A Market With a Difference

By mukul on Oct 22, 2007 in Start a Business

Commodity trading is all set to open up huge career opportunities. Manjula Sen reports :-
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It was back to school for a Mumbai-based general manager of treasury at the State Bank of India (SBI). Keeping him company was a vice-president of HDFC Bank. They were sitting with the rest of the first batch at the Welingkar Institute of Management, Mumbai, learning the intricacies of commodity trading. That was three years ago, when the government first allowed futures trading in commodities. Since then, the three-month diploma in commodities market (DICM) class has seen a steady stream of students, ranging from housewives and bankers to analysts and MBAs, all seeking to tap into the future.
"Commodity trading has existed since Chanakya's time but somehow, we lost the initiative to the West and the US," says Anil Mendhi, who heads the DICM programme at Welingkar. Then came 2003, when the government allowed trading in a select list of commodities. In just 36 months, trading volumes rose by 28 times. Trading at the domestic commodity exchanges amounted to an incredible Rs 36,76,000 crore in 2006-2007, up from Rs 1,29,000 crore in 2003-2004. This fiscal year has seen a total business of about Rs 15,00,000 crore till August.
For the uninitiated, trading in this segment is buying and selling in commodity derivatives (futures or options). Right now, in India, options are not allowed. Futures trading in commodities take place in gold, silver, agricultural commodities, metals, crude and so on. The Forward Markets Commission (FMC) is the body that is responsible for regulating and promoting futures trade in commodities.
Commodity derivatives are traded at the commodity exchanges, the two major ones being the National Commodity and Derivative Exchange (NCDEX) and the Multi Commodity Exchange (MCX). NCDEX is promoted by ICICI Bank, the Life Insurance Corporation of India, the National Bank for Agriculture and Rural Development (Nabard) and the National Stock Exchange of India (NSE). MCX, an independent and demutualised multi commodity exchange, is among the world's leading bullion and energy exchanges. Its shareholders include Financial Technologies (I) Ltd, Nabard, NSE, one of the affiliates of Fidelity International, several public sector banks including the SBI and Canara Bank, HDFC Bank, SBI Life Insurance Co. Ltd, Merrill Lynch and Citigroup.
Gold, silver, agricultural commodities (including grains, pulses, spices and oilseeds), mentha oil, metals and crude are among the commodities that the exchanges deal in. Specialised commodity exchanges also exist and there is a recommendation to upgrade some of these to international futures markets.
Apart from this, those entering commodity trading include the public sector State Trading Corporation of India. Online trading in commodities is a new initiative that the trading major will begin this year, notwithstanding the fact that the government has banned trading in wheat, rice, urad and tur.
All this has opened up tremendous career opportunites. "When we started our diploma course, we thought we would begin with a batch of 30 but the response was so huge that Welingkar's started with two batches of 60 students each," recalls Mendhi.
Trading for a perfect future
The diploma was aimed at the national level exchanges which were facing a tremendous shortage of skilled people. "Just like the software industry had to hire ordinary graduates to plug vacancies when it took off in India 10-15 years ago, commodity trading is taking on anyone who has a basic knowledge of the subject," Mendhi explains.
Exchanges like the NCDEX and MCX offer courses in futures trading. GB Pant University in Uttarakhand offers it as part of its agri-business module. And the Indian Institute of Management at Lucknow has incorporated it in its management executive development programme. Modules are conducted by the BSE and the NSE as well. Welingkar's also offers commodity trading as an elective for its postgraduate course in management.
"Banks and FIIs are still not allowed to trade in futures but experts believe it's only a matter of time before they are," says Suresh Devnani, head of business development, MCX. ICICI Bank has started a commodities department in anticipation of just such a future.
No pun intended but what kind of future does commodity trading offer? "If you want to grow with a sector, commodities are where growth has been exponential," says Devnani. Opportunities exist across the value chain, he says. Be it brokers, exchange members, analysts, traders and participants in exchanges (firms like Godrej and ICICI Bank) ― all are seeking experienced people. These include charting in technicals, products, market watch and surveillance and product development.
Candidates with qualifications in soil physics or an agricultural background would have an edge over MBAs. Devnani says that when hiring people at senior levels, the exchanges try to mesh departmental requirements with corresponding functions.
For instance, in clearing and settlement and warehousing, people from retail and equity would be able to fit in as procurement, trading and distribution are functions in those fields as well. Those with similar portfolios in equity would be considered for risk management. But in commodities such as fisheries, pulses and wheat, specialisation is needed. This is where those with a degree in agriculture are required. The sector also needs people with majors in finance, currency and international markets.
The only drawback is the total lack of participation in commodity trading by farmers, says Mendhi. It would help them to hedge their risk in commodity exchanges and protect them from middlemen. There were plans to bring farmers into the fold through computer terminals in villages but these are at the early stages yet.
As of now, stay-at-home wives and mothers who feel they understand foodgrains best, traders looking at new trends and markets, executives from treasury banks dealing with currency that will open up for trading after further reforms and company sponsors are honing up on their trading skills in a sector that has just stepped into the limelight.
Shorthand
Specialised commodity exchanges: They trade in specific types of commodities, say bullion or grain or minerals. Currently, there are 21 such exchanges. NCDEX and MCX are two of the four multi commodity exchanges.

Commodities: These are raw materials used to create products, ranging from food to furniture, that consumers buy. They include agricultural products such as wheat and cattle, energy products such as oil and gasoline, metals such as gold, silver and aluminum and "soft" commodities (that cannot be stored for long) such as sugar, cotton, cocoa and coffee.
Charting in technicals: Technical analysts use mechanical rules to detect changes in the supply of and demand for a stock and capitalise on the expected change.
Future or Futures: Used to denote all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange. Both futures and options are part of a class of securities called derivatives, so named because they derive their value from the worth of an underlying investment.
Futures trading in commodities: Agreement to buy / sell shares of a specific stock in a designated future month at a price agreed upon today by the buyer and seller. The contracts themselves are often traded on the futures market.
Commodity derivatives: Contracts such as options and futures whose prices are derived from the price of the underlying financial asset (in this case the raw material).

Option: It is the right to buy or sell. While a futures contract is the promise to make a transaction, options give the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options.
Demutualised : The process by which mutual organisations or companies convert themselves to for-profit public companies that distribute profits to shareholders in the form of dividends.
Participants: They are partners or shareholders in an exchange.
Clearing: An adjunct to a futures exchange through which transactions executed on its floor are settled by matching purchases and sales.

Warehousing: The interim holding period from the time of the closing of a loan to its subsequent marketing to capital market investors.
Source: The Telegraph (Kolkata, India)

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