Introduction, Contents, Foreword, From the Editorial Desk ... - MCX

A
Joint Endeavour
CommoditY insights
Yearbook 2010
A bAnk of ExCLuSIvE knowLEdgE And
InforMAtIon on CoMModItIES ECoSyStEM
Global Products
Global Practices
Sponsors

introduction
About Commodity Insights
The idea behind ‘Commodity Insights’, a bank
of exclusive knowledge and information on
commodities ecosystem jointly published by the
Multi Commodity Exchange of India and PricewaterhouseCoopers,
is to provide readers/users
(economic stakeholders like traders, processors,
consumers, financial institutions, policymakers,
analysts, industry observers, academicians, and
students) with rare insights into the commodities
ecosystem. This is our small second step in making
this yearbook a benchmark resource spreading
knowledge and providing very useful market
information in one place in a novel way: presenting
useful data related to commodity markets in an
easy-to-use way 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 healthy
development of the entire ecosystem.
The focal point of the second edition, ‘Commodity
Insights Yearbook 2010’, is ‘Global
Products, Global Practices’. Towards this goal, we
have sought to achieve keen involvement of internationally
acclaimed authors who all are experts as
well as prolific writers in their respective domain,
especially in the areas of policymaking and ideation.
Besides, our value-adds this year will include
specific case studies on ‘oil hedging and metals price
risk management’, data on ‘BRIC economies’, data
giving a broad perspective global economy, etc.
The yearbook, we promise, will be truly useful to
all stakeholders as a year-long, one-stop reference
material. A fascinating and engaging read too!
2 | Commodity Insights Yearbook 2010

About PwC
PwC refers to the network of member firms of
PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity
committed to working together to consistently provide
clients seamless services of high standards, giving
PwC a competitive edge. More than 161,000 people
(over 6,000 in India) in 154 countries across the PwC
network share their thoughts, experience and solutions
to develop fresh perspectives and practical advice. The
130-year old Indian firm – PricewaterhouseCoopers Pvt.
Ltd. (www.pwc.com/India) – is the oldest and largest
professional services firm that offers a comprehensive
portfolio of Advisory and Tax & Regulatory services,
each presenting a basket of finely defined deliverables.
With a global outlook and local knowledge of culture,
laws and business needs, PwC through its solutions to
the challenges of globalization helps clients in India
make the most of the changing market scenario. In
India, PwC has offices in nine cities – Ahmedabad,
Bangalore, Bhubaneshwar, Chennai, Delhi NCR,
Hyderabad, Kolkata, Mumbai, and Pune.
About MCX
Multi Commodity Exchange of India (MCX) is a
demutualised commodity exchange with permanent
recognition from the Government of India to facilitate
online trading, clearing and settlement operations for
commodity futures markets across the country. Since
its inception in November 2003, millions of small
and medium enterprises, corporate houses, exporters,
importers and traders have benefitted from this
nationwide electronic trading platform through its
efficient and transparent price discovery and price risk
management. MCX is the sixth largest commodity
exchange in the world and ranks No. 1 in silver, No. 2
in gold and natural gas, and No. 3 in crude oil and zinc
futures trading (by the number of contracts traded),
according to FIA and data on exchanges’ websites.
A PwC & MCX Joint Endeavour | 3

Contents
Foreword ....................................................................................07
From the Editorial Desk ................................................... 08
Market Commentary:
Commodity Markets – Poised to unlock value for the
stakeholders ...............................................................................10
Experts’ Views:
Commodity Exchanges: Role in a Globalising Economy
- Jeffrey M. Christian .................................................................18
Lessons from the Crisis: Future of Financial Regulation
and Global Imbalances - Partha Ray .................................22
Mumbai as an IFC – Role of Commodity Exchanges
- Ashima Goyal ..........................................................................30
Inter-Relation between Different Markets – Lessons for
Commodities - Adam Gross ...................................................38
Price Risk Management Instruments in Agriculture
- Panos Varangis ........................................................................ 46
Commodity Exposures – Best Practice Treatment for
Hedge Accounting - Blaik Wilson ........................................52
Carbon Markets: The Post-Copenhagen Scenario
- Pamposh Bhat .......................................................................... 60
Every effort has been made to ensure the high quality and accuracy of the content of the Yearbook. Under no circumstances, MCX and/or
PwC shall not 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 reflect those of the organisations/institutions they bear allegiance to,
MCX, or PwC (the views shared by Jeffrey M. Christian, MD and Founder - CPM Group, are both his and the Group’s). 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.
4 | Commodity Insights Yearbook 2010

Weather Derivatives: A Key Tool for Mitigating the
Impact of Climate Change – Rajas Parchure ................... 64
Metal Price Risks – A New Reality - Jeffrey Bollebakker &
Arnab Ghosh ................................................................................70
Gas Pricing in India – Changing Contours
- Deepak Mahurkar ....................................................................78
Special Feature:
Currency Futures - A Key to Managing Exchange
Rate Risk .....................................................................................58
Market Data for Ready Reference:
Indian Economy - An overview ...........................................92
Non-Agricultural Commodities .........................................132
Agricultural Commodities ................................................. 226
Emerging Commodities – Managing Price Risks for
India Inc - Pankaj Chandak .....................................................86
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.
A PwC & MCX Joint Endeavour | 5

Tel. : +91-11-23782807
+91-11-23070121
Fax : +91-11-23384716
e-mail: secy-ca@nic.in
RAJIV AGARWAL
Secretary
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from the EDIToRIAL DESK
Reaching Out
to enrich the Ecosystem…
In our continued commitment to
enriching the commodity markets
ecosystem, it is our pleasure
to have joined hands once again
to bring out the second edition of
‘Commodities Insights Yearbook’.
In line with the Multi Commodity
Exchange’s stated focus on “global
commodities and global practices”,
we have reached out to some international
experts, specialists in their
respective domains, to contribute
to the first part of the yearbook
dedicated to continuous knowledge
sharing and enrichment. The result
of this knowledge delivery process
is inside – for all stakeholders to
read and benefit from. The experts’
contributions cover multiple dimensions
of commodity markets, from
risk management in commodities/
verticals to global best practices in
markets and among their heterogeneous
stakeholders to the role
commodity exchanges can play in
making Mumbai an International
Financial Centre.
Thanks to the warm response various
ecosystem stakeholders and the
users of this yearly compendium
have extended to our endeavour
with their candid feedback, we have
taken sincere efforts to provide an
increased number of useful data
sets on commodities and improve
Standing (from left to right): Mr. Niteen Jain, Mr. Sujan Bhattacharyya, Ms. Vidya Shintre, Ms. Dhwani Mehta, Mr. Nazir Ahmed Moulvi, and Mr. Debojyoti Dey.
Seated (from left to right): Dr. Kiran Karande, Ms. Carol Daver, and Dr. V. Shunmugam

the overall quality of the book
based on their feedback.
Having won several credentials
in its journey to becoming India’s
largest and the world’s sixth largest
commodity exchange, driven
by its strategic partnerships with
various ecosystem players, it was
time for MCX to focus on creating
a global benchmark platform with
worldwide-traded commodities,
which would follow global benchmark
practices to provide domestic
economic stakeholders with a costeffective
platform to mitigate the
forces of international commodity
fundamentals in Indian time zone.
priate guidance in their future
decisions ranging from personal
consumption to national economic
policymaking.
In our bid to reach out to a wider
base of stakeholders – and give them
access to the yearbook – than the
limitation of a printed edition allows
us to, we have already hosted the
electronic version of the first edition
of ‘Commodity Insights’ on the
exchange website, www.mcxindia.
com. It draws an average of 411 visitors
everyday and has attracted nearly
56,680 hits since it was uploaded in
May-end. To inform those who are
new to this joint endeavour of MCX
and PwC, the first issue was released
on October 14, 2009.
We would like to thank Mr. Jignesh
Shah, Vice Chairman – MCX;
Mr. Lamon Rutten, MD and CEO
– MCX; Mr. Parveen Singhal, DMD
– MCX; and Mr. Kumar Dasgupta,
Partner – Price Waterhouse; for their
continuous encouragement and
support without which this initiative
of ours would have remained
unaccomplished. We also would
PwC, which services clients the
world over in their efforts towards
price risk management of globallytraded
commodities, becomes
MCX’s natural partner in this joint
endeavour aimed at enlightening
market participants, academicians,
corporations, and policymakers
with prices and the fundamentals
that shape them. We firmly believe
that this effort of ours will help
all these stakeholders with approlike
to thank Sujan Bhattacharyya,
Niteen Jain, Nazir Moulvi, Dhwani
Mehta and Debojyoti Dey, all from
MCX, and Dr. Kiran Karande from
Price Waterhouse for their relentless
efforts, day in and day out, without
which our idea would not have
taken the shape of this book. It is our
pleasure to acknowledge the work
of summer interns from SCMHRD,
Pune – Ms. Arshika Mishra, Mr.
Ankit Dua and Mr. L. Deepak – on
updating the data sets published in
the 2009 edition. And finally, this
message from the editorial desk will
not be complete without thanking
Ms. Carol Daver and Ms. Vidya
Shintre who helped gather financial
support for packaging this idea of
ours in a most presentable manner.
You may share your views,
thoughts, and suggestions with
us at ci@mcxindia.com, or at the
email addresses provided below;
this surely will help us enrich
‘Commodity Insights’ even further
in future attempts.
Hope, you find this edition worth
referring to, time and again.
V. Shunmugam
Chief Dr. V Sunmugam Economist
Multi Commodity Exchange of India
Kumar Dasgupta
Dr. V Sunmugam
Kumar Dasgupta
Partner
Kumar Dasgupta
Price Waterhouse
A PwC & MCX Joint Endeavour | 9

market CoMMENTARY
Commodity Markets –
Poised to unlock value
for the stakeholders
With gradual realisation and acceptance by
economic stakeholders that in order to take
necessary commercial decisions, they have to
factor in global (not just domestic) availability
and prices of commodities, there has also been
a tacit recognition of the necessity of protecting
commercial operations from the risks posed by
high price volatility at the international level. An
Ernst and Young survey in 2008 found that there
has been an overwhelming recognition of risks
stemming from commodity price fluctuations
and, thus, of the importance of hedging of inputs
at pre-fixed prices as a risk-mitigating strategy.
However, our markets, which are mature enough
to unlock values for the stakeholders, now
need an enabling environment that is based on
imaginative and bold policy agenda.
For reasons with multiple
implications, commodities
have been in the news for much
of the period since ‘Commodities
Insights’ made its appearance last
autumn. Although much water
has flown since then, commodities
with their varied economic dimensions
have come to visit us more
often, at times with a greater force
than before. With globalisation of
the Indian economy, nearly all
its players – from tractor-driving
farmers to jet-flying corporates –
are getting exposed to the vagaries
of international fundamentals
affecting commodities that they
are concerned with. Whether
the Indian economy is truly ‘decoupled’
from the forces driving
economies elsewhere in the world
or not, particularly during a crisis
scenario like the current one, our
10 | Commodity Insights Yearbook 2010

market CoMMENTARY
domestic commodity markets,
undeniably, are linked to the
global fundamentals of demand,
supply, policy actions and market
expectations much more now than
ever before.
New global risks and
increasing recognition
of hedging
With gradual realisation and acceptance
by the country’s economic
stakeholders that both global availability
and prices of international
commodities have to be factored
in, to take the necessary production
and other commercial decisions,
there is also a tacit recognition
of the necessity of shielding their
commercial operations from risks
posed by commodity price volatility
at the international level. A
2008 survey by Ernst and Young
(E&Y) across a broad range of
Indian companies found that there
has been overwhelming recognition
of the risks arising out of commodity
price fluctuations and, thus,
that of the importance of hedging
of inputs at pre-fixed prices as a
risk-mitigating strategy as per the
responses of most of the surveyed
lot. Yet, protection against adverse
commodity price movements is
viewed more as a tactical measure
than as a strategic device to manage
risks.
The effect of price volatility of various
commodities on corporate bottom
lines was amply demonstrated
by a recent study carried out by a
prominent Indian business daily.
The study used quarterly results
of over 1,500 manufacturing firms,
which indicated that expenses on
‘raw material’ had increasingly
eaten away a higher share of the
otherwise healthy performance of
their sales.
As the table shows, raw material
expenses, which had, in fact,
declined by 3.19% in December
2009, increased by 59% in March
2010 and 28 percent in June 2010
for this large sample of companies.
The expenses also consistently
accounted for more than half the
sales since March 2010. Consequently,
net profits of these companies
have been falling consistently
over the past three quarters. And
this is despite their net sales successfully
weathering adverse world
economic conditions to post robust
year-on-year growth.
Perhaps the companies could do
pretty little to reduce their raw
material bill. But what they could
have definitely done is to arrest
the impact of commodity price
volatility and, by extension, the
volatility in their net profits. As
the table shows, increases in net
profits gyrated wildly from 67.40%
to 11.48% during the last three
quarters. Evidently, a robust risk
management tool like commodity
futures trading to hedge against
such volatility could have enabled
them to lock in input costs at predetermined
levels. This, sadly, was
not done to the desired extent by
these companies, a result of failure
to take risk management from
tactical to strategic levels by their
management. What also added to
their woes is lack of a policy and
institutional environment that
could promote risk management
culture among them.
A similar survey of 1,100 companies,
after their March 2010 quarter
results were announced, was conducted
by another publication. The
combined net profits of these companies
showed a marked increase
of 28.5%, year on year. However, if
the commodity companies (merely
155 in all) were left out, the net
profits of the rest fell by more
than 9 percentage points to 19.8%!
Conversely, the quarterly profits of
these 155 commodity companies
grew by more than 103%, Y-o-Y, in
March 2010, proving the dichotomous
effect of commodity prices
on corporate bottom lines.
effect of commodity prices on corporate bottomlines
Heads June ‘10 March ‘10 December ‘09
Rs. /crore % change Rs. /crore % change Rs. /crore % change
over over over
June ‘09 March ‘09 Dec. ‘08
Net sales 418,814 23.07 448,346 30.09 401,200 19.18
Raw Mat. Expense 210,731 27.63 235,468 58.94 159,284 (-)3.19
Raw Mat to sales (%) 50.32 1.80 52.52 9.53 39.70 (-)9.17
Net Profit 43,419 11.48 47,649 40.92 48,218 67.40
Source: Capitaline
For an economy trying to wither
the effects of the recent financial
crisis on its foreign trade prospects,
commodity price volatility has
been a double whammy for its
agriculture sector in the past one
year. Such high volatility is, again,
a result of Indian agricultural
markets responding to signals emanating
from international markets
in an increasingly globalised world
where rapid strides in information
and communication technology
(ICT) mean that the smallest news
of relevance in the remotest part
of the world can have its profound
effect felt within domestic markets
and that there remains a structural
12 | Commodity Insights Yearbook 2010

Healthy market growth
– in need of policy
initiatives
Markets facilitating the trade in
commodity-based derivatives in
India are regulated under the Forcorrection
of prices pending for
long. The double whammy is due
to volatility adversely impacting
food prices and input costs and,
thus, the bottom lines of industries
using them as raw materials. The
state machinery often tries to
intervene in the market to cushion
both sides of the market by absorbing
such volatility often at the cost
of the exchequer.
The moot point is that risks associated
with commodity price spikes
and volatility have, in recent times,
risen considerably and affected
more and more economic entities
that are being exposed to risks
associated with increasing volatility
while being ever more aware of
the impact of this exposure on their
economic pursuits. While they
seek to cover these risks through
hedging against commodity price
movements, how attractive does
the market they approach appear.
The E&Y survey found nearly all
respondents to hedge through
recourse to plain vanilla products
alone. Significantly, about 68% of
them had a hedging horizon of less
than three months, indicating that
they could not explore possibilities
of long-term hedging to protect
long-term business cash flows.
Clearly, there is a demand for
safe hedging through a variety of
hedging instruments, many more
than what the market currently
provides. While OTC forward
contracts can fulfil the demand
for customised hedging products,
they lack the kind of liquidity
and safety that exchange-traded
and exchange-cleared derivatives
provide. The market for the latter,
unfortunately, seems to have
run into a wall as the supply of
67.4%
To 11.5% – Companies’
net profits gyrated, as
wildly as this, in the past 3
quarters. Surely, a robust risk
management tool like commodity
futures could have helped
lock in input costs at
predetermined
levels.
products has scarcely been able to
match their ability and needs. The
reason, as has been elucidated in
several fora by several constituencies
in recent years, is the slow pace
of policy and institutional reforms
for nurturing the use of commodity
derivatives by the stakeholders
in India.
A PwC & MCX Joint Endeavour | 13

market CoMMENTARY
ward Contracts (Regulation) Act,
1952, an Act enacted in the backdrop
of wartime shortages. Evidently, a
market which has grown by nearly
40% in the past four years to become
one of the largest in the world
(implying its enormous importance
for the economy) and its products
are reckoned as an investible asset
class in the league of stocks and
fixed income instruments, needs
to function under the ambit of a
market-enabling regime than this
Act allows. The intended amendment
to the Act is yet to see the
light of day, despite being at various
stages of review by legislators for
close to four years. As a result, not
only is market development, incommensurate
to the level of economic
requirement being impossible to be
taken up under the existing law but
also that integration of the commodity
futures market with the
physical ecosystem has been left
incomplete. The reluctance of both
capital and money market regulators
to let their regulated entities
enter the commodity futures market
appears to be for two broad reasons:
the lack of clear policy guidelines
and the absence of an autonomous
regulator for this market. Similarly,
denying products such as options
and intangibles, which could fulfil
the hedging demand of a very large
number of stakeholders – not the
least of who are from the farming
community – is tantamount to
keeping these stakeholders away
from an effective risk-mitigating
device.
That economic stakeholders are
more prone to commodity price
risks under effect of global forces
has been well recognized by now.
This has been the biggest contributor
to the creation of the demand
side of the commodities derivatives
market. What has been less appreciated
is the tremendous potential
that a fast-growing large economy
like India holds in the world of
commodities market to get back
its ancient price-setting power.
Given the size of its population and
nature and growth potential of its
economy, India is one of the largest
producers and/or consumers of
most commodities. With liberalised
markets – both physical and futures
- and an accommodative policy
regime that promotes new products
and market participation from India
and abroad, the commodity derivatives
market in India can set global
benchmarks not only in terms of
prices discovered in its markets
but also in terms of products and
practices. Already, despite being
under a relatively restrictive market,
the country’s largest commodity
futures exchange is the sixth largest
in the world, occupying the top
position in silver and second position
in gold and natural gas. With
an accommodative policy, India
can definitely be the price-maker
rather than a passive price-taker
for most commodities in the world
market, especially the ones that the
stakeholders actively trade in. Such
policies would not only include
Courage is not
the absence of
fear, but rather
the judgment
that something
else is more
important
than fear
Ambrose Redmoon
those that promote futures trading
in commodities but also remove the
hurdles on the way towards formation
of a pan-India physical market
for commodities setting up a solid
platform for national commodity
derivative markets.
Today, as we stand at the cusp of
history and a generation witnesses
the transition of India from a
poverty-stricken country to one
of prosperity and economic might,
the visages of control that inhibit
this transition have to be identified
and removed. Cynics argue against
liberalising commodity markets for
a range of imaginary fears, ranging
from stoking fires of inflation to
securing supplies of key intermediaries.
But as our experience
with liberalisation (together with
similar actions of the other emerging
superpower, China) has clearly
demonstrated, there is much more
to gain through liberalisation of
markets and economy than to give
into what the phantoms of imagination
would lead us to believe.
After all, the Indian economy has
proven to be robust enough to
withstand and emerge successfully
from transitions and crises; and
markets, under leadership-providing
regulators, mature enough to
unlock values for the economic
stakeholders. What is needed now
is only an enabling environment,
created by an imaginative and bold
policy agenda, so that these values
are reaped by all stakeholders to
their fullest extent. As American
writer Ambrose Redmoon once
famously said, “Courage is not
the absence of fear, but rather the
judgment that something else is
more important than fear”, only
some boldness in policymaking and
a commitment towards further
liberalisation of economic forces
can catapult us to the next level
of growth
14 | Commodity Insights Yearbook 2010

PricewaterhouseCoopers Pvt. Ltd.
2nd Floor, 252, Veer Savarkar Marg, Shivaji Park, Dadar, Mumbai 400 028 (India)
Phone: +91-22-6669 1000; Fax: +91-22-6654 7800
Website: www.pwc.corn
Multi Commodity Exchange of India Ltd.
Exchange Square, CTS No. 255, Suren Road, Chakala, Andheri (East), Mumbai 400 093 (India)
Tel: +91-22-6731 8888; Fax: +91-22-6649 4151
Website: www.mcxindia.com