Market influencing factors

Ø Price movements of other metals.
Ø Inflation.
Ø Available supply verses Fabrication demand.
Ø Fluctuation in deficits and interest rates.
Ø Income level of the rural sector of the economy.

Silver is traded in International Exchanges like CBOT, DGCX, NYMEX and TOCOM while in India it is traded in MCX and NCDEX and NMCE.

Contract Specification of Silver:

Gold and Silver Ratio:

Silver can be an effective means of diversifying investment assets and preserving wealth against the ravages of inflation for the average investors. Although the value of silver may vary, it has an intrinsic value that is immutable and permanent. When the first coins were made over 2,500 years ago in ancient Greece, the ratio of gold to silver was generally between 10:1 and 13.5:1, depending on the relative proximity of gold or silver mines.  According to historic price ratio of silver to gold shows that about 10 ounces of silver would buy one ounce of gold, it means the ratio between gold and silver is 10:1.

The peiod between 1976 to 1980, was remarkable period of bull market in precious metals, showed the ratio 17:1. Again, when  the market entered into recession in the year 1990 and 1991, the ratio rose from 71:1 to 100:1.
 
It is evident from the past history is that we can expect silver to drop faster than gold during a recession, and silver will rise faster than gold during a bull market in the metals. The main driver for the rise in the silver price between 1976 and 1980, and the concurrent dropping in the ratio, was investment demand. 

But the recent monthly ratio is about a 75:1 ratio. It can be summerised by the below drawn chart that the gold and silver ratio lies between 47- 75  since November 2003 to November 2008 . It means silver is historically cheap as compared to gold.

A simple application of this observation is to trade silver for gold in the middle of a recession, when an expansion in the economy starts and demand for commodities also increases.

There are several derivatives of palm oil viz., Crude Palmoil, Crude Palmolein, RBD (Refined Bleached Deoderised) Palmoil, RBD Palmolien and Palm Kernel Oil.
Moreover crude palm oil is also used in the manufacturing of soaps, ointments, cosmetics, detergents, lubricants, and feedstock for biodiesel. It is diverted for producing bio-diesel because it’s easily available and cheap.
Now a days, demand of palm oil is increasing due to higher prices of other edible oils such as soyabean, sunflower and mustard oil etc. It is evident from the market data that whenever the prices of other edible oils increase then the demand of palm oil also increases because consumers shift from other costlier oils to cheap palm oil. The price of palm oil is less as compared to other edible oils.

Market Influencing Factors

· World demand and supply fluctuations of the competitive edible oils
· Domestic demand and supply fluctuations of other oils and oilseeds
· Seasonal cycles, as April to December is the peak production period in Indonesia.
· Import policies of the importing nations

Major Consuming Countries: China, India, European, Indonesia and Malaysia

Major Producing Countries: Indonesia, Malaysia, and Thailand
Indian Scenario:

India holds a very small share of palm oil production in the world figures. It hardly contributes to the world production and is not able to satisfy its domestic consumption demand. It produces a mere 70000 tonnes of palm oil annually i.e. just 0.2% share in the total world’s production. The state having the maximum production of palm oil in India is Kerala as it produces 20000 tonnes per year. India is basically a net importer of the palm oil.

Global Scenario:

The World produces about 40 million tonnes of palm oil per annum. Out of which more than 85% is produced by Malaysia and Indonesia combined. Malaysia is the largest producer of palm oil in the world and Indonesia is the closest competitor to the leader country in this production context.
Crude palm oil markets in India are

· Kandla (Gujarat)
· Mumbai (Maharashtra)
· Kakinada (Andhra Pradesh)
· Chennai (Tamil Nadu)

The major crude palm oil markets in the world are Bursa Malaysian Derivatives (BMD) – largest futures market for crude palm oil Indonesia

The United States has two sources of heating oil: domestic refineries and imports from foreign countries.  Refineries produce heating oil as a part of the “distillate fuel oil” product family, which includes heating oils and diesel fuel. Distillate products are shipped throughout the United States by pipelines, barges, tankers, trucks and rail cars.   The United States produces about 85 percent of its heating oil, while the remainder is imported from Canada, the Virgin Islands and Venezuela.

Heating oil is commonly delivered by tank truck to residential, commercial and municipal buildings and stored in aboveground storage tanks located in the basements, garages, or outside adjacent to the building. Heating oil is very similar to diesel fuel. It is used to fuel furnaces in homes or buildings. It is usually dyed to distinguish it from taxed vehicle fuel.

India’s leading commodity exchange, MCX which has an array of energy contracts such as Brent crude oil, electricity, natural gas and ATF expanded it energy futures segment by launching futures trading in ` Heating Oil` for February, March and April months.

 
Factors Effecting Heating Oil Prices:

Seasonality in the demand for heating oil - When crude oil prices are stable, home heating oil prices tend to gradually rise in the winter months when demand is at the peak. 

Changes in the cost of crude oil - Since crude oil is a major price component of heating oil, changes in the price of crude oil generally affect the price of heating oil. Crude oil prices are determined by worldwide supply and demand.  Demand can vary worldwide with the economy and the weather condition while OPEC and other factors can influence supply.

Competition in local markets – Competitive differences can be substantial between a locality with only one or a few suppliers or dealers versus an area with a large number of competitors.  Consumers in remote or rural locations may face higher prices because there are fewer competitors.

Regional operating costs - Prices also are impacted by higher costs of transporting the product to remote locations.  

Heating oil is refined from crude oil so there is positive correlation between heating oil and crude oil prices. Most years, the price of Heating Oil climbs up to reach a high point in August. This coincides with consumers stocking up on oil for the winter. Some consumers lock in the price at this point and buy a full winter’s worth of oil, but many buy a smaller amount with the intention of restocking as needed. With the buying pressure off by October, the price of Heating Oil falls.

The yield of gur from sugar cane depends mostly on the quality of the cane and the efficiency of the extraction of juice.

Muzaffarnagar district in Uttar Pradesh has the largest jaggery market in India, followed by Anakapalli of Visakhapatnam district in Andhra Pradesh. These are the biggest and second biggest in the entire world respectively.

Manufacturing Process
Jaggery manufacturing is done on a small scale by a group of farmers. It can be produced, just by boiling the pure clarified sugarcane juice. Then it is filtered and boiled in wide, shallow iron pans with continous stirring and, simultaneously soda juice is added in required quantity. While boiling, brownish foams come at the top which are continuously removed to get golden yellow colour of jaggery. The consistency of the juice becomes thick and then it is poured into the small to medium sized iron or aluminum cans where blocks of jaggery are formed after cooling. Size of the blocks can vary from 1 kg. to 12 kgs. Finally, these blocks are packed in gunny bags. From 100 kgs. of sugarcane, 10 kgs. of jaggery is made. . There is only 5% or even less capital requirement for making gur as compared to sugar production. That is why it is within the reach of common sugarcane farmers also.

The process flow chart is as under:

Major Producers are : Brazil, India, EU, China and USA
Major Importer: Russia, Indonesia
Major Exporter: Brazil, EU, Thailand, Australia

Uses of Gur
· It provides health nutrition value.
· It is used to purify the blood and regulate the liver function.
· It is used for sweating milk, and preparing tea.
· It contains proteins, minerals and vitamins, which are essential constituents for the body.

The two most widely known are the Philadelphia’s Gold & Silver Index i.e.

Ø XAU Gold Stock Index: The XAU is a capitalization-weighted index. The XAU was started on January 1979 with a value of 100.

Ø BUGS AMEX HUI: The HUI is a modified equal dollar weighted index. The HUI was started on March 15, 1996 with a value of 200.

These indices by themselves do not have many components but only represent a few companies in the Gold sector of the Stock Market. HUI contains 15 stocks and XAU contains 16 stocks. These indices are not only different in the number of stocks they represent but also in the proportion of hedged and unhedged stocks that they contain and in the way they are calculated. If we had an index that combines these two indices we could get a better representative sample of the Gold sector and better represent the proportion of hedging and its influence within the sector.

The major difference between the two is that the BUGS index is made up exclusively of mining stocks that do not hedge their gold positions more than a year-and-a-half into the future. This makes the BUGS Index much more profitable than the XAU when gold prices are rising, but can also compound its losses when gold declines.

The New Gold Index was composed in 2002 and that the HUI just recently was changed from 12 stocks to 15 components. AMEX added 2 new stocks that began trading in Dec. 2002 or Jan. 2003. These two new stocks namely IAG and GOLD, which are not included in the New Gold Index at present. This New Gold Index consists of 26 stocks, which represent a larger proportion of Gold stocks.

Gold funds are different from gold exchange-traded funds (ETFs) and should not be confused with the later. Gold funds are MFs that invest primarily in the stocks of companies that are active in mining of gold and other precious metals like platinum, silver and also diamonds. Gold ETFs, on the other hand, invest solely in pure gold. Since gold funds invest in equities of gold mining companies, their correlation with the equity market is much higher than that with gold bullion, and hence, they are known to move in tandem with the equity market.

For comparison charts has been included of the Gold Prices with XAU and HUI so that one can view all indices together.

It is simply an arithmetic sum of all of the component stocks. So if all of the stocks rise then the index rises. Each stock is as important then the next. These charts show that when gold prices are on the rise, the Gold XAU and HUI Index provide an excellent way for investors to capitalize on that increase. As we can see in the month of October –Dec when the prices of gold continuously increased then the XAU and HUI index also increased. The correlation between Gold prices and HUI has 0.82163 and XAU and Gold prices has 0.77981. It shows that the index has a high correlation to the prices of gold.

Commodity futures are contracts where commodities are traded in future prices. The system of trading commodity futures is very simple and easy. Let us assume that a person buys commodity futures for $1000. After some time, the value of the commodity futures increases. As a result, the buyer of the commodity futures will gain because he can now sell off the contract for an amount higher than the amount for which he purchased. This type of contract can also be referred to as a forward contract where commodities are purchased at present but the commodities are delivered after a certain period of time. Here the commodities are not actually traded. The commodities are stored in a warehouse and they are taken out from the warehouse only after the expiry of the period mentioned in the commodity futures.

The warehouse operator holds the stored commodity by way of safe custody and is legally liable to make good any value lost through theft or damage by fire and other catastrophes, but has no legal or beneficial interest in it.

When the commodity sold in Futures market is taken to the warehouse, the client receives a legal document from the warehouse known as warehouse receipt.

Warehouse receipts: WR are documents issued by warehouse operators as evidence that specified commodities of stated quantity and quality have been deposited at particular locations by named depositors. The depositor may be a producer, farmer group, trader, exporter, or indeed any individual or body cooporates.

NSDL, the first depository in the country was established in the year 1996 to remove the difficulties arising out of use of physical (paper) certificates for settlement of trades on stock exchanges and improving settlement efficiency. The depository system has successfully met its objectives. On the basis of the success of demat, rolling settlements were introduced and today, India is one among the few countries that have T + 2 rolling settlement system.

Drawing lessons from the depository system for securities, NSDL and national level multi-commodity exchanges have worked out a scheme to extend depository services for settling trades in commodity futures.

With the increase in activity in the commodities futures market and establishment of national level screen-based multi-commodities exchanges, need for an efficient settlement system in that market is felt. Broadly, a commodity futures contract may be settled either by cash or by delivery of commodity depending upon the terms of the trade, demand of the buyer and rules of the exchange. If the trade is expected to be settled by way of delivery of commodity, the clearinghouse of the commodity exchange will receive warehouse receipts from the seller instead of actual commodities and pass such warehouse receipts over to the buyer. In case of national commodity exchanges, buyers and sellers operate from different parts of the country and if warehouse receipts are in physical form, the warehouse receipts have to be delivered across the country from the seller to the buyer, which could lead to systemic inefficiencies.

Warehouse receipts are title documents issued by warehouses to depositors against the commodities deposited in the warehouses. These documents are transferred by endorsement and delivery. Either the original depositor or the holder in due course (transferee) can claim the commodities from the warehouse. Warehouse receipts in physical form suffer all the disadvantages of the paper form of title documents.

Some of these limitations are as follows:

• Need for splitting the warehouse receipt in case the depositor has an obligation to transfer only a part of the commodities;
• Need to move the warehouse receipt from one place to another with risk of theft/mutilation, etc. if the transferor and transferee are at two different locations.
• Risk of forgery.

LME Warehouse is a place where we can store and handle a multitude of non-ferrous products, including copper, zinc, aluminum, lead, tin, nickel and aluminum alloy. There are over 400 LME approved warehouses in approximately 35 locations covering the USA, Europe, the Middle and the Far East.

If you want to produce or to trade copper or tin, or whatever listed on the LME, you can sell the metal to one of the many big warehouse of the LME, all over the world, and can receive a warrant. This is a way to share the cost of these warehouses between the many industry participants and make it more efficient, to compete against other products.

In LME Warehouses certainty is possible because the metal stored in warehouses belongs to the owner of the warehouse receipt issued by the warehouse company when the metal is first placed in the warehouse.

Investor should also make sure that LME warrants and off warrants are also take into consideration while reading the LME stock scenario which is published by the London Metal Exchange each working day from Monday to Friday.

LME Warrant: A document of possession, issued by the warehouse company, for each lot of LME approved metal held within an LME approved facility is called “LME Warrant”. Warrants are issued as the means of delivering metal under LME contracts. The number of live warrants reported accounts for all warrants that apply to material that is good for LME delivery, which has not been cancelled.

Cancelled Warrant: The number of cancelled warrants indicates the number of warrants for material that have been taken off warrant but haven’t necessarily been moved from the warehouse. These cancelled warrants are reported on by the LME until they are physically moved from the warehouse. Cancelled warrants information is important in that it represents the change in stockpiles of metal, which may no longer be available at warehouses and is booked for removal or onward shipment. This information is a valuable indicator of consumption trends, which in turn can provide valuable information in price trends.

Whenever the cancellation activity increases, it means that more metal is embarked for withdrawal, which will, in turn have positive impact on metal prices. Cancel warrants should be used to compare with the total stock available in the warehouses. This will give a cancellation ratio, which would be different for different metal.
London Metal Exchange does not run or operate its own warehouses. In fact it approves geographical locations globally as good delivery points and then approves warehouse companies, which operates within those locations provided with specific facilities. Now, these approved warehouse companies set fixed rents, which is charged on yearly basis against the storage of LME- warranted metal. These rent charges are published by the exchange and become effective on the beginning of every new financial year i.e. 1st day of April every year. Also if there are any changes to the costs of the rent, in that case warehouse companies has to inform the exchange by giving notice, further which is given to LME members at least three months prior to the operative date.

Many of the participants in base metals markets would probably expect a strong negative relation between LME warehouse inventories and 3-month forward prices over long periods of time. In other words they would expect lower inventories to be associated with higher prices, and vice versa. However, the existence of a strong negative relationship between inventories and prices does not guarantee the profitable trading signals always as other economic factors also determine the prices. But somewhat analysis suggests that the market more often is slow to react, than not, to significant changes in LME inventories for most of the base metals.

India’s commodity futures exchange MCX (Multi Commodity Exchange of India Ltd), has launched futures trading in “Electricity” whereby electricity will be available for futures trading. This is the first time in India when electricity will be available for futures trading. MCX received the approval from market regulator Forward Markets Commission for launching weekly and monthly electricity contracts on 09 Jan 2009. The exchange will launch eight weekly contracts and four monthly contracts. The first trade was executed in the March monthly contract at Rs 7,300 per Megawatt hour (MWh).

Globally, Nordpool in Sweden, Norway, Finland, Denmark, Inter Continental Exchange in UK, Power next SA in France, European Energy Exchange in Germany, PLM in the US and Australian Securities Exchange in Australia offer electricity futures trading platform.

The contract-trading unit will be 1MWx24 hours with tick size as Rs 1 per mwh. The delivery will be optional for both buyers and sellers and due date rate will be the average of daily system prices of day-ahead market of Indian Energy Exchange (IEX) for delivery during the contract week/month.

It will trade through Monday to Saturday between 10 a.m. and 11.55 p.m., except Saturdays which will be from 10 a.m. to 2 p.m. At any point of time 8 weekly contracts and 4 calendar month contracts will be available for trading.

The total annual market size (electricity generation) in 2007-08 is Rs 2,00,000 crores (for 665 million mwh @ Rs 3000 / mwh), about 665 billion units. The present short term market per year is around 4% to 5% of the total market. Rs 13500 crores (30 million MWh @ 4500 per mwh) which is equivalent to about 30 billion units.

Trading in electricity futures will be helpful as power prices are volatile. Those who buy or sell power in the spot market will be benefited directly from this. Apart dealings via an exchange are always safe as its clearinghouse provides a system of guarantee that mitigates counter party credit risk. Electricity futures will attract huge market participation. Introduction of this facility will help get the true price in the market and will also rationalize the use of electricity. It will increase the depth of the market, where all sellers and buyers can come on one platform and trade.

There are two major types of coal – coking coal and thermal or steaming coal. Coking coal is used to make coke, which is an essential ingredient in iron and steel production whereas thermal coal is used to provide heat energy. It is mainly used in power stations where coal heats water to produce steam. This steam then powers the turbines which produce electricity.

Uses of Coal

Ø It is used to make electricity.
Ø It is used in Steel production.
Ø It is used in Cement manufacturing
Ø It is used as a liquid fuel.

Producing Countries: China, United States, India, Australia, South Africa, Russia, Indonesia, Poland, Germany and Canada.

Consuming Countries: China, United States, India, Russia, Japan, South Africa, Germany, Australia, Poland and South Africa.

Exporting Countries: Indonesia, Australia, South Africa, Netherland, Venezuela, Canada, Poland, USA and China.

Importing Countries: Japan, South, Taiwan, Germany, United Kingdom, Russia, Canada, Spain, Italy and France.

Major Producing State in India: Jharkhand, Madhya Pradesh, Orissa, Andhra Pradesh, Maharashtra, West Bengal and Uttar Pradesh.

Indian Scenario:

The Indian coal industry is the fourth largest in terms of coal reserves and third largest in terms of coal production in the world. Coal India Ltd. (CIL), the country’s largest coal producer, produced 379.69 million tonnes of coal in the year 2007-08, against 360.61 million tonnes in the previous year. It is aiming for a total production of 425 million tonnes during the current year.

Global Scenario:

Coal is found across the world and is mined in 50 countries. In Australia, the two main locations are in the Sydney Basin in New South Wales and the Bowen Basin in Queensland. Most of the coal mined in the United States is produced about one billion tonnes per year. South African coal exports are projected to decline to 61 million tonnes in 2008 from 66 million tonnes last year.

National Commodity and Derivatives Exchange (NCDEX) has launched futures trading in thermal coal on 10th Sep 2008.

Some commodities are produced only for a few months in a year. But their demand continues in the whole year or some commodities always available but there are fluctuations in prices or quantities that are synchronized with the season or time of year. Some futures contracts are based on annually produced commodities like corn, wheat, soybeans, cotton, etc. An annually produced commodity tends to have supply available at one time (harvest) while demand is variable, and segmented throughout the year. Other futures contracts are based on a market with variable production cycles, and more constant demand components like Petroleum Products (Crude Oil, Heating Oil), Metals (Gold, Silver, Platinum), etc

So investor should always keep in mind seasonal fluctuation in commodity prices before investing.

Now the question is what are the sources of seasonal fluctuations in prices or quantities of commodity? There are main sources like (1) Demand and Supply and (2) Climate. which effect the fluctuation in prices.

Demand and supply is the major factor which effect the prices of commodity There may be waves in the market that are about a yearlong. The prices of soybeans, oil and meal are mainly determined by the supply and demand characteristics. In CBOT soyabean prices rose to more than double in current year from last one year due to strong demand and supply squeeze. As we can see the seasonal effect in the sugar market because prices of sugar increases from mid of August due to festival seasons.

On the demand side, we have natural gas. In summer natural gas is only used for cooking. But in winter natural gas is burned for heating fuel also. This results in higher natural gas prices in winter. The principal method is to buy gas in the off-season and store it for winter use. If gas is put in storage in the summer and withdrawn in the winter, the cost of gas charged to consumers in the winter will be a blend of the current market price and the cost incurred when buying in the summer. This blending tends to have a limiting effect on the price volatility to some extent. It is far from perfect insulation, however. When natural gas prices rise or fall dramatically, consumers will still see noticeable changes in their gas rates.

If we talk about maize, the season of bird flu is having a cascading effect on several poultry-related sectors. Due to the outbreak of bird flu, the demand for maize from the industry goes down and in turn decline in prices is seen.

The another main reason for these seasonal variations is climate. Changes in climate and the cycle of seasons throughout the year can affect the supply of some commodities (e.g. fresh fruits and vegetables), or the demand for them (e.g. coal, winter and summer clothing). Crops, despite the major advances in agribusiness in recent years, are still dependent upon climatic conditions. In fact; seasonal fluctuations are present in almost all sectors of most economies.

Floods and droughts affect food production both in terms of quantities and in terms of relative composition of the food basket. Major negative impact could be seen in the production of rice, wheat, maize and soya, all major consumption items globally. Calendar events can also create seasonal commodities. Climate change has a tremendous influence on commodity prices. Like floods in the corn belt in the US have had a significant impact on corn prices in recent times.

For example: Maize prices are seasonal in nature. From the seasonal indices graph shown below, we can see that maize prices go down during the month of September and October because of arrival pressure in the market. As arrivals start diminishing, prices show a recovery from the post-harvest decline during the April-June months.

As we can see that the Hurricane season has disrupted energy firms along the Gulf of Mexico – which accounts for a quarter of US oil production and 15% of natural gas production. The sector is still reeling from the impact of Hurricane. According to the federal Minerals Management Service 98 percent of crude oil production and 94 percent of the natural gas production in the Gulf of Mexico was shut down at the well because of the storm. In preparation for Ike, four Gulf coast refineries have shut down operations, accounting for 6.7 percent of the nation’s capacity. That has helped crude oil continue its slide from its record high of $147.90 a barrel on 11th July 2008. This is the effect on oil prices due to climate change.

Conclusion
Certain goods are demanded in particular seasons. Anyone who invests in the commodity market must take the seasonal phenomenon into account. So before investing in commodity market, investor should always consider season of that particular commodity in which investor wants to invest. If Investor wishes to trade on a seasonal basis, then it is advisable to diversify with a large spectrum of markets. For example, a seasonal investor may wish to establish a portfolio consisting of Unleaded Gasoline, Soybean Meal, Live Cattle by choosing at least one market from each of the major groups of commodities, a particular event will not disrupt the behavior of all markets. Commodity can be sold during the season with profit and when it becomes out of season the commodities is either not sold or even if sold it is sold at loss.