A STUDY ON THE EFFECT OF COMMODITY

TRADING ON INDIAN ECONOMY

ABSTRACT

A commodity may be defined as an article, a product or material that is bought

and sold. It can be classified as every kind of movable property, except Actionable Claims,
Money & Securities. Commodity market is an important constituent of the financial markets
of any country. It is the market where a wide range of products, viz., precious metals, base
metals, crude oil, energy and soft commodities like palm oil, coffee etc are traded. Most
commodity markets across the world trade in agricultural products and other raw materials
(like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil,
metals, etc.) and contracts based on them. These contracts can include spot prices, forwards,
futures and options on futures. Other sophisticated products may include interest rates,
environmental instruments, swaps, or ocean freight contracts. For many emerging market
economies, commodity exports constitute more than 60% of total exports.

A commodities exchange is an exchange where various commodities and

derivatives products are traded The Government of India permitted establishment of National
level Multi-Commodity exchanges in the year 2002. They are:

 Multi Commodity Exchange (MCX) located at Mumbai

 National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai
 National Board of Trade (NBOT) located at Indore
 National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Just as SEBI regulates the stock exchanges, commodity exchanges are regulated
by Forwards Market Commission (FMC); Forwards Market Commission is under the
purview of the Ministry of Food, Agriculture and Public Distribution.

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 Commodities exchanges usually trade futures contracts on commodities, such as
trading contracts to receive something, say corn, in a certain month. Speculators and
investors also buy and sell the futures contracts to make a profit and provide liquidity to the
system.

The first organized futures market was however established in 1875 under the
aegis of the Bombay Cotton Trade Association to trade in cotton contracts. Derivatives
trading were then spread to oilseeds, jute and food grains. The derivatives trading in India
however did not have uninterrupted legal approval. By the Second World War, i.e., between
the 1920’s &1940’s, futures trading in organized form had commenced in a number of
commodities such as – cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed,
wheat, rice, sugar, precious metals like gold and silver. During the Second World War
futures trading was prohibited under Defence of India Rules.

After independence, the subject of futures trading was placed in the Union list,
and Forward Contracts (Regulation) Act, 1952 was enacted. Futures trading in commodities
particularly, cotton, oilseeds and bullion, was at its peak during this period. Deregulation and
liberalization following the forex crisis in early 1990s, also triggered policy changes leading
to re-introduction of futures trading in commodities in India. In April, 1999 the Government
took a landmark decision to remove all the commodities from the restrictive list. Food-grains,
pulses and bullion were not exceptions; Government allowed setting up of new modern,
demutualised Nation-wide Multi-commodity Exchanges with investment support by public
and private institutions. National Multi Commodity Exchange of India Ltd. (NMCE) was the
first such exchange to be granted permanent recognition by the Government.

This project intends to highlight the importance of commodities in an economy.

It is also to give an insight on how the price fluctuations of commodities affect the economy
of a country. It is a venture to give awareness to the public about the benefits and risks
involved in commodities future trading.

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INTRODUCTION

The universe is made of cycles, all things are related to each other and all things
are going or seeking for equilibrium. Such are the commodity prices; they are strongly
related to many things. In a free market environment where the competition dominates the
commodities prices change mainly with the change in supply and demand. Either a shift in
supply or demand or an increase or decrease in one of them may affect the commodity prices.
This has an output to the global economy.

Commodity prices are generally less volatile than the stocks and this has been
statistically proven. Therefore it's relatively safer to trade in commodities. Also the
regulatory authorities ensure through continuous vigil that the commodity prices are market-
driven and free from manipulations. However all investments are subject to market risk and
depends on the individual decision. There is risk of loss while trading in commodity futures
like any other financial instruments.

The Government of India permitted establishment of National level Multi-

Commodity exchanges in the year 2002. They are:

 Multi Commodity Exchange (MCX) located at Mumbai.

 National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai.
 National Board of Trade (NBOT) located at Indore.
 National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Indian commodity market is set for paradigm shift. Four licenses are recently
issued by Govt. of India to set-up National Online Multi Commodity Exchanges – to ensure a
transparent price discovery and risk management mechanism. List of commodities for futures

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trade has increased from 11 in 1990 to over 100 in 2003 Reforms with regard to sale; storage
and movement of commodities are initiated. Shift from administered pricing to free market
pricing has taken place with WTO regime. Overseas hedging has been allowed in metals.
Petro-products marketing companies have been allowed to hedge prices. Institutionalization
of agriculture also has taken place.

Commodity futures market has been in existence in India for centuries. The
Government of India banned futures trading in certain commodities in 70s. However, trading
in commodity futures has been permitted again by the government in order to help the
Commodity producers, traders and investors. In the world market India ranks first in
commodities like pea and pulses, second in wheat, groundnut, sugarcane, jute and jute fibres
and third in cotton, rapeseed and rice.

World-wide, the commodity exchanges originated before the other financial

exchanges. In fact, most of the derivatives instruments had their birth in commodity
exchanges. But the current mindset is such that commodity exchanges are speculative
markets not meant for actual users. If commodity exchanges do not enable physical delivery,
they are then only for speculation awareness is lacking amongst actual users. Interest rate,
exchange rate, risk etc are actively ensured but not commodity risk. Main impediments are
centered on safety transparency and taxation issues. The commodity exchanges have got
some of the most high profile corporate as their promoters. Multi Commodity exchange of
India, promoted by Financial Technologies Ltd has got on board institutions such as SBI,
HDFC Bank, Canara Bank, Corporation Bank, Bank of India, Union Bank of India, Bank of
Baroda. The National Commodity and Derivatives Exchange (NCDEX) have got NSE,
ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank as the major share-holders. Such a high
profile share-holding provides these exchanges valuable experience, knowledge and also
high standards of operations. Also the exchange guarantees the settlement of trades and so
eliminates the counter-party risk in the transactions.

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 It has always been interesting to study about commodity trading and its effect on
world economy, especially Indian economy. It is believed that commodity exchange has a
very important role to play India’s leap towards a better economy and to be a developed
country.
OBJECTIVES OF THE STUDY

 To study the importance of commodity trading in Indian economy.

 To study the importance of commodity futures trading.

 To analyze the effect of commodity price fluctuations on the economy.

 To study the issues related to commodity trading.

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SCOPE OF THE STUDY

It is well known that commodity trading has a great impact on every country’s
development. But the common man is not taking advantage of this because of the risks
involved in it. This study on commodity gives an overview of the issues related to trading,
the risks and the benefits involved in it and its effect on the country’s economy and currency
value. This study gives meaningful information on commodity futures trading. It also gives
valuable details to the farmers who are the main traders of commodities in India. It also
attempts to solve the common problems faced by them in the industry.

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LIMITATIONS

 Realistic conclusions are not possible.

 Reliability of secondary information available.

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RESEARCH METHODOLOGY

Case study research design is used for the study. As per the design secondary
data is taken in to consideration and is critically analyzed. Internet websites are used as the
main source of secondary data.

Methodology : Descriptive Research

Data Required : This information need of the research is such that it

requires secondary data.

Secondary Data : Internet, books, various publications and magazines.

Data Collection Method : Data was collected through internet websites of

Commodities and trading.

Data presentation : Mainly descriptive in nature. Graphical representation

is also included where it is found necessary.

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COMMODITIES MARKET

For any emerging market economy commodities exchange plays a major role.
Commodities have a major share in the export of each and every country. Since it has a great
impact in any country’s economy and its development it is essential to have a thorough
knowledge about commodities their markets and trading. This study gives an insight in to
these major areas.

The commodities market exits in two distinct forms namely the Over the Counter
(OTC) market and the Exchange based market. Also, as in equities, there exists the spot and
the derivatives segment. The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer,
processor, wholesaler etc. Majority of derivative trading takes place through exchange-based
markets with standardized contracts, settlements etc.

COMMODITY MARKETS IN INDIA

Spot trading mostly in regional mandis and unorganized markets are common.
Markets are fragmented and isolated. Government procurement activities are reduced and are
mostly restricted to cereals as of date. There are restriction on interstate movements and
warehousing of commodities. Futures trading is largely regionalized and based on pit trading.
There is an overwhelming need to develop commodity futures market as a stabilizing
influence.

TYPES OF TRADING

Exchange:

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 It is a common platform for all traders. There is price transparency and low transaction
cost. Counter party credit risk is absent. Market prices are available to a wider world. A
standardized contract size is also there.
Bilateral Trading:
It has restricted access and the trade prices are unknown to other players. High loss and
time consuming negotiations are there. Counter party credit risk is involved. Difficulty in
price dissemination takes place. The contracts are customized.
Open Outcry:
Participants congregate in a ring to discover prices. Physical presence in exchange
premises is required. Price quotations and traded prices are not transparent. Online real time
price dissemination cannot be facilitated monitoring of member’s positions and risk
management practices are cumbersome.
Online Trading:
Participants put their order online to discover prices. Orders are routed through
electronic networks. Quotations and traded prices are available online. Real time price
dissemination is possible. Online monitoring of member positions can be done.

TYPES OF MARKETS
Capital Markets:
Prices movements are based on expectations of future performance price changes can
also be due to corporate actions like dividend announcements, bonus shares and stock splits.
Predictability of future performance is reasonably very high. History of management
performance will be a great support.
Commodity Market:
Price movements are purely based on supply and demand. Season plays an important
role. Price changes are due to policy changes, change in tariffs, duties etc. Predictability of
future risks are not in control. Failure of monsoon, formation of el-ninos at pacific etc affect
the prices.

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Commodity Futures:
Commodity Futures are contracts to buy specific quantity of a particular commodity at
a future date. It is similar to the Index futures and Stock futures but the underlying happens to
be commodities instead of Stocks and indices. Commodity futures market has been in
existence in India for centuries. The Government of India banned futures trading in certain
commodities in 70s. However, trading in commodity futures has been permitted again by the
government in order to help the Commodity producers, traders and investors. Worldwide, the
commodity exchanges originated before the other financial exchanges. In fact, most of the
derivatives instruments had their birth in commodity exchanges.

PARTICIPANTS IN COMMODITY FUTURES

 Farmers/ Producers
 Merchandisers/ Traders
 Importers
 Exporters
 Consumers/ Industry
 Commodity Financers
 Agriculture Credit providing agencies
 Corporate having price risk exposure in commodities

DIFFERENT TYPES OF COMMODITIES THAT ARE TRADED

 Precious Metals: Gold, Silver, Platinum etc

 Other Metals: Nickel, Aluminum, Copper etc
 Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
 Soft Commodities: Coffee, Cocoa, Sugar etc

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  Live-Stock: Live Cattle, Pork Bellies etc
 Energy: Crude Oil, Natural Gas, Gasoline etc

The commodities are divided into the four broad sections: Energy, Precious
Metals, Industrial Metals and Agriculture.

ENERGY

Energy security and the effects of burning fossil fuels on the environment are
considered two of the most pressing issues facing the world economy in the 21 Century. The
surge in oil prices during this decade is encouraging the development of alternative energy
sources such as nuclear, bio-fuels, fuel cell technology as well as renewable energies such as
wind and hydro power. Even so, the world economy still remains heavily dependent on crude
oil.

CRUDE OIL

Crude oil is a complex mixture of various hydrocarbons found in the upper layers
of the Earth’s crust. There are over 130 different grades of crude oil around the world. Their
grades are mainly a function of sulphur content and gravity. The highest quality crude’s are
those with low sulphur content and a high specific gravity. Specific gravities measure the
weight of the oil relative to water on this basis West Texas Intermediate (WTI), the US
benchmark crude oil and Malaysia’s Tapis are the best quality crude oils in the marketplace.
The heavier, sour crudes from the United Arab Emirates and Mexico are of a poorer quality
and consequently trade at a discount to WTI. Sweet crudes are defined as those with a 0.5%
sulphur content or less while sour crudes have a sulphur content of 1.5% or more. The area
between 0.5-1.5% is sometimes referred to as intermediate sweet or intermediate sour. The

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reference to sweet and sour relates to the early days of crude oil production as one of the
easiest ways to judge the sulphur content of crude oil and products was by taste and smell.

Major Producers: Saudi Arabia is the world’s largest producer as well as exporter of crude
oil. Although the US is the world’s third largest oil producing nation, it is also the world’s
largest importer of oil, representing 26% of cross-border trade in oil. The largest oil reserves
exist in Saudi Arabia, Iran and Iraq.

Major Consumers: The United States remains the largest consumer of oil, accounting for
25% of world consumption. In 2005, China overtook Japan to become the world’s second
largest oil consumer. Since 1995 India has moved from being the 13 largest oil consuming
nation to the world’s 6.

Major Uses: Fuel products constitute the vast majority of demand for petroleum. Gasoline is
used to power automobiles, light trucks, boats, recreational vehicles and farm equipment.
Kerosene is used for commercial aircraft, while distillate fuel oils such as diesel and heating
oil are used to power buses, trucks, trains and machinery, heat buildings and fire industrial
boilers. Liquefied petroleum gases (LPGs) such as propane, ethane and butane are used for
domestic heating and cooking, farming and as a gasoline alternative. Petroleum is also used
in the petrochemical production of solvents, lubricating oils, waxes, asphalt, fertilizers,
pesticides, synthetic rubber and plastics. Exchange traded Crude oil futures and options are
traded primarily on the New York Mercantile Exchange (NYMEX) and the Intercontinental
Exchange (ICE). Brent crude is generally accepted to be the world benchmark, and is used to
price two-thirds of the world’s internationally traded crude oil supplies. In the US, the West
Texas Intermediate (WTI) crude oil is the benchmark. Price conventions & codes Crude oil is
priced in US dollars per barrel

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OIL PRODUCTS

Since there are more than 130 different crude oil grades, refineries can be
optimized to produce “cuts” or fractions that are best suited to the characteristics of the crude
oil being run and the type of products that are most in demand in the local markets refined
products by use not surprisingly different parts of the crude oil barrel have different uses. The
US tends to favour crudes with a high gasoline cut and favours complex refineries that can
produce clean, light products. Also, the US emphasizes liquefied petroleum gas (LPG).
Propane is a liquid under low pressure, is easy to burn and is typically used in locations
where natural gas is not available. It is also used as a chemical feedstock for making ethylene
and propylene. Butane is used predominantly as a motor gasoline blending component as it is
good for starting cold engines. Normal butane is also used as a chemical feedstock.
Terminology for the other products can vary around the world. Jet fuel in the US and Europe
is referred to as kerosene in Asia. The term gasoline is used globally in spark-ignited
combustion engines although “petrol” is a more common term for gasoline in the UK and in
the US.

NATURAL GAS

Natural gas is a colourless, odourless, highly flammable gaseous hydrocarbon

which gives off a great deal of energy when burned. Although it consists primarily of
methane, it can also contain ethane, propane, butane and pentane. It is relatively clean
burning, emitting relatively low levels of harmful combustion by-products. Like oil, natural
gas is described as sweet or sours depending on, in the case of gas, its hydrogen sulphide
content. Hydrogen sulphide is highly poisonous and is removed during processing. Because
methane is odorless, natural gas distribution companies add a harmless, but, stinky chemical
(mercaptans) to the gas prior to distribution to end-users so that consumers can more easily
detect leaks. Gas is also described as wet or dry depending on the presence of natural gas

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liquids (NGLs) and other energy gases. If natural gas is greater than 90% methane then it is
referred to as dry. Wet gas can be “stripped” of the NGLs (or LPGs) at facilities called gas
processing plants.

Major Producers: The US and the countries of the former Soviet Union are the largest
producers of natural gas. The Russian natural gas industry is dominated by Gazprom, which
controls 95% of production. In the US, Texas, Louisiana, Alaska, New Mexico and
Oklahoma hold more than half of the country’s reserves. Europe and the former Soviet Union
together hold 42% of world reserves, while 34% is located in the Middle East.

Major Uses: Burning natural gas is relatively clean, producing 30% less carbon dioxide than
petroleum and 45% less than coal. The major use for gas is in homes, businesses and
factories for heating, cooking and cooling. Natural gas is increasingly used as a source of
energy for electricity generation via gas turbines and steam turbines. Compressed natural gas
is used as a vehicle fuel for public transport buses. In addition, natural gas is used as a base
ingredient in the manufacture of ammonia, antifreeze, fabrics, glass, steel, plastics and paint.

LNG

Liquefied natural gas, or LNG, is a clear, colourless liquid formed when natural
gas is cooled to -162°C. It is odourless, non-toxic and non-corrosive. Liquefaction takes
place in independent units called trains, and begins by removing impurities which would
freeze at low temperatures. The gas is then cooled under high pressure, condensed, and then
reduced in pressure for storage. The resulting liquid is 1/600th of the volume of natural gas,
and about half as dense as water. Purified LNG is usually composed of 90% methane and
small amounts of ethane, propane, butane and heavier alkanes.

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Major Producers: The world’s largest LNG producers and exporters are Indonesia and
Malaysia, with exports going to Japan, South Korea and Taiwan. Algeria supplies Europe
and the US, while Qatar exports to Spain and India in addition to Japan and South Korea.
Russia and Iran possess the world’s largest proved gas reserves, but do not yet have
liquefaction capability, although there are LNG projects currently underway in both
countries.

Major Uses: LNG’s primary benefit is its ease of transportation and density of storage.

POWER

1) Publicly Owned Utilities: These publicly owned utilities and operated by municipalities,
states or the federal government. They produce electricity and sell it to consumers or other
utilities at cost.

2) Investor Owned Utilities: These are owned by private shareholders. Most IOUS are
beginning to divest their energy production and focus on distribution. Around three-quarter
of the US power grid is owned by these companies.

3) Cooperative Utilities: These were created by the government to provide electricity to

rural areas deemed unprofitable by the IOUs. They are government subsidized non-profit
entities free from state or local taxes. There are two basic types of power generators today
and they can be distinguished by the type of load they handle namely base or peak load. Base
load plants are typically steam driven. These must be run at full capacity and are difficult to
start up and shut down. Peak load plants usually use gas turbines. They operate at a lower
efficiency, but can be started up and shut down rapidly.

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COAL

Coal is a fossil fuel. It is combustible, sedimentary, organic rock which is

composed mainly of carbon, hydrogen and oxygen. Coal is classified into four types, lignite,
sub bituminous, bituminous and anthracite according to their carbon and water content. The
harder the coal, the less moisture it has and the more efficient when it is used as a fuel.
Lignite has the lowest carbon content and heating value and alongside sub bituminous coals
are used primarily for electricity generation. Anthracite has the highest carbon content with
the lowest amount of moisture and hence has the highest energy content of all coals. It is
used in high-grade steel production. Bituminous, which is sub-divided into thermal and
metallurgical coal, is used for both electricity generation and for making coke in steel
production.

Major Producers: The largest coal producing countries are China, USA, India, Australia
and South Africa. China is not only the world’s largest producer, but, also the largest
consumer of coal. Two-thirds of the world’s coal reserves are located in Europe, Eurasia and
the Asia Pacific. On current technologies, there is enough coal to last for another 200 years.
Major Uses: Coal is primarily used to generate electricity, accounting for almost forty
percent of electricity production worldwide. Large quantities of coal are also used in the
manufacture of steel. It is also used in cement manufacturing as a liquid fuel.

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 PRECIOUS METALS

GOLD

Gold has the symbol Au derived from the Latin word aurum. Gold has the atomic
number 79. It is the most malleable and ductile metal known to man such that a single gram
of gold can be beaten into a sheet of one square meter or a wire more than one mile long.
Gold is a good conductor of heat and electricity, and it is unaffected by air, heat, moisture
and most solvents. It is occasionally found in nuggets, but occurs more commonly as minute
grains between mineral grain boundaries.

Major producers: South Africa, Australia and the US account for approximately one-third
of the world’s annual gold production. The bulk of South African production takes place in
the Witwatersrand region of the Transvaal, near Johannesburg. South Africa’s reserves are
estimated at 40,000 tonnes, or 40% of the world’s total. In the US, the largest gold producing
states are Nevada, followed by Alaska and California. Major holders Global central banks
remain a powerful community in terms of the world gold market. Their combined holdings
amounted to 30,733 tonnes as of April 2006. The largest holder of reserves is the United
States with 8,135 tonnes, equivalent to 75.1% of their total reserves.

Major Uses: The majority of gold consumption relates to jewellery demand. Alloys of gold
with silver, copper and other metals are often used because pure gold is too soft for ordinary
use. When used in jewellery, it is measured in karats (k), with pure gold being 24k, and lower
numbers indicating higher copper or silver content. Gold has some industrial uses, due to its
electrical conductivity, resistance to corrosion, reflective ness, and other physical and
chemical properties. It is used in electrical connectors and contacts, electronics, restorative
dentistry, medical applications, chemistry and photography. However, its cost relative to
other metals limits the wider use of gold for industrial purposes.

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SILVER

Silver has the symbol Ag derived from the Latin argentum. It has the atomic
number 47. Silver is often found in close proximity to other ores, such as lead, copper and
zinc. Sterling silver is a commonly used alloy of silver containing 92.5% silver and 7.5%
copper. Silver has the highest electrical conductivity of all metals, but its cost being 50 times
more expensive than copper has prevented it from being used more widely for electrical
purposes.

Major Producers & Consumers: Peru is the world’s largest producer of silver at 3,191
tonnes in 2005, followed by Mexico, Australia, China and Chile. Large increases in Mexican
and Australian production in 2005 brought global production to a new high of 641.6 million
ounces or just under 20,000 tonnes. However, production decreases have occurred in Canada
and Poland. Given silver’s importance in industrial applications, the US and Japan are the
largest consumers representing more than 35% of world fabrication demand. India and China
are the world’s third and fourth largest consumers of the metal.

Major Uses: Silver has been used in the manufacture of ornaments, utensils, jewellery and
coins. However, unlike gold, silver has significantly more industrial applications helped by
the fact that silver is 50 times cheaper than gold. Due to its conductivity silver is used
extensively in the electronics sector as well as in photography. In fact industrial uses
constituted roughly two-thirds of silver demand in 2005 compared to approximately 10% for
gold.

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PLATINUM

Platinum has the symbol Pt and the atomic number 78. The English word
platinum derives from the Spanish platina meaning little silver. Platinum is one of the noble
metals, that is very few chemicals will react with it or corrode it. It is 30 times rarer than
gold, representing around 5 parts per billion of the Earth’s crust. In addition, it is both twice
as expensive as well as heavy as gold. Like gold, platinum is pliable such that one gram can
be rolled into a fine wire over one mile long. The metal has excellent catalytic properties and
its resistance to tarnishing makes it well suited for making jewellery.

Major Producers: Around 80% of the world’s reserves and production of platinum occur in
Southern Africa primarily in South Africa’s Bushveld Igneous Complex, just north of
Pretoria. Platinum also occurs in Zimbabwe’s Great Dyke, which bisects the country from
north to south. Of the remaining global deposits, Russia’s are the most significant and these
are predominantly a by-product of Norilsk’s nickel deposits. The next major producers are
Canada and the US. Again this production is mostly a by-product of nickel and palladium
production. In terms of yield, 7 to 12 tonnes of ore are required to produce just one troy
ounce, or approximately 31 grams, of platinum.

Major Uses: Platinum is used extensively in autocatalytic applications accounting for about
50% of total platinum usage. Its use is predominantly to clean tailpipe emissions in light duty
diesel automotives. Jewellery is the second most important demand category, accounting for
around 25% of total demand with China constituting approximately 45% of the global
platinum jewellery market. Platinum is also becoming increasingly important as an industrial
metal in the chemical, electrical and glass manufacturing industries. However, it is platinum
as well as ruthenium’s role as a catalyst in hydrogen fuel cell technology which could
revolutionize demand for these metals particularly in an environment of high oil prices. Fuel
cells convert the energy of a chemical reaction directly into electricity, with heat as a by-
product. Unlike fossil fuels, the exhaust product of a fuel cell is water.

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ALUMINIUM

Aluminium has the symbol Al and atomic number 13. Its name derives from the
Latin word alumen. It is one of the most abundant metallic elements in the earth’s crust.
However, it is very rare in its free form, occurring often in volcanic mud, but more often is
found primarily as the ore bauxite. Its most important characteristics are its resistance to
corrosion and its light weight. Aluminium is extremely difficult to separate from its ore
(bauxite) and consequently difficult to refine, requiring enormous amounts of energy.

Major Producers & Consumers: The world’s major primary aluminium producers are
China, Russia and Canada. In terms of exports, Canada accounts for the lion’s share with
14.4%. Aluminium is one of the few commodities that China exports. The main importers are
the US, Japan and Germany. However, in terms of bauxite mine production Australia, Brazil,
China and Guinea accounted for over 70% of world mine production in 2005.

Major Uses: Most materials that claim to be aluminium are in fact an aluminium alloy. Since
aluminium weighs less than one-third as much as steel its high strength-to-weight ratio
makes aluminium suitable for the construction of aircraft, cars and train carriages. Building
construction and transportation equipment account for around 50% of aluminium
consumption.

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COPPER

Copper has the symbol Cu and has the atomic number 29. The word copper
originates from the Mediterranean island of Cyprus, or Kupros in Greek, where it was mined.
It is the oldest mined commodity in the world dating back more than 10,000 years. Its reddish
colour made it easy to recognize. When mixed with tin it becomes bronze and when
combined with zinc it produces brass.

Major Producers & Consumers: The world’s major copper mine producing countries are
Chile, the United States, Indonesia and Peru. However, Chile accounts for almost 40% of
world exports. China is now the world’s second largest importer of copper after the United
States. The state-owned Chilean mining company Codelco controls 12.4% of the world’s
copper production. Along with aluminium and nickel, the copper market is one of the most
concentrated in the mining sector.

Major Uses: Copper is used extensively in electrical applications accounting for about 75%
of total copper usage with building construction being the single largest market. Since copper
is biostatic, that is bacteria will not grow on its surface, it is used in air-conditioning systems
and food processing systems. In terms of substitutes, aluminium is possible for example in
power cables, electrical equipment, automobile radiators and cooling and refrigeration tubes.
In addition, titanium and steel can be used instead of copper in some heat exchanges while
optic fibre substitutes for copper in telecommunication applications. Finally, plastic can
substitute for copper in water pipe, drain pipe and plumbing fixtures.

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LEAD

Lead has the symbol Pb and atomic number 82. It is usually found in ore with
zinc, silver as well as copper. Lead is a bluish-white lustrous metal. It is very soft, highly
malleable, ductile, but, is a relatively poor conductor of electricity. It is very resistant to
corrosion, but, tarnishes upon exposure to air.

Major Producers & Consumers: China and the USA are the world’s major producers as
well as consumers of lead. Secondary production or recycling is now widely practiced and
currently accounts for more than 50 per cent of usage worldwide. In recent years, significant
lead resources have been demonstrated in association with zinc and/or silver or copper
deposits in Australia, Canada, Chile, Ireland, Mexico, Peru, Portugal and the US. Identified
lead resources of the world are estimated to total more than 1.5 billion tonnes, according to
the US Geological Survey.
Major Uses: The prime use of lead is in the manufacture of batteries. In addition, lead was
widely used in plumbing and petroleum products. However, more recently it has been phased
out of piping and petroleum because of its toxic nature. In terms of substitutes, plastics have
reduced the use of lead in building construction, electrical cable covering, cans and
containers. Aluminium, iron, plastics and tin compete with lead in other packaging and
protective coating. Tin has replaced lead in solder for new or replacement potable water
systems in the US. In the electronics industry, there has been a discernible move towards
lead-free solders with varying compositions of tin, bismuth, silver and copper.

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NICKEL

Nickel has the symbol Ni and atomic number 28. Nickel is a hard, malleable,
ductile metal that has a silvery tinge that can take on a high polish. Nickel occurs in nature
principally as oxides, sulphides and silicates. Nickel is primarily used in the production of
stainless steel and other corrosion-resistant alloys. Fluctuations in its price have been used as
a barometer for world growth.

Major Producers: The major nickel producing countries are Russia, Australia, Canada and
Indonesia. Ores of nickel are mined in about 20 countries on all continents, and are smelted
or refined in about 25 countries. Russia, Canada and Norway are the world’s largest nickel
exporters accounting for almost 80% of world exports.

Major uses: The chief use of nickel is in the production of stainless steel accounting for
almost 70% of nickel usage in 2005. Nickel helps to improve the durability and corrosion
resistance of steel. Apart from the steel industry, nickel has uses in the production of other
steel and non-ferrous alloys including "super" alloys, often for highly specialized industrial,
aerospace and military applications. It is also used in plating and coins.

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TIN

Tin has the symbol Sn and atomic number 50. The symbol Sn is derived from the
Latin word stannum, meaning dripping because the metal melts easily. It is silvery-white,
lustrous grey metallic element. It is also soft and pliable.

Major Producers: The principle ore of tin is the mineral cassiterite, which is found in
Indonesia, China and Peru. World resources, principally in West Africa, south East Asia,
Australia, Bolivia, Brazil, China and Russia are sufficient to sustain recent annual production
rates well into this century.

Major Uses: The main uses of tin are in soldering in the electronics industry and tinplating.
It is also commonly used in glass manufacture and super-conducting magnets. Aluminium,
glass, paper, plastic or tin-free steels can substitute for tin in cans and containers. Other
materials that substitute for tin are epoxy resins for solders, copper-based alloys and plastics
for bronze, plastic for bearing metals that contain tin and compounds of lead and sodium for
some tin in chemicals.

ZINC

Zinc has the symbol Zn and atomic number 30. Zinc is the fourth most common
metal in use, behind iron, aluminium and copper in terms of annual production.

Major Producers: Zinc ores are mined in more than fifty countries with Canada and
Australia being the leading exporters. China represents almost 30% of all zinc consumed in
the world and today China is the world’s 2nd largest importer after the United States. Zinc
has several substitutes since aluminium, steel and plastics substitute for galvanized steel.

Major Uses: Roughly 55 percent of all metallic zinc produced today is used to galvanize
other metals such as steel or iron to prevent corrosion. Large quantities of zinc are used to

25
produce die castings, which are used extensively by the automotive, electrical and hardware
industries. Zinc is also used as a chemical compound in rubber, ceramics, paints and
agriculture. It is traded on the LME and is quoted in US dollars per tonne.

IRON

Iron ore has the symbol Fe and after aluminium is the most abundant of all metals
in the Earth’s crust. The most important ores are hematite (Fe2O3, 70% iron), magnetite
(Fe3O4, 72% iron), and taconite. Hematite deposits are mostly sedimentary in origin, often
found in alternating layers of chert (a type of quartz), hematite and magnetite. Also known as
“natural ore,” certain hematite ores of high iron content can be fed directly into blast furnaces
as direct charge materials. Taconite is a silica-rich low-grade iron ore containing up to 30%
magnetite and hematite which can be processed to yield a concentrate that contains 65% iron.
Magnetite is the most magnetic of all minerals, and is processed for steelmaking by crushing
and separating the magnetite from other minerals using a magnet.

Major Producers: China is the largest producer of iron ore, having mined 390 million tons
by natural weight in 2005, or 26% of world production, followed by Brazil (279mt) and
Australia (263mt). China is also the largest consumer of iron ore, and the largest producer of
steel. The largest company producing iron ore is CVRD, a Brazilian mining company,
followed by the Australian companies BHP Billiton and Rio Tinto Group. Together, these
three companies supply 70% of the world’s iron ore exports.

Major Uses: Almost all iron ore mined (98%) is used for steelmaking. It is either used
directly or first converted to pellets, briquettes or concentrates. Although hematite ores are
preferred, their gradual depletion has increasingly led to the production of other ores having
inferior chemical and physical properties and lower iron content, such as pisolitic ores from
Australia. Fortunately, changing blast furnace technology has made the use of such lower
quality ores possible without loss of efficiency or quality. Other uses of iron ore include

26
metallurgy products, magnets, auto parts, chemical catalysts, paints, printing inks, plastics,
cosmetics, artist colours, laundry blue, paper dyeing, fertilizer, baked enamel etc.

STEEL

Steel is a metal alloy made up primarily of iron with small amounts of carbon.
The addition of varying amounts of carbon allows for greater hardness and strength, but also
results in increased brittleness. Steel typically contains between 0.2% and 2.1% carbon by
weight; higher carbon content alloys are referred to as cast iron, and lower carbon content
alloys are called wrought iron. Iron is typically found in the form of iron oxide or iron pyrite.
Extraction of iron from iron oxide is performed through a process called smelting whereby
the ore is heated to a liquid state and the oxygen removed as it bonds with carbon. Following
this, the iron is reprocessed to remove excess carbon. It may be combined with other
elements, then cast into ingots, worked at high temperature to remove cracks and form an
initial shape, heat-treated, and cold worked to produce a final shape.

Major Producers: The largest steel-producing country is China, with 349.4 million metric
tons produced in 2005, representing 31% of world production. Output growth was highest in
China, with production rising 25% over 2004. Other leading steel producing countries are
Japan, which produced 112.5mt in 2005, the US (93.9mt), and Russia (66.1mt). The world’s
largest steel-producing company is Mittal Steel, based in the Netherlands, which produced
63.0mt in 2005, followed by Arcelor S.A. of Luxembourg, producing 46.7mt. The recently
announced merger of the two will result in a combined group, Arcelor Mittal, which would
produce about 10% of the world’s steel. Steel prices are determined by long-term physical
contracts. There are currently no futures contracts traded on steel, although the London Metal
Exchange is giving active consideration on their introduction.

27
Major Uses: Historically, the high cost of steel meant that it was used only for limited
applications such as knives, razors, springs, swords, and other cutting tools. Today, steel is
one of the most versatile and common industrial materials. The construction industry is the
largest market, utilizing steel in modular building systems, roofing and siding components,
doors, commercial and residential framing, truss plates and connectors, decking, bridge and
highway construction, harbours, tunnels and culverts. In automobile manufacturing, steel
accounts for more than 50% of the weight of a typical car in the form of the car body, engine,
gearbox, transmission, steering, suspension, springs, and interior. Additional transport uses
include the construction of commuter trains, rail tracks, buses, trucks, ships, aircraft and jet
engines. In the power and energy industries, steel is used in the construction of oil and gas
wells, offshore oil platforms, pipelines, and turbines for power generation. Other important
uses include electromagnets, earth-moving equipment, cranes, forklifts, farm equipment,
storage tanks, domestic appliances, cutlery, food and beverage cans, tools, office equipment
and road signs.

URANIUM

Uranium is a silvery white, weakly radioactive metal which is slightly softer than
steel. It occurs naturally at low levels in virtually all rock, soil and water. All isotopes and
compounds of uranium are toxic to the kidneys and potentially carcinogenic
.
Major Producers: Canada is the world’s largest producer of uranium, amounting to 14,000
tonnes of uranium oxide in 2005, about one-third of total world production. Cameco and Rio
Tinto are the largest uranium-producing companies, each accounting for 20% of world
production. Cameco operates three mines in the Athabasca Basin in northern Saskatchewan.
Australia has the world’s largest reasonably assured reserves of uranium, amounting to
1,142,000 tonnes, representing 30% of the world’s total. Aside from Canada and Australia,
South Africa is another major producer of uranium. Although there are deposits in parts of
Asia and Africa for example in Kazakhstan, these regions have a low level of production
reliability. Uranium is sold only to signatories of the Nuclear Non-Proliferation Treaty,

28
which allows international inspectors to verify that uranium is used only for peaceful
purposes.
Major Uses: The U-235 isotope is used as fuel for nuclear reactors and the explosive
material for nuclear weapons. Uranium enriched to about 3.5% U-235 is used for power
generation in civilian nuclear reactors, while uranium enriched to greater than 90% U-235 is
used for nuclear weapons and nuclear-powered ships and submarines. Because of its high
density, depleted (238U) uranium is used for armour-piercing bullets, missiles and armour
plating. Other uses for uranium include photographic chemicals and radiation shielding.

AGRICULTURE

Corn and wheat dominate agriculture in terms of world production, each

amounting to more than 600 million tonnes in 2005. The United States is the world’s
agricultural superpower. It is not only among the top two producers of corn, cotton, lumber
and soybeans in the world, but, it also holds a similarly dominant position in terms of world
exports for corn, cotton, soybeans and wheat. While China has historically been relatively
self-sufficient in agricultural commodities, the last few years has seen a dramatic increase in
its agricultural imports. One of the major changing consumption patterns underway in the
country is the move to more high protein diets. This has been brought about by rising
incomes, which have typically led to an increasing demand for meat; this will increase the
country’s demand for animal feeds and on current trends is expected to push the country into
becoming a net importer of corn over the next year.

COFFEE

Coffee is generally classified according to two types of bean: Arabica and

Robusta. The most widely produced coffee is Arabica which makes up about 70% of world
production. It is also considered superior and trades at a premium to the Robusta bean.
Robusta is the stronger of the two beans with more caffeine, a bitter taste and is grown at
lower altitudes.

29
Major Producers & Consumers: Coffee was introduced to Brazil in 1727 from French
Guiana. Today, Brazil and Colombia are the world’s largest producers of Arabica coffee.
80% of all coffee produced in Brazil is of the Arabica variety. Coffee in Brazil is grown in
the states of Parana, Espirito Santos, Sao Paulo, Minas Gerais, and Bahia. Vietnam, which
specializes in Robusta production, has seen strong growth in its coffee production over the
past few years. Robusta coffee production is also concentrated in Indonesia and West Africa.
The EU and the US constitute 70% of world coffee consumption.

Major Uses: Coffee berries are picked, defruited, dried, sorted and sometimes aged to yield
the green coffee bean. The beans are then roasted and ground before being prepared to make
coffee.

COTTON

Cotton is one of the oldest fibres known to man. Today, cotton is the most
important textile fibre in the world, making up more than 40% of total world fibre
production. Cotton is classified according to the staple, grade and character of each bale.
Staple refers to the fibre length. Grade ranges from coarse to premium and is a function of
colour, brightness and purity. Character refers to the fibre’s strength and uniformity.

Major Producers & Consumers: The largest producers of cotton are China, the US and
India, constituting 60% of world production. China is not only the world’s largest producer,
but also the largest consumer and hence importer of cotton. China’s cotton needs are a result
of the growth of its textile industry. The majority of Chinese cotton acreage is grown on
small farms located in the Yellow River valley, Yangtze River valley and Northwest region.
The US is the second-largest producer of cotton, and also the world’s top exporter, making
up more than a third of total world trade in cotton.

30
Major Uses: Cotton’s properties such as softness, absorbency and insulation make it suited
to a diverse range of applications. Its fibres are used to make a variety of textiles that are
used in clothing, furnishings and industry.

SUGAR

Sugar can be derived from both sugar cane and sugar beets, the latter being more
costly to produce. There is little perceptible difference between the sugar derived from either
source. Most sugar cane comes from countries with warm climates, such as Brazil, India,
China and Australia. Beet sugar is grown in regions with cooler climates. Of all the sugar
produced, about 75% is processed from sugar cane.

Major Producers & Consumers: Brazil is the largest producer and exporter of sugar in the
world with the European Union a distant second in terms of exports. Brazil, Australia,
Thailand, the EU-25 and Cuba account for more than 70% of total world free market exports.
US production is evenly divided between beet and cane sugar. The largest sugar beet
producing states are Minnesota, Idaho, North Dakota and Michigan. The largest cane
producers are Florida, Louisiana, Texas and Hawaii. Subsidies and high import tariffs have
made it difficult in the past for other countries to export into the EU or compete with it on
world markets. The World Trade Organization ruling in April 2005 against EU sugar export
subsidies is heralding a four-year programme of cuts, which should see a decline in EU sugar
exports going forward.

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WHEAT

Wheat is classified according to season, gluten content and grain colour. The
different growing seasons mean that there is either winter wheat or spring wheat. Winter
wheat in the United States is planted from September to December and harvested in early
July. In terms of gluten content, wheat can either be hard or soft. Hard wheat has high protein
content while soft wheat has high starch content. Wheat is also classified according to grain
colour such as red, white or amber. Wheat planted in the spring is mostly red wheat while
winter wheat is mostly white wheat.

Major Producers & Consumers: The United States is the fourth largest producer of wheat
in the world, but, it is the world’s largest exporter, representing 24% of global exports. The
largest US wheat producing states are Kansas, Oklahoma, Washington and Texas. The
world’s largest wheat producer is the European Union followed by China and India.

Major Uses: Wheat is a staple food used to make flour for bread, cakes, pasta and noodles as
well as for fermentation to make alcohol. The husk of the grain, separated when milling
white flour, is bran. Wheat is also planted as a forage crop for livestock while straw is also
used for roofing thatch.

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MULTI COMMODITIES EXCHANGE

Headquartered in the financial capital of India, Mumbai, MCX

(www.mcxindia.com) is a demutualised nationwide electronic multi commodity futures
exchange set up by Financial Technologies with permanent recognition from Government of
India for facilitating online trading, clearing & settlement operations for futures market
across the country. The exchange started operations in November 2003.
Apart from being accredited with ISO 9001:2000 for quality standards, MCX offers futures
trading in 55 commodities as on December 31, 2007, defined in terms of the type of contracts
offered, from various market segments including bullion, energy, ferrous and non-ferrous
metals, oils and oil seeds, cereals, pulses, plantations, spices, plastics and fibres. The
exchange strives to be at the forefront of developments in the commodities futures industry
and has forged ten strategic alliances across the world, including with Tokyo Commodity
Exchange, Chicago Climate Exchange, London Metal Exchange, New York Mercantile
Exchange, New York Board of Trade and Bursa Malaysia Derivatives, Berhad.

KEY SHAREHOLDERS

The Key shareholders in MCX are: State Bank of India and its associates (SBI),
National Bank for Agriculture and Rural Development (NABARD), National Stock
Exchange of India Ltd. (NSE), SBI Life Insurance Co. Ltd., Bank of India (BoI), Bank of
Baroda ( BoB ), Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Bennett
Coleman & Company Limited , Fid Fund (Mauritius) Ltd. -an affiliate of Fidelity
International, ICICI Trusteeship Service Limited, IL&FS Trust Company Limited, Kotak
group, Citibank Strategic Holdings Mauritius Limited, Merrill Lynch Holdings (Mauritius)
and Financial Technologies of India Ltd.

33
VISION & MISSION

MCX will offer ‘unparalleled efficiencies’, unlimited growth’ and ‘infinite

opportunities’ to all market participants. It will be acknowledged as the ‘Exchange of
Choice’, based on its strong service availability backed by superior technology.

MCX is committed towards revolutionizing the Indian commodity markets. It

aims to empower the market participants through innovative product offerings and business
rules; so that the benefits of futures markets can be fully realized. MCX will focus its efforts
towards meeting the requirements of all the stakeholders in the commodity ecosystem
without any bias. It shall focus its efforts towards establishing globally acceptable industry
norms.

The Corporate Social Opportunities (CSO) policy of MCX forms a part of the
vision and mission of MCX. As India’s no.1 Commodity Exchange, MCX recognizes its
corporate social opportunities commitments in its various roles, and reaches out to cover both
its employees and the stakeholders. MCX is committed to growing responsibly in line with
best international practice; MCX aims through its CSO policy to respond to public
expectations on how a well-managed company should interact with its environment; to share
its good fortune by supporting merit-worthy causes; and to optimizing its positive impact on
public welfare by leveraging its strengths in its CSO activities. We see CSO as a positive
contributor to our growth and business.

MCX is also part of the UN Global Compact movement that supports universal
environmental and social principles. It is also on board of CII Western Region CSO
committee and is working closely with them on various partnership models.
The CSO mandate is a critical function of MCX, steered by the Joint Managing Director and
a team consisting of Vice President, Manager, Management trainee and six GSK
coordinators. The various CSO activities undertaken at MCX reflect upon the core business

34
of the company, thereby resonating with our stakeholders. Our aim is to work towards
developing sustainable and viable projects that even without support are a living module
within themselves, ready to be replicated by other external agencies.

Neutral Image: MCX's most important strength is that it is an independent and de-
mutualized exchange since inception.

Value Proposition: Headquartered in the financial capital of India, Mumbai, MCX is led by
an expert management team with deep domain knowledge of the commodities futures
market. It also has strong partnerships with banks, financial institutions, warehousing
companies and other stakeholders of the marketplace.

Insurance of Settlement Guarantee Fund: MCX is the only domestic exchange which has
insured its ‘Settlement Guarantee Fund’, to the tune of Rs.100 crores by ‘The New India
Assurance Co.Ltd.

Strategic Equity Partnerships: MCX’s wide based strategic equity partners include -
Financial Technologies (I) Ltd., State Bank of India Ltd. and it’s associates, National Bank
for Agriculture & Rural Development (NABARD), National Stock Exchange of India Ltd.
(NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank
Ltd., Union Bank of India Ltd., Canara Bank Ltd., Bank of India Ltd., Bank of Baroda Ltd.,
HDFC Bank Ltd., SBI Life Insurance Co. Ltd.

Trade Support: MCX has already tied up exclusively with some of the largest players in the
commodities eco-system namely, Bombay Bullion Association, Bombay Metal Exchange,
Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana,
United Planters Association of India and India Pepper & Spice Trade Association. MCX has
also established the National Gold Delivery market in partnership with World Gold Council.

35
International Alliances: MCX has various strategic Memorandum of Understandings/
Licensing Agreements with global exchanges like The Tokyo Commodity Exchange
(TOCOM); The Baltic Exchange, London; Chicago Climate Exchange (CCX); New York
Mercantile Exchange (NYMEX), London Metal Exchange (LME); Dubai Multi
Commodities Centre (DMCC); New York Board of Trade (NYBOT) and Bursa Malaysia
Derivatives, Berhad (BMD)

FTIL-Technology Partner: Financial Technologies India Ltd’s (FTIL) proven mettle of

end-to-end exchange trading technologies addressing trading/ surveillance/ clearing and
settlement operations help enhance the MCX Trade Life Cycle operations (Pre-Trade, Trade
and Post-Trade). In addition to its technological capabilities, FTIL also brings to MCX its
associations with technology giants such as Microsoft/ Intel and HP.

Trading: MCX employs state-of-the-art, new generation integrated trading platform that
permits faster and efficient operations in a cost effective manner. The Exchange Central
System is located in Mumbai, and maintains the Central Order Book, which matches the
trades on a pre-defined matching algorithm, and confirms the execution of trades to the
members on an online real-time basis. It has an integrated Surveillance and Settlement
System. Exchange members located across the country are connected to the central system
through VSAT, Leased line, Internet or any other mode of communication as permitted by
the Exchange. The Exchange also has a Disaster Recovery Site.

36
Risk Management: The central objective of MCX's Risk Management System is to assess
and manage the risk of the market in an expeditious manner to ensure smooth and timely
pay-in/ pay-out process of the Exchange. Some of the basic functions of Risk Management
are as follows –

 Real-time Margining System at client level

 Monitoring of position limits (Quantity)
 Capital adequacy norms
 Daily price limits
 Initial margins
 Special margins
 Marked-to-market margin
 Delivery period margin

Clearing and Settlement: The Clearing and Settlement System of the Exchange is system
driven and rule based. The Exchange has its own in-house clearing house, which undertakes
to clear each and every trade and is counter-party for all trades; thus offering novation (zero
counter-party risk) to each and every trade executed on the Exchange

Clearing Bank Interface: Exchange maintains electronic interface with its Clearing Banks.
All members of the exchange have their Settlement and Client Accounts for exchange
operations with the Clearing Bank. All debits and credits are affected electronically through
Settlement account only.

Delivery and Final Settlement: All contracts on maturity are for delivery. MCX specifies
tender and delivery periods. For example, such periods can be from the 8th working day till
the 15th day of the month - were 15th is the last trading day of the contract month - as tender
and/ or delivery period. A seller or a short open position holder in that contract may tender
documents to the exchange expressing his intention to deliver the underlying commodity.
The exchange would then select the buyer from the long open position holder for the

37
tendered quantity. Once the buyer is identified, seller has to initiate the delivery process and
the buyer has to take delivery according to the delivery schedule prescribed by the exchange.

EFFECTS OF THE OIL PRICE UPSURGE ON THE WORLD ECONOMY

Introduction
In early 2002, the world economy emerged from the recession caused by the bursting
of the communication technology bubble and the 9/11 terrorist attacks and launched a
recovery led by the United States and China. U.S. and Chinese economic growth has worked
to boost demand for oil and other resources and raise their prices. The current world
economic recovery has exceeded three years, and Japan’s recovery has topped the average
economic expansion period. Oil and other primary resources prices have risen fast during the
recovery, but these price hikes have yet to lead to inflation, as prices of final goods have
remained relatively stable in industrial nations. In particular, the WTI crude oil price
exceeded $60 per barrel in June and $65 per barrel in August, continuing to rewrite its record
high. However, the oil price upsurge has yet to have any visible adverse effect on the world
economic recovery. I would like to consider the effects of the oil price upsurge on the world
economy, while reviewing present conditions of major national or regional economies.

Present Conditions of the World Economy

JAPANESE ECONOMY
After experiencing economic contraction in 2001, the Japanese economy started its
recovery on the strength of export growth supported by growing U.S. and Chinese demand.
While later being affected by U.S. economic and other conditions on a quarter-by-quarter
basis, the Japanese economy grew 1.0% in 2002, 2.0% in 2003 and 1.9% in 2004, and it has
thus continued the recovery led by private capital investment and exports. Manufacturers
have led the current economic recovery, and therefore, one can say that it is a business
sector-led recovery. In this initial phase of the recovery, companies restructured themselves
to reduce costs and increase earnings, while their sales failed to increase due to persistent

38
deflation; however, their sales have turned up recently. They are now enjoying growth in
both sales and profit, and ratios of pretax profit to sales have risen to levels equivalent to
those during the economic bubble period for both manufacturing and non-manufacturing
companies. Oil and other primary resources price hikes have been priced into intermediate
goods, but they have yet to spread to final goods prices. This is because the cost increase on
energy and materials price hikes has been absorbed by productivity growth and wage control.
However, the primary resources price upsurge has begun to affect earnings at some industries
and small companies. At households, income growth had been weak with consumption
growth remaining slow, but employment insecurity has faded away as companies’
restructuring has run its course. Wage income has increased slightly on bonus growth. In this
way, the oil price upsurge, though appreciated as a risk factor affecting sustained economic
recovery, has yet to bring about any clear adverse effects.

U.S. ECONOMY
As the silicon cycle entered a recovery phase in 2002, U.S. economic recovery started
on robust business investment. The Bush administration’s large income tax cuts and the
Federal Reserve’s low interest rate policy boosted residential investment and personal
consumption, leading the economic recovery. Concerns emerged as employment failed to
improve in the initial phase of the economic recovery. However, employment turned up later
and has been improving smoothly. The U.S. economic recovery over the past three years has
not necessarily been smooth. It was affected by corporate accounting problems and
geopolitical risks occasionally. Overall, however, the U.S. economy has continued its
expansion. On the other hand, such economic expansion has led to robust demand for oil, and
this has become a factor behind the oil price upsurge. The oil price run up has been expected
to boost gasoline prices and cap consumption, but so far, no major effect has been seen, as
income has been increasing on economic expansion. Consumption has been increasing
moderately. The consumer price index rise, though having accelerated temporarily, has been
relatively stable on the Fed’s appropriate interest rate hikes.

39
EU ECONOMY
In Euro land, economic recovery in major countries, such as Germany and France,
had not been so strong until 2003. Economic growth and inflation gaps had been widening
between major Euro land countries, like Germany and France, and minor ones, such as
Ireland. Major countries saw their budget deficits exceed the 3% of GDP stability standard
level. Euro land had thus been faced with various problems. In mid-2003, however, Germany
and some others, although with a delay in structural reforms, began gradual recovery
depending on exports and centered on the corporate sector. In France, domestic demand
recovery was seen. Due to the euro’s appreciation, however, Euro land recovery has been
slow, and recently, economic sentiment has deteriorated fast. The oil price upsurge’s effects
on Euro land have mostly been offset by the euro’s rise. While bringing about such a benefit,
the euro appreciation has worked to slow down exports and has made Euro land’s economic
future uncertain.

CHINESE ECONOMY
China has maintained strong economic growth above 9%. In 2004 when excessive
capital investment emerged on such rapid economic expansion, however, China adopted
measures to prevent overheating. The rapid economic growth has forced China to increase oil
demand, while energy efficiency has remained low. China shifted from a net oil exporter to a
net importer in 1993 and has expanded oil imports year by year. Consumer prices, including
food prices, have moved substantially, but they have been basically stable. China heavily
depends on coal among primary energy sources and income growth on economic expansion
has been faster than the cost rise accompanying the oil price upsurge. Therefore, any effects
of the oil price upsurge are not clear at present.
Global oil production capacity has changed little since the early 1970s as new oilfield
development stagnated in the Middle East on weak prices in the 1980s. The IEA Oil Market
Report shows that oil production capacity in 11 OPEC countries had remained above 30
million bpd with no net increase between the 1970s and 1990s before falling slightly in 2000.
As a result, OPEC’s surplus oil production capacity, though fluctuating temporarily, had
remained at around roughly 6 million bpd. Since 2000, however, the surplus capacity has

40
declined on global demand growth. In particular, the surplus capacity slipped below 1 million
bpd in the autumn of 2004 before recovering somewhat.
Meeting such demand/supply balance and surplus production capacity, oil prices have
turned up since late 2001. Unlike the sharp price hikes seen in the 1970s, the latest spike has
emerged from the market on tightening demand/supply balance as demand has increased
against leveling-off supply capacity. As oil demand has increased on the world economy’s
sustained growth, a successive series of developments destabilizing oil supply have occurred
since 2003. They include the confusion accompanying the Iraq War, Russia’s Yukos
problem, Venezuela’s political instability, Nigeria’s strikes, losses from large hurricanes in
the Gulf of Mexico and the Middle East’s instability. As surplus production capacity is
declining, oil prices are expected to rise easily on the market in response to any development
that indicates a temporary supply constraint. Growing expectations of higher oil prices
prompt investors outside the oil industry to take advantage of globally low interest rates by
pouring short-term surplus money into the oil market in pursuit of capital gains. Such moves
have accelerated the oil price upsurge. Such speculative money inflow basically represents
arbitrage trading (taking advantage of price gaps between different times) and contributes to
stabilizing prices for a certain period of time. In 2004, however, these investors posted net
purchases, contributing to boosting oil prices.

Features of the Oil Price Upsurge

The current oil price upsurge has basically accompanied a global demand increase, as
noted earlier. In this sense, it is in line with the market mechanism. Since the short-term price
elasticity is limited, the price hike does not affect demand considerably. However, any
excessive price hike could affect world economic growth and lead to a decline in demand and
to lower prices through the income effect. Accordingly, if conditions are so that the market
mechanism moves soundly, any excessive price hike may be corrected automatically, and
any hike that is sharp enough to bring about a demand decline may be avoided.
As noted earlier, the inflow of short-term speculative money has surely accelerated
the current price hike. Demand emerging from speculative money investment is temporary,
and speculative investors may not use oil they purchase. However, they may sell back the oil
to become suppliers in the future. As long as persistent demand expansion and price hikes

41
attributable to speculation continue under current ultra-low interest rates, the possibility of
worthwhile profits is high. If the oil price upsurge leads to widespread inflation and interest
rate hikes, opportunity costs for speculative money may increase. This may prompt
speculative investors to sell back oil, allowing oil prices to decline. In such case, monetary
tightening may cause a slowdown in the world economy, leading to lower oil demand. Oil
prices may then collapse on an eased demand/supply balance. Either way, speculative
investment is aimed at intertemporal arbitrage (taking advantage of price gaps at different
times), and therefore, it is hard to believe that the price hikes will be sustained. Furthermore,
oil price hikes cannot be sustained because they stimulate the development of new oilfields
and the development and utilization of new energy sources over the medium or long term.
Over the short term, abundant official oil reserves and private inventories may work to deter
excessive price hikes.

Oil Price Upsurge’s Macroeconomic Effects

The first is the terms of trade effect, or the income transfer effect. The price elasticity
of oil demand is extremely limited over the short term, and any price hike does not cause any
sharp decline in demand. Therefore, oil demanders may make additional payments meeting
price hikes to suppliers. In effect, some of demanders’ income is transferred to suppliers.
Japan, which depends almost fully on foreign countries for oil supply, makes additional
payments, meeting price hikes, to overseas oil-producing countries, and some income is
transferred to them as payments for imports. A country that domestically produces oil may
transfer income depending on import volume.
The second is a change in the income distribution through the oil price hikes’ ripple
throughout domestic prices. For a country that depends fully on imports for oil supply, the
price effect is the same as the income transfer effect. The oil price hike, unless passed on to
consumers, may deteriorate corporate earnings. If the hike is passed on to consumers,
corporate earnings may remain unchanged with consumers shouldering the cost in the form
of purchasing power losses.
The first and second effects mean that gross demand declines on the loss of domestic
purchasing power. If a country receiving the income transfer spends such a transfer
sufficiently on massive consumption, no demand loss may emerge for the entire world

42
economy. Generally, however, oil-consuming countries have a higher propensity to consume
than oil-producing countries. Therefore, global demand may decline on such an income
transfer.
The third effect is on supply, rather than on income or demand. As long as production
technology remains unchanged, a company may combine capital, labor, energy and other
production factors to minimize costs and employ the optimum combination into production.
This means that production factors’ optimum shares for input may depend on their relative
prices unless production technology changes. If oil prices rise substantially, production
factors’ relative prices may change dramatically, and any optimum combination to minimize
costs may then fail to work. If the company were to maximize profit under the existing
technology in response to new prices, it would have to cut production.
From the viewpoint of demand, the income transfer may cause a short-term demand
shortage that reduces the size of the economy. In the long run, optimum production may
grow more difficult to maintain from the viewpoint of supply. This may lead to a decline in
production. As a result, demand and supply may decrease together to match each other.

Effects of Oil Price Upsurge

Let us look at the terms of trade effect among the effects of the oil price upsurge on
the economy. Paying attention to limited price elasticity of oil demand over the short term, I
first estimated an income transfer (an increase in import value) that results from an oil price
hike of $10 per barrel in 2002 and 2003. The ratio of oil imports to gross domestic product is
roughly 1% for each importer. For both years, the income transfer’s ratio to GDP is 0.4% for
the United States, Japan and China. An average ratio for seven European countries comes to
0.3%. The lower percentage for Europe indicates that Britain, as an oil-exporting country,
receives an income transfer (through an increase in export value). Whether such a percentage
is viewed as large or small may be controversial, but for the two years, however, these
nations achieved higher economic growth than such ratio, indicating that they were able to
fully absorb the oil price hike reflecting the oil import cost rise.
During the second oil crisis, oil prices gradually rose from the fourth quarter of 1978
through the first quarter of 1980. The terms of trade deteriorated gradually and the
accumulative deterioration reached nearly 40% in the first quarter of 1980. The deterioration

43
exceeded the level attributable to oil price hikes by some 10 percentage points and included
the adverse effect of the yen’s depreciation that began simultaneously with the oil price
hikes. The overall income transfer’s ratio to GDP peaked at more than 5% in the first quarter
of 1980, including more than 3% in the effect of oil price hikes alone. Later, oil price hikes
were passed on to export prices and the yen appreciated somewhat, leading to some
improvements in the terms of trade and a decline in the income transfer.
Although the current oil price hike has been substantial, the deterioration in the terms
of trade has been limited to some 10% even three years after oil prices began to rise in the
first quarter 2002. The overall deterioration exceeded the effect of oil price hikes alone and
included the yen’s slight depreciation and hikes in prices of raw materials, including iron ore.
An income loss on the deterioration in the terms of trade is limited to some 1.0% of GDP.
The deterioration in the terms of trade and the income transfer this time have been limited as
oil’s share of overall imports has declined to limit an overall import price hike to a smaller
level than the oil price hike and as oil imports’ ratio to GDP has declined from 5% during the
first oil crisis to the recent level of 1%.
Next, I would like to consider the oil price hikes’ effects on overall prices and
corporate earnings. The domestic corporate goods price index has been posting a year-to-year
rise of around 1% due to the oil price hike and other factors. However, the consumer price
index has remained below the year-before level. Oil and other raw material price hikes have
been passed on to intermediate goods, leading corporate goods prices to rise in line with cost
increases. Amid keen competition, however, they have not spread to final goods yet. Has
such a price trend affected corporate earnings? According to the Finance Ministry’s statistics
on financial statements of incorporated businesses for the first quarter of 2005, pretax profit’s
ratio to sales stood at the same level as in 1988 during the economic bubble period for both
manufacturing and non-manufacturing industries, and profit growth was high. It is difficult to
find any adverse effect of oil and other raw material price hikes on corporate earnings.
Corporate earnings have continued to improve amid the current economic recovery. Profit
increased initially on personnel cost reductions through the promotion of restructuring.
Recently, a sales expansion has been combined with the personnel cost reductions to
accelerate profit growth. Oil and other raw material price hikes started on the beginning of

44
the current economic recovery. Industrial material manufacturers have absorbed oil and other
raw material price hikes by passing the cost increase on to their products. Others have
absorbed their cost increase by containing personnel costs and expanding production to raise
productivity, without raising prices of final goods. Unlike the two oil crises in the 1970s, the
current oil price upsurge has not led to overall price hikes or corporate earnings deterioration.

Reasons for Limited Effect of Current Oil Price Upsurge

As reviewed above, all effects of the current oil price upsurge have been smaller than those
of past oil price upsurges. Why are these effects smaller?
One reason is the improvement in the efficiency of energy and oil utilization. Since
the first oil crisis in 1973, Japan has continued energy-saving efforts and reduced its
dependence on energy. This has been combined with the diversification of energy sources to
reduce the effect of oil price hikes. Individual companies have improved their energy
efficiency and the industrial structure has been transformed into one featuring a lower
dependence on energy. As a result, the energy efficiency for the entire Japanese economy has
been improved dramatically. The energy intensity to GDP has been improved by 34% in
Japan since the late 1970s and by 50% in the United States. The smaller improvement in
Japan indicates that the energy efficiency in Japan in the late 1970s had been higher than in
the United States. Next, Japan’s energy intensity to GDP has remained at a half of the U.S.
level since the early 1970s (see Figure 5), indicating Japan’s higher efficiency. In the 30
years since the second half of the 1970s, the energy intensity to GDP improved substantially,
declining by about 60% in Japan and by about 50% in the United States. The current oil price
upsurge should have affected the optimum input of production factors, but the reduced
dependence on oil on the improvement of oil consumption efficiency since the first oil crisis
in 1973 has been coupled with the diversification of energy sources to considerably reduce
the effects of the oil price upsurge on production. The improvement in the oil consumption
efficiency has led to a decline in oil imports’ ratio to GDP from 5% in the 1970s to the recent
level of 1%. The decline in oil imports’ ratio to GDP has worked to reduce the income
transfer on the oil price hike. The differences between the economic environments in the
1970s and present might have also contributed to reducing the effects of the oil price

45
upsurge. In the 1970s, the U.S. economy remained slack for a long time, faced with a high
inflation rate and low economic growth. In international finance, the dollar grew more
destabilized. The first oil crisis came just after the collapse of the Smithsonian monetary
system, and the dollar had been depreciating during the second oil crisis. In contrast, there
has been no concern regarding inflation, although concern on deflation has emerged
temporarily. Global economic recovery has been under way, and reflecting the robust U.S.
economy, the dollar has been relatively stable against other major currencies. Let me make
some points regarding the economic environment differences.
First, exchange rates have changed dramatically. The Japanese yen’s value against the
dollar has doubled since the 1970s. This has contributed to lowering Japan’s income transfer
on the oil price hike by making a yen-denominated price hike smaller than a substantial
dollar-denominated price rise. This is the same case with the EU, though not with China,
which has pegged the Yuan to the dollar.
Second, economic growth has changed. This time, major countries have achieved
relatively higher economic growth rates that are somewhat different. They have fully offset
the income transfer on the oil price upsurge with an income rise on economic growth.
Third, the inflation environment has changed. In the 1970s, oil price upsurges came
amid global inflation. Tough monetary tightening was required to cope with inflation and
inflationary expectations, which grew easily. This time, however, deflation or low inflation
has continued, making it difficult for inflationary expectations to grow even on the oil price
run up. It has been easier for monetary policy to respond to any concern about inflation.
Fourth, long-term interest rates have been stable at low levels. In spite of smooth
global economic growth and interest rate hikes in the United States and some other countries,
long-term interest rates in the United States and other countries have remained at low levels,
contributing to accelerating their economic growth and making the effects of the oil price
upsurge less visible. The low long-term interest rates are attributed to low inflationary
expectations and recycling of surplus money in China and other countries. However, it is
difficult to identify any factor behind low long-term interest rates. We may have to keep a
close watch on the future trend of long-term interest rates.

46
 Fifth, the labor market has changed. During the two oil crises in the 1970s, the labor
market was relatively rigid, lacking flexibility in wage determination. Labor’s relative share
of income was rising or leveling off, and such labor market conditions affected companies’
flexible input of production factors and made it difficult for companies to absorb costs. This
time, however, labor’s relative share of income has generally declined in major industrial
countries. Even upon the oil price upsurge, companies have replaced production factors
under the flexible labor market, absorbing cost increases by holding down wages. Even
without raising product prices, companies have absorbed cost increases and secured their
earnings without curtailing production.

Various Institutes’ Model Simulations

I have reviewed the effects of the oil price upsurge and reasons why the effects of the
current price hike are less serious than those of such hikes in the 1970s. Here, I would like to
consider the magnitude of the effects of the oil price upsurge using quantitative
macroeconomic models. The IEEJ and Cabinet Office in Japan, as well as the IEA, OECD,
IMF, ADB and other international organizations and research institutes, have conducted
model-using simulation analyses. The IMF analysis was rather old, having been conducted in
2002, and other analyses were done in 2004. Presumed oil price hikes differ depending on
the timing of the analysis, but most of them indicate a $10 per barrel rise. Only the OECD
analysis focuses on inflation arising from the oil price upsurge and deals with two
hypothetical cases – one for a monetary policy tolerating inflation and another for such a
policy fighting against inflation.
In such a simulation, researchers change only the oil price among exogenous
variables for the standard case and look into how endogenous variables respond to the oil
price change. The simulation is thus aimed at extracting only the oil price effects. In reality,
however, not only oil prices change in any national economy, all economic variables
including other exogenous ones may change simultaneously and each variable depends on
the others. Therefore, it is difficult to compare any simulation result and the real economic
situation. Furthermore, oil prices are treated as an exogenous variable and separated from
responses to economic activity changes, while the current oil price hike is attributable
primarily to real national economic activities. In this sense, such a simulation contains

47
limitations. As the linearity is presumed for many models, doubling of a price hike leads to
doubling of its effect. As far as such models are used, any simulation may indicate an oil
price hike affecting economic activities.
The IEEJ simulation analysis indicates that GDP declines 0.4% on an oil price hike of
$9 per barrel in 2005. The magnitude is almost equal to estimates given by international
organizations. The simulation by the Cabinet Office Economic and Social Research Institute
indicates that GDP falls 0.45% on an oil price hike of $17.2 per barrel. This effect is smaller
than those estimated by the others.
International organizations use global models where oil price effects on the world
economy can be observed. According to their simulation, an oil price hike may affect China
seriously. Effects may be less serious on the United States than on Japan. This is because
effects on the Japanese economy include not only direct effects of oil price hikes but also
spillover effects emerging from those on the United States and China through international
trade. An income transfer was earlier estimated at 0.4% of GDP on an oil price hike of $10
per barrel and at 1% of GDP on terms of trade effect on a hike close to $20. This does not
differ far from international organizations’ simulation results. Income transfers represent an
effect on a country as earlier shown. International organizations’ simulation results cover
international linkages and indicate greater effects on Japan than a single-country analysis.
They thus hint that if oil prices continue to rise, the Japanese economy could face indirect
effects through trade with China and other foreign countries, as well as direct effects that
may be limited. While these simulation analyses view any effect of price hikes as
proportionate to such hikes, the longer continuation of price hikes is likely to bring about a
fast increase in their effects.

Future Prospects
Oil price hikes have continued, with the WTI crude exceeding $65 per barrel in
August. So far, oil prices have fallen short of affecting national economies seriously, and
income growth has fully absorbed cost increases. The world economy sees relatively ample
labor supply and undercapitalization as China and Eastern Europe shift to market economies.
Therefore, companies do not have to shoulder the cost of oil price hikes. Instead, households
with slow income growth bear such costs. Even though oil price hikes have had no serious

48
effects on national economies, the risk of serious effects on economies may be accumulated
on a long continuation of price hikes. Over the short term, no increase is expected in surplus
oil production capacity and oil demand is likely to remain firm. Even if current oil prices are
excessively high, they cannot be expected to fall fast and stabilize at lower levels. Oil prices
may go up or down in response to various future developments. Excessive oil price hikes
could have serious economic effects and lead to less demand and lower prices. However, the
current oil price hikes have basically originated from an increase in demand through the
market. If disturbances caused by speculative money diminish, oil prices may stabilize.
Over the medium or long term, oil prices will depend on production capacity and
national economic situations including oil demand and quite a few people are optimistic
about oil supply. The present high oil prices can stimulate the development of alternative
energy sources and new oilfields, leading to a gradual increase in supply. However, whether
such a supply increase could meet the demand rise is uncertain. Problems exist with state-run
and other public entities’ engagement in oil production. Particularly, large oil-producing
countries such as Middle Eastern nations and Russia have failed to efficiently develop
oilfields. On the other hand, oil demand will depend on economic conditions in the United
States and China, which have led demand expansion over the past several years. I would like
to consider national economic conditions.

JAPANESE ECONOMY
The Japanese economy has continued annual growth close to 2% since 2003. In the
face of a decline in productive population, however, Japan cannot be expected to achieve
high growth. The government’s “Structural Reform and Medium-Term Economic and Fiscal
Perspectives” and “21st Century Vision” projects future annual economic growth at around
1.5%. Expecting a decline in labor input, they envisage considerably high total factor
productive growth that would have to be sustained. Budget deficits are enormous, with
massive government debt issues planned for the future. It is feared that the savings rate will
decline on the aging population. Japan is now required to increase investment accompanied
by technological innovation and efficiently restructure its economy. Since the enhancement
of energy efficiency is expected to continue, Japan’s oil demand is likely to slowly increase.

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U.S. ECONOMY
Even with huge budget and trade deficits, the U.S. economy has continued powerful
growth and is forecast to achieve potential growth above 3% in future. Short-term interest
rates may soon be raised to 4%, a level neutral to the economy. In spite of the recent gradual
hike in short-term interest rates, however, long-term interest rates have been falling, as noted
earlier. The low long-term interest rates might have stimulated residential and non-residential
investment. Given this phenomenon, the present growth base is not necessarily secure. Short-
term economic fluctuations are likely. Among industrial nations, however, the United States
features a high population increase. Even though it may be difficult for the U.S. economy to
sustain such high growth as seen in the past years, the economy can be expected to maintain
growth meeting the potential level that would be above 3% or slightly lower than the recent
growth. Therefore, U.S. oil demand is expected to remain firm. Despite the considerable
improvement in energy efficiency over the past three decades as noted above, the United
States can afford to make further improvements. Therefore, future oil demand growth may
become slower than the present growth.

EU ECONOMY
After recovering until 2004, the Euro land economy has seen deterioration of
economic sentiment due to sluggish exports on the rising euro. In the area, economic growth
and inflation gaps are large between major and minor countries, indicating difficulties facing
monetary policy for the single-currency zone. The euro’s strength is being corrected in
response to problems regarding the ratification of the EU constitution. For the short term, an
exchange rate problem as an obstacle to economic recovery is diminishing. How political
instability would affect economic growth and would be a problem over the long term. Over
the medium or long term, however, the EU economy is likely to sustain the past average
growth of around 2%, even with short-term fluctuations. EU oil demand is thus expected to
moderately increase.

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CHINESE ECONOMY
The Chinese economy has sustained annual growth close to 10%, but some problems
have made it difficult for the economy to sustain such high growth. First, China has problems
regarding exchange rates. In July, China shifted from the Yuan’s complete peg to the dollar
to a managed floating exchange rate system. However, little exchange rate fluctuation has
been seen. Under the Yuan’s fixed peg to the dollar, a large international payments surplus
had worked to ease domestic monetary conditions. In 2003, excessive domestic monetary
easing was feared to bring about overheating on rural capital investment. China then took
anti-overheating measures including interest rate hikes, changes in reserve requirements and
window guidance. These measures produced some effects in the second half of 2004, but the
international payments surplus has remained enormous, exerting pressures on domestic
liquidity to ease. At present, easing liquidity still remains under control, falling short of
leading to any serious domestic inflation problem. Capital flow regulations have become
ineffective, allowing capital inflow to increase fast. This indicates that the Chinese economy
faces a classic problem that up to two of the three monetary policy objectives – free capital
flow, exchange rate stability and independent monetary policy – can be achieved
simultaneously. Theoretically, it is desirable to increase the freedom of exchange rates to
address the current situation. This may be a reason why China changed the foreign exchange
rate system. However, the degree and speed of the exchange rate realignment and its effects
on the Chinese economy are uncertain. Wild exchange rate fluctuations could affect
economic growth through the deterioration of net exports. Given economic gaps and linkages
between China’s domestic regions and the mobility of labor and capital, doubts emerge on
whether China should maintain a single currency. Depending on the speed of exchange rate
realignment, the problems could grow more serious.
Second, China has various structural problems including underdeveloped
infrastructures including water and electricity supply, and widening income gaps between
regions. Potential problems, which have yet to emerge amid sustained growth, include
inefficient management of state-run corporations and non-operating loans.
Third, China, which is consuming massive amounts oil and other primary resources,
has utilized such resources inefficiently and wastefully. Rapid domestic economic growth has

51
prevented this problem from emerging. The costly production structure with the inefficient
resources utilization may soon come to a deadlock, slowing down economic growth.
Exchange rate fluctuations could lead this problem to come into focus more clearly.
Fourth, China has problems with the efficiency in utilization of labor and capital,
though having abundant labor and capital with a high savings rate as requirements for
economic growth. The problems must be solved. The Chinese situation is similar to the
Singaporean situation as described by Paul Krugman in his “Myth of Asia’s Miracle” in
1994. Krugman doubted the sustainability of Singapore’s high economic growth that he said
was attributable to excessive input of production factors and failed to be accompanied by
total factor productivity growth in the absence of domestic technological development. Later
the Singaporean economic growth plunged on the Asian currency crisis, but this was not
attributable to the problems that Krugman pointed to. However, Singapore’s distribution of
resources then had complied with market economy principles. China lacks efficiency in the
distribution of resources and the utilization of production factors, and this could work to limit
economic growth.
While various structural problems lead many people to doubt if China could sustain
the current high economic growth over the medium or long term, the Chinese economy is
likely to grow relatively faster than other economies. Its oil demand can be expected to
increase steadily, although an increase as fast as in the past is unlikely.
The United States and China will have a great influence on global oil demand over
the medium or long term; however, U.S. economic growth may slow down to the potential
level, and Chinese growth may drop slightly in correction to the past high growth. If no sharp
rise comes in economic growth of other major countries, global income growth may slow
down somewhat and grow in a more stable and sustainable manner. Under such economic
developments, global oil demand cannot be expected to continue such fast growth as seen in
the recent years, but it may grow steadily. As a result, oil supply capacity may increase
according to demand growth over the medium or long term. Given such a steady increase in
oil demand and the stepped-up development and utilization of new energy sources, oil prices
may stabilize in terms of relative prices reflecting price conditions in industrial countries.

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IEEJ: December 2005
By Hiromi Kato

ANALYSIS OF THE IMPORTANCE OF COMMODITY TRADING

Structure of Commodity Market in India: Chart-1

Trading in commodity market takes place in two distinct forms such as the Over-The-
Counter (OTC), which are basically spot market and the exchange-based market. Further, as
in equities, there exists the spot where participation is restricted to people who are involved
with that commodity, such as the farmer, processor, wholesaler, etc. and the derivatives
segments where trading takes place through the exchange-based markets like equity
derivatives. At present, there are 23 exchanges operating in India and carrying out futures
trading activities in as many as 146 commodity items. As per the recommendation of the
FMC, the Government of India recognized the National Multi-Commodity Exchange
(NMCE), Ahmedabad; Multi Commodity Exchange (MCX) and National Commodity and

53
Derivative Exchange (NCDEX), Mumbai, as nation-wide multi-commodity exchanges.
NMCE commenced in November 2002 and MCX in November 2003 and NCDEX in
December 2003. Unlike the stock markets, the commodity markets in India have a single
product (only futures) and a single user11 (only traders including corporate).
Commodity trading has a very important role in the economy of each and every
country. India, primarily an agrarian economy is developing itself as an upcoming industrial
giant. With diverse commodities for trading, better trading options and facilities, Indian
economy is boosting up. In its part to become a developed nation commodities and
commodity futures trading plays a prime role.
Gold is primarily a monetary asset and partly a commodity. Gold market is highly
liquid and gold held by central banks, other institutions and retail jewelers keep coming back
to the market. Due to large stocks of gold as against it demand, it is argued that the core
driver of the real price of gold is stock equilibrium rather than flow equilibrium. Gold can be
used as a portfolio diversifier to improve investment performance. Gold is valued in India as
a savings and investment vehicle and is the second preferred investment after bank deposits.
India is the world’s largest consumer of gold in jewellery as investment. The gold hoarding
tendency is well ingrained in Indian society. Domestic consumption is dictated by monsoon,
harvest and marriage season. Indian jewellery off take is sensitive to price increases and even
more so to volatility. In the cities gold is facing competition from the stock market and a
wide range of consumer goods. Facilities for refining, assaying, making them in to standard
bars in India, as compared to the rest of the world, are insignificant, both qualitatively and
quantitatively.
Silver is often called as industrial commodity there are few substitutes for silver in
most applications, particularly in high-tech uses in which reliability, precision and safety are
paramount. Today, it is sought as a valuable and practical industrial commodity, and as an
appealing investment. The demand for silver is built on three main pillars; industrial and
decorative uses, photography and jewellery and silverware. Indian industrial demand is
estimated to have fallen by around 13% in 2002. As a result, the silver imports in to India for
domestic consumption also fell sharply. Inspite of this fall, India is still one of the largest
users of silver in the world, ranking alongside those Industrial giants, Japan and the US.

54
 Crude oil is the mixture of hydrocarbons that exist in a liquid form in natural
underground reservoirs. All industries are directly or indirectly dependent on derivatives
from crude oil. Its price movements largely affect prices of lubricants, petrochemicals,
fertilizers, paints, transportation costs etc. The prices of crude oil are highly volatile. High oil
prices lead to inflation. India ranks amongst the top ten oil consuming countries and imports
about 70% of its total oil consumption. It has no oil exports. India faces a large supply
deficit, as domestic oil production is unlikely to keep pace with demand. IOCL is the largest
refinery company in India. Government has permitted foreign participation in oil exploration,
an activity restricted earlier to state owned entities. The petroleum refining and marketing
sector is undergoing a huge restructuring with influx of foreign direct investments thus
facilitating more efficient markets in time to come.
Natural gas is a colorless, odorless, environment friendly energy source, which is the
cleanest of all the fuels that is traditionally being used in India. In India’s energy mix, natural
gas is the fastest growing energy source its consumption in India is expected to grow by 10%
in the coming years. The Indian energy requirement shall keep pace with expected GDP
growth during the next few decades. The current import is around 22% of the domestic
consumption n. While there is a decline in gas availability there have been large discoveries
of gas reserves by private sector. Natural gas supplies are expected to increase over the next
five years the later demand of gas is estimated to be twice the supply. The transitional
pipelines, being planned by different companies will result in a better flow of gas to the
deficit regions in the country.
India is emerging as a net exporter of copper from net importer owing to rise in
production by the three companies namely Hindalco, Sterlite Industries and Hindustan
Copper Ltd. Growth in Real Estate and Automobile sector is expected to sustain demand to
copper at high levels. The size of copper industry is about four lakh tons. Copper goes in to
various usages such as building, cabling for and telecommunications, automobiles etc. Two
major states owned telecommunications service providers; BSNL and MTNL consume 10%
of country’s copper production. Copper prices in India are fixed on the basis of the rates that
rule on LME the preceding day.

55
 Among the base metals nickel is the most volatile owing to its strong demand and
tight supply. About 65 % of nickel is used in the manufacture of stainless steels, and 20 % in
other steel and non ferrous, including super alloys, for highly specialized industrial,
aerospace and military applications. Nickel market in India is totally dependent on import
and India imports around 30000 tons of nickel. With growth in the stainless steel sector
nickel import demand is expected to increase in the coming years.
Tin is an important commodity in international trade and is used in hundreds of
industrial processes throughout the world. In India tin is imported from various countries and
small amount is produced also. It is used by food packaging industries, also in fire retardants
and as anti corrosion and engineering coatings. Rising tin prices coupled with availability of
cheaper substitutes are the major reason for decrease in attractiveness of tin as packaging
material. India is a net importer of tin plate. Tin plate packaging is picking up in the country.
In India tin plate is mainly used for packaging edible oil and cashew, processed food and non
food.
Zinc is a bluish white lustrous metal. It is the fourth most widely used metal in the
world. It is used for alloys, electroplating, metal spraying, electrical fuses, paint, glue, rubber,
batteries and matches. The Indian zinc industry entered its transformation phase with the
privatization of the largest zinc producer, Hindustan zinc ltd. By 2010 India is expected to
attain complete self sufficiency in meeting its zinc demand. Thereafter, the process of India
becoming a zinc supplier to the world would be initiated.
Steel is an alloy of iron and carbon, containing less than 2% carbon, 1% manganese
and small amounts of silicon, phosphorus, sulphur and oxygen. Steel is the most important
engineering and construction material in the world. It is the most important, multi-functional
and most adaptable of materials. Steel production is 20times higher as compared to
production of all non-ferrous metals put together. India is the eight largest producer of steel
with an annual production of 36.193 million tons, while the consumption is around to 30
million tons. Iron and steel can be freely exported and imported from India. India is a net
exporter of steel. The government of India has taken a number of policy measures, such as
removal of Iron and Steel Industry from the list of Industries reserved for public sector,
deregulation of price and distribution of Iron and Steel and lowering of import duty on

56
capital goods and raw materials, since liberalization for the growth and development of
Indian Iron and Steel Industry. After liberalization, India has been a huge scale addition to its
Steel making capacity the country faces no shortage of Iron and Steel materials.
Aluminium is the third most abundant element found in Earth’s crust and exists is
very stable combination with other materials particularly as silicates and oxides. Aluminium
is light with a density that is only one third of Steel. India is the 5th largest producer of
Aluminium in the world. At current levels of consumption, the existing reserves will have an
estimated life of over 350 years. India’s reserves are estimated to be 7.5% of global deposits
and installed capacity is about 3% globally. In terms of demand and supply, India is self-
sufficient, and has a competitive export potential. India’s annual export of Aluminium is
about 82,000 tons India’s annual consumption of Aluminium is around 0.61 million tons and
is projected to increase to 0.78 million tons by 2007. About a decade back, the primary
Indian producers Included BALCO, NALCO, INDAL, HINDALCO and MALCO.
Aluminium prices in India are fixed on basis of the prices prevailing on LME. India has
emerged as a net exporter of Aluminium, on competitive terms, with liberalization terms.
Government monopoly in Aluminium production, price and distribution control has been
diluted to incentivise private sector participation.
Lead is very corrosion-resistant, dense, ductile and malleable blue-grey metal that has
been used for at least 5,000 years. Lead production equaled approximately 82,000 tonnes in
2004, mostly from secondary sources. The main constraint in Lead production in the country
is the lack of Lead ore reserves, which necessitates large-scale imports and recycling.
Domestic demand for Lead is close to 170,000t/y. The total primary smelting capacity in the
country is 89,000t/y, consisting of 65,000t/y (HZL) and 24,000t/y (Indian Lead Ltd). The
major suppliers for the imports were China, The Republic of Korea and Australia: 54%, 15%
and 10% respectively. The domestic Industry is characterized by the presence of only a few
players in the primary segment. The primary Lead Industry in India is divided between the
following main players: Binani Industries Ltd. and Sterlite Industries (India) Ltd. (Hindustan
Zinc Ltd.).
Wheat is a cereal grain grown and consumed word wide. Wheat is more popular than
any other cereal grain for use in baked goods. India has the largest area in the world under

57
wheat. However, in terms of production, India is second largest behind China. In India,
Wheat is sown during October to December and harvested during March to May. The Wheat-
marketing season in India is assumed to begin from April every year. In terms of
productivity, Punjab stands first followed by Haryana, Rajasthan, UP, Gujarat, Bihar and
MP. Indian Wheat is largely soft/medium hard, medium protein, bread Wheat. India also
produces around 1.5 million tonnes of durum Wheat, mostly in central and western India,
which is not segregated and marketed separately. India consumes around 72-74 million
tonnes of wheat a year. There are around thousand large flour mills in India, with a milling
capacity of around 15 million tonnes.
Medium Staple Cotton is ginned cotton with staple length of 24-26 mm. J34 is the
major medium staple cotton variety cultivated in India. The northern region of India is the
primary producer of short and medium staple, while the southern states primarily grow long
staples. The central region grows long and medium staples. India with an annual production
of 15-16.5 million bales (1bale=170kg) is the World’s third largest cotton producer. India
also has the largest area under cotton. India produces around 11% of the world’s cotton from
20% of the area. Despite having the largest area under cotton in the World, India ranks third
in World output of cotton due to its abysmally low average yield of 300kg against a World
average of 550kg per hector. Although cotton is cultivated in almost all the state in the
country, the nine states of Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Punjab,
Haryana, Rajasthan, Tamilnadu and Karnataka account for more than 25% of the area under
the output. In India cotton is sown during March to September and harvested during
September to April. The peak marketing season for the crop is during November to March.
Cotton is the most important raw material for India’s Rs. 150,000crores textile Industry,
which accounts for nearly 20% of the total national Industrial production and provides
employment to over 15 million people. It also accounts for more than 30% of exports,
making it India’s largest net foreign exchange Industry. India earns foreign exchange to the
tune of $10-12billion annually from exports of cotton yarn, thread, fabrics, apparel and
made-ups. Cotton accounts for more than 75% of the total fiber that is converted in to yarn
by the spinning mills in India and 58% of the total textile fabric materials produced in the
country. More than 80% of the cotton produced is sold out by march 31 every year and the

58
price starts firming up from April and easing only in September when the new crop starts
arriving in the market.
Gur and Khandsari are the traditional Indian sweeteners which are produced in
addition to sugar. These are the natural mixes of sugar and molasses. The Indian sugar
Industry is the second largest agro processing Industry in the country. India is the largest
consumer and the second largest producer of Sugar in the World next to Brazil. The Indian
sugar prices are largely governed by the releases of Sugar made by the Government. The
Sugar economy in India is highly regulated. There has been a demand for liberalization of the
Sugar economy. Efficient futures trading and subsequent price discovery would be the first
step in this regard.

59
 ANALYSIS OF THE IMPORTANCE OF COMMODITY DERIVATIVES
TRADING
INTRODUCTION
The Indian economy is witnessing a mini revolution in commodity derivatives and
risk management. Commodity options trading and cash settlement of commodity futures had
been banned since 1952 and until 2002 commodity derivatives market was virtually non-
existent, except some negligible activity on an OTC basis. Now in September 2005, the
country has 3 national level electronic exchanges and 21 regional exchanges for trading
commodity derivatives. As many as eighty (80) commodities have been allowed for
derivatives trading. The value of trading has been booming and is likely to cross the $ 1
Trillion mark in 2006 and, if all goes well, seems to be set to touch $5 Trillion in a few years.

HISTORY
The history of organized commodity derivatives in India goes back to the nineteenth
century when the Cotton Trade Association started futures trading in 1875, barely about a
decade after the commodity derivatives started in Chicago. Over time the derivatives market
developed in several other commodities in India. Following cotton, derivatives trading
started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in
Hapur (1913) and in Bullion in Bombay (1920). However, many feared that derivatives
fuelled unnecessary speculation in essential commodities, and were detrimental to the healthy
functioning of the markets for the underlying commodities, and hence to the farmers. With a
view to restricting speculative activity in cotton market, the Government of Bombay
prohibited options business in cotton in 1939. Later in 1943, forward trading was prohibited
in oilseeds and some other commodities including food-grains, spices, vegetable oils, sugar
and cloth.
After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952
which regulated forward contracts in commodities all over India. The Act applies to goods,
which are defined as any movable property other than security, currency and actionable

60
claims. The Act prohibited options trading in goods along with cash settlements of forward
trades, rendering a crushing blow to the commodity derivatives market. Under the Act, only
those associations/exchanges, which are granted recognition by the Government, are allowed
to organize forward trading in regulated commodities. The Act envisages three-tier
regulation: (i) The Exchange which organizes forward trading in commodities can regulate
trading on a day-to-day basis; (ii) the Forward Markets Commission provides regulatory
oversight under the powers delegated to it by the central Government, and (iii) the Central
Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and
Public Distribution - is the ultimate regulatory authority.
The already shaken commodity derivatives market got a crushing blow when in
1960s, following several years of severe draughts that forced many farmers to default on
forward contracts (and even caused some suicides), forward trading was banned in many
commodities considered primary or essential. As a result, commodities derivative markets
dismantled and went underground where to some extent they continued as OTC contracts at
negligible volumes. Much later, in 1970s and 1980s the Government relaxed forward trading
rules for some commodities, but the market could never regain the lost volumes.

CHANGE IN GOVERNMENT POLICY

After the Indian economy embarked upon the process of liberalization and
globalization in 1990, the Government set up a Committee in 1993 to examine the role of
futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures
trading in 17 commodity groups. It also recommended strengthening of the Forward Markets
Commission, and certain amendments to Forward Contracts (Regulation) Act 1952,
particularly allowing options trading in goods and registration of brokers with Forward
Markets Commission. The Government accepted most of these recommendations and futures
trading were permitted in all recommended commodities. Commodity futures trading in India
remained in a state of hibernation for nearly four decades, mainly due to doubts about the
benefits of derivatives. Finally a realization that derivatives do perform a role in risk
management led the government to change its stance.

61
 The policy changes favoring commodity derivatives were also facilitated by the
enhanced role assigned to free market forces under the new liberalization policy of the
Government. Indeed, it was a timely decision too, since internationally the commodity cycle
is on the upswing and the next decade is being touted as the decade of commodities.

COMMODITY DERIVATIVES
India is among the top-5 producers of most of the commodities, in addition to being a
major consumer of bullion and energy products. Agriculture contributes about 22% to the
GDP of the Indian economy. It employees around 57% of the labor force on a total of 163
million hectares of land. Agriculture sector is an important factor in achieving a GDP growth
of 8-10%. All this indicates that India can be promoted as a major center for trading of
commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to
1980s suppressed the very markets it was supposed to encourage and nurture to grow with
times. It was a mistake other emerging economies of the world would want to avoid.
However, it is not in India alone that derivatives were suspected of creating too much
speculation that would be to the detriment of the healthy growth of the markets and the
farmers. Such suspicions might normally arise due to a misunderstanding of the
characteristics and role of derivative product. It is important to understand why commodity
derivatives are required and the role they can play in risk management.

62
Differences Between equity Derivative Markets and Commodity Derivative Markets:

Exhibit-1

Particulars Equity Derivative Markets Commodity Derivative Markets

Size and Stage of Large volumes of trading and Relatively smaller and in its nascent
growth high depth stage

Underlying Shares Physical commodities

Settlement Cash settled Can be settled by physical delivery

Futures (including index) and
Instruments options
Wider participation: FIIs, Mutual
Funds, Banks and Indian
Participation Financial Institutions etc.
Local (migration is generally not
Assets Class possible)
Only futures
Retail participation proprietary. Client
trades and some corporate
participation
Global and hence migration is
possible

It is common knowledge that prices of commodities, metals, shares and currencies

fluctuate over time. The possibility of adverse price changes in future creates risk for
businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen
price changes. A derivative is a financial contract whose price depends on, or is derived
from, the price of another asset. Two important derivatives are futures and options.
 Commodity Futures Contracts: A futures contract is an agreement for buying or
selling a commodity for a predetermined delivery price at a specific future time.
Futures are standardized contracts that are traded on organized futures exchanges that
ensure performance of the contracts and thus remove the default risk. The commodity
futures were established to bring farmers and merchants together. The major function
of futures markets is to transfer price risk from hedgers to speculators. For example,
suppose a farmer is expecting his crop of wheat to be ready in two months time, but is
worried that the price of wheat may decline in this period. In order to minimize his
risk, he can enter into a futures contract to sell his crop in two months’ time at a price
determined now. This way he is able to hedge his risk arising from a possible adverse
change in the price of his commodity.

63
  Commodity Options contracts: Like futures, options are also financial instruments
used for hedging and speculation. The commodity option holder has the right, but not
the obligation, to buy (or sell) a specific quantity of a commodity at a specified price
on or before a specified date. Option contracts involve two parties – the seller of the
option writes the option in favour of the buyer (holder) who pays a certain premium
to the seller as a price for the option. There are two types of commodity options: a
‘call’ option gives the holder a right to buy a commodity at an agreed price, while a
‘put’ option gives the holder a right to sell a commodity at an agreed price on or
before a specified date (called expiry date). The option holder will exercise the option
only if it is beneficial to him; otherwise he will let the option lapse. For example,
suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per
quintal and pays a ‘premium’ of $0.5 per quintal (or a total of $50). If the price of
wheat declines to say $20 before expiry, the farmer will exercise his option and sell
his wheat at the agreed price of $25 per quintal. However, if the market price of
wheat increases to say $30 per quintal, it would be advantageous for the farmer to sell
it directly in the open market at the spot price, rather than exercise his option to sell at
$25 per quintal.

Futures and options trading therefore helps in hedging the price risk and also provide
investment opportunity to speculators who are willing to assume risk for a possible return.
Further, futures trading and the ensuing discovery of price can help farmers in deciding
which crops to grow. They can also help in building a competitive edge and enable
businesses to smoothen their earnings because non-hedging of the risk would increase the
volatility of their quarterly earnings. Thus futures and options markets perform important
functions that can not be ignored in modern business environment. At the same time, it is true
that too much speculative activity in essential commodities would destabilize the markets and
therefore, these markets are normally regulated as per the laws of the country.

64
COMMODITY EXCHANGES
To make up for the loss of growth and development during the four decades of
restrictive government policies, FMC and the Government encouraged setting up of the
commodity exchanges using the most modern systems and practices in the world. Some of
the main regulatory measures imposed by the FMC include daily mark to market system of
margins, creation of trade guarantee fund, back-office computerization for the existing single
commodity Exchanges, online trading for the new Exchanges, demutualization for the new
Exchanges, and one-third representation of independent Directors on the Boards of existing
Exchanges etc. Responding positively to the favorable policy changes, several Nation-wide
Multi-Commodity Exchanges (NMCE) have been set up since 2002, using modern practices
such as electronic trading and clearing. Selected Information about the two most important
commodity exchanges in India [Multi-Commodity Exchange of India Limited (MCX), and
National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX)] is given in
Exhibit-2
Note: The table shows the turnover in commodity futures market in Rs.Crores
Source: www.fmc.gov.in

Turnover in Commodity Futures Market

Exchanges 2004 2005 2006 2007

Multi Commodity
Exchange (MCX) 165,147 961,633 1,621,803 2,505,206
NCDEX 266,338 1,066,686 944,066 733,479
NMCE
(Ahmadabad) 13,988 18,385 101,731 24,072
NBOT( Indore) 58,463 53,683 57,149 74,582
Others 67,823 54,735 14,591 37,997
All Exchanges 571,759 2,155,122 2,739,340 3,375,336
% of GDP 18.3 61 90 92

BOOMING BUSINESS

65
 Since 2002 when the first national level commodity derivatives exchange started, the
exchanges have conducted brisk business in commodities futures trading. In the last three
years, there has been a great revival of the commodities futures trading in India, both in terms
of the number of commodities allowed for futures trading as well as the value of trading.
While in year 2000, futures trading were allowed in only 8 commodities, the number jumped
to 80 commodities in June 2004. The market regulator Forward Markets Commission (FMC)
disseminates fortnightly trading data for each of the 3 national & 21 regional exchanges that
have been set up in recent years to carry on the futures trading in commodities in the country.

Exhibit-3
Note: The table shows Commodity group-wise value of trade in Rs.Lakh Crores
Source: Executive Council report 2008

Commodity Groups 2004-05 2005-06 2006-07 2007-08

Bullion and other metals 1.8 7.79 21.29 26.24
Agriculture 3.9 11.92 13.17 9.41
Energy 0.02 1.82 2.31 5
Others 0 0.02 0.001 0
Total 5.72 21.55 36.77 40.65

Exhibit-4
Note: The table shows Commodity group-wise value of trade in percentage.
Source: Executive Council report 2008

Commodity Groups 2004-05 2005-06 2006-07 2007-08

Bullion and other metals 31.47 36.15 57.90 64.55
Agriculture 68.18 55.31 35.82 23.15
Energy 0.35 8.45 6.28 12.30
Others 0 0.09 0.00 0.00
Total 100 100 100 100

Exhibit-5

66
Note: The table shows Volume of trade in Major Commodity derivative market.
Source: Futures Industry Association
Major Exchanges 2003-04 2004-05 2005-06 2006-07
New York Mercantile
Exchange (NYMEX) 163.15 204.6 (25) 276.2 (35) 353.3 (28)
Dalian Commodity Exchange
(DCE) 88.3 99.17 (13) 120.7 (19) 185.5 (54)
Chicago Board of Trade
(CBOT) 599 674.6 (12) 805.8 (19) 945.7 (20)
Tokyo Commodity Exchange
(TOCOM) 74.4 61.8 (-17) 63.7 (3) 47.7 (-26)
London Metals Exchange
(LME) 71.9 78.3 (9.3) 86.9 (11) 92.5 (7)
Shanghai Futures Exchange
(SHFE) 40.57 33.7 (-16.7) 58.1 (72) 85.5 (48)
Multi Commodity Exchange
(MCX) 20.4 45.63 (122) 68.9 (51)
National Commodity &
Derivatives Exchange
(NCDEX) 51.5 53.27 (4) 34.5 (-34)
Chicago Mercantile Exchange
(CME) 805 1090.3 (35) 1409 (29) 2804 (50)

ANALYSIS OF THE EFFECT OF COMMODITY PRICE FLUCTUATIONS

ON THE ECONOMY
Exhibit-6

67
Note: Review of Imports of India 2003-2008
Source: Department of Commerce- www.commerce.nic.in

2003-2004 2004-2005
Commodity Amount In % Amount In %
Rs Share Rs Share
OIL AND GAS 10431108.2 29.05 15644545.5 31.22
2 2
GOLD AND JEWELLERY 6504450.62 18.11 9338734.51 18.64
ENERGY 3185745.92 8.87 4336697.67 8.66
OTHERS 15789461.2 43.97 20786476.7 41.48
35,910,765 100.0 50,106,454 100.0
India's Total Import .96 0 .40 0

2005-2006 2006-2007
Commodity Amount In % Amount In %
Rs Share Rs Share
OIL AND GAS 22274024.4 33.73 27,990,727. 33.30
1 07
GOLD AND JEWELLERY 9160413.68 13.87 10,224,988. 12.17
32
ENERGY 6160677.6 9.33 8,422,825.0 10.02
0
OTHERS 28445775.4 43.07 37,412,090. 44.51
78
66,040,891 100.0 84,050,631 100.0
India's Total Import .09 0 .17 0

2007-2008
Commodity Amount In %
Rs Share
OIL AND GAS 34,720,546.1 34.30
1
GOLD AND JEWELLERY 10,645,199.1 10.52
2
ENERGY 10,180,795.3 10.06
8
OTHERS 45,684,629.4 45.13
9
101,231,17 100.0
India's Total Import 0.10 0

68
Exhibit-7
Note: Review of Exports of India 2003-2008
Source: Department of Commerce- www.commerce.nic.in
2003-2004 2004-2005
Commodity Amount In % Amount In %
Rs Share Rs Share
MINERAL FUELS, MINERAL OIL 1715981.03 5.85 3208287.68 8.55
PRODUCTS
JEWELLS (MAKED) 4945106.37 16.86 6486409.87 17.28
ORGANIC CHEMICALS 1297459.36 4.42 1626741.47 4.33
OTHERS 21378127.8 72.87 26212513.9 69.84
6 8
29,336,674 100.0 37,533,953 100.0
India's Total Export .62 0 .00 0

2005-2006 2006-2007
Commodity Amount In % Amount In %
Rs Share Rs Share
MINERAL FUELS, MINERAL OIL 5253760.29 11.51 8,554,199.1 14.96
PRODUCTS 2
JEWELLS (MAKED) 7020872.99 15.38 7,278,416.3 12.73
6
ORGANIC CHEMICALS 2150402.13 4.71 2,594,964.1 4.54
1
OTHERS 31216750.8 68.40 38,750,348. 67.77
6 95
45,641,786 100.0 57,177,928 100.0
India's Total Export .27 0 .54 0

2007-2008
Commodity Amount In %
Rs Share
MINERAL FUELS, MINERAL OIL 11,687,796. 17.82
PRODUCTS 74
JEWELLS (MAKED) 7,976,309.4 12.16
3
ORGANIC CHEMICALS 2,886,978.4 4.40
5
OTHERS 43,035,267. 65.62
45
65,586,352 100.0
India's Total Export .07 0

69
INFERENCE
Analyzing Exports and Imports of India from 2003 to 2008 it is evident that the major
commodities which will have an influence in trade are Oil and gold. So I would like to focus
my study objective on oil prices which forms the major import commodity.

F TEST
Exhibit-8
Null Hypothesis: Both samples are equal
Alternative hypothesis: Both samples are not equal.

OIL
YEAR TRADE DEFICIT PRICE
2004 -6,574,091.34 38.84
2005 -12572501.4 53.35
2006 -20399104.82 64.27
2007 -26872702.63 71.13
2008 -35644818.03 97.04

F-Test Two-Sample for Variances

Trade Oil Price
Mean -20412643.64 64.926
Variance 1.31681E+14 471.17803
Observations 5 5
df 4 4
F 2.79472E+11
P(F<=f) one-tail 3.84099E-23
F Critical one-tail 6.388232909

INFERENCE
F value is more than one. So null hypothesis is rejected. This clearly shows that oil prices
have less effect in forming trade deficits. The huge variance of oil prices shows the volatility

70
of oil prices. The small positive variance of trade deficits show the diversified portfolio of
exports and imports which is a positive point of Indian Economy.

Exhibit-9
YEAR IMPORT OIL CONSUMPTION
35,910,765
2004 .96 2,130,000
50,106,454
2005 .40 2,130,000
66,040,891
2006 .09 2,320,000
84,050,631
2007 .17 2,450,000
101,231,170
2008 .10 2,438,000

ANOVA: Single Factor

SUMMARY
Averag Varianc
Groups Count Sum e e
3.37E+0 674679 6.79E+1
Import 5 8 83 4
114680 229360 2.49E+1
Oil Consumption 5 00 0 0

ANOVA
Source of P-
Variation SS df MS F value F crit
1.06E+ 1.06E+1 31.2980 0.00051 5.31765
Between Groups 16 1 6 6 4 5
2.71E+ 3.39E+1
Within Groups 15 8 4

1.33E+
Total 16 9

71
INFERENCE
Small variance in oil consumption shows that consumption is same through the years and it is
predictable. Imports have increased which shows us that capital deficits are formed from
other sources than Oil.

Exhibit-10
Note: comparison of foreign investments and GDP
Source: www.indexmundi.com

YEAR FI GDP
2004 23.10 2900
2005 23.80 3100
2006 28.10 3400
2007 29.20 3800
2008 31.80 2700

ANOVA: Single Factor

SUMMARY
Averag Varianc
Groups Count Sum e e
FI 5 136 27.2 13.585
1590
GDP 5 0 3180 187000

ANOVA
Source of
Variation SS df MS F P-value F crit
2485037 2.02E- 5.31765
Between Groups 24850369.6 1 0 265.76 07 5
93506.7
Within Groups 748054.34 8 9

72
 25598423.9
Total 4 9

INFERENCE
Foreign investment has increased in India which shows the wide investment opportunities.
This can be a reason of increased GDP even when the basic oil prices are high when a deficit
keeps on increasing. All together I can conclude that Indian economy surpassed this shock of
increased oil prices without much difficulty.

Exhibit-11
Note: Factors of Real GDP
Source: www.indexmundi.com

Growth Of Real GDP 2003-04 2004-05 2005-06 2006-07 2007-08

GDP(factor cost) 8.5 7.5 9.4 9.6 9.0
Agriculture 10.0 0.0 5.9 3.8 4.5
Industry 7.4 10.3 10.1 11.0 8.5
Services 8.5 9.1 10.3 11.1 10.8
Per capita GDP 6.9 5.8 7.7 8.1 7.5

INFERENCE
Though an agrarian economy our performance was poor as far as agriculture was concerned
from 2003 to 2008. This was anticipated by the services growth and new industry ventures
happened in India during that time. This explains the avenues for foreign investment which
flooded to India during this time.

73
 ANALYSIS OF THE ISSUES OF COMMODITY TRADING
COMMODITY TRADING

Volatility: There is no doubt that commodity prices are volatile. The concern is with the
levels of prices rather than volatility. Commodity prices are obviously affected by the same
basic factors, namely the market fundamentals of demand and supply. However, the nature,
strength and driving forces of these demand and supply factors varies from one commodity to
another Major impacts on demand and supply on world markets for particular commodities
are also affected by the entry and exit of countries as importers and exporters. A move
towards self-sufficiency decreases import demand, and there are a number of instances of
major importers becoming major exporters.

Technical change: Technical change can also lead to pressure on prices from the demand
side: improved efficiency of raw material use in processing can mean a declining share of the
raw commodity in the finished product. With respect to consumer preferences, there is
increasing evidence of globalization in food consumption one facet of which is increasing
livestock products consumption in developing countries in particular, though this might be
offset to some extent by lower consumption in the developed countries

74
Fiscal Policy: There is a definite link between monetary policies, exchange rates and
commodity prices. Prices are relationships between two quantities, a quantity of the object
for sale, and a quantity of a quid pro quo-usually money-offered for it. It may therefore be
expected that changes in prices could reflect not only market-specific trends but also
monetary development. In a world of inflation, for example, commodity prices would be
rising, and in a world of deflation they would be falling. Both would be clear manifestations
of monetary rather than real disturbances. There would not be a problem of "commodity
prices," there would be a problem of monetary stability. To analyze significant trends in
"commodity prices," therefore it is important first to isolate the monetary disturbances (if
they are present) from the real disturbances. In our world of multiple currencies and flexible
exchange rates, commodity prices might rise in one currency but fall in another.
Costs: The "farm problem" in most developed countries is usually stated as a price/cost
problem. That is, farm interest groups have argued for decades that prices are often too low
to cover average costs, where average costs are perceived to include a reasonable return to
the labour contributed to the enterprise by farmers and unpaid family workers. As commodity
markets have become increasingly integrated and globalized, farm problem prices have also
become globalized. World prices for grains reflect world supply and demand, and
technological changes have both global and competitive (local) effects.

COMMODITY DERIVATIVES

Commodity Options: Trading in commodity options contracts has been banned since 1952.
The market for commodity derivatives cannot be called complete without the presence of this
important derivative. Both futures and options are necessary for the healthy growth of the
market. While futures contracts help a participant (say a farmer) to hedge against downside
price movements, it does not allow him to reap the benefits of an increase in prices. No doubt
there is an immediate need to bring about the necessary legal and regulatory changes to
introduce commodity options trading in the country. The matter is said to be under the active
consideration of the Government and the options trading may be introduced in the near
future.

75
The Warehousing and Standardization: For commodity derivatives market to work
efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient
warehousing system in the country. The Habibullah (2003) task force admitted, “A
sophisticated warehousing industry has yet to come about”. Further, independent labs or
quality testing centers should be set up in each region to certify the quality, grade and
quantity of commodities so that they are appropriately standardized and there are no shocks
waiting for the ultimate buyer who takes the physical delivery. Warehouses also need to be
conveniently located. Central Warehousing Corporation of India (CWC: www.fieo.com) is
operating 500 Warehouses across the country with a storage capacity of 10.4 million tonnes.
This is obviously not adequate for a vast country. To resolve the problem, a Gramin
Bhandaran Yojana (Rural Warehousing Plan) has been introduced to construct new and
expand the existing rural godowns. Large scale privatization of state warehouses is also being
examined.

Cash versus Physical Settlement: It is probably due to the inefficiencies in the present
warehousing system that only about 1% to 5% of the total commodity derivatives trades in
the country are settled in physical delivery. Therefore the warehousing problem obviously
has to be handled on a war footing, as a good delivery system is the backbone of any
commodity trade. A particularly difficult problem in cash settlement of commodity derivative
contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash
settlement of outstanding contracts at maturity is not allowed. In other words, all outstanding
contracts at maturity should be settled in physical delivery. To avoid this, participants square
off their positions before maturity. So, in practice, most contracts are settled in cash but
before maturity. There is a need to modify the law to bring it closer to the widespread
practice and save the participants from unnecessary hassles.

The Regulator: As the market activity pick-up and the volumes rise, the market will
definitely need a strong and independent regulatory similar to the Securities and Exchange
Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an
independent body, the Forwards Markets Commission (FMC) is under the Department of

76
Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends
on it for funds. It is imperative that the Government should grant more powers to the FMC to
ensure an orderly development of the commodity markets. The SEBI and FMC also need to
work closely with each other due to the inter-relationship between the two markets.

Lack of Economy of Scale: There are too many (3 national level and 21 regional)
commodity exchanges. Though over 80 commodities are allowed for derivatives trading, in
practice derivatives are popular for only a few commodities. Again, most of the trade takes
place only on a few exchanges. All this splits volumes and makes some exchanges unviable.
This problem can possibly be addressed by consolidating some exchanges. Also, the question
of convergence of securities and commodities derivatives markets has been debated for a
long time now. The Government of India has announced its intention to integrate the two
markets. It is felt that convergence of these derivative markets would bring in economies of
scale and scope without having to duplicate the efforts, thereby giving a boost to the growth
of commodity derivatives market. It would also help in resolving some of the issues
concerning regulation of the derivative markets. However, this would necessitate complete
coordination among various regulating authorities such as Reserve Bank of India, Forward
Markets commission, the Securities and Exchange Board of India, and the Department of
Company affairs etc.

Tax and Legal bottlenecks: There are at present restrictions on the movement of certain
goods from one state to another. These need to be removed so that a truly national market
could develop for commodities and derivatives. Also, regulatory changes are required to
bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country
in 2005, but has not yet been uniformly implemented by all states.

COMMODITY MARKETS

Role of banks in commodity markets: Financing of agriculture poses certain special risks
for banks and so, banks need to mitigate these risks in order to ensure effective credit

77
delivery to the agriculture sector. One of the key risks for banks is the commodity price risk.
The volatility in the prices of agricultural commodities may cause severe loss to the farmer
who may be unable to repay his dues to the bank. If the prices collapse, the distress in the
farming community can widespread and security obtained by the bank may have very limited
usefulness. Commodity derivatives can mitigate these risks to a certain extent. Banks do have
an extensive rural reach and expertise in agriculture lending which enable them to play a big
role in the development of the commodity market. Banks can help to fund margin or trading
capital requirements. Further, banks can provide loans against commodities by accepting
warehouse receipts (WR) as collateral.
One of the major recommendations of this study is to amend the Banking Regulation
Act, 1949 permitting banks to deal in the business of agricultural commodities including
derivatives. Further it also recommended that banks can maintain proprietary positions with
adequate limits in agri-commodity derivatives to mitigate their risk while lending to farmers.
Besides, banks also may be granted general permission to become professional clearing
members of commodity exchanges subject to the conditions that they should not assume any
exposure risk on account of offering clearing services to their trading clients.

Participation of FII and Mutual Funds in Commodity Markets: Mutual funds and
Foreign Institutional Investors are presently not allowed to trade in commodity markets. The
government is considering the proposal to allow these entities to trade in commodity future
markets. Yet the other set of challenges in front of the exchanges are creating awareness and
information dissemination. While volumes are important for commodity exchanges, what is
probably more critical is awareness. Awareness at the grassroots will be essential to
materialize and sustain the success it is foreseeing.

Taxation issues: A commodity futures contract is an agreement to buy or sell a specified

quantity and quality of a commodity in future at a certain price. Commodity futures contracts
can be settled either by way of squaring of or by physical settlement. Commodity futures
contracts, which are squared off before expiry of the contracts, do not have implications of
sales tax. In other words, sales tax is not applicable on futures contracts, because selling a

78
futures contract means a commitment to sale, which is different from actual sale. Therefore,
it is not necessary to obtain sales tax registration prior to entering in to a futures contract.
However, if the seller does not square off the position and intents to deliver goods in
respect of his sale position, then he is required to have sales tax registration. As per law in
respect of any commodity that attracts sales tax, only sellers having sales tax registration can
give delivery; otherwise it becomes URD (Un Registered Dealer) transaction. At the time of
sale, the seller must submit a sale bill specifying the commodity, quantity, rate, name of the
buyer etc. and the bill must contain his LST (Local Sales Tax no.) and CST (Central Sales
Tax no.) such sales tax registration should pertain to the state, where the specified delivery
centre of the futures contract as per MCX rules is located. For example, if the designated
delivery centre for a commodity is Ahmedabad, a seller having sales tax registration of
Gujarat in entitled to deliver goods at Ahmedabad along with a bill specifying Gujarat sales
tax no., but a seller having sales tax registration of Delhi is not entitled to deliver at
Ahmedabad along with a bill having Delhi sales tax registration number. Further, in case it is
URD transaction, it would attract higher amount of tax, which must be collected by the buyer
from the seller in case of URD and deposited with the sales tax department. Due to higher tax
rate, it is practically not possible to carry out URD sales.
In case the seller is not registered with the sales tax department in the relevant state,
another option available to him is to deliver through a consignment agent having relevant
sales tax registration. It is not necessary for the buyer to have sales tax registration, but if the
buyer takes delivery in one contract and wants to give delivery in a subsequent contract, he
needs to have sales tax registration for offering delivery; otherwise it would become URD
attracting higher tax rates. Sales tax implications in commodity futures transactions resulting
in delivery from the seller and buyer’s point of view.

79
 CHART-1

Growth Of Real GDP 2003-04 2004-05 2005-06 2006-07 2007-08

GDP(factor cost) 8.5 7.5 9.4 9.6 9.0
Agriculture 10.0 0.0 5.9 3.8 4.5
Industry 7.4 10.3 10.1 11.0 8.5
Services 8.5 9.1 10.3 11.1 10.8
Per capita GDP 6.9 5.8 7.7 8.1 7.5

80
 50.0
45.0 8.1
7.7
40.0 6.9 7.5
35.0 8.5 10.3 11.1
5.8 10.8 Per capita GDP
30.0 Services
7.4 9.1
25.0 10.1 11.0 Industry
8.5 Agriculture
20.0
10.0 10.3 GDP(factor cost)
15.0 5.9
3.8 4.5
10.0 9.4 9.6 9.0
8.5 7.5
0.0
5.0
0.0
2003-04 2004-05 2005-06 2006-07 2007-08

INFERENCE

The Chart explains the sector wise GDP growth. Years are plotted in X-axis and sectors are
plotted in Y-axis. When Agriculture showed a decline in contribution, services and industry
sectors showed a gradual steady rise.

CHART-2

Year Inflation GDP

2004 3.8 8.3
2005 4.2 6.2
2006 4.2 8.4
2007 5.3 9.2
2008 5.9 8.5

81
 10
9.2
9 8.5
8.3 8.4
8

7
6.2
6 5.9
5.3
5 Infulation
4.2 4.2 GDP
4 3.8

0
2004 2005 2006 2007 2008

INFERENCE

The chart has Year plotted in X-axis and growth rates in percentage plotted in Y-axis. Two
variables compared here are Inflation and GDP.

CHART-3

Exchanges 2004 2005 2006 2007

Multi Commodity Exchange 165,14 961,63 1,621,8 2,505,20
(MCX) 7 3 03 6
266,33 1,066,6 944,0 733,47
NCDEX 8 86 66 9
13,98 18,38 101,7 24,07
NMCE (Ahmadabad) 8 5 31 2
58,46 53,68 57,1 74,58
NBOT( Indore) 3 3 49 2

82
 67,82 54,73 14,5 37,99
Others 3 5 91 7
571,75 2,155,1 2,739,3 3,375,33
All Exchanges 9 22 40 6
% of GDP 18.30 61.00 90.00 92.00

4000000

3500000

3000000

2500000

2000000

1500000

1000000

500000

0
2004 2005 2006 2007

INFERENCE

The chart shows trading happened in Exchanges for Commodity derivatives. Different
Exchanges are shown in different colours. Years are plotted in X-axis and sales is plotted in
Y-axis.

CHART-4

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 2005- 2006-
Commodity Groups 2004-05 06 07 2007-08
Bullion and other metals 1.8 7.79 21.29 26.24
Agriculture 3.9 11.92 13.17 9.41
Energy 0.02 1.82 2.31 5
Others 0 0.02 0.001 0
Total 5.72 21.55 36.77 40.65

45

40

35

30

25

20

15

10

0
2004-05 2005-06 2006-07 2007-08

INFERENCE

The chart represents year wise data on commodity groups. Years plotted on X-axis and
values in Rs.Lakh Crores are shown in Y-axis.

84
FINDINGS

 There has been an exponential growth in futures trading after complete liberalization
of industry in 2003 and with the setting up of three national level exchanges.
Agricultural commodities constituted a significant proportion of total value of trade
till 2005-06. This place was taken over by Bullion and other Metals in 2006-07.
Further, there has been a gradual fall in agricommodity volumes during 2007-08 over
the previous year

 The fact that agricultural price inflation accelerated during the post futures period
does not, however, necessarily mean that this was caused by futures trading. One
reason for the acceleration of price increase in the post futures period was that the
immediate pre-futures period had been one of relatively low agricultural prices,
reflecting an international downturn in commodity prices. A part of the acceleration
in the post futures period may be due to rebound/recovery of the past trend. The
period during which futures trading have been in operation is too short to discriminate
adequately between the effect of opening up of futures markets and what might
simply be the normal cyclical adjustment.

 Although the volume of futures trading in India has increased phenomenally in recent
years, its ability to provide instruments of risk management has not grown
correspondingly, and has in fact been quite poor. The reason for this is high basis risk
in most contracts which keeps out potential hedgers and lends to greater dominance
by speculators. This is a serious area which should be addressed by both, the
exchanges and the regulator.

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 With progressive opening up of the economy including trade in agricultural
commodities, Indian markets cannot be insulated from global factors. It is illogical to
argue that futures markets are a channel for global factors to influence the domestic
spot markets. In an open economy, global supply demand related factors will impact
on the domestic markets whether futures trading are permitted or not. There are of
course weaknesses in the functioning of the futures market, but it needs improvement
rather than banning.

 Oil prices analysis have opened less facts on the impact of high prices and its
consequences, but rather came out exposing the strengths of Indian economy in
withstanding such shocks which is a blessing in disguise.

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SUGGESTIONS

 Propose an amendment Bill to upgrade the regulation and to improve the capabilities
of the regulator need to be pursued vigorously.
 Exchanges should act as self regulatory organizations capable of administering fair
play, objectivity and customer orientation.
 There should be a consultative group both in FMC, as well as in the exchanges
comprising persons with proven domain knowledge of commodity sector.
 At the apex level, a Committee on Commodity market, akin to the HLCC in the
Capital Market, should be constituted with Deputy Chairman, Planning Commission
or one of the Members of the Planning Commission as its nominee Chairman.
 Collections from the transaction tax, if and when imposed on futures markets, should
be earmarked exclusively for development of the required physical market
infrastructure and to improve farmers’ access to it.
 Conditions should be created so that farmers can use agri futures market to transfer
their price risks. The contract designs should be tailored to meet the needs of the
physical market.
 Setting up of national spot electronic exchanges by the national commodity
exchanges is an attempt to create a national integrated market. National integration of
the markets should be promoted.
 Banks and Financial Institutions which are at present not permitted to trade on
Commodity Markets should, subject to approval by the Banking Regulator, be
allowed to trade up to limits required for the purpose of devising customized OTC
products suited to the needs of small and marginal farmers.

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  It is of prime importance to create structure which enables dissemination of prices to
the remotest corners of the country. This will ensure that benefit of price discovery of
exchange platforms reach the farmers.

CONCLUSION

From India’s example of overturning a commodity price shock in to strength, the theory of
managing commodity booms and busts become really important. Its clear from the past that
commodity prices are very volatile and preventive actions are less effective here. Its best to
take always proactive steps in surpassing it or driving it in to a new strength which is very
beneficial in these times of short rallies of commodity prices.

 Prudent fiscal policies which includes lifted import, and capital restrictions, tightened
money policies, accumulated foreign reserves and reduced foreign debts.
 Export taxes: such taxes can alleviate both the spending and the resource movement
effects of the boom and protect non booming tradable sectors. Tax revenues can be
invested in high yielding public investment programs that increase long term growth.
 Commodity boom bonds: These are bonds denominated in foreign currency held by
local exporters of commodities. The bonds can be considered as forced savings in
foreign currency. Their purpose is to protect the economy of the commodity
exporting country from the effects of sudden inflow of foreign currency.
 Hedging instruments: predictable future revenues using futures options and swaps.
 Revenue stabilization funds: another way to manage commodity price shocks is to
create a stabilization fund to stabilize govt expenditures. By saving resources in boom
years govt can reduce the need to cut spending in leaner times.
 International commodity agreements: to stabilize commodity prices.

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BIBLIOGRAPHY

⇒ www.commerce.nic.in
⇒ www.indexmundi.com
⇒ www.scribd.com
⇒ www.ssrn.com
⇒ www.bbc.co.uk
⇒ www.goldmansachs.com
⇒ www.google.com
⇒ www.reuters.com
⇒ www.icrier.org
⇒ www.ieej.or.jp
⇒ www.eurojournals.com
⇒ www.infodriveindia.com
⇒ www.infobanc.com
⇒ www.inflationdata.com
⇒ www.nipfp.org.in
⇒ www.adbi.org
⇒ www.nber.org
⇒ www.finmin.nic.in
⇒ www.openlib.org
⇒ www.imf.org
⇒ User-guide-to-commodities
⇒ MCX Learners manual

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