commodity insight yearbook 2011 - part_1

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Yearbook 2011Commodity insights

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001-011_CIYB_2011_Prologue.indd 1001-011_CIYB_2011_Prologue.indd 1 1/26/2012 1:33:57 AM1/26/2012 1:33:57 AM

INDIAN ECONOMYEXPERTS' VIEWSPROLOGUE

Commodity Insights Yearbook 20112 Commodity Insights Yearbook 20112

MARKET COMMENTRYINTRODUCTION

About Commodity InsightsThe idea behind Commodity Insights, a bank of exclusive knowledge and information on

the commodities ecosystem, jointly published by the Multi Commodity Exchange of India Ltd

and PricewaterhouseCoopers, is to provide economic stakeholders like traders, processors,

consumers, fi nancial institutions, policymakers, analysts, industry observers, academicians,

and students with rare insights into the commodities ecosystem. This is our third consecutive

humble step in making the Yearbook a benchmark resource by spreading market intelligence

through easy-to-access useful data and a rich repertoire of analytical articles to portray an

all-inclusive, up-to-date and lucid exposition of a range of issues and concerns that are of

paramount importance to a healthy development of the entire ecosystem.

The focal point of Commodity Insights Yearbook 2011 is ‘Commodity Economy during Recession and Recovery’. To achieve this goal, we have sought to achieve keen and intense

engagement of internationally acclaimed experts who are prolifi c authors in their own domain,

especially when it comes to ideation and providing leads for informed decision-making on

the policy front. In this edition, our value-adds include rare granular-level data on the Indian

economy, time series data giving a broad span temporal perspective to the commodity

economy, etc. The Yearbook, we believe, will prove to be truly useful and a fascinating read

for the stakeholders as a one-stop, ready-reference material for the years ahead.


DATABANK - NON-AGRI COMMODITIES DATABANK - AGRI COMMODITIES

A PwC & MCX Joint Endeavour 3www.mcxindia.com / www.pwc.com/in/en


PwC (www.pwc.com) fi rms help organisations and individuals

create the value they are looking for. PwC has a network of

fi rms in 158 countries with close to 169,000 people committed

to delivering quality in assurance, tax and advisory services.

In India, PwC (www.pwc.com/India) offers a comprehensive

portfolio of advisory and tax & regulatory services, each of which

presents a basket of fi nely defi ned deliverables. Indian network

of PwC fi rms also provide services in Assurance, as per the

relevant rules and regulations in India. Providing organisations

with the advice they need, wherever they may be located,

PwC’s highly qualifi ed, experienced professionals, who have

sound knowledge of the Indian business environment, listen

to different points of view to help organisations solve their

business issues and identify and maximise the opportunities

they seek. PwC’s industry specialisation allows help its clients

co-create solutions for their sector of interest.

In India, PwC is located in Ahmedabad, Bangalore,

Bhubaneshwar, Chennai, Delhi NCR, Hyderabad, Kolkata,

Mumbai and Pune.

Multi Commodity Exchange of India Ltd. (MCX) is India’s

leading commodity exchange based on the value of commodity

futures contracts traded. The demutualised Exchange has

permanent recognition from the Government of India to facil-

itate online trading, and clearing and settlement operations

for commodity futures across the country. It offers trading in

over 40 commodity futures based on contract specifi cations,

from a diverse range of classes including bullion, ferrous and

non-ferrous metals, energy and agriculture. The same under-

lying physical asset traded under different contract specifi ca-

tions is regarded as a separate commodity future. A majority

of these commodities are signifi cant in the Indian and global

context, and are also traded on international exchanges. MCX

(www.mcxindia.com) was the 5th largest* commodity futures

exchange globally in terms of the number of contracts traded.

The Exchange was also the world’s largest* exchange in silver,

the second largest* in gold, copper and natural gas, and

the third largest* in crude oil, with respect to the number of

futures contracts traded.

* Source: Data published for the period between January 1 and June 30, 2011

on the websites of the exchanges, use of Market Data and FIA volume survey,

September2011.

Disclaimer: Multi Commodity Exchange of India Limited is proposing, subject to

market conditions and other considerations, a public offer of equity shares by way

of an offer for sale and has fi led a Draft Red Herring Prospectus (“DRHP”) with the

SEBI. The DRHP is available on the websites of SEBI at www.sebi.gov.in and the book

running lead managers at www.edelweissfi n.com, http://www.online.citibank.co.in/

rhtm/citigroupglobalscreen1.htm and www.morganstanley.com/indiaofferdocuments.

Investors should note that investment in equity shares involves a high degree of risk

and for details in relation to risk factors, please see the section titled “Risk Factors”

in the DRHP. This advertisement may not be published or distributed in the U.S.,

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absent registration or an exemption from registration under such act.

About PwC About MCX


INDIAN ECONOMYEXPERTS' VIEWS

Commodity Insights Yearbook 20114

Message ......................................................................................................................05

Foreword ...................................................................................................................07

Prologue.....................................................................................................................08

Experts' Views:Commodity price movements: Understanding causes and consequencesJohn Baffes, Senior Economist, World Bank ............................................................................. 14

Business cycles and their relationship with the commodity economyStephan Pfaffenzeller, Lecturer ± Economics, University of Liverpool ................................... 18

Can the commodity economy be decoupled from the financial sector?Adam Gross, Director of Strategy ± Bourse Africa........................................................................ 22

Recent trends in global commodity prices and regulatory responses: Which way now?Partha Ray, Professor of Economics, Indian Institute of Management - Calcutta ..................28

Commodity cycles : Follow or cause economic cyclesRobin Roy, Associate Director, and Sanjoy Majumder, Senior Consultant, Financial Services, PwC ..... 36

China©s pre-eminence in the global gold marketJeffrey M. Christian, Managing Director, CPM Group .........................................................................40

Re-writing the rules of the game: evolving contours of global regulatory regimes to govern derivativesMichael Greenberger, Law School Professor, and Michael Vesely, JD, University of Maryland ....44

Market as a ªbail-outº institution: Commodity exchanges in liberalised trade regimeNilanjan Ghosh, Head ± Research & Strategy, MCX ............................................................................ 50

Market Data for Ready Reference:Indian Economy ± An Overview ....................................................................................................... 54Non-Agricultural Commodities ........................................................................................................74Agricultural Commodities ...............................................................................................................178

Every effort has been made to ensure high quality and accuracy of contents in the Yearbook. Under no circumstances, MCX and/or PwC shall be liable to any user for unintended/accidental errors. The opinions/views expressed and shared by domain experts/authors in all documented materials are their own and do not necessarily refl ect those of the organisations/companies/institutions they bear allegiance to, MCX, or PwC. Sources of information/statements in “Experts’ Views” may be found in the references, as indicated by the authors. Users/readers may carry out due diligence before using any data/information herein; neither MCX nor PwC will be responsible for any discrepancies/disputes arising out of such use.

All rights reserved. No part of this publication may be reproduced, or transmitted in any form, or by any means – electronic, mechanical, photocopying, recording, scanning, or otherwise – without explicit prior permission of MCX or PwC.

Contents

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INDIAN ECONOMYEXPERTS' VIEWSPROLOGUE




While the jury is out on the linkages between the commodity economy and the financial sector, what has emerged as a clear message from the recent turmoil is the strength of well-regulated exchange-traded derivatives as a safe risk-mitigating tool ± one that ensures rather than disturbs economic stability.

Has commodity economy really decoupled?

The clouds of a prolonged recession that fi rst

gathered on the global economic horizon

with the sub-prime crisis in the American

housing market in 2007, and thickened

after the collapse of the Lehman Brothers in 2008,

stubbornly refuses to dissipate. The weak spots in

economic systems have been exposed, while whole

societies are witnessing unprecedented turmoil

owing to vulnerabilities created as a result. Thus,

near-total freeze of trade credit shook the otherwise

solid foundation of Asian economies at the height

of the economic downturn in 2009, while an overtly

liberal fi scal agenda followed by European nations

for years has made them pile unsustainable levels

of debt, leading to a potential crisis. Consequently,

large sections of the world economy are staring at a

seemingly unending period of economic stagnation

with apprehensions of deep social unrest.

While commenters and scholars have been

analyzing threadbare all relevant strands during the

PROLOGUE


PROLOGUE



current instability in global fi nancial markets, an

aspect that has been left less examined and, as such,

deserves an inquisition is the impact that the recent

economic downturn has had on commodity markets.

The interrelations among the real sector, the fi nancial

sector and the commodity economy have grown both

in depth and in complexity over the past decade so

that the developments in one have immediate impact

on other sectors. More importantly, the manners

in which these interrelations play out and manifest

have undergone some visible changes themselves,

thanks to the rising complexity just mentioned. For

instance, some observers have commented that

for a few commodities that have an unambiguously

positive and strong correlation with economic cycles,

the decline in prices during the recent downturn has

been muted compared to previous cycles. For some

commodities, there has been no discernible impact

at all.

These stylized facts raise the important question:

To what extent has the oft-talked-about ‘decoupling’

of the commodity sector actually taken place? On the

other hand, it is also possible that as against earlier

downturns, the timing and force of counter-cyclical

policy interventions have been of higher order during

the present downturn. Such expansionist policies,

aimed at arresting economic contractions, could have

worked their way into asset markets lifting prices

across asset classes, including commodities. Prolif-

eration of fi nancial instruments that have commod-

ities as the underlying could also have contributed

to this linkage between counter-cyclical policies and

commodity prices. However, it is still far from being

clear as to what extent this factor would have been at

play and what reasons can be attributed to the differ-

ential impact on different commodities.

The other signifi cant development in the last

decade has been the unprecedented growth of a

number of large economies, generally referred to as

the ‘emerging economies’, whose growth has been

associated with concomitant huge demands placed

on natural resources. During the fi nancial crisis of

2008 and after, these emerging economies remained

largely unscathed and experienced only a slowdown

while most developed economies were reeling under

recession. It is, therefore, possible that the forces

of demand and supply of multiple commodities

have appeared to act during the recent downturn in

manners different from those in the earlier reces-

sions.

The macro changes observed in the commodity

economy during the recent global economic downturn

have had several and severe effects at the micro

level too. Corporate bottomlines, especially of fi rms

majorly exposed to commodities and those involved

in international trade, have been affected signifi cantly

by commodity price volatility. These developments

have made fi rms look out for hedging devices and

practices to protect their bottomlines. While many of

them found commodity futures as a safe platform to

hedge their risks, it was time they needed to cast a

relook at their existing hedging strategies in light of

the changing paradigm of downturn in all markets they

have stakes in and the interconnectedness among

them. For instance, the prices of most commodities

attached to global markets are found to be impacted

thrice by economic events such as the recent one.

First, by the economic event itself; second, by the

demand-supply fundamentals, which are affected by

the event; and third, by the movements in the markets

of those currencies in which global commodities are

mostly denominated in.

Thus, hedging against commodity price gyrations

has become a sine-qua-non for healthy corporate

bottomlines, as much for farmers’ profi tability. In this

context, the role of exchange-traded commodity deriv-

atives, vis-à-vis over-the-counter (OTC) derivatives, has

been receiving renewed attention in recent years. This

attention is a direct offshoot of the failure of loosely

regulated off-exchange derivative products in the US

and other developed markets that led to the crisis in

world fi nancial markets in 2008-2009. Indeed, the

global crisis was, in many ways, a crisis of market

regulation. It is for this reason that the US, the EU

and many other countries are currently going about

tightening the regulatory frameworks that govern their

fi nancial and commodity markets. The crisis was also

one of trust, which myriad OTC products that prolif-

erated before the crisis bred but eventually killed

in the developed markets. The noticeable growth of

the transparent exchange-traded commodity deriva-

Hedging against commodity price gyrations has become a sine-qua-non for healthy corporate bottomlines, as much for farmers’ profitability.

PROLOGUE




tives market, even as the OTC market is shrinking,

is the result of both these factors. According to Bank

of International Settlements (BIS) data, the gross

market value of OTC commodity contracts crashed by

80 percent in just two years, from US $2,213 billion

in June 2008 to $457 billion in June 2010. Yet, the

number of exchange-traded contracts increased by

38 percent to 2,830 million in 2010 from 2,042

million in 2009. The benefi ts of transparent and well-

regulated exchange-traded commodity derivatives are

indeed becoming visible to market players and, no

doubt, more so in the wake of the recent downturn.

In view of all the above factors, it is pertinent

that research agenda either in the commodity sector

or in economic cycles include various facets of

inter-relationships between them, especially during

periods of turbulence in either. This is important

for at least two objectives: one, to explore the

possibility of using commodity price behaviour as a

useful tool for predicting economic cycles. Two, and

more importantly, to investigate the degree to which

current efforts directed at global economic recovery

can be infl uenced by commodity price movements.

The latter is a particularly critical objective to keep

in view when formulating effective anti-cyclical

policies. Indeed, the exploratory journey to test the

inter-linkages among commodity and other fi nancial

markets will throw its biggest benefi ts to public policy

and enable policymakers to tread the careful path

in avoiding policies aimed at buoying some markets

that often have unintended ramifi cations for others.

As observed above, what has emerged as a clear

message from the recent turmoil is the strength of

well-regulated exchange-traded derivatives as a safe

risk-mitigating tool — one that ensures rather than

disturbs economic stability.

Keeping in tune with these issues of high contem-

porary relevance, the 2011 edition of ‘Commodity

Insights’ very aptly focuses on the theme ‘Commodity

Economy during Recession and Recovery’. Accord-

ingly, the Yearbook attempts to scrutinize some

of these critical issues and ask questions on the

interconnectedness of markets designing appro-

priate ahead-of-the-curve policy actions, and whether

commodity cycles will follow or cause business cycles,

going forward. The Experts’ Opinions, substantiated

by ‘Data for Ready Reference’, are an endeavour to

investigate and fl ag these critical issues and seek

to delve deep into them. Indeed, the mission of the

“Insights” will be achieved if readers are suffi ciently

invigorated and triggered by the commentaries inside

to embark upon a deeper probe, on their own, into the

dynamics of inter-linkages among markets and their

policy implications.



commodity insight yearbook 2011 - part_1

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