Had you invested in oil at $8 (Rs 328) per barrel six years ago, your investment by now would have appreciated nearly nine-fold. Had you done so in gold at $300 (Rs 12,300) per ounce four years ago, its worth would have more than doubled to $662 (Rs 27,142) per ounce.
And an investment in copper four years ago would have paid off too with the metal soaring from $2,200 (Rs 90,200) per tonne to about $7,400 (Rs 3,03,400) per tonne currently. Crude oil, gold and copper all were among the sizzling commodities that were globally sought over the last half decade. For investors, looking for good investments outside of stocks, bonds and real estate, commodities may be your answer.
In fact, investing in commodities has been a breeze in recent times, thanks to the three new multi-commodity exchanges in the country—Multi Commodity Exchange (MCX), the National Commodity and Derivatives Exchange (NCDEX) and the National Multi-Commodity Exchange (NMCE).
The basic principles of commodity trading, in terms of the cycle of demand and supply, are the same. Commodities that are in demand appreciate higher than commodities that are out of favour. But that may not be the case always as the commodity markets are driven by global factors and, therefore, it needs as much study as a normal stock market. Says Praveen Singh, Research Analyst, Sharekhan: “Investors must research before entering the ring. Ideally, they should go through a good broker who can help take informed decisions.”
Volumes and business is booming at the exchanges, and commodity investing is gaining increasing acceptance with the investor fraternity ever since it was introduced in 2003. The two national level exchanges, MCX and NCDEX, together clock a daily average turnover of Rs 15,000 crore. Over the last few years, a steady increase in the number of commodities traded has corresponded with a steady increase in their volumes, thereby increasing liquidity and consequently attracting more participants.
Several commodities are doing well, but the actively traded ones are those that have a global appetite such as gold, silver, crude oil, copper, zinc and nickel.
Precious commodities are a big draw with investors, partly because of the huge appetite for gold in the country. Jobbers, too, play a role in keeping the liquidity alive. But after the FMC (Forward Markets Commission) banned international arbitrage between the MCX and COMEX (New York Mercantile Exchange), volumes and liquidity have dipped slightly in gold and silver. To some extent, this has shifted speculator interest and activity to other commodities.
Yet, it’s the global product—crude oil—that has caught investor interest in India. A highly volatile commodity, it’s a favourite with speculators— so far not a single barrel has been delivered till date.
Base metals, too, have been very popular with investors and punters alike due to their strong fundamentals. Low global inventories, supply outages due to strikes at major mines and robust demand from faster growing economies like China and other South-East Asian countries have resulted in lots of price and volume increases. Among others, agri-commodities like chana, guar, soyabean, pepper and jeera have seen considerable speculator interest.
Investors can trade in the three exchanges—all the three have electronic trading and settlement systems, and a national presence. You have to trade through a registered broker. Several prominent equity brokers like Motilal Oswal, SSKI and Sharekhan, Refco-Sify Securities and ICICI Commtrade (ICICI Direct) offer commodity trading services, apart from stock broking. For investors looking for delivery-based trading on the MCX or the NCDEX, a demat account with NSDL or CDSL is a must. The list of commodities that can be traded is cleared by FMC. It includes bullion (gold and silver), metals (steel, copper, aluminium, lead and nickel), crude and several agri-commodities. Gold, silver and crude are actively traded on MCX, while agri-commodities are preferred on NCDEX and NMCE.
Contracts are standardised and the lot size is linked to the minimum quantity that can be traded of the underlying commodity. Trading, however, can be done only on the margin money that is paid upfront to exchanges through brokers. These margins range from 5-10 per cent of the value of the commodity contract and in some instances can be as low as Rs 5,000. The duration of the contracts vary and can extend up to six months. Trading starts from 10 a.m. and continues till 11.30 p.m. (in the case of agri-commodities, it’s only till 5 p.m.) Explains Singh: “Since we are neither major producers nor consumers of base metals, we look at global markets like the London Metal Exchange for a cue on pricing and hence trading continues till late in the evening.”
For those looking to diversify their portfolio, commodities could be a worthwhile investment. Those investors with a bit of risk appetite could do well to look at this market. Points out Tejas Parekh, Senior Research Analyst, Motilal Oswal: “Commodities can give higher returns than equities. Anyone can afford to trade since the margin requirements are low.”
AS GOOD AS THEY GO
The metal nosedived over 40 per cent since a record high of $51,800 (Rs 21,23,800) a tonne in May to a 10-month low of $28,000 (Rs 11,48,000) in July after steel production cutbacks (nickel is among the main components used to prevent steel from corroding). China, which consumes around 10 per cent of the world’s nickel production, cut its steel production mainly due to a decline in steel demand from Europe and Asia. Says Tejas Parekh, Senior Research Analyst, Motilal Oswal: “It’s a good commodity to short. We expect nickel prices to touch $25,000 (Rs 10,25,000) levels at LME and dip to Rs 990 per tonne on the MCX from Rs 1,100 levels right now.”
Futures touched a new all-time high of $78.77 (Rs 3,229.57) per barrel in August. The spurt in prices was due to supply worries and heightened geopolitical tensions in North Sea. Going forward, demand is expected to be robust with strong economic growth indicators from US, China and India. In India, prices are expected to touch Rs 3,200-3,300 per barrel over next two months, up from Rs 2,900 now.
The prices softened recently—largely due to the government’s decision to remove the duty on crude palm oil to allow cheap imports to combat inflation. Prices were impacted by fears of outbreak of bird-flu in the region affecting poultry product exports from India. However, strong demand for edible oils is likely with the festival season round the corner. Analysts estimate prices to firm up to Rs 1,650 per quintal in a couple of months from Rs 1,550 per quintal right now.
Its prices more than doubled last year. After touching a high of Rs 15,800 per tonne last month, prices have corrected by 20 per cent, partly due to the harvesting season in Brazil and Indonesia, which reduced export demand from India. However, in the coming months, higher demand is expected to firm up prices again— more so as production globally is expected to reduce by 15-20 per cent. Analysts estimate that prices on the domestic exchange, NCDEX, may move up by 20-25 per cent in the next few months.