MCX

11.00 am          425 / 11,980

1.00 pm –          885 / 49,455

3.00 pm            1,310 / 64,656

5.00 pm            1,760 / 69,920

6.30 pm            1,955 / 72,605

8 .00 pm           2,045 / 74,670

10.00 pm          2,170 / 77,165

11.55 pm          2,300 / 79,770 

Brent Crude     NCDEX / MCX /

Crude oil (in barrels)           

11.00 am          100 / 49,900

1.00 pm –          300 / 70,200

3.00 pm            600 / 103,200

5.00 pm            1,500 / 119,300

6.30 pm            1,900 / 140,100

8 .00 pm           2,000 / 221,200

10.00 pm          2,000 / 306,800

11.55 pm          2,000 / 327,500 

Copper (MT)

11.00 am          6 / 446

1.00 pm –          12 / 770

3.00 pm            28 / 1,130

5.00 pm            34 / 1,292

6.30 pm            37 / 1,374

8 .00 pm           38 / 1,461

10.00 pm          39 / 1,534

11.55 pm          40 / 1,630 

What is more, up to 5 pm, the distribution of value traded on both the exchanges was in the ratio of 35:65 on MCX and NCDEX…and hereafter comes the interesting switch in the value of trading after 5 pm to 11.55 pm – MCX has over 95 per cent of value traded while the balance is with NCDEX. 

And on an international holiday of New Year January 1, 2008, even when trading in agro commodities till around 5 pm was the highest on NCDEX, trading in the four international commodities was seen lopsided to say the least during evening trades on MCX… 

Time                             products            MCX / NCXDEX (in % terms)

10 am – 5.00 pm            AGRI                 13 / 87

10 am – 5.00 pm            Gold                  84 / 16

5 pm to 8 pm                 Gold                  86 / 14

8 pm – 10 pm                 Gold                  94 / 6

10-11.55 pm                Gold                  93 / 7

Almost same trend for  Silver  

10 am – 5.00 pm           others              95 / 5

5 pm to 8 pm                Others                 99.81 / 0.19

8 pm – 10 pm                 Others                98 / 2

10-11.55 pm                Others                  95 / 5 

On December 17, 2007, yours faithfully had mentioned in the post titled India’s narrow commodities, evening trades spoil futures game that … “these are known to be pure speculation and only arbitrage between domestic and international commodity exchanges, and are illegal too”. 

The above commodity trading figures of just one day – January 1, 2008 – substantiates my observation that calls for urgent attention of both the regulator and the government. The evening trades are concentrated among the small number of traders and that too on just on MCX.

There is much more to commodities than just trading, and so there is too much at stake in the Indian commodity derivatives market. Therefore, the surging evening trading / unhealthy and unwarranted speculation / arbitrage between domestic and international commodity exchanges surely needs to be curbed.  

So, as we enter in the New Year, we surely hope that the concerned regulators and the government would take note of this unhealthy trend in Indian commodity trading that has given a tarnished image on the Indian commodity futures arena, more so when options on commodity futures are said to be on the list of some important clearances awaiting the government nod.  

Two other related posts would also be interesting https://commoditywise.wordpress.com/2007/12/10/rising-monopoly-in-india%e2%80%99s-commodity-futures-trading/ https://commoditywise.wordpress.com/2007/11/26/evening-commodity-trade-%e2%80%93-healthier-with-restrictions/

Advertisements

C

ommodity market players, wake up! After decades of dollarization, India’s foreign exchange kitty is now fast getting euro-ized. Accordingly, the euro component in India’s forex kitty is rising fast – possibly even faster – than the slide in the weakening dollar component. 

So, can the Indian commodity trade also be euroized? For decades, Indian trade has been dollarized, and also largely to USA. It’s time that the Indian commodity exporters began thinking in terms of euro and European markets. 

At the end of December 2007, India’s foreign exchange (forex) is valued at $6 trillion. If the exchange rate of around 1.46 euros to one Us dollar is considered, the value of India’s forex kitty in euro terms is Eur4.10874 trillion.  

On January 1, 2008, the Reserve Bank of India (RBI) reference rate for the US currency was at Rs 39.42 per dollar and the reference rate for Euro was at Rs 57.51 on Jan. 01, 2008 as against Rs 58.12 on Dec. 31, 2007. According to the figures released by International Monetary Fund (IMF), India’s $6 trillion forex kitty has over 26.4 per cent of euros and around 63.8 per cent of US dollars. Interestingly, the percentage of US dollars has declined by almost 10 per cent to 63.8 per cent from 72.8 per cent in 1999. The comparative figures of euro component in 1999 is not available, but that the percentage of euro has been rising since the past few years – in July-September 2006 it was placed at 24.4 per cent – a rise of two per cent in euro component in some 18 months to December 2007, almost the same percentage decline in US dollar component. This shows that euroization of India’s forex kitty has already begun even when neither the government nor the Reserve Bank of India (RBI) wants to say it openly. And herein is the opportunity for Indian commodity players to increasingly tap the European markets more than ever before.

EU-India trade has swelled to euro 48 bn in 2006 taking India’s trade with EU (plus UK) account for over 22 percent in 2007. For one, the share of India’s exports to EU countries is barely around 1.7 per cent in whole of EU’s import basket. This can be increased by exporting more of Indian commodity related products to EU. According to available information, EU imports more of agriculture and energy products, iron & steel from India than it exports. http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113390.pdf)  

The Indian rupee (INR) has been strengthening since more than a year now. The stronger INR has hit the margins of the exporters of commodities, goods and services and therefore, are forced to rework at their business strategies. If the IMF figures of euroization of Indian forex kitty are any indication, it is time for the players in the commodity markets to start thinking in terms of euros. Interestingly, the European Union (EU) along with UK has emerged as one of the most important trading partners. By 2006, it  Despite the stronger INR, India’s exports are rising.

However, if the commodity exporters want to earn more, it is time for them to review their export strategies and billing patterns to euro which will fetch them more compared to the weakening US dollar. Yes, India’s exports though seen to be rising are affected by the strengthening INR impacting the margins of the exporters. India’s exports grew at 26.82 per cent in November 2007, but were down from 35 per cent growth recorded in October 2007. During the eight-month period to November 2007, India’s exports have reached to $98.38 billion from $80.59 bn in the same period last year.

WISHING YOU ALLA VERY HAPPY&PROSPEROUS NEW YEAR

After the good wishes…some realities in the world of commodities  

Three news items point to the things in store for the members of the commodity markets, including the consumers and investors.  First, Consumers may have to pay more in 2008 Two, a model portfolio for investment in 2008 – Though a model portfolio, it does not have a single item of commodity even when commodities are the flavor of the season not just in India but the world over.  Three, Drop in demand may hurt growth These items were published in Hindustan Times Business Section pages. Published on the very first day of the supposedly Happy New Year, these news – for general reader and not financially savvy investor, along with other news – point to some hard times in store for consumers, investors, industry players and therefore, of course, the economies and the global economy.

Investors of commodity market like those in the roller coaster equity and currency markets, have gained good returns in 2007 at least in three commodities – crude oil, gold and wheat (among other agro commodities). Crude oil ended the year 2007 with a gain of 57 per cent, gold 31 per cent and wheat almost 100% (if the prices of wheat futures on Chicago Board of Trade – CBOT are any indication). 

Clouds of gloom on global economy loom large. Over the past couple of weeks, these have been cited by the US Federal Reserve, analysts of leading banks, and also in India by both the Prime Minister and the Finance Minister. This could impact the demand for commodities, however, despite this, the likely trend for commodity prices seems to be upward, barring may be the crude oil prices that though threatening to cross $100 a barrel, is flirting at that levels and it could slide below $85 too.

Given the kind of dual demand for commodities as a whole (from consumers as also from investors) and their supplies, chances are consumers will be disappointed as they will have to pay more for the food products as also for the fuel for their vehicles. The investors in these commodities are on the other hand sure to be happy with possibly good returns from their investment. But it always pays to be cautious then overoptimistic.

In this sense commodities are an integral part of any model portfolio and therefore, cannot be ignored by any analyst or investment advisor. Therefore, the published news item on so-called `model investment portfolio’ cannot be considered to be a model one, as the analyst of one of the mid-level brokerage seems to be hooked more on to the equity markets that in India did give good returns over the last two years and are likely to do so even in 2008.

What this `model portfolio’ (mentioned above) reflects is more of the general mindset of the investment analysts of almost all the brokerages in India. For, various reasons, commodities in India are yet to enter their collective mindset of investment analysts and advisors.

And here lies the biggest challenge for all connected with India’s commodity markets – brokerages, commodity exchanges, the commodity market regulator and of course the government – to make commodity markets attractive not just for the investors but also for the whole lot of players of the commodity markets.

Investors are ready to invest in commodities, analysts at brokerages may also be willing to recommend the possibly rewarding investment avenues in commodity markets and some of them do recommend, but commodities are not yet as part of a `model investment portfolio’ in India. Therefore, both the regulator and the government are collectively responsible for making commodity markets attractive even for the industry players and of course, the investors.And in India, of the two leading nation-wide multicommodity exchanges, Multi Commodity Exchange (MCX) of India seems to be in for a good tidings during the whole of 2008, as its rival National Commodity & Derivatives Exchange (NCDEX) has been forced to reset its entire business development team after the resignation last month of the members of its business team lead by N Gupta. There are more developments to unfold at the NCDEX. All this has severely hit the business at NCDEX.

Even as NCDEX will be busy strengthening its business as a whole, the possible lifting of suspension of trading in wheat, rice and two pulses, could benefit MCX without it doing anything. Since March 2007, the government’s suspension in trading in these key agro commodities has severely hit the business of NCDEX.

And one of the most aggressive and also influential brokerages in New Delhi has tied up with India’s top commodities trading firm owned by the government to set up yet another commodity exchange in the country. It remains to be seen how and when will this new commodity exchange emerge on the horizons of Indian commodity market.

 And the Indian government keeps promising to strengthen the commodity market regulator Forward Market Commission (FMC), even when there is confusion among the finance and agriculture ministry as to the overall subject of independence of the FMC.  In these sense, a lot many developments are in store for the Indian commodity markets that will be interesting – both for consumers and investors – during 2008.  But the moot question will remain unanswered – if commodity markets are attractive for investors, can it be equally interesting for the consumers too? Given the diverse interest of the players of these two markets they always will be on the opposite camps where consumers find themselves at the receiving end.

My earlier posts will be interesting

Are we fuelling the commodities bubble?

L

ast Friday evening (December 21, 2007) while flipping through TV channels, a news highlight on Zee Business TV channel stopped me flipping further. `Narendra Gupta, market strategist of National Commodities & Derivatives Exchange (NCDEX) put in his papers’. Mr Gupta is known to be next only to CEO & MD Mr P H Ravikumar.

After seeing the news highlight, I waited for more details on the news. There was nothing. I tried the NCDEX website – www.ncdex.com for official version, but here too there was no mention.  Next day, I tried to search about it in the newspapers, business channels, but there was nothing on Mr Narendra Gupta resigning from NCDEX. For next two days, I was busy with a family marriage, and I could not check for more details about the resignation of Mr Gupta from NCDEX. 

On Sunday, December 23, 2007, The Economic Times carried the news: NCDEX top brass Narendra Gupta puts in papers’. And along with Mr Gupta, even Mukund Annigeri, head of the spot market at NCDEX, and few others are reported to have resigned’. The ET scribe tried to get the official view on the unexpected exodus at NCDEX. PH Ravikumar, MD & CEO replied: “We do not comment on management related issues. I will neither confirm nor deny.” 

Three days after the spot news, on Monday, December 24, 2007, the NCDEX website is silent on the issue. The postings, contents on NCDEX website are as usual. This indicates there is serious thinking and debate within NCDEX and its management on whether or not to let go Mr Gupta and few others of his team that are reported to have resigned, and the management does not want to comment anything at this crucial stage.   

For various reasons, Mr Gupta may or may not want to move out of NCDEX and even the management may not want to let go such a top executive in whom the management had put in full faith and support since NCDEX inception in mid-2003 for the growth of the commodity exchange in the decontrolled era. And Mr Gupta has largely met the expectations of the management. Opportunities in competitive market or is it too-o tiring and futile to fight government supported competition / closed minds?

In the course of business, there have been allegations against and opposition to Mr Gupta and his style of functioning. There have been charges too leveled against him w.r.t. wild fluctuations in select agro commodity prices, but he was cleared of these charges.  According to the report in ET (December 23, 2007): A high-level committee (set up in January 2007) under the chairmanship of Justice PN Bhagwati … directed that a ‘reorganisation’ of the NCDEX management should take place. A section of the market believes that the trouble at the exchange was triggered by intense pressure from the regulator’. 

Since its inception, NCDEX had focused more on trading in agro commodities knowing the importance of risk management required in India’s agro sector. However, agriculture in India though a state subject is intensely political, and that too from Center that seems to have been pretty comfortable playing the market game. Under various pretext, government intervention, meddling, enquiries, bans on trading in futures, etc have been more frequent than expected. This has grossly colored the perception about commodity futures in general and in turn has badly hit the business of NCDEX so much so that NCDEX, which had `grown exponentially in its first few years since its inception in 2003, suddenly saw volumes halve in 2007, to Rs 6.74 lakh crore from 12.4 lakh crore last year’.  

Having stabilized the exchange with both his acumen and management support, Mr Gupta was given the additional responsibility also to device new growth strategy for the exchange that could see volumes climb and possibly steer NCDEX out of the current mire of opposition, complaints, low volumes … and make it stronger to take on challenges in a much open and better regulated environment. 

However, the going at NCDEX seem to be getting increasingly difficult also for Mr Gupta (and few of his colleagues who are reported to have resigned), more so with the government constantly at their back putting clamps on trading in agro commodities – more for political reasons than economical – and with rather less maneuvering room in a market-oriented environment, it could be possible that Mr Gupta (and his team) would not have shown positive growth in trading volumes on the exchange. And then there was this `reorganization at NCDEX’ recommended by the Bhagavati panel. 

Is Mr Gupta along with his team and therefore, NCDEX a victim of high level politics played on the arena of Indian commodity futures market jointly by the competition and allegedly supported by the agriculture ministry? 

It is an open secret that commodity futures market in India seriously requires a strong regulator. But the Indian commodity market players are grossly divided on the subject with the large influential section wanting the status quo – a relatively weak regulator watching over the market with translucent glass, or better still willing to turn a Nelson’s eye – while the other wants a stronger regulator that could also be the part of Securities and Exchange Board of India (Sebi) and more serious players than just day and evening traders pushing volumes on the exchange to take benefits of arbitrage that is not permitted.  

For the overall growth of the commodity and risk management market in India, NCDEX like many others including ministry of finance prefers more transparency, more serious players and a stronger regulation. Mr Gupta and his team part of the forward-looking management team would have been facing the pressure from the powerful lobby and therefore, the decision to resign.   

Or may be it could be something else that only Mr Gupta knows about… 

So, at a time when the commodity derivatives markets are booming, opportunities are emerging and beckoning, competition is rising, NCDEX is searching for a stronger support both within and at the ground level as also at the Center.. 

It is in this larger perspective that the resignation – enforced? – of Mr Gupta needs to be viewed. And may be for these reasons even the NCDEX is silent about the subject of resignation of Mr Gupta and prefers to remain silent while it debates the pros and cons of this unexpected development.  

In any country, fighting government supported competition is extremely difficult, so also for NCDEX and possibly even for Mr Narendra Gupta and his team. Leadership however, is all about pushing ahead with the proactively positive agenda keeping the larger picture in mind … and proving the competition wrong. 

My earlier posts touching upon these issues would be interesting readings

Wheat – US gains on India’s folly 

India’s narrow commodities, evening trades spoil futures game

Sebi may also regulate India’s commodity markets, but…

Evening Commodity Trade – healthier with restrictions 

India’s 25th commodity exchange soon

N

arendra Modi, soon-to-be-sworn-in Chief Minister of Gujarat has finally proved that the way ahead for India is only Economic Growth, and not squabbles based on religion and petty politics. If India wants to shine out in the global arena Narendra Modi’s leadership has proved that it pays to focus on people-oriented industries like agriculture, oil & gas, textiles among others commodity sectors for overall economic growth. 

Vibrant Gujarat was Narendra Modi’s famous annual week-long jamboree that he had for the past five years used to show case business and investment opportunities in the state that attracted vast amounts of monies from within and overseas business investors. During these years, he let his policies speak for themselves. And after five years, fighting against all odds, and barrage of severe criticisms from all possible quarters, Narendra Modi, the indomitable fiery spirit of Bhartiya Janta Party (BJP) has proved all doomsayers wrong.  

Both the electronic and the print media, sold to the Congress view against Modi, are left nursing their own wounds along with the party that they had supported so aggressively on pitting religious sentiments against Modi. Economic Growth with Safety and Protection was possibly the subtle message that the thumping victory Narendra Modi gave to the electorate of his state. 

Recently, came across, this interesting viewpoint from one of India’s leading financial portal – rediff.com – http://ia.rediff.com/money/2007/nov/26guj.htm 

Who rides the bull? Well, nobody really knows. But one thing is for sure, without Gujaratis there is no bull run. And you can trust Gujaratis to revive, revitalise, rejuvenate or make financial markets fall like nine pins.  

Gujarat contributes over 21 per cent in exports and 13 per cent of India’s industrial production. Gujarat is now at top of the 15 States’ Economic Growth league tables. The latest figures show that Gujarat has recorded a huge 10.6 per cent growth during the 10^th Plan period, while Punjab with its woeful 5.9 per cent growth has slumped to the lowest rung where it joins Jammu & Kashmir with the same percentage of growth.  

Commodity business is largely people-oriented business and economic growth in India therefore, revolves around mastering people-oriented commodity business only. In Gujarat, at least five commodity sectors are thriving in the Gujarat state – agriculture (cotton, edible oils), oil & gas, gems & jewelry and textiles. That the state government is hugely supportive of boosting tourism is also interesting. Across India, agriculture continues to be the largest private sector business in India, though dependent more on politics and government policies. Being a State subject, India’s agriculture seems to be falling between the two stools – Center and the States and which of the two will best support Indian agriculture. India’s growth prospects therefore, like witnessed in Gujarat, call for goal-and-result-oriented policies that elevate people to support your views, for if people are elevated, strengthened they in turn will support the overall policies and elevate their leader. 

While agriculture tops the list of profile of the Gujarat State, energy tops the list of investment opportunities. The state’s official websites – http://www.gujaratindia.com/ and http://www.indextb.com/  highlight various important and attractive sectors like infrastructure, industries and mining. 

A small comparison between Gujarat and Punjab will be important here. Gujarat during the last five years has literally blossomed under the Narendra Modi’s leadership – which was viewed as highly questionable, esp after the 2002 riots that followed the unmindful train blast in Godhra that killed over 300 travelers. Modi’s latest victory has swept aside all allegations to his leadership only because his leadership has helped Gujarat State propel to the top of the states’ economic growth league tables. Punjab on the other hand, too largely was agro based. Till few years ago, Punjab was known to be a leader in cotton and wheat. But the farmers there were literally spoilt doubly, one with the suffusing financial support from the central government for growing wheat, two, from the MNCs like PepsiCo and others that gave good rewards to the farmers for their corporate farming. So, like the land there spoilt by overdoses of fertilizers, the farmers of Punjab and its leadership too was possibly spoilt. That there were other state-specific problems is a different story. 

Punjab turns laggard in economic Growth, shouts a graphic description of the 15 State Economic Growth League table on page 1 of Business section of Hindustan Times (December 24, 2007), while the first half page of the same (today’s) Hindustan Times, there is this story of the unexpected victory of Narendra Modi followed who is happy and vibrant with the outcome of the poll results. The caption of the story and picture on page 1both says “Unstoppable … Is Modi’s next stop Delhi?’ 

Sign of things currently, are also the signs of shape of things to come…  

Economic Growth is the result of leadership, more so in times of adversity, and Narendra Modi’s leadership has proved what Leadership is all about. And at the core are the state’s agro sector and its business community that have collectively contributed to the state’s economic fete against all odds and criticisms.   

Highlights of Gujarat

• State Domestic Product (SDP) rising at an average growth rate of 12.4% per annum in real terms (from 1994-2002)
• Leader in various industrial sectors, Chemicals, Petrochemicals, Drugs & Pharmaceuticals, Dairy, Cement & Ceramics, Textiles, Engineering and Gems & Jewellery
• Largest grass-root Petroleum Refinery in the world operational at Jamnagar
• Three LNG terminals to come up; Gas grid system in operation
• One of the first few states to have encouraged private sector investment in the infrastructure; Excellent road network – exceeding 74,000 kms
• Gujarat accounts for almost 21% share in the export basket of India
• Longest coastline of 1600 kms, dotted with 41 ports, 1 major, 11 intermediate and 29 minor ports
• Country’s first private sector ports – Pipavav and Mundra – already in operation. In addition, the liquid cargo (chemicals) handling port at Dahej is also set up in joint sector and made operational
• Highest number of Airports in India – 11 including an international airport in Ahmedabad

 Here I would quote once again what the rediff.com article (mentioned above) says:

‘So who should control commodity market if it needs exponential growth? Not a Gujarati at the helm of affairs but more of a Gujarati culture of doing business. Move out of political compulsions and let simple laws of economics take its own course. Understand the relationship between demand and supply. Only the Gujarati way of doing business will tell you that this relationship underlines the forces behind the allocation of resources’.

E

thanol, the Green Fuel, has been thrown up as a political tool in India. And caught between the ethanolics game of government and the industry are the Indian tippers.   

Faced with almost 10 mn tn of extra sugarcane production, doubling of ethanol blending with petrol would possibly be easy. The Central Government wants to double the ethanol blending to 10 per cent, but the states enjoying the high revenues from alcohol sales are not willing to let go the higher alcohol production in their states. If they do direct more alcohol for ethanol, the Indian tippers pegs would get costlier.  

As the volatile crude oil prices continue to threaten to cross $100 per barrel, India hopes to partially soften the impact by doubling the use of sugarcane ethanol blending with petrol to 10 per cent from October 2008. It also plans to make five per cent ethanol blending mandatory in all states – except Jammu & Kashmir –  even when India’s experience from blending five per cent ethanol for the past two years remains anybody’s guess. 

Since the past more than one year, the government has been talking about doubling the use of ethanol to blend with petrol was in the news since last more than one year. India will require around 1.25 billion liters of ethanol each year if it pushes ahead the plan of 10 per cent blending of ethanol with petrol.  

And the mandate to increase the supply of ethanol to the petroleum sector is given to Sharad Pawar, Food and Agriculture Minister. Pawar is also known as the Maratha strongman from Maharashtra, India’s leading sugarcane growing state. Therefore, astute politician that he is, Pawar has once again thrown up ethonal recently in the hope to pacify members of two, possibly even three, groups – sugar industry that is burdened with over production and subdued prices, government faced with the prospect of hiking petrol price at a time when it is busy fighting the blues of early general elections next year, and possibly farmers – if political will remains hereafter – by promising them early solution to the non-payment of their dues by sugar mills. The non-receipt of sugar cane dues from sugar mills is hindering the smooth sowing of wheat that usually ends by mid-January each year. 

By throwing up ethanol Pawar wants to convey his being on their side with both his loyal sugar industry and also to his government masters that doubled use of ethanol would help reduce the use of costly crude oil and thereby soften the impact of high crude oil prices on the country’s budget. So, while the sugar industry would possibly be happy to see their huge pile of cane molasses being used to make increased ethanol (which possibly would help them increase their profitability hit by over production and subdued prices) the political masters would be happily busy calculating the gains from reduced use of crude oil following the doubled blending of ethanol in petrol. 

Petroleum companies – including the government owned and in private sector – have been opposing the high Rs 21.50 per liter that the sugarcane ethanol makers charge them to lift ethanol. A section of ethanol makers are supplying the product at Rs 2 lower – at Rs 19.50 per liter. So, there’s tug-o-war between the petrol-companies and ethanol makers. 

India’s sugar production during sugar-year ended September 2007 is estimated to be around 29 mn tn. The 15 mn tn molasses is enough to produce around 3,300 mn liters of alcohol – one-third of which is used for potable and industrial alcohol. But not all states are willing to part with their sweet revenues, getting sweeter from revenues of potable alcohol. Like agriculture itself, the subject of alcohol too is a state subject. 

Even when the Central Government wants to introduce 10 per cent ethanol blending, there are 32 states that too would want to join the government’s plan to reduce the country’s crude oil import bill and divert more molasses alcohol to ethanol production.  Potable alcohol industry is one of the biggest revenue earners for almost all the states. The national exchequer itself earns around Rs 25,000 crore revenues from sale of potable alcohol.

So, more alcohol for ethanol would mean less for the potable alcohol industry. And no states would want to see their revenues impacted by higher ethanol use – especially when Article 47 of India’s Constitution envisages that the states shall impose prohibition (on the use of alcohol) for promotion of public health and nutrition. 

Interestingly, it could also be the tussle between the Food processing ministry and the agriculture ministry and the petroleum ministry that want to increase the alcohol use for ethanol manufacturing. Well, even when the issue of states willingness to divert more alcohol for ethanol production remains unsolved, the issue of manufacturing pure – water-free alcohol required for auto fuel manufacturing – too is a big unsolved issue. 

Amidst all this, where does the farmer fit in? Farmers in this political ethanol game are but marginal players – though in reality the farmers are at the very core of the ethanol game. Ignoring them would surely prove to be detrimental to both the sugar industry as also the politicians. But the interests of sugarcane farmers seem to be less bothering to Sharad Pawar and his political masters in the finance ministry and the Central Government. 

No wonder, the Indian tippers are a worried lot, may be the automobile drivers would be happy with ethanol blended cheaper auto fuel, but increased alcohol use for ethanol would possibly reduce alcohol availability for potable alcohol industry and this situation could be used by the potable makers to raise the prices.

I

nflation may have been politicized since more than a decade ago, helping politicians and bankers to jointly bluff the consumers of favorable inflation figures despite rising food and other commodity prices prices. But food prices will continue to be largely driven by the market forces – investment market or the consumer market – where governments can hardly intervene to soften the impact of rising food prices. 

Food prices have risen for a decade now. For example, wheat prices are at its peak in USA in December 2007, and so also majority of other food product prices. A recent report in The Telegraph of UK, informs ‘Food prices are accelerating at their highest rate for 14 years – and running at more than three times the rate of inflation, official figures show.

Thus, the overall demand supply situation in the global food and agri industry is such that the food prices are likely to remain high and even rise for next more than a decade too. How can governments help improve this situation?

The Food and Agricultural Organisation (FAO) of United Nations recently appealed to the governments and international communities to take “urgent and new” steps to protect the poor countries from rising food prices. Tucked away in one small corner, a small report in Hindustan Times (December 20, 2007) quoting UN’s FAO Director-General Jacques Diouf said: “Urgent and new steps are needed to prevent the negative impactes of rising food prices from further escalating and to boost crop production in the most affected countries”. 

At best, what the governments of rich countries can do here however is to supply large chunk of food to poor peoples in poor countries at highly subsidized prices, or for that matter free. 

 USA, possibly the only country openly flouting WTO norms on agriculture in every possible way, has been fast to take advantage of the widening demand-supply gap in the global agro arena. According to US Department of Agriculture (USDA), US agricultural exports for fiscal 2007 are expected to reach $79 billion, making 2007 the fourth record year in a row. For fiscal year 2008 export are again expected to increase to $83.5 billion. The Economist in its December 7, 2007 issue on rising food prices commented: “Food today is so cheap that the West is battling gluttony even as it scrapes piles of half-eaten leftovers into the bin”. 

In India where almost 50 per cent of world’s hungry are known to live, each year the government announces food programs aimed at helping the poor and poorest of the poor – BPL, living below the poverty line. Despite huge costs to the exchequer, the country’s state-owned granaries are known to be infested with rats and mices that eat away large chunk of food grains stored for the poor to be distributed through its rotten, porous and corrupt public distribution system (PDS).  

The lopsided policy on food grains is so poor that India is one of the top countries to import wheat for third year in a row. So, if the government and its corrupt bureaucrats wake up to stem the loss from such granaries and PDS at the earliest, there would be sufficient food grains to feed the BPL families, if not stop from helping Uncle Sam by importing wheat from USA. 

Similarly, the governments of many developed and developing countries can take necessary steps to help the BPL families in their own or in other countries. Most importantly, the governments need to infuse funds to the under-fed agriculture sectors. Comments The Economist – “Three-quarters of the world’s poor live in rural areas. The depressed world prices created by farm policies over the past few decades have had a devastating effect. There has been a long-term fall in investment in farming and the things that sustain it, such as irrigation. The share of public spending going to agriculture in developing countries has fallen by half since 1980. Poor countries that used to export food now import it”.  

Yes, there are ways and means to soften the impact of rising food prices, provided of course, politics is kept aside.

I

t was an unexpectedly joyous visit to the10-floor jewelry shopping complex in Mumbai for Monisha Lambah, the 30-year plus executive of a BPO. Ms Lambah wanted to buy some jewelry for her own to wear during the marriage of her friend in Chennai. 

No, Ms Lambah did not prefer to buy the heavy and staid pure gold jewelry that was also costly compared to the one that she went to buy. And within few hours of browsing at this new 10-storied jewelry shopping complex, Ms Lambah bought for the occasion `jewelry’ worth Rs 6,000!! If she were to buy pure gold / and or silver jewelry, she would have had to pay more than Rs 200,000!!!  

Currently, a large section of Indians are in the midst of the bi-annual gorgeous and boisterous marriage season. The current marriage season that began in November will continue till February next year. But the gainers of this season are not the traditional gold and silver jewelry makers, India’s famed multi-billion bullion jewelry market is losing attraction from the buyers and therefore, is forced to be on the look out for a stronger hook. 

Increasing number of retail buyers – mainly from the marriage families – are turning away from the gold and silver jewelry to more attractive but also cheaper varieties of imitation and fashion jewelry. And aiding and whetting their appetite for cheap, trendy and attractive fashion jewelry are the dozens of soaps on the idiot box!! Also, the ever rising prices of both gold and silver used for traditional jewelry that the bride’s parents usually give to their daughters as part of the custom aimed at giving the bride some gold that she can use in times of distress sometime in the future – as an economically safety product.

These days, depending on the quality 10-gram gold costs around Rs 10,000-11,000 and one kg of silver costs over Rs 19,00-20,000 – but the quality is usually questionable in both the cases. 

And it is not that the lure of gold jewelry has dipped only in the domestic markets. Even the export of the gold jewelry usually made from of 16-18 carat gold has slipped. Hit by the stronger rupee, the gold jewelry exports during April – November 2007 have slipped by four per cent from the same period last year, latest figures from the Gem and Jewelry Export Promotion Council (GJEPC) show.  

Little wonder therefore, the 1,000-plus members of the India Imitation Jewelry Manufacturers’ Association – IIJMA – are a happier lot. And their clan is expanding fast spreading their reach across large section of India’s bustling metros and mini-metros. The high profit margin from the manufacture, sale and exports of imitation and fashion jewelry have enriched and emboldened them so much that they have collectively contributed to erect a huge10-floor imitation jewelry – IIJMA House – in one of the bustling western suburb of Mumbai, India. 

This lure of imitation jewelry has been there for decades. The imitation jewelry usually came from parts of Gujarat like Rajkot, Surat and Ahmedabad. Such fashion or imitation jewelry was no-no socially when gold was relatively cheaper. But since the price of both gold and silver have begun to rise and has already crossed the reach of common man and his wife and supported by the almost captivating soaps on the idiot box, these days the lure of fashion and imitation jewelry is vastly acceptable, such that women of even well-to-do family boldly flaunt their `riches’. The attractiveness of both designs and price has spread far and wide across most of the metros and in Mumbai, there is a whole set of unorganized industry for imitation and fashion jewelry. 

The traditional bullion jewelry makers and sellers may be cursing these new trendy jewelry makers and suppliers. But their own brethren are also increasingly pushing the one gram plated pure 24 carat gold jewelry that the buyers are also lured away from pure gold and silver jewelry. So what if the golden sheen of this new type of jewelry lasts only for two years? Anyway, Indian women are known for their short-term love affair with their 2-3 year old jewelry and are frequently attracted to buy new jewelry every couple of years, largely replacing their old jewelry. 

The premises of the IIJMA building are either owned by the exporter / traders or are leased out. Usually such places are meant only for commercial and wholesale trade. However, given the massive jump in demand for imitation and fashion jewelry, the numbers of makers and suppliers too have increased substantially during the last one year. This trend has therefore, lured the owners of the premises at IIJMA to partly increase their sales by keeping their IIJMA premises open for almost 10-hours every day also for the retail buyers. 

The price of both the imitation and one-gram gold plated jewelry is almost one-tenth of the supposedly pure gold jewelry. And the varieties of fashion jewelry are simply marvelous compared to intricate but staid and heavy jewelry of the yesteryears that the buyers and owners of pure gold and silver jewelry are forced to tuck it away in the safe deposit vaults of home / banks. 

Yes, the Indian bullion jewelry market is fast being eclipsed by the new, aggressive and cheap competition from the extremely attractive imitation and fashion jewelry now increasingly available almost at all the shopping malls mushrooming all over the metros. The decades old lure of the golden clasp of pure gold and silver jewelry is getting loosened faster than the traditional jewelers had expected.

W

heat futures on Chicago Board of Trade (CBOT) surged more than three percent on Monday (December 17, 2007) and surpassed $10 a bushel for the first time. And while leading wheat buyers from Australia are reported to have preferred to stay away from buying wheat currently, India has continued to import wheat even at such high levels. 

India, largely an agrarian economy and one time one of the leading wheat producer, seems to have faltered on its wheat policy despite government’s support to wheat growers.

For various reasons, India’s agriculture ministry is forced to continue to import wheat – third time in 2007 and for third year in row. During 2007 wheat prices have almost doubled. The last tender to import 350,000 tn floated by State Trading Corporation (STC) on December 10, 2007, closed yesterday, December 17, 097. The wheat would be delivered in April 2008. 

On Monday, December 17, the bellwether Chicago Board of Trade March wheat (WH8) contract rose by the 30-cent-per-bushel daily trading limit to $10.09 per bushel, before falling back to $10.01, reported CNBC.com on December 17, 2007. The gainers are not just the wheat producers and exporters in USA, but also the commodity funds, hedge funds, and investors largely unrelated to the agro economy, except for taking advantages of the rise in prices. 

No, despite its voracious requirements that force import of wheat, there has been no attempt by the Indian government to take advantage of hedging mechanism – neither on domestic nor on international commodity exchanges. The government has suspended trading in wheat futures since March 1, 2007 following rise in prices in domestic markets and severe ruckus raised in the Parliament by the opposition parties, including the members of the Left Front which is a partner in the current United Progressive Alliance (UPA) Government led by Congress.  

In India, wheat can be purchased only in the spot market and the prices keep on fluctuating for various reasons. There is no hedging mechanism and so no one can lock in wheat purchases at relatively lower prices that can be seen on the commodity exchanges. So, after having got severely stung by the government’s suspension of trading in wheat futures in March 2007, the National Commodity & Derivatives Exchange (NCDEX) now plans to introduce wheat on its newly set up NCDEX Spot Exchange, a wholly owned subsidiary of NCDEX. As NCDEX has focused on agro futures, its volumes got severely impacted by the government’s suspension in wheat futures.  

Therefore, it is difficult to understand what sort of progress is being exercised by the UPA government by continuously importing wheat from the USA at highest ever prices, and that too without any sort of hedging mechanism. And surely there is no such an urgent need to import wheat thrice in an extremely bullish year for wheat prices. The likely shortage of wheat – both in the domestic and international market – could have been perceived by the Agriculture Ministry well in advance so as not to burden the wheat consumers of India with such high priced wheat – and no political party in India is at all bothered by this situation as no one is now complaining!! 

Interestingly, during the 10-days of the latest wheat import by India, the bidders too have been forced to raise their quotes for supplying wheat tendered to be imported by STC. As the STC’s latest bid to import 350,000 tn of wheat ended yesterday (December 17), the bidders raised their bids to around $ 459.90-579.62 usd per tonne from earlier levels. 

The pain for Indian wheat consumers – in the form of higher wheat and bread prices – is likely to be a bit more severe in 2008, as the farmers have delayed to sow winter crop of wheat in most of the northern region. In India, each year farmers in northern region grow two crops – sugar cane in mid-June July followed by wheat sowing in November –December. The delay for wheat sowing this season in November- December 2007 is caused by the ongoing delay in the payments by the sugar mills. Pending their receipts from the sugar mills, the farmers can’t go ahead with wheat sowing by mid-December. 

Sharad Pawar, India’s Agriculture Minister, a representative of sugar barons from Maharashtra, has once again been successful in forcing the Central Government to shower multi-crore largesse for the sugar sector earlier this month. This largesse would surely benefit the sugar millers (also Sharad Pawar and his loyalists), but these millers now raise objection to the payment to farmers on the basis of the State Administered Price (SAP) which though cleared by the Supreme Court in 2004 is said to be higher than the central government’s price. 

The Indian farmer is entangled in the policy tangle of the sugar barons. Therefore, the enforced delay in sowing wheat this season, would in turn would lower the wheat crop further during the 2008 wheat harvest season – April-June 2008. And interestingly, it is during this time India expects to receive the consignment of 350,00 tn of wheat tendered earlier in December 2007. 

Little, wonder therefore, instead of finding solutions to the wheat tangle in our own homeland, both our ministers and the government are finding the solution to the possible wheat shortage problem by importing wheat from USA. May be the stronger rupee is one of the attractive factors whereby the importing India would have to pay less in US dollar terms – but this neither solves India’s wheat conundrum, nor help the farmers and the wheat consumers.

I

f India wants to take on the vast emerging opportunities in the Asian commodity futures arena, it is important that the government urgently address two of the biggest menacing aspects – one, trading in narrow commodities, two, evening trades that extend up to midnight. 

India opened up commodity futures markets (not options) in mid-2003 and since then the trading in commodity futures has attracted a interest from speculators, day-traders, neo-investors in commodity markets. Latest figures show that the commodity futures trade on all the 24 Indian commodity exchanges was Rs 22,68,826.98 crore (approx Rs 22.7 bn, or $560 billion) during April 2, 2007 to November 15, 2007 

The commodity futures trading figures show there is huge interest that has pumped up the volumes and value of trades on the three nationwide commodity exchanges (NMCEs) – National Commodity and Derivatives Exchange (NCDEX), Multi Commodity Exchange (MCX) of India and National Multi Commodity Exchange of India Ltd (NMCEIL).  

However, the commodity trading volumes swell during the evening trades that coincide with the opening up of the international commodity exchanges. These trades are facilitated maximum on just one commodity exchange – MCX which has the highest value of commodity trade in these trades. Traders, speculators rush during evening to push in their trades on MCX only in four commodities traded on international commodity exchanges like New York Commodity Exchange (Comex division), London Metal Exchange (LME) and couple of others. These are crude oil, gold, sliver, copper. And these are known to be pure speculation and only arbitrage between domestic and international commodity exchanges, and are illegal too. 

It is no secret that the trades done in evening trading session on MCX or sometimes even on NCDEX, if ever, are done only by select speculator-invertors in these four international commodities. And because the trade timing extends up to 11.30-11.45 pm serious players find it cumbersome to trade up to midnight. This evening section of trading has thus got a bit of tarnished image on the Indian commodity futures arena.  

Two related posts would be interesting https://commoditywise.wordpress.com/2007/12/10/rising-monopoly-in-india%e2%80%99s-commodity-futures-trading/ 

https://commoditywise.wordpress.com/2007/11/26/evening-commodity-trade-%e2%80%93-healthier-with-restrictions/  

Narrow commodities – largely from the agro sector – have very small eco-system and also a small value-chain, which may extend even up to foreign countries using the value added products of these narrow commodities. However, price manipulation in these narrow commodities is much easier because of their small eco-system – i.e. small produce, small market where a handful of sellers and buyers usually control over 95 per cent of these commodities and their fate and prices too. Thus, hedgers are afraid to enter the commodity exchanges to hedge their position and risks in the four international commodities and also in the narrow commodities as the prices on the commodity exchanges are known to have been rigged up by the punters and speculators.  

Thus, India’s commodity futures game is largely spoilt by these two aspects – evening trades the narrow agro commodities. Along with the punters, speculators, day traders and neo-investors in commodity markets and the Forward Market Commission (FMC) are collectively responsible for this muddled game in commodity futures. 

If the government seriously wants to improve the tangled situation in India’s nascent commodities markets, it is important that the government address these two menacing aspects at the earliest.

The Forward Market Commission (FMC) had in early 2003 decided to completely open up the Indian commodity market for futures trading. In its zeal to catch up the lost time of four decades of suspension of trading in commodity derivatives, the FMC preferred to avoid looking into the veracity / importance of futures trading in few or some of the commodities, like the narrow commodities.

“Instead of FMC not allowing trading in futures in any commodity, It would be better that anyone objecting FMC’s views to allow trading in futures of any commodities should come up with their own reasons for not allowing futures trading in that/those commodity/ies”, was the view of one of the members of the FMC. Section 17 of Chapter IV of The Forward Contract Regulation Act gives FMC the requisite powers to prohibit forward contracts in certain cases. 

It would be interesting to see what the narrow commodities are and how they fare on the Indian commodity exchanges.

But about this,a day later.