One more year has gone by and it is time to say farewell by ringing out the old and ringing in the new. For the global economy 2008 was an eventful one—it saw the prices of food grains, crude oil and essential commodities skyrocketing even as inflation reached four digit levels in some countries like Zimbabwe. By September, the economic slowdown whose signals were quite visible due to the impact of US sub prime lending in 2007 started slowly engulfing the global economy and at the dawn of the New Year many nations are implementing new and new stimulus package to revive their economies.
The heightened speculative activity in global exchanges raised the need to bring in more stringent practices to regulate the markets. Regulators everywhere are fund starved and people starved whether it is India’s Forward Market Commission or.US Commodity Futures Trading Commission.
For India also, both commodities, equities and the economy as a whole went from euphoria created by a rising sensex, commodity futures volumes and near-double digit growth and to make mattes worse a double digit inflation. The year saw commodity Futures being blamed for creating inflation and at the same time there was no clear evidence regarding this. And towards the fag end of the year, suspension on four commodity Futures were lifted and resumption of Futures likely in four other banned commodities by early 2009.
The introduction of Commodity Transaction Tax in the Union Budget early this year also created widespread resentment among the commodities sector.
The Bombay Stock Exchange sensitive index (Sensex)crashed from 21000 levels mainly on account of foreign institutional investors, the key drivers of the Indian stock market in the past few years, pulling out around $13 billion by end-November 2008, which is over 75 per cent of the estimated $17.2 billion pumped in by these investors during the whole of 2007.
The following commodity developments captured the headlines more than the other usual market movements in India.
Forward Contract Regulation Act: The year 2008 started on a bright when government brought forward the ordinance to amend the Forward Contract Regulation Act to give more power and independence to the commodity market regulator Forward Marketing Commission (FMC).
Commodity Transaction Tax: On February 29, Palaniappan Chidambaram shocked the Commodities sector by imposing a commodity transaction tax of 0.017 % on turnover or Rs 17 per lakh and a 12% service tax on exchange levy. But it never got implemented.
Abhijit Sen Committee: Was appointed in February to look into the role of Futures market in fueling inflation and suggest measures to increase farmer’s income. On April 29, the report submitted was not conclusive regarding the role of Futures market in stoking inflation
Commodity Futures Ban: Following allegations that inflation was caused by commodity Futures, the Union Government suspended trading in rubber, soyoil, potato and chana in addition to wheat, rice, tur and urad which were banned earlier.
Spices Exports: India achieved a major milestone when spices exports crossed $1 bn mark in 2007-08.
New Exchange in Singapore: Financial Technologies Ltd, promoters of India;s leading commodities exchange, Multi-Commodity Exchange of India (MCX) launched Singapore Mercentile Exchange on July 9 to serve as the LME and Nymex for Asian markets.
Crude Oil: Crude oil prices reached record high of $147.7 per barrel
Gold: Gold continued to be seen as a safe-haven investment throughout the world and is the only commodity that has weathered the economic slowdown. Early 2008 saw Gold prices shooting up to a record $1,033.90 an ounce in March which was never attained later on as it dropped to a low of $705 an ounce in November.
Dollar: It was the weakness of the dollar against major currencies that led to intensive speculation in commodity Futures even as return from equities was not worth talking about.
Interestingly, the analysts who were upbeat on commodities during the first half of the year describing it as the saviour of investors who were losing money in the stock market had to swallow their words as base metals, energy and agriculture commodities started crashing. The unprecedented global growth which was in part due to the boom in emerging economies of India and China have also started feeling the heat of the economic slowdown as the year draws to a close.
How will 2009 be?
India’s commodities Futures business is set to end the year with a record turnover of Rs 50,00,000 crore an impressive 40 per cent growth in volumes inspite of the fact that it was hamstrung by political opposition, high inflation levels and ban on trading in a number of commodities.
The increased corporate interest in commodity Futures are visible from the fact that MMTC and Indiabulls formed a joint venture to set up fourth national commodity exchange in the country, which is expected to be operational early next year, Anil Ambani group company Reliance Money picked up stake in NMCE and Kotak group in Ahmedabad Commodity Exchange.
An upsurge in interest was not only limited to India Inc as the Indian commodity futures market came on the radar of global comexes with NYSE picking 5 per cent stake in MCX at about Rs 240 crore.
There are already indications that ban on trading of wheat, rice, tur and urad could be lifted in February 2009 which is expected to raise trading volumes further up.
World wide, analysts don’t expect a major return of investment money into commodities in 2009 even as slowdown may gradually ease due to stimulus packages as speculators have been badly hurt in the crash.
In U.S. commodity markets, the recent weekly data from the Commodity Futures Trading Commission has told the story of shell-shocked investors fleeing commodities or cashing out to secure funds.
Open interest in the CBOT’s largest ag contract, corn, for example, had grown to 1.4 million contracts by spring. Today, the total is 800,000 contracts as commodity funds downsized to meet the global margin call that came as economies collapsed.
Drop in commodity prices should be beneficial for economies; with prices cheaper, demand might be restored. Some Indian analysts have already cast their vote in favour of a fe commodities that are likely to turn bullish in 2009 apart from Gold. This includes base metals, crude oil, agri-commodities such as rubber, sugar, soyabean.